(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)
Progress in the treatments of most cancers is a gradual and incremental process in which very few therapies can come close to creating a cure on their own. Cancer cells have evolved numerous biological mechanisms that allow them to overcome the effect of most drugs when used as a single agent. This has led to the near universal practice of combining drugs with different modes of action, most commonly chemotherapies, monoclonal antibodies and targeted therapies. Used in combination, they can produce synergistic results.
My interest in Senesco (OTCQB:SNTI) initially was based on their lead drug SNS01-T, which has a very unique and differentiated mechanism of action. This gives rise to the promise that it could offer a unique approach to treating cancer that could result in its being added to existing therapies. It is this differentiated mechanism of action that makes SNS01-T so conceptually interesting to me. The recent announcement of the potential merger with Fabrus and with this the involvement of the famed biotechnology investor Dr. Phillip Frost has added to my interest. I will go into this shortly.
SNS01-T stems from Senesco's unique understanding of the gene called eukaryotic translation initiation factor or eIF5A which plays an integral role in regulating the life and death (apoptosis) of cells. Cells are programmed to have a finite lifespan and once this has been reached, nature has evolved mechanisms to cause cells to die and be eliminated from the body, a process known as apoptosis. Most forms of cancers are the result of cells that have developed mutations that allow them to evade apoptosis. Senesco's objective is to alter cancer cells so that they are once again subject to the programmed death cycle.
SNS01-T has the promise that because of its highly proprietary and unique biological approach, it can be added to existing therapies to improve overall outcomes. The initial therapeutic target of SNS01-T is B cell cancers, principally multiple myeloma (MM) and non-Hodgkin's lymphomas such as diffuse large B-cell lymphoma (DLBCL) and mantle cell lymphoma (MCL). Animal studies have suggested that it is highly synergistic with Revlimid and Velcade, the two current mainstay drugs for treating multiple myeloma. This suggests a promising pathway to clinical development
The company is now in a Phase Ib/IIa trial that is primarily evaluating SNS01-T in multiple myeloma and to a lesser extent in diffuse large B cell lymphoma (DLBCL) and mantle cell lymphoma (MCL). The primary purpose of the trial is to establish that the drug is safe. The trial started with a low dosage of SNS01-T in cohort 1 and then progressed to higher doses in cohorts 2 and 3. These doses have each demonstrated that the drug is safe. In addition in nine evaluable patients, the drug has stabilized the cancer for a period of time in five MM patients and one DLBCL patient.
The Phase Ib/IIa trial is entering a critical phase as the fourth cohort of six patients (possibly more) is now being recruited. The dosing in cohort 4 on an mg/kg dosing basis is nearly double that of cohort 3 and thirty times greater than cohort 1. Preclinical data in both MM and DLBCL demonstrated pronounced tumor shrinkage at this dose level.
I think that in order for the company to move to a Phase IIb trial, SNS01-T will have to show at least one objective response in which the tumor shrinks for a meaningful period of time. Stable disease will not be enough to warrant moving forward. In the event that this is not achieved, the options would be to add more patients, increase the dose, and increase the number of cycles or some combination of the three. Results of cohort 4 could be known by 3Q or 4Q, 2014.
Senesco's stock has asymmetric upside potential if results in cohort 4 are promising and allow the company to move into a Phase IIb trial that could be potentially the basis for approval. This trial could start in 1H, 2015 and potentially complete in late 2016 in a positive scenario. This could lead to an NDA filing in 2017 and approval in 2018 if everything goes right.
Senesco has been operating with a strained balance sheet for some time. Given the cash constraints that it has faced, it has done a credible job of moving SNS01-T forward through development, pre-clinical trials and into Phase Ib/IIa. It still has a substantial challenge ahead as it tries to get the drug into and through a Phase IIb trial. My cash flow projections suggest that the company will need to add $26 to $28 million of cash to complete a Phase IIb trial and then partner SNS01-T. A recent financing could enable the company to access enough capital to accomplish this.
Senesco recently announced an innovative equity offering in which it is issuing 180,000 units at a price of $30 per unit. This immediately will bring in $5.3 million through the issuance of 1.8 million shares at an effective price of $2.92. In addition, there are three tranches of warrants that, if exercised, could bring an additional $20 million of cash. This new financing under the assumption that all warrants are exercised could bring in $25 million at an effective price of $3.21.This would likely allow for the company to complete the Phase II trial and partner SNS01-T assuming that the Phase IIb trial is successful.
Senesco has added 1.8 million new shares to its previous share base with this recent offering bringing the number of currently outstanding shares from 3.2 million to 5.0 million. In addition, there are 0.8 million warrants outstanding from other financings so that the potential fully diluted share count currently is 5.8 million shares. If all of the series A, B and C warrants are exercised, there will be 11.2 million shares outstanding so that based on the current share price of $6.00 the market capitalization would be $67 million based on 11.2 million fully diluted shares.
Success in the Phase II trial that then leads to an attractive partnering deal would likely have a dramatic effect on the stock price. If it is the case that the Phase IIb trial is successful, the data is robust and a partnering relationship results, I think that we could see a market capitalization of $150 million or more; this is obviously data dependent. At the lower end of this range, this would represent more than a doubling of the share price by the end of 2016.
Fabrus Merger Adds a New Dimension to the Senesco Story
As I was completing this article on Senesco, an important new element was added to the investment equation. On December 30, 2013, Senesco announced that it had executed a non-binding letter of intent to merge with Fabrus, a privately-held, biotechnology company. Fabrus will be merged into a wholly-owned subsidiary of Senesco and Senesco will be the surviving corporation. Stockholders of Fabrus and current Senesco shareholders will each own about 50% of the "new" Senesco. The companies expect to sign a definitive agreement in early 2014, subject to final review and approval by their boards. Current Senesco stockholders will not be required to vote on this transaction.
The founder and President of Fabrus is Dr. Vaughn Smider, a faculty member at The Scripps Research Institute in La Jolla, CA. He is a co-inventor of its technology. Fabrus was started by Pfizer (PFE) as a part of a biotechnology incubator program in 2007. It was spun out in 2010 as a separate company with Pfizer maintaining an equity stake. Fabrus owns all of the rights to its intellectual property and drug candidates.
In 2010, Opko Health (OPK) and the Frost Gamma Investments Trust invested alongside to acquire 13% of the outstanding shares of Fabrus. Dr. Phillip Frost is the CEO and Chairman of both Opko Health and Frost Gamma Investments Trust. He is also the current Chairman of Teva Pharmaceutical (TEVA). Dr. Frost became a billionaire based on a fabulously successful career as a biotechnology entrepreneur that began with the founding of Key Pharmaceuticals which was sold to Schering-Plough in 1986. He is the current Chairman of Fabrus and is instrumental in its management and development.
The uniqueness of Fabrus' technology is that it brings the speed and flexibility of small molecule screening to fully human antibody therapeutics. Importantly, this technology base is unique and not dependent on existing antibody engineering intellectual property. The discovery format is analogous to a combinatorial chemistry library and enables direct cell based screening of targets that are difficult to address with conventional antibody technologies. These include G-protein coupled receptors and ion channels. This technology approach allows for the rapid development of data at very early discovery stages, and can screen multiple targets or pathways in parallel.
Fabrus is at a pre-clinical stage of development. It has two collaborations in place with a large pharma and a large biotech company to discover antibodies for drug targets that are resistant to traditional antibody discovery methods, and has an internal pipeline that includes next generation antibodies targeting renal cell carcinoma and inflammation. An additional appeal of the merger is that Fabrus antibodies could complement Senesco's eIF5A gene regulatory platform by directing its nanoparticle-based therapeutics to cells of interest.
Price Action Subsequent to Announcement of Fabrus
The announcement of the Fabrus merger caused a significant increase in the price of Senesco. On December 13, 2013, Senesco reached its lowest closing price of the month at $3.95. On December 30, 2013 following the release of the news on the Fabrus merger, it closed at $6.25. This was a 58% price increase.
At this point in time it is hard to model the effect of the Fabrus merger on Senesco. We know little about the product pipeline of Fabrus and the additional capital needs that this will impose on Senesco. This price movement reflects the faith of investors in Dr. Frost's role in the "new" Senesco. He has great credibility based on his business accomplishments and his involvement validates for many investors the promise of Senesco's technology.
Dr. Frost also brings the potential for Senesco to more easily access larger amounts of capital than has been possible in the past. He controls substantial investment potential based on his role in Opko and his own personal wealth. In addition, his reputation may cause many other investors to want to invest alongside him.
On a nearer term note, if the price appreciation in the stock is maintained it makes it much more likely that the warrants issued in the recent financing will be exercised and would give Senesco the full $25 million potentially available from that offering.
The involvement of Dr. Phillip Frost in Senesco could cause investors to look at the company in a totally different light. It has been a small, micro-cap company with extremely limited financial resources and largely has been ignored. I think that many investors now may choose to invest in the company simply because they want to invest alongside Dr. Frost. I think there will also be less concern that Senesco will run out of money as Dr. Frost could provide much easier access to capital given his personal resources and his business connections. Simply put, Senesco has gained enormous credibility assuming that the merger with Fabrus goes through. This is now a stock to watch.
I am not recommending the stock at this point in time although this is always subject to change. Results so far in the Phase Ib/IIa trial have not yet demonstrated a strong biological effect for SNS01-T although stable disease in six of nine evaluable patients is encouraging and the safety profile is also encouraging. There is a tremendous amount riding on the outcome of cohort 4 for which we may see results in 2H, 2014. If results are encouraging (one or more objective responses) and the company proceeds to a Phase IIb trial that could potentially be a registrational trial, the stock could react very positively. However, more equivocal results might cause the company to treat additional patients with an altered dosing form and/or dosing schedule. Such an outcome would have a negative impact on the stock and probably would require the company to raise capital at a depressed price.
At this point, we know very little about Fabrus other than that it seems to have a very interesting technology platform with a good intellectual property position. It seems to be in a very early stage of product development so that it is difficult to evaluate its products; they are some time away from meaningful clinical data. The cash burn of Fabrus will add to the burn rate of the "new" Senesco and as I have previously outlined, the company just barely has enough cash to get SNS01-T through Phase IIb.
I will need to know a great deal more about the business strategy of the "new" Senesco before I can evaluate its long-term potential. While I respect Dr. Frost, I am not willing to follow him unquestionably. For the time being, I am on the sidelines with this stock, but intend to cover it closely in the future.
This note is the introduction to a more in-depth article that was published on my website on January 3, 2014 that is only available to subscribers to my website.