Investment Risk in Cleveland BioLabs Has Been Wiped Off the Table

Oct. 3.10 | About: Cleveland BioLabs, (CBLI)

A couple of hours into the trading day on Wednesday, Cleveland BioLabs, Inc. (NASDAQ:CBLI) announced top line results of the second human safety study for CBLB502, a drug under development for the treatment of Acute Radiation Syndrome. The results of that study have not been fully digested by Wall Street, but the development has set into motion future events that will impact CBLI's share price.

CBLB502 is the same drug for which the Company just recently received a $45 million contract from the U.S. Department of Defense Chemical Biological and Medical Systems Medical Identification and Treatment Systems to be developed and stockpiled as a medical radiation countermeasure.

The newly announced results from the study demonstrated a difference in biomarker response proportional to the dose applied as single intramuscular injections of CBLB502, which was the primary goal of the trial. The information will be used in the design of the definitive safety trial following further discussions with the U.S. Food and Drug Administration (FDA), but it is also a very key development for the stock.

Prior to pointing biotech investors to the news via twitter, the news appeared to have fallen on deaf ears. Late in the day and during after hours trading, however, the stock picked up some momentum and price action. We expect that this will continue, since several government entities - both foreign and domestic- were waiting to see the results from this study before placing additional orders for stockpiling/defense purposes.

As BioMedReport's subscribers were told immediately following the announcement of the study results, these orders could be substantial and are only the beginning of the next leg up for this still, undervalued company.

We feel extremely bullish after this round of developments for Cleveland BioLabs. In fact, we would argue that much of the "risk" associated to an investment in CBLI has been wiped off the table and that the value of this company should skyrocket.

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The biggest question surrounding CBLI's discoveries about programmed cell death and their robust pipeline of drugs for multiple medical and defense applications was whether a government as big as the U.S. would actually place an order with the company. CBLI's protectans are being developed as drug candidates that protect human tissues from acute stresses such as radiation from a nuclear explosion and chemotherapy, but investors knew that they weren't the only player in that space fighting for government contracts.

Still, as we reported nearly a month before the first government contract from the Department of Defense, CBLI is well ahead of the pack. The company has very strong intellectual property positions covering these technologies and products, including granted patents for CBLB502. And now that the DoD has placed their order, the biggest question has been answered.

Not that it hadn't been somewhat addressed previously. In fact, in late July, the Biomedical Advanced Research and Development Authority (BARDA) of the Department of Health and Human Services (DHHS) exercised a $4.1 million milestone-based option on the Company's existing contract for selected tasks in the advanced development of CBLI's Radiation Antidote for Defense. The value of that contract, originally awarded in September 2008, is $15.6 million, including an increase in the first milestone-based option, which was exercised in September 2009.

When that option was exercised, it fully supported the validation of the CBLB502 manufacturing process, manufacturing of additional registration batches of the drug, and more studies. All of those activities were necessary for completion of a Biologic License Application (BLA) for the U.S. Food and Drug Administration (FDA).

In addition, the Obama administration's strategy on revamping American nuclear strategy has been making news and seeks to revamp the nation’s nuclear posture for a new age in which rogue states and terrorist organizations are greater threats than traditional powers like Russia and China.

In recent interviews, including one with the New York Times, President Obama argued that his worries about a nuclear attack on the U.S. could be deterred with a series of graded options and that “I’m going to preserve all the tools that are necessary in order to make sure that the American people are safe and secure.” Under the administration's guidance, BARDA and other federal agencies, have allocated considerable financial resources towards development of defense measures precisely like CBLB502. In fact, the development of CBLB502 has been funded with considerable government dollars and is designed to protect soldiers and other key personnel from the effects of lethal doses of total body irradiation following a nuclear attack or radiation disaster. The drug decreases incapacitation from radiation in order to maintain military operations.

In July, CBLB502 was granted fast track status from the FDA for the drug and there is currently no FDA approved medical countermeasure to reduce the risk of death following a lethal dose of total body irradiation.

Given Wednesday's news we feel confident going forward that additional grant monies for CBLI's Radiation Antidote for Defense could be awarded sometime before the end of October. We estimate that the value of those research dollars could reach $50 million. We also now believe that a foreign government like Israel, who was waiting for these human study results, could place their own order for defense stockpiling sometime before January. That does not take into account additional orders for the U.S. stockpile which could start rolling in as soon as Q1, 2011. Some of the closest U.S. allies may start lining up for their own doses as well.

As CBLI's CEO Michael Fonstein told BioMedReports in August:

We believe CBLB502 is well positioned as a potential award candidate... It also potentially sets up a successful program for potential purchases from the even bigger potential customer in the United States, the Biomedical Advanced Research and Development Authority (BARDA) of the Department of Health and Human Services (HHS), whose mandate is to develop and acquire countermeasures for the Strategic National Stockpile... Then there are other potential foreign buyers, such as Israel, or other countries with a seemingly imminent nuclear threat.

What makes these government orders so attractive to investors is the fact that every dollar of sales represents 95% profit for Cleveland Biolabs because unlike other biotech companies and drug developers, CBLI does not have to pay a sales force or marketing costs to push the product into the market. Furthermore, they do not have to amortize research because nearly all of the work which has gone into devloping the drug(s) has been paid for by government grants. Consider then, that a $100 million order means $95 million in operating profits.

Consider also that the company could have several other news catalysts related to the medical (non-defense) applications of CBLB502 between now and the end of the year and you'll see why the stock remains undervalued.

We will keep you posted on developments. Our complete interview with CBLI's CEO, Michael Fonstein is here.

Disclosure: Long CBLI