Over the weekend I noticed Jeremy Richards article on Perifosine. I didn't give it much thought, because I don't respect Richards writing or investment opinion. Then on Monday, March 5th, I saw that it had a very positive effect on KERX and AEZS, and the article was even mentioned on Marketwatch as putting KERX up 19%. The stock continued going up a whopping 35%. At that point, I started my short position. I saw no other reason or news that would cause the stock to go up so much. The result of his article demonstrates how big of an effect retail investors can have on small cap stocks.
If you had trouble understanding Richards' article, you're not alone. It was deliberately written to make it seem like he is a biotech expert. Having worked for a legit biotech fund, I know a true biotech expert when I see one. I have interpreted Mr. Richards' hard to understand article below in easy to understand language. Upon close inspection, it's clear that the writing is gobbledy-gook, and means nothing. Because the article clearly had a strong effect on the market, I thought it would be a worthwhile endeavor to translate the article into layman's terms. If his article didn't affect the stock much, then I wouldn't use my time for this.
Note: this is not to say that Perifosine won't get approved, but there is no indication that further positive catalysts are imminent from Richards' article. Although I am short KERX, and am a little biased, for the most part this interpretation is meant to be neutral on the stocks, just pointing out the fallacies of Mr. Richards' points. My previous article written a couple months ago on Perifosine was a bearish article.
The format I'm giving to interpreting the article is for each paragraph I show: Richards' writing, followed my interpretation, followed by my comment.
Richards' writing: The original modeling employed by KERX and AEZS was based upon a 6.5 month median Overall Survival (OS) for the CAP arm consisting of Xeloda plus Placebo and a two-month advantage in the median OS for the PCAP arm (Perifosine plus Xeloda or Capecitabine).
My interpretation: It was originally assumed that the lifespan of patients who were taking Xeloda plus Placebo (the CAP arm) would only live for 6.5 months. The trials are attempting to prove that those adding Perifosine to the regimen (the PCAP) would live an extra two months, or 8.5 months.
My comment: OK this makes sense, the trial is to show that patients live longer through Perifosine treatment, although two months is hardly much of a lifespan improvement.
Richards' writing: The 6.5 month OS projected for the CAP arm is actually greater than the median OS survivals of 5.3 to 5.9 months reported in the literature. In fact, the actual deaths in the CAP arm would have been greater than if the 6.5 month OS was actually applicable. That is, a life expectancy shorter than 6.5 months would have meant more relatively early deaths. Keeping in mind that the CAP arm consisted of patients who had failed previous therapies, a lower OS than 6.5 months seems reasonable.
My interpretation: In actuality, patients should live less than 6.5 months on average on the Xeloda plus placebo (CAP) treatment, more like 5.3 to 5.9 month based on previous studies. The 6.5 month lifespan is generous, therefore, more frequent deaths should be expected.
My comment: Richards is saying that 6.5 months is too long a time to assume the patients will live under the CAP treatment. I don't see how this is a positive comment for Perifosine, it is a neutral comment.
Richards' writing: "Despite this probable bias toward more deaths occurring at early points in time in the CAP arm than originally projected, the 163 deaths as of August 3, 2011, were approximately 10% less than the management projected numbers of 180 - 185 deaths. As a result, management revised its projections for the timing of the 360 events in Q4 2011 to sometime in Q1 2012. The evidence that PCAP was working was confirmed by the Yakult Honsha initiation on January 3, 2012, of P1 studies in Japan."
My interpretation: There were less deaths than expected in the Xeloda plus placebo arm. As a result, management revised its projection to a later date. Because Yakult Honsha initiated P1 studies in Japan, that means there's evidence that Perifosine is working.
My comment: So management pushed back the projection to a later date, how is this a positive for Perifosine? And Yakult Honsha just started its Perifosine studies in Japan, how is that evidence that the drug works?
Richards' writing: "Even allowing for approximately 10% to 20% of the CAP arm to still be alive today, the difference in numbers from the 360 event that must be filled in large part by deaths in the PCAP arm for the 360 event to occur is significant. The difference is so marked, it is reasonable to project the 360 event will confirm the PCAP advantage to be longer and more statistically significant than the original two month difference set in the XPect study. Interestingly, the price per share has not reflected this opinion."
My interpretation: Because 10%-20% patients of the CAP arm who should've died are alive today, that means that there should be a greater number of patients alive in the PCAP arm. For some reason, the share price hasn't reflected this opinion.
My comment: So more patients are alive in the CAP arm. How does that make the PCAP arm more favorable? If anything, that means that the treatment without using Perifosine is doing well for the patients.
Richards' writing: "These events and others confirm that initial modeling was excessively conservative when it employed a two-month survival for the PCAP arm. Now with the recent announcement by Ron Bentsur, CEO of KERX, that the 360 event is imminent and should occur in March 2012, it is highly likely that the effectiveness of PCAP has been proven although the final results have not yet been announced."
My interpretation: Since the initial modeling was conservative for the CAP arm, it should also be conservative for the PCAP arm. Now, since the CEO of KERX announced the upcoming results, then it's highly likely that Perifosine is proven effective.
My comment: The CEO hasn't given any indication that Perifosine is effective. Just because he is announcing the results soon doesn't mean that it's a positive. The results haven't been announced yet.
Richards' writing: "We are extremely confident in management's repeated suggestion that PCAP will be confirmed as a NDA before the end of 2012. We believe that PCAP will significantly exceed the results of Onyx's (ONXX) regorafenib which only offered an increase in OS of 1.4 months. Thus, PCAP will be the most effective treatment of its kind."
My interpretation: We are confident in the management's suggestion that PCAP will be FDA approved before the end of 2012. We believe that Perifosine will be more effective than reografenib. Therefore, Perifosine will be the most effective treatment of its kind.
My comment: So just because Jeremy Richards has faith in management's confidence in Perifosine, that's proof that Perifosine will be FDA approved. It's also proof that Perifosine will be the best colorectal cancer drug of its kind. When has management of a biotech firm ever not shown confidence in their drugs? Isn't that management's job? How is that proof that the drug will be effective?
Richards' writing: "As per the AEZS fact sheet, if a NDA is approved for PCAP, significant milestone payments and later royalties may be expected from its partners Handok in South Korea, KERX in North America, Hikma in MENA, and Yakult Honsha from Japan, which paid AEZS $8 million for exclusive rights on Perifosine. AEZS stands to receive an additional $62.5 million from Yakult if certain pre-established milestones are met. Meanwhile, AEZS-108, 130, and other agents in the AEZS pipeline are on the sidelines, awaiting further developments. A takeover bid by Roche (RHHBY.PK) and/or an announcement that a partner has been chosen for European marketing of PCAP remain distinct possibilities. Roche is the logical suitor since PCAP patent control allows extension of its Xeloda franchise, albeit indirectly. Potential other suitors that may buy AEZS and/or KERX are large pharmaceutical companies with an interest in oncology such as Celgene (CELG) and Gilead Sciences (GILD)."
My interpretation: "Once Perifosine is approved a domino effect of riches will happen to KERX and AERZ like royalties from sales in other countries and new partners, more drugs that are in the pipeline will be approved, followed by buyout of AEZS and or KERX.
My comment: Now after Mr. Richards has "proved" by his own logic that Perifosine will be approved by the FDA and will be the best drug of its kind, he's assuming there's going to be all kinds of catalysts that will boost the value of KERX and AEZS. Although these events could happen, there is no sure thing that these catalysts will occur even if Perifosine does get approved whereas Richards is letting his rosy imagination run wild.
Richards' writing: "Dr. Williams, one of our biotech consultants, has added 500,000 shares to his position in KERX this month as he was encouraged by the delay in the 360 event and believes KERX will trade upwards of $10 this year. Dr. Williams also owns 1.2 million shares of AEZS. We value his opinion immensely and his track record is impeccable. Most notably, he invested in Dendreon (DNDN) at under $4 a share in 2006 when it was out of favor with the Street and sold it at $50 in 2010. Dr. Wurlitzer, a well-respected surgical oncologist and former surgical instructor at a major university, now owns approximately one million shares of AEZS as he firmly believes in the success of Perifosine."
My interpretation: "Our biotech consultant, Dr. Williams, has bought a bunch of KERX and AEZS. Therefore, you should too because his track record is impeccable and we value his opinion."
My comment: To pump the stocks up further, Mr. Richards divulges that his biotech consultant, who supposedly has a great track record and his opinion is valued, owns a bunch of shares of KERX and AEZS.
In conclusion, I welcome intelligent Seeking Alpha readers to disagree with my interpretation.