Hope Springs Eternal In Biotech

by: Michael J. Ray

An acquaintance of mine once gave me a pearl of wisdom about investing. He stated that there is no such thing as hope in investing. He is correct in his statement in that depending on hope is not a great strategy. Usually there are enough facts and trends present that depending on hope is not a logical step to make investment decisions. That being the case though, there is one sector that does embrace hope as an investing component and that sector is speculative biotech.

It is hope that is the key of this sector. It is the hope from children's families that have complications of bone marrow transplants that drives the sector. It is the hope from patients and their families that suffer from macular degeneration where eyesight is slowly being lost. It is the hope from individuals suffering from breast cancer who are waiting for a better treatment. All these hopes highlight unmet medical need, which in turn brings investors and researchers to the scene.

Unfortunately hope in itself is not enough to guarantee success for all, including investors. This has recently been shown when such popular companies like Keryx (NASDAQ:KERX) and BioSante Pharmaceuticals (BPAX) failed to meet the mark. KERX faltered when they released results of their Phase 3 clinical trial evaluating the drug Perifosine. When reviewing the tests with patients that had refractory advanced colorectal cancer, the drug did not meet the primary endpoint of the trial. The hope of both investors and patients were dashed, and the stock price quickly declined 68% on the news. Today the stock trades around $1.70 a share, which is well off its highs.

BPAX's had a similar failure as their female dysfunction drug LibiGel failed in two late-stage clinical trials. LibiGel was said to have huge potential and was likened to female Viagra, but as hoped faded so did the stock price. Cresting over $3.50 a share at one point, the stock today trades well under the $1 mark.

Both KERX and BPAX are not completely out the game though. Each has other products in the pipeline, but their most touted opportunities came up empty. But this article is about hope, and hope is said to spring eternal. That being the case, here are three companies keeping hope alive for both investors and patients alike.

Osiris Therapeutics (NASDAQ:OSIR)

Osiris Therapeutics, Inc. is a stem cell company that is focused on developing and marketing products to treat medical conditions in the inflammatory, autoimmune, orthopedic and cardiovascular areas. OSIR's products are derived from adult bone marrow which according to the company is readily available and non-controversial source. According to the company, these stem cells have demonstrated the ability to repair different types of tissue and offer an opportunity to develop revolutionary new treatments for certain disease from inflammatory diseases, heart attacks, diabetes and arthritis.

Turning to the company's financial statements also gives investors hope. The biosurgery product revenue rose 49% from the previous quarter to $1.14 million. The total revenues were $4.6 million in the first quarter of 2012, but this included a final amortization of a license fees from their collaboration agreements. In the first quarter of 2011 the total revenues were $10.4 million, and that amount was almost exclusively of amortized license fees.

Turning to the expenditure side of the house, we also see some improvement. The research and development expenses for the first quarter of 2012 were $4.0 million, compared to $4.7 million incurred in the first quarter of 2011. The general and administrative expenses also decreased and were $1.5 million for the first quarter of 2012 compared to $1.7 million for the same period of the prior year.

Net cash used in operations for the three months ended March 31, 2012 was $4.0 million. At the end of the quarter OSIR had $44.2 million of cash, receivables and short-term investments. That being the case, the cash burn rate should be under control for some time. When all the final figures come together, the net loss for the first quarter of 2012 was $1.3 million.

The real excitement and hope for this company comes in the form of the approval of Canadian regulators to use their stem cell therapy Prochymal. This drug is intended to have many uses, but for now it will be used to treat a deadly side effect of bone marrow transplants called graft vs. host disease. This is a condition in which transplanted bone marrow cells attack the body of the patient. The drug will be used in children who are not responding to steroid therapy treatment. The drug was granted a type of conditional approval because of the lack of effective treatments, but further tests will still be run.

Now this treatment will not be a big money maker, but the events are far reaching. This will be the world's first company to receive market approval for a stem cell product. Needless to say this should be a historical event. Unfortunately though nothing is without risk in the world of biotech. It seems that Osiris was developing Prochymal and a second stem cell treatment as part of a partnership with Genzyme, which is a unit of the drug maker Sanofi. It seems that earlier this year Sanofi had discontinued the late-stage testing of the drug, and Osiris believes that the collaboration between the companies has been terminated. This would mean that all rights to Prochymal would be held by Osiris. Needless to say, Sanofi disputes this and now both companies are discussing the status.

What it comes down to is that Prochymal is a therapy with many potential uses if it can get approved. The final plan is to use it to treat Crohn's disease, repair of heart tissue following a heart attack, the protection of pancreatic cells in patients with type 1 Diabetes, and the repair of lung tissue in patients with pulmonary disease. With this many uses the drug has the potential to be blockbuster, and funds from its sales could be used to further the other products in the pipeline. Needless to say, there is lot of hope being focused on Osiris.

Advanced Cell Technology Inc. (ACTC.OB)

If Osiris's technology is something that inspires hope, then what ACTC is working on should help to solidify it. Advanced Cell Technology is a biotechnology company focused on the development and commercialization of human embryonic and adult stem cell technology in the field of regenerative medicine. ACTC's ace in the hole is their patented Single Blastomere derived Embryonic Stem Cells (hESC). What makes this so powerful is that ACTC can generate hESC without the destruction of the embryo. Needless to say, this technology helps the company sidestep highly charged religious and political issues that plague other entities.

This technology is nice, but how to put it into practice is the question. For this ACTC is currently involved with clinical trials dealing with the treatment of Stargardt's macular dystrophy [SMD] and dry age-related macular degeneration [dry AMD]. The trials each have 12 patients which will be given ascending dosages of 50K, 100K, 150K and 200K cells. What is even most impressive is the prestigious entities that have agreed to participate with ACTC on this ground breaking procedure. See the list below:

US Clinical Trial Sites

•Jules Stein Eye (UCLA)

•Wills Eye Institute

•Bascom Palmer Eye Institute

•Massachusetts Eye and Ear Infirmary

European Clinical Trial Sites

•Moorfields Eye Hospital

•Aberdeen Royal Infirmary

These medical establishments are some of the top institutions in the world dealing with ocular programs. Odds are they must see some potential if they are willing to partner with ACTC.

Turning to the trials we can see how patient's hopes are rising. In the U.S. the Stargardt's first cohort is complete and they have been cleared to treat the next set of patients. In Europe the first SMD patient has been treated, and they are about to treat patients 2 and 3. Results are very positive. ACTC reports that one of the U.S. SMD patients improved from 0 to 5 letters on the ETDRS visual acuity chart. At the nine month follow-up the visual acuity gains remain stable and the patient continues to show improvement. In Europe the SMD patient has improved from 5 letters to 10 letters on the visual acuity chart, and has reported that his vision has significantly improved to a point where he has the ability to read text on TV.

In the dry AMD patient the vision improved from 21 to 28 letters on the ETDRS visual acuity chart. Results with newer patients are said to show similar trends that have already been observed for both the AMD and SMD patients presented above.

As inspiring as all this medical breakthrough is, the stockholders have not had much to rejoice about. Like most small companies, ACTC at one point had to accept toxic financing plans to keep afloat. Along with that came major dilution to the stock which further damaged the company's books. As a result the company's market cap sank to $167 million where it trades today. To try and remedy the situation management has decided to take its own medicine. To start, ACTC called for a huge increase in the number shares which would help settle the toxic financing and all related litigation issues. Now with outstanding shares well over 2.6 billion and trading on the bulletin boards, the stock is very venerable. Management then made a determination that an up listing to the NASDAQ is needed to further the exposure of the company. To do this ACTC plans for a reverse split of between 1 for 20 and 1 for 80 shares. It is right about here where the hope for quick profits was dashed. When a company completes a massive stock dilution and then a reverse split in such a short period of time, it is like yelling fire in a crowded theater. Investors ran for the door, which explains some of the weakness in today's stock price.

Turning to the company's financials we find that ACTC ended 2011 with $13.1 million cash on hand and was virtually debt-free. Looking deeper we see that for 2011 ACTC utilized $13.6 million in cash for operations, compared to $8.8 million in the year-earlier period. This increase was primarily from ACTC's ongoing clinical activities in the US and Europe. The company states that another $15 million more is available and that they are going to be able to self-fund both the U.S. clinical trials and EU clinical trial.

The question now is if all hope is lost for investors? The title of this article is "Hope Springs Eternal in Biotech" and that concept is true for ACTC. Having unprecedented success in addressing an unmet medical need worth $25-$30 billion is enough to see that hope very much still exists. On top of that, ACTC has so many patents and other potential products that it would take a book to cover them all. Needless to say hope is very much alive with this company as well.

Galena Biopharma, Inc. (NASDAQ:GALE)

Galena Biopharma is another biopharmaceutical company that is fueled by hope. GALE is focused on developing the next-generation cancer immunotherapies in the form of Peptide vaccines. These vaccines have many advantages over the existing cancer treatments including such things as better safety profiles, longer lasting protection, and easier administration.

The company was originally incorporated as Argonaut Pharmaceuticals in Delaware, on April 3, 2006. They changed the name to RXi Pharmaceuticals Corporation on November 28, 2006. On September 26, 2011, the company once again changed their name Galena Biopharma in connection with a planned separation of two entities. When the dust settled we find Galena, which will operate as an oncology drug development company, and RXi Pharmaceuticals (NASDAQ:RXII), which will continue to develop RNA based therapies. Our focus in on Galena, so we shall continue our analysis there.

Galena's approach to cancer treatment is to focus on the "minimal residual disease". This is the disease that may remain in a cancer survivor. The plan is to prevent the recurrence in early stage patient who may harbor residual cancer cells that are not detectable by current technology. Without such a treatment many individuals will relapse in significant numbers over time. To address this the company is counting on the product NeuVax. The product is under a Phase 3 clinical trial and is also being tested in combination with Herceptin, which is a drug from Genentech/Roche.

Obviously there is lots of hope for GALE to succeed, but how does the company measure up on the financial side? GALE has not generated any revenue to date and may not generate product revenue in the foreseeable future. The interest income off their investments for the first quarter was negligible and really not worth the time to report on. Net cash provided by financing activities was $2,153,000 for the three months ended March 31, 2012.

For the three months ended March 31, 2012, GALE reported a huge net loss of approximately $24,761,000 compared with a net loss of $3,841,000 for the three months ended March 31, 2011. The loss increased by $20,920,000 or approximately 545%. The dramatic increase was made up of a few key elements. First the total research and development expenses for the quarter were approximately $3,671,000. When we compare this to $2,156,000 for the three months ended March 31, 2011, there is an increase of $1,515,000, or 70%. This increase was due to an increase in costs related to the ramp up of the Phase 3 clinical trial. Finally there was a $20,549,000 other expense for the three months ended March 31, 2012. While huge, this increase was due to an increase in the fair value of warrants accounted for as a liability, as well as warrants settled during the three months ended March 31, 2012

What all this boils down for a company like GALE is their cash position and burn rate. As of March 31, 2012 they had cash and cash equivalents of approximately $8.7 million, compared with $11.4 million as of December 31, 2011 and $24.9 million as of April 30, 2012. As one might have guessed, the increase in the cash and cash equivalents from March 31, 2012 to April 30, 2012 was attributed to the proceeds of an offering that closed on April 15, 2012. As a result GALE believes that their existing cash and cash equivalents should be sufficient to fund the operations through at least the second quarter of 2013. At that time GALE will to find a partner, complete a secondary offering, or locate some sort of financing to keep the hope alive.

In conclusion, these three companies are some of the faces of hope in biotech. Both patients and investors have invested time, money, and tears in hope of success. The risks are high but so are the rewards. Only time will tell, but until then expect volatility as hope rises and falls with each passing day.

Disclosure: I am long ACTC.OB, GALE.