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Introduction

I am starting my coverage of Northwest Biotherapeutics (NWBO) with a Buy. I became interested in this small bulletin board company based on research that I did on Dendreon (DNDN) whose prostate cancer vaccine Provenge is the first approved cancer therapeutic that uses living dendritic cells. I came to believe that this technology had the potential to significantly improve cancer outcomes over current regimens based on chemotherapy, monoclonal antibodies and targeted therapies.

I looked for other companies with dendritic cell technology and came across Northwest. The company has had a tortured financial and stock price history over the past decade in which it has struggled as an underfunded and ignored company scrambling to stay alive. Somehow, it has managed to advance its lead product, DCVax-L for glioblastoma multiforme (the most severe type of primary brain cancer), to a Phase III trial for which topline results are expected in 2013 or early 2014.

Northwest has a compelling technology platform and products. It is a pioneer and industry leader in using living cells as the basis for therapeutic products. In the case of living cell therapy, the manufacturing process is the product and through its collaboration with Cognate BioServices, it has developed sophisticated manufacturing technology. It is in Phase III development with DCVax-L for glioblastoma multiforme and has another product DCVax Prostate that is waiting for funding to begin a Phase III trial.

This report is a condensed version of a more comprehensive report that I have written. I have omitted much of the supporting data so that more detail oriented investors may want to refer to that report. This report focuses on NWBO, but investors should be aware that ImmunoCellular Therapeutics (IMUC) has a dendritic cell vaccine for glioblastoma multiforme at a similar stage of development. IMUC is discussed in my larger report.

Phase I Trial Results for DCVax-L were Impressive

DCVax-L is has begun a Phase III trial on the basis of data from two Phase I trials. Like most Phase I trials, these involved a small number of patients (twenty), had no control arm and were done at a single clinical site. Seasoned biotech investors will quickly point out such results are often not replicated in larger studies and this has certainly been the case with prior cancer vaccines.

I understand this and I initially viewed the Phase I trials with conventional skepticism, but as I looked closer I found the results just too striking to ignore. Investors often get excited with cancer drugs if Phase I/II results in difficult to treat cancers (like glioblastoma multiforme) show objective responses of 30% to 40% (defined as shrinking the tumor mass by more than 50% in solid tumors). Usually improvements in progression free survival (time for the tumor to start growing again) and median survival are measured in a few months or even weeks.

DC Vax-L showed median progression free survival of 25.0 months which compares to 6.9 months expected with standard of care "SOC" and median overall survival of 36.4 months versus 14.6 months expected for SOC. The data suggests that after three years, 55 of every 100 patients treated with DC Vax-L would be alive versus 16 of every 100 treated with SOC. Even with all of the Phase I caveats, this strong signal of activity suggesting a "beyond impressive" increase in survival was just too much for me to ignore.

Manufacturing Process is Superior to that of Provenge

My experience with Provenge had shown me that in living cell based products, the manufacturing process is the product. I came to believe that NWBO had a superior approach to manufacturing as compared to Provenge. Both start with the collection of monocytes through a blood draw. These monocytes are then matured into the dendritic cells that are the basis for Provenge and DCVax-L. The Provenge manufacturing process results in a mixture of cells in which monocytes are only about 20% of total cells while the DCVax-L process produces 80% monocytes. This greater potency allows DCVax-L to be given as simple intra-dermal injections versus a one hour infusion for Provenge. I think that this low monocyte yield might also impair the efficacy of Provenge in relation to DCVax-L, but this is just speculation on my part.

The Provenge manufacturing process requires making fresh product for three infusions given over a one month period. The DCVax-L process makes sufficient quantities in one batch production process to allow for treatment over three years. Unlike Provenge, this allows for booster shots which intuitively I think might increase efficacy. The vials of DCVax-L are cryopreserved until needed. They are then delivered to a doctor's office where they are simply thawed and injected unlike the one hour infusion needed for Provenge.

The more efficient manufacturing process for DCVax-L should sharply reduce the cost of manufacturing relative to Provenge. Because of high cost of goods sold, Dendreon had to price Provenge aggressively and management has suggested that it will take $500 million of Provenge sales to break even. DCVax-L is expected to be priced more in line with other types of new cancer therapy and carry normal pharmaceutical margins. Importantly, DCVax-L is given as seven injections over the first year so that it doesn't have quite the dose density that has created a reimbursement issue for Provenge.

Fraunhofer and King's College Collaborations Put Me over the Top

I was intrigued with the Phase I data and the superior manufacturing process, but I kept thinking what am I missing? It is not comforting to like a company that everyone else seems to be indifferent to or negative on. Understanding Northwest's collaborations with Fraunhofer Institute and Kings College London and King's College Hospital provided third party validation and gave me the investment courage necessary to push me over the top and go out with a Buy. I thought that if these prestigious and knowledgeable institutions were willing to team up with Northwest that I might be on to something.

Fraunhofer is a prestigious and well respected research institute in Germany that over 60 years has gained a reputation for advancing science in healthcare and many other areas. Kings College Hospital is the premier teaching hospital in London and serves a catchment area in the U.K. of 4.5 million patients. King's College London is a sister institution that does contract manufacturing and has expertise in production of living cell products.

I think that the Fraunhofer and the King's College collaborations bring to Northwest's European development efforts the same benefits for manufacturing, clinical trial support and interaction with regulatory agencies that small companies look for when they partner with a big pharma company. Importantly, these collaborations do not produce the significant dilution to shareholders caused by sharing profits with a pharma partner. Northwest also does not risk losing control over product development if the big pharma company moves too slowly or becomes distracted, a not uncommon occurrence. These unique and highly valuable collaborations are a critical aspect of Northwest that investors have overlooked.

The manufacturing operations of Fraunhofer and King's College London provide significant benefits. Because the manufacturing process is so crucial to the product, it will bear close scrutiny if the time comes for regulatory agencies to consider approval of DCVax-L. At that time, the European regulatory agencies will have thorough knowledge of the DCVax-L manufacturing process. It is also necessary to have European manufacturing to cope with the logistics associated with personalized medicines. These facilities might also mitigate the risk of any manufacturing disruption that might occur in the US, UK or Germany as the other two may be able to offer backup.

Both Fraunhofer and King's College London had existing clinical grade manufacturing facilities for living cell products, a portion of which they are dedicating to the DCVax-L program. Thus Northwest was able to avoid the capital expenditures and a time delay of two years that would have been involved in constructing new facilities assuming that somehow Northwest could have raised the necessary funds.

The relationship with Toucan Funds and its founder, Linda Powers, also puzzled me at first. There are significant cross dealings between Toucan and Northwest as Ms. Powers is Chairman and CEO of Northwest and has been responsible for and invested in numerous fund raisings. My initial suspicion was that there might be something wrong. However, as I looked closer, I concluded that funding from the Toucan Funds, its affiliates and Ms. Powers all stem from the unwavering support of Northwest by Ms. Powers and this is the only thing that has kept Northwest from going out of business. The strength of this conviction is underlined by the 53% ownership of Northwest by Toucan, its affiliates and Ms. Powers. If you want to find a management with "skin in the game" NWBO certainly comes out near the top of the list.

An Asymmetric Investment Opportunity

Some hedge funds have made enormous returns by looking for asymmetric investment opportunities. These stem from finding upcoming events that are not well understood and which have the potential to cause dramatic stock movements in the case of a positive outcome. The chances for such a positive outcome may be modest, but if it does occur the potential reward dramatically offsets the risk of being wrong. This is asymmetric investing and biotechnology lends itself very much to this approach.

For an asymmetric opportunity there has to be lack of awareness or extreme skepticism that a positive outcome can occur. Small biotechnology companies fit this approach because most Wall Street analyst coverage in biotechnology is focused on larger biotechnology names (more symmetric investing). In addition, the large number of trial failures in small biotechnology has produced a pervasive skepticism that any clinical trials will succeed.

Asymmetric investing does not mean that an investor is smart enough to predict with certainty clinical trial outcomes. The premise is that the event has a reasonable chance of occurring, is unexpected and if it does occur the upside potential dramatically offsets the risk of losing much or all of the investment if the outcome is negative.

The approach I have used to gauge potential upside for Northwest is to compare it to two other cancer targeted biotechnology companies that have drugs in similar stages of development. If the Phase I results for DCVax-L are repeated in the Phase III trial, it will be a great breakthrough for treating glioblastoma multiforme. In addition, it will validate the dendritic cell approach for the treatment of most solid tumors. I believe that the market would respond to this event in the same way that it has reacted to Pharmacyclics (PCYC) results with ibrutinib in hematological cancers which has resulted in an increase in market capitalization from $500 million to $4 billion over the last year. With the 431 million fully diluted shares for Northwest that I project for 2014, this would result in a price of over $9.00.

This is an obvious best case. In the event that the results are positive, but show more modest improvements, I think that the example of Threshold Pharmaceutical (THLD) with TH-302 might be a good model, When results showed modest objective responses and modest improvement in progression free survival in pancreatic cancer, the market capitalization jumped from $77 million to $450 million. At $450 million, Northwest would sell for over $1.00 per share.

Of course, the Phase III trial could fail. There is ample precedence for trial failures in biotechnology and especially in cancer vaccines in which very promising Phase I results were not replicated in Phase III trials. There is a very real risk that if this occurs with DCVax-L that Northwest would fail. Anyone investing in Northwest must be prepared to lose all of their money. My asymmetric analysis suggests that an investor is risking at most $0.22 to see an upside of as much as $9.00 in an optimistic case and perhaps $1.00 in a positive but more subdued case. Don't ask me to assign odds for each scenario. I just think that there is a reasonable chance for success in which case the upside is so significant that this risk is justified.

There Are Significant Negatives

The starting point for analyzing the potential for a stock is to recognize the negatives and this is even more imperative when dealing with an emerging biotechnology company like Northwest Biotherapeutics. There is a long list of negative issues that any potential investor should consider.

  • Northwest Biotherapeutics is a bulletin board listed company that sells for $0.22 per share and has a market capitalization of about $57 million.
  • There is almost no Wall Street research coverage or institutional awareness of the company.
  • There are only eight fulltime and two part time employees. However, this metric gives no credit to its relationships with Cognate BioServices, Fraunhofer Institute, King's College in London, its contract research organization and other contract services. In the aggregate these provide Northwest with significant additional personnel and infrastructure resources.
  • NWBO ended the first quarter with just $37,000 of cash, current liabilities of $24 million and long term liabilities of $1 million. The burn rate in the first quarter was $3.5 million. Northwest appears insolvent at first look. However, this balance sheet is typical of the quarter ending balance sheets that Northwest has presented for several years. The company has done a long string of small financings on a quarter by quarter basis to fund the company.
  • In the 10-K for 2011 the auditors raised a going concern issue. Again this has been a recurring issue for Northwest for the past several years.
  • The company just filed an S-1 in which it announced that it plans to raise about $25 million of cash. Raising this amount would be extremely important from an investor standpoint as it would finance the company through the completion of the primary endpoint of the Phase III trial and announcing of topline results in late 2013 or 2014. If this offering is unsuccessful, the company must continue to finance from quarter to quarter to complete its Phase III clinical trial, which could cause many investors to be concerned about solvency and avoid the stock.
  • Coincident or prior to the offering, the company will try to eliminate most of the debt overhang by converting $17 million of notes payable and convertible notes into equity. About $9 million of this is owned by Toucan and its affiliates and another $7 to $8 million by investors who have consistently supported the company in the past. I think that Northwest will be able to convert most of this debt into equity. However, failure to do so could potentially block the equity offering and force the company to rely on quarter over quarter financings.
  • Certain aspects relating to clinical issues also cause unease. The company is jumping from Phase I to Phase III on the basis of two Phase I trials that enrolled only 20 patients, that had no comparison arm and were done at a single clinical center. Seasoned biotech investors will quickly point out that this is an uncomfortably small number of patients and the lack of any control arm is usually a danger signal as is work done at just one center.
  • By my calculations, the company now has 257 fully million shares, warrants and options outstanding. If the offering and recapitalization are successful, I estimate that the number of fully diluted shares will increase to 431 million fully diluted shares.

Can the Phase III Trial Succeed and If So, Will FDA Approve DCVax-L?

The randomized Phase III trial of DCVax-L in glioblastoma multiforme will enroll 300 patients in the US, Germany and the UK with topline results expected in late 2013 or early 2014. The primary endpoint is median time to progression and patients who progress in the control arm will be switched to DCVax-L. This is similar to the original design of the Provenge Phase III trial. Provenge did not successfully reach the time to progression endpoint, but it did show a statistically significant improvement in median overall survival and this ultimately led to its approval. The improvement in overall survival was achieved even though the patients in the control arm also received Provenge once their disease progressed.

Because of the similarities of the DCVax-L trial design to that of Provenge, there will be a lot of fretting as to whether DCVax-L will be successful. There will also be concern because the FDA has signaled that it prefers to see a survival benefit in cancer trials and often requires two separate, confirmatory trials for approval. These FDA issues raise the concern that even if the endpoints of the trial are successfully reached that the FDA may require another supporting Phase III trial.

These are legitimate concerns, but the experience with Avastin gives hope. Avastin was studied in GBM patients who had failed standard of care. The FDA approved Avastin on the basis of an open-label, multicenter, randomized, non-comparative study that enrolled 167 patients of whom 85 received Avastin and 82 received Avastin plus irinotecan. An objective response was observed in 25.9% of patients and the median progression
free survival was 4.2 months. This study was supported by a second study conducted by NCI that was a single-arm, single institution trial that enrolled 56 patients who were given Avastin alone. This study produced an objective response of 19.6% and median progression free survival of 3.9 months. No evidence of improved survival was seen in either study. The FDA granted approval in 2009 based on these results. Note that the DCVax-L trial added DCVax-L to standard of care while Avastin was used in sicker patients who had failed SOC.

Price Target Discussion Modeled on Pharmacyclics and Threshold

In trying to set a price target for Northwest, I used the approach of studying the market capitalization of companies with cancer targeted drugs that are in a similar stage of development that have caught the attention of Wall Street. If the Phase III trial results for DCVax-L are about the same as its Phase I trials, I think that Northwest could be viewed in the same very bright light as Pharmacyclics.

In a period of about one year, Pharmacyclics has increased from $7.00 per share to a recent price of $57 and now has a market capitalization approaching $4 billion. The company has clearly caught the attention of Wall Street where its lead drug ibrutinib is correctly viewed as potentially a major advance for treating lymphomas and leukemias. A worldwide partnering deal with Johnson & Johnson has validated the technology and bolstered investor confidence. There are analyst projections that ibrutinib can achieve $2 billion or more of annual sales.

The clinical data for ibrutinib is based on two non-randomized, Phase Ib/II trials. In one trial there were 69 patients with chronic lymphocytic leukemia "CLL" or small lymphocytic lymphoma "SLL" who had failed standard therapy. After 18 months of follow-up, 70% to 90% of the patients divided into three distinct groups according to disease characteristics did not experience a progression in their disease. In an additional 26 treatment naïve patients, 12% achieved a complete response and 96% of patients had no disease progression at 14 months.

A second non-randomized trial of 30 patients combined ibrutinib with bendamustine and rituximab in CLL. The overall response rate was 93% with 13% of patients achieving a complete response with no morphologic evidence of CLL. With a median follow up of 8.1 months only 2 patients reported progressive disease and an additional 5 patients proceeded to stem cell transplant.

The takeaway point from these two trials is that ibrutinib as a single agent and in combination with other drugs can delay progression of these two intractable hematological cancers for an impressive length of time. The data is too immature to draw meaningful conclusions about survival benefits but given how well that it is holding the cancer in check, it is likely to be impressive.

It is difficult to compare results in different cancers other than to say that glioblastoma multiforme and refractory/relapsed CLL and SLL are aggressive and difficult to treat. DCVax-L and ibrutinib have both shown impressive results in patient populations for which available treatment options are limited. The partnership with Johnson & Johnson gives third party validation of ibrutinib, but the Fraunhofer and King's College Hospital and King's College London collaborations also provide validation for Northwest. The most obvious difference is the greater number of patients in the ibrutinib trials, 125 versus 20 for DCVax-L, which gives somewhat more confidence in the interpretation of results for ibrutinib.

The market opportunities for both DCVax-L and ibrutinib are equally huge if they are successfully developed. The US glioblastoma market is an addressable market of about $1 billion and the European market is about the same size. Just as the mechanism of action of ibrutinib opens the potential for broad usage in most stages and types of lymphomas and leukemias, the dendritic cell vaccine approach of Northwest is applicable to most stages and types of solid tumors. The addressable markets for each drug are vast. I can see that in the event that the Phase III results for DCVax-L are like those of Phase I, analysts might also estimate $2 billion of sales potential and this could result in a market capitalization of $4 billion for Northwest.

In comparing and contrasting what we know about the two drugs, the first thing to note is that the results for each are both in non-randomized trials. DCVax-L was done at a single center versus multiple centers for ibrutinib. The two trials of ibrutinib enrolled 125 patients versus 20 for DCVax-L. The edge goes to Pharmacyclics in the reliability of the results, but not overwhelmingly so.

The second company to consider is Threshold Pharmaceuticals, whose lead drug, TH-302, has shown activity in a broad range of solid tumors. Threshold's price has increased from $1.29 in early February 2012 to a current price of $7.82, which gives it a market capitalization of $413 million. The strong move in the stock was caused by the release of results from a Phase II study in pancreatic cancer in which TH-302 was added to gemcitabine or other agents used in treating pancreatic cancer. This showed an improvement in progression free survival from 3.1 months to 5.6 months and the objective response rate was 22%.

Threshold is an example of what more modest positive results in terms of therapeutic improvement might do to Northwest's market capitalization. The example of Threshold might apply if the results of the Phase III trial data for DCVax-L were to show encouraging but not "knock your socks off" type of results. This might result in a $413 million market capitalization.

Source: Northwest Biotherapeutics' DCVax Cancer Vaccines Could Lead To A Sea Change In Cancer Treatment