Today biotechnology remains one of the few bright spots in the uncertain economic landscape. IBISWorld estimates that Global Biotechnology industry revenue will reach $228.6 billion in 2012, having increased at an average rate of 10.4% per annum over the past five years. The Biotech Index (IBB) gained 42.6% this year, while the S&P 500 increase was only 14.5%. As the nation's baby boomers continue to age, the demand for pharmaceuticals continues to grow and revenues of the biotechnology industry will increase, albeit at a slower compounded annual rate of 9% between 2012 and 2015.
One of the fields where biotechnology has made extraordinary breakthroughs is cancer immunotherapy - the use of the immune system to reject cancer. The healthy immune system is necessary for control of malignant disease and its activation was a goal in immunology and oncology. Unfortunately, many attempts were compromised by a poor understanding of the immunization mechanism. Harold Varmus, a Nobel laureate and the director of the National Cancer Institute, was recently quoted as stated that "except for monoclonal antibodies, every therapy that exploited the immune system was pretty abysmal. There weren't any good ideas about why immune therapy failed." Patients who didn't respond to available therapies have shown dramatic and unexpected responses to new treatments that unleash the immune system.
At the forefront of this development are three companies: Two large-cap big pharmaceutical players, Pfizer (PFE) and Novartis (NVS) and one micro-cap Northwest Biotherapeutics (NWBO). Pfizer's vaccine stimulates the patient's immune system to fight the cancer and it is in the early stages of development. Novartis is in the advanced stages of development of a blood cancer treatment. T-cells are taken from a patient's immune system, reprogrammed in vitro, and re-injected. The new cells find the cancer cells and destroy them. This treatment was tested on leukemia patients who are now in remission.
But what's happening at Northwest Biotherapeutics is truly game changing. It is entering phase II clinical trials for DCVax-Direct. When DCVax-Direct was administered in pre-clinical animal studies, existing tumors regressed. Importantly, the regressed tumors included not only tumors treated with DCVax-Direct but tumors on the opposite side of the animal's body (which were not injected) as well. Further, when the animals were subsequently injected with cancer cells, the animals didn't re-develop cancer, indicating immune memory. DCVax-Direct, like the Novartis approach, takes out a patient's immune cells and reprograms them to attack cancer. The difference with DCVax-Direct is that it reprograms dendritic cells instead of T-cells, and it can, according to the company, be used to treat any kind of tumor anywhere in the body.
Recently Northwest Biotherapeutics announced a 1 for 16 reverse stock split. This is, in my opinion, a first step in a planned public offering and listing of the common stock on the NASDAQ Capital Market. The reverse stock split increased the price of the stock from the pre-split price of $0.30 per share to current (appreciated) price $6.50. The higher stock price is important since many institutions cannot buy stocks selling below $1.00. Without the stock split, the upcoming offering would rely on retail investors and speculative hedge funds. The reverse stock split brings in large institutional investors.
Take a look at Ariad Pharma's (ARIA), whose blockbuster drug ponatinib was found to have broad potential applications in cancer treatment. Ariad's stock price three years ago was $1.39. In 3 years, it gained 1500% to $17.27. Another example is Pharmacyclics (PCYC), which reported striking results for ibrutinib in hematological cancers. This increased PCYC's market capitalization from $500 million to $4.4 billion over the last year. Success in the phase III trial of Northwest's other applications such as DCVax-L - an application to remove solid tumors (not even taking in account DCVax-Direct) could result in a similar jump in market capitalization.
NWBO had 10.4 million shares outstanding, 1.4 million options and 5.0 million warrants (adjusted for the 1 for 16 reverse split). If all these options and warrants are exercised, there would be 16.8 million fully diluted shares. The company also will issue stock for $25 million. Assuming that NWBO will issue 2.6 million shares to retire $17 million debt and 3.8 million shares for stock issue with a current price of $6.50, total number of shares will be 23.2 million. This will undoubtedly dilute the current share value of its current holders, but considering a company with no debt and possible successful trials looming, a successful development can cause share prices to surge manifold.
It goes without saying however, that the risks associated with investing in this industry are quite high. A failure in a clinical study, lack of adequate capitalization; a competitor coming to market first could send a company stock to a nose dive. The future outcome for Northwest Biotherapeutics will be either bankruptcy or extremely high appreciation. Due to advantages listed above, the chances of the latter are very high, but still a gamble. So if you're going to place a bet, keep it minimal until further news arrives.