One Approach for Investing in Emerging Biotechnology Stocks

I write on biotechnology and pharmaceutical companies of all sizes, but I have spent much of the last year focusing on small biotechnology companies ranging in size from as low as $50 million in market capitalization.to about $400 million. There is much less analyst and investor attention on these stocks, which can lead to pricing inefficiencies. There is also considerable risk as the investment thesis for the stocks often hinges on the outcome of a single clinical trial. While I don't have precise statistics, my impression is that more than half of late stage trials fail. These investment opportunities fit my asymmetric investing approach.

What do I mean by asymmetric investing? 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 that have the potential to cause

Investment Thesis

It has been some time since I have written on Antares (ATRS); in fact, my last note was in September 2012. My lack of writing shouldn't be interpreted as a decline in interest. Antares remains one of my favorite biotechs and one of my largest personal biotech holdings. This is a brief update on the fundamental drivers for the stock over the next few years.

Antares' management has done an excellent job in building a business based on developing and licensing products in return for a royalty. This can be a good business as indeed Antares is proving. However, the truly great stock successes have been with companies having fully integrated business models that go the further step and bring new products to market on their own. It is the transition from the royalty based to fully integrated business model that is the most important fundamental driver for

Key Investment Summary

The lead investigator will give an important update on the ALS phase I trial on Friday, May 17 that will have meaningful efficacy data on eight patients and safety data on fourteen. I believe that the paper will be positive based on highly encouraging efficacy already reported for five patients. I also think that the action of the FDA, which has seen these results, in approving a phase II trial is another indicator that results will be encouraging. There will be some investor caution because there is data on only eight patients, but my judgment is that there will be a positive move in the stock following the release of this paper. I continue to be a buyer.

Background on ALS Phase I Trial

Neuralstem (CUR) has discovered and developed regionally specific neural stem cells that can be surgically implanted in the spine where they engraft in

Investment Thesis

Trius (TSRX) announced an important new development today that bolsters my investment case for the company, and I continue with my Buy rating on the stock. In a recent report, I explained why I thought that Trius could potentially reach $40 per share in 2020. This bolsters the potential for achieving that lofty price target.

I want to make it immediately clear that the patent application that is the subject of this report is based on non-clinical studies that have not yet been confirmed in human studies. However, non-clinical data for antibiotics have considerable predictive importance for human studies. It is a well-established principle that the in-vitro activity of antibiotics is a surrogate for the activity in the human body if in-vitro concentration of the drug matches that in-vivo. There have been comparable examples in the development of hepatitis C virus drugs in

Introduction

I am beginning a new approach in my writing on biotechnology companies. As those who have followed my writing may appreciate, I try to do in-depth research reports on companies and most of my investment ideas are long term. I do not have a trading focus and try to not get overly caught up in near term price fluctuations as long as I remain confident that my long term thesis remains valid.

Despite my non-trading approach, I recognize that there is a need to provide timely comments on late breaking news and sometimes on price fluctuations. I will try to do so in this and subsequent weekly reports that focus on recent events, generally occurring within the last week. I will also highlight upcoming catalysts for stocks. I will concentrate on companies that I actively follow, but I may also write on companies that I am only monitoring.

This

Introduction

This note is based on comments made by management during the ImmunoCellular Therapeutics (IMUC) conference call of May 9, 2013.

Data from the Phase II Trial of ICT-107

ImmunoCellular continues to guide that the Data Monitoring Committee for the ICT-107 trial in glioblastoma multiforme will conduct an interim safety and futility analysis during the second quarter. The company believes that the most positive outcome would be a recommendation to continue the trial. IMUC continues to expect that it will have top line results at the end of 2013.

The phase II trial is based on 124 patients with an endpoint of median overall survival. It is randomized roughly 2:1 so that about 83 patients will receive ICT-107 plus standard of care and 41 will receive standard of care. The powering assumes an improvement for the ICT-107 regimen of 8.0 months over 18.8 months median overall survival assumed for standard

Results of the Important DOUBle Trial Are Imminent

During the May 8th quarterly conference call, InSite's (INSV.OB) management said that enrollment in the phase III DOUBle trial had completed and topline results should be available in late 2Q, 2013. This trial is evaluating AzaSite Plus, AzaSite, DexaSite and DuraSite in blepharitis. If AzaSite Plus wins in this trial, it could be a home run as it would be the first drug ever approved for blepharitis-but there are uncertainties. This trial is based on the hypothesis that the steroid component (dexamethasone) of AzaSite Plus will provide short term control while the antibiotic component (azithromycin) will provide long term control. This hypothesis was not tested and confirmed in a phase III trial.

In the DOUBle trial, there are various possible outcomes as it pertains to AzaSite Plus. Let's hope that it wins and we will all be very happy. It could

Intermezzo was launched by Transcept's (TSPT) marketing partner Purdue in April 2012. I believed then and now that it is a highly effective product and fills a unique niche for middle of the night insomnia. Sales in 2012 were disappointing, but Purdue stepped up in major way to relaunch the product late last year with a direct to consumer advertising campaign and the decision to use their 500+ analgesic sales force to market the product. I thought that this would reinvigorate the product. My analysis was wrong and I am withdrawing my Buy recommendation. The launch is a failure.

A brief post mortem of the situation suggests a number of things that I misjudged. It has been difficult to make physicians and patients aware that middle of the night awakening was a disease condition and had a new effective therapy. Managed care barriers were much more difficult to surmount than

Investment Thesis

This report is an update based on a number of recent events. I discuss encouraging long-term survival results for DC Vax-L that is unprecedented in glioblastoma multiforme. I also go over the phase III trial progress for DC Vax-L and the compassionate use program that will proceed abreast of the phase III trial in Europe. For the first time, I analyze the pre-clinical trial results for DC Vax-L and the phase I/II trial that is about to begin. Finally, I go over financial issues.

I am encouraged by the progress made by the Northwest Biotherapeutics (NWBO) over the past year and maintain my Buy recommendation. I first began coverage in July of 2012. At that time it was a bulletin board company with $430,000 of cash on its balance sheet, $31 million of debt and $1 million of assets. Not surprisingly, most investors regarded the company as being

Investment Opinion and Thesis

I am continuing to recommend purchase of Neuralstem (CUR). The company has completed its first trial in humans, a 15 patient Phase I trial in amyotrophic lateral sclerosis or ALS. Results of this trial have indicated that the surgical procedure used to implant the cells and the cells themselves are safe, which is the critical first step. Importantly, there have been encouraging signals of efficacy in this dreadful disease, which is invariably fatal and for which there is only one approved drug; Rilutek extends life by three months or so in some younger patients, but has no effect on quality of life. Most ALS patients die within three to five years of diagnosis and during that time, they suffer a horrible deterioration in quality of life. There is a desperate need for effective therapy.

The clinical trial program has now gained traction. The FDA has

Investment Thesis

On May 31, 2012, I wrote a blog post on Cadence (CADX) entitled "Ofirmev Launch has Gained Traction: Reiterate Buy" when the stock was at $2.72. At that time the stock was still suffering from the widespread investor concern that the Ofirmev launch was a disappointment and that a legal challenge from generic competitors could lead to generic competition in the 2014 to 2016 period.

Since then it has become clear that the Ofirmev launch to the surprise of many is extremely successful. In the first quarter of 2013, the Company reported Ofirmev sales of $21 million which represented a year over year increase of 163% and a sequential increase of 23% from 4Q, 2012. During the first quarter conference call, Cadence raised its sales guidance for 2013 from a range of $94 to $100 million to $97 to $103 million.

My current Ofirmev sales estimates for

Introduction

This report deals with the just announced management change at A.P. Pharma (APPA.OB) and the positive impact that I believe it will have on the stock. It does not get into an in-depth discussion of the fundamentals and financial projections for the Company. For those wanting more background, I would refer you to past reports that I have posted on my website.

New Management

The Board of Directors of A.P. Pharma has brought in the management team that was responsible for founding the biotechnology company Ardea in 2006 and selling it to Astra Zeneca in April 2012 for $1.3 billion. At the time of sale, Ardea, like A.P. Pharma, had one late stage product; this was lesinurad for gout. Barry Quart will join the Company as Chief Executive Officer. He was a co-founder of Ardea along with Kevin Tang in 2006 and held the position of Chief Executive

Overview

Discovery Laboratories (DSCO) just announced still another delay in the launch of Surfaxin. The company received five Complete Response Letters (CRL) dating from 2004 before finally gaining approval of Surfaxin in March of 2012. Management then indicated that it planned to launch Surfaxin in November of 2012. However, in October it indicated that there was an issue to be resolved with an analytical chemistry method (quality assurance test) that would result in the launch being delayed until 2Q, 2013.

Most investors were expecting an announcement of the launch of Surfaxin, but were shocked by a press release on April 15, that indicates there will be still another delay. The FDA made four specific requests for new information. The company indicated that it could reply to the FDA within two months and the FDA by regulation then has up to four months to respond which would delay the launch of

Overview and Investment Importance

Those who read my initiation report on Cytokinetics (CYTK) understand that the importance of successfully conducting a phase III trial for omecamtiv mecarbil and then commercializing the product cannot be overstated. It could bring in as much as $300 million of pre-commercialization milestones from its partner Amgen by mid-2017. In addition, omecamtiv mecarbil targets a serious unmet need for a safe inotropic agent for congestive heart failure. If it can safely replicate the clinical effects seen in phase I and II trials and can show a durable effect, this could be a several billion dollar drug with Cytokinetics realizing as much as half of the profits.

Cytokinetics probably will be reporting the phase IIb results for omecamtiv mecarbil in the ATOMIC-AHF trial in 2Q, 2013. Investors are attuned to looking for statistical significance on the primary endpoint of a trial to judge its success. ATOMIC-AHF

Investment Summary and Opinion

I attended Trius's (TSRX) CEO Jeff Stein's presentation at the BioCentury Conference in New York on April 5th; this note summarizes some key takeaway points, particularly on how clinical trial data differentiates tedizolid from Zyvox. I think that the clinical data underlying the upcoming NDA filing for tedizolid is solid, and given the desire of the FDA to expedite the development and approval of important new antibiotics per the GAIN act, I think that there is a very high probability of approval of tedizolid in the US in mid-2014 and in Europe in early 2015.

There is always the risk that something could occur in the Chemistry, Manufacturing and Controls section of the NDA that could delay approval, a not infrequent occurrence. Outside investors have little data to judge such a possibility. The only thing that I can say is that given the precision in the

Investment Overview

Repligen (RGEN) has gone through a metamorphosis that has dramatically changed its business model and investment outlook. For many years, its primary focus was on high risk drug development, but it was also building a high quality bioprocessing business that provides consumable products used in the manufacturing of biological products. The acquisition of a major competitor, Novozymes (now Repligen Sweden), in 2011 provided the critical mass for a standalone business in bioprocessing. Management and the board decided to exit the drug development business to focus on bioprocessing.

The bioprocessing business has outstanding investment characteristics:

• In manufacturing biological products, companies are reluctant to alter even small components of the process once the product is approved. Even a slight change has the potential to cause changes in product characteristics that can lead to clinical effect issues and regulatory problems. Once manufacturers decide on a manufacturing process, subsequent changes are rare.

InSite Vision (INSV.OB) just announced that it agreed to sell its royalty stream on future sales of Besivance, a product that is marketed by Bausch & Lomb. The company will receive $15 million upon closing and an additional $1 million if certain undisclosed sales levels are met by February 2014. The deal was done with SWK Holdings (SWKH.OB), which will be entitled to all of the royalty stream of Besivance in the near term. Royalties from Besivance were $1.2 million in 2011 and $2.1 million in 2012.

After SWK receives a 1x return on its investment, InSite will receive 25% of the royalty over and above $4.2 million annually; this which would represent a sales level of about $70 million or double estimated sales of $35 million for 2012. If SWK receives 2.75x its investment or $44 million, the full royalty will be returned to InSite. Patent protection for Besivance

Overview

A.P. Pharma (APPA.OB) has just released the disappointing news that it has received a Complete Response Letter for APF530. The press release described three issues that led to the CRL.

• With respect to chemistry, manufacturing and controls or CMC, the FDA has requested the refinement of one product quality analytical test method, and that certain deficiencies identified during facility pre-approval inspections be addressed.
• The FDA has requested that a human factors validation study evaluating the usability of the APF530 syringe system together with its proposed product labeling and instructions for use be conducted with product assembled using a validated, commercial process.
• With respect to clinical, the FDA has requested a re-analysis of the existing Phase III clinical data that reclassifies patients into those receiving moderately emetogenic chemotherapy and highly emetogenic chemotherapy according to the recently modified ASCO 2011 Guideline. The FDA did not request any new clinical studies.

The

Investment Thesis

It is my hypothesis that dendritic cell cancer vaccines have the promise to be a major advance in cancer therapy. In October of 2011, Dr. Ralph Steinman was posthumously awarded one-half of the Nobel Prize in Physiology or Medicine for his discoveries of the dendritic cell and its role in adaptive immunity. His discoveries have made possible the development of therapeutic cancer vaccines that are produced by removing living cells (monocytes) that are precursors to dendritic cells, loading them ex vivo with cancer antigens that stimulate the immune system to fight cancer and then re-injecting them into the body, a process called autologous immunotherapy.

There is a great unmet medical need for better ways to treat cancer. Chemotherapies that are the cornerstones of cancer therapy are essentially poisons dosed at low levels to destroy rapidly dividing cells like cancer. At the same time, they also kill normal

Key Investment Considerations

Cytokinetics Has Two Key Drugs in Phase IIb Development

Cytokinetics (CYTK) has been the pioneer in developing new drugs based on muscle biology which modulate the mechanics of muscle, particularly those which affect contractility. It has two late stage drugs that will be reading out data on critical phase IIb trials in 2013. Phase I and IIa trials for both drugs have shown clinically relevant effects, strong safety profiles and robust pharmacokinetic profiles. However, until investors see topline data from the phase IIb trials, it requires a leap of faith to believe that this information accurately defines these drugs and their potential benefit.

Omecamtiv mecarbil is a first in class cardiac myosin activator that activates cardiac muscle contractility. It is being developed for the treatment of congestive heart failure in collaboration with Amgen. It addresses the significant unmet medical need for an inotropic drug that can increase