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Follow @SmithOnStocks on Twitter for more updates (http://twitter.com/#SmithOnStocks Please read this section carefully for some important disclosures. Who Am I? My name is Larry Smith. My career was spent on Wall Street as a biotechnology and pharmaceuticals analyst and also as Director of... More
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  • Washington Post Calls For An Investigation Into Hedge Fund Trading And Adam Feuerstein's Blogging

    In a hard hitting article, the Washington Post has called for an investigation into potential stock manipulation by short sellers of NWBO and other emerging biotechnology companies. The article was written by Steven Pearlstein, a 2008 Pulitzer prize winner. The Post suggests that there may be a wide spread criminal conspiracy that has victimized many small biotechnology companies and their investors. The Post also focuses on the prominent role of Adam Feuerstein in this situation. I have written a detailed analysis that elaborates on the Post article and provides further background information that can be seen at this link.

    Small biotechnology companies and investors have been clamoring for years that short sellers are manipulating the prices of emerging biotechnology stocks. This has largely fallen on deaf ears as the SEC has taken no action. However, it appears that the heat has now been turned up. The Washington Post is one of the most prominent newspapers in America and highly influential in Washington. Its most famous investigational reporting piece was about Watergate and it carries great prestige. Securities regulators, politicians and law enforcement agencies are likely to be prompted by this article. It could also trigger wide spread media investigations.

    If hedge funds are indeed collaborating in a stock manipulation scheme, they are now faced with the probability of possible SEC and Congressional investigations accompanied by an FBI probe and media digging. For the first time, they could be facing investigations from institutions with subpoena powers. If there is coordinated trading and naked shorting and fomenting by friendly bloggers as has been alleged, it will be discovered. If the Post is correct, we may be in the early days in an intensive Watergate like investigation that could expose a criminal enterprise of vast proportions.

    The tag line for this investigation could very well be that a band of rapacious hedge funds are manipulating the prices of small companies trying to develop treatments for cancer, swindling small investors out of hundreds of millions of dollars and blocking treatment of patients from potential cancer drug breakthroughs. This is a compelling story for any politician or regulator and could be especially the case for politicians with enmity to Wall Street such as President Obama and Senator Elizabeth Warren, not to mention Attorney General Eric Holder.

    So what are the stock market implications? If indeed there is ultimately shown to be a criminal conspiracy, how bold will the hedge funds be in the interim. Nothing in the past has had any effect on their behavior and perhaps this will also be the case with the Washington Post article. Moreover, there is no objective evidence that I am aware of that comes together to prove a criminal plot. The evidence, however powerful, is circumstantial. If the hedge funds are confident that they are acting legally, nothing will change in their conduct.

    However, if there are guilty consciences, we may see a sharp reduction in their shorting activity and possibly some could begin to unwind their short positions. This could create an enormous short squeeze in the case of Northwest Biotherapeutics where there are 8 million legitimate shorts and an estimated 4 million or more naked shorts. The effective public float of the Company after subtracting out management and closely held shares could be about 20 million shares. If the shorts begin to panic, we could see a short squeeze of enormous proportions.

    You can follow comments on the Washington Post article on this link. So far, they have been overwhelmingly supportive and appreciative of the Post article and there is an overwhelming consensus that there appears to be manipulative stock trading practices on the part of hedge funds.

    You can follow comments on Mr. Pearlstein's article at this link. I have also written an extensive summary on the Washington Post article. The Washington Post article included the following chart which shows that the shorting activity against tiny Northwest Biotherapeutics bears a striking correlation with Feuerstein's blogs. The Washington Post notes that his articles seemed to have been timed to blunt the effect of positive developments and drive down the stock price.

    Graph of spikes in short sales in Northwest Boi

    Disclosure: The author is long NWBO.

    Tags: NWBO
    Sep 29 1:28 PM | Link | Comment!
  • My Dialogue With Adam Feuerstein On Northwest Biotherapeutics

    Perspective

    I think that all investors in Northwest Biotherapeutics (NASDAQ:NWBO) would concur that Adam Feuerstein has a vendetta against NWBO and its management. He has written 19 negative blogs (or is it 20) on the company just since March 2014. Since September of 2013, NASDAQ reports that the short interest on Northwest has increased from 635.000 shares to 8,000,000. Some observers have estimated that naked shorts could account for an additional 4,000,000 shares. Most investors believe that F-stein's blogs have played an important role in this aggressive short attack on this tiny company.

    Feuerstein's communication platform is his blog on TheStreet.com and his tweets. He only infrequently responds to comments on his blog. In the 140 or fewer characters that he communicates with on Twitter; he can only state conclusions and not the underlying rationale for those conclusions. Feuerstein's style is to state conclusions with scant reasoning and he uses a vicious attacking style. Here is how he describes himself on Twitter "Sr. Columnist at TheStreet, aka the Col. Jessep of biotech/drug stocks. Data Are. I curse. Said one analyst: The likes of Adam Feuerstein attack viciously."

    I think that most investors would like to see Feuerstein in a dialogue in which he has to support his conclusions. This hoped for event just occurred. In a recent article on Seeking Alpha, SmithOnStocks had the opportunity to go head to head with Feuerstein in the comments section of that article. This gives the reader the opportunity to gauge the strength of F-stein's arguments against mine. F-stein brought a knife to a gunfight.

    How the Dialogue Started

    A third party wrote an article on Seeking Alpha in which he went from a sell to a hold. It was not an in-depth article and I took the opportunity to put in some clarifying comments. This started an extensive dialogue with Feuerstein in the comments section of that article which provides a fascinating insight into his thought process. Here is the initial comment that I made that triggered the exchange.

    Smith On Stocks Comment

    In March of this year, the Paul Ehrlich Institute or PEI which is the German equivalent of the FDA also granted early access to DCVax-L and a separate German agency responsible for reimbursement has indicated that it will reimburse DCVax-L. I believe the reimbursement price will be in line with chemotherapies and targeted therapies or roughly $50,000 to $100,000 for a course of treatment. I believe that this will result in DCVax-L revenues from Germany in 4Q, 2014.

    Also remember that DCVax-L is approved under this early access program for all grades of gliomas and recurrent glioblastoma in Germany, not just newly diagnosed glioblastomas as in the phase 3 trial. I consider this German early access more imminent and more important than the PIM designation by MHRA although the PIM designation is also an extraordinary achievement. For a complete discussion of the UK and German Programs follow this link.

    The Company has also reported very interesting data on interim results of its phase 1/2 trial of DCVax Direct that indicate that the immune response being seen is consistent with the hypothesized mechanism of action. Remember that this phase 1 trial in is inoperable tumors so that patients cannot be offered effective therapy and are destined for hospice. These are very aggressive terminal cancers. With this in mind, there have been two highly encouraging case reports on a sarcoma and tpancreatic cancer patient. Here is the link for a discussion of the pancreatic cancer patient.

    The Company has performed extremely well in achieving important regulatory validation of DCVax-L from UK and German regulators and in early trial data on DCVax Direct. The fundamentals have not been the problem. A prominent blogger (NYSE:AF) has a vendetta for NWBO and he is a problem. He accused the company of withholding efficacy data from an interim analysis of the DCVax-L trial. In actuality, there has been no interim efficacy analysis. This caused considerable weakness as AF alleged that the Company was somehow misleading investors because the interim efficacy analysis revealed problems with the trial and that this meant the phase 3 trial was going to fail. Of course, all of this was widely misleading since no efficacy analysis had been performed.

    This AF allegation led to an unprecedented statement by the obviously outraged Chairman of the Data Monitoring Committee; this is an independent committee of leading physicians and academics charged with monitoring safety and efficacy in the phase 3 trial that has no connection to Northwest. The Chairman sharply rebuked the blogger (AF). He said that there had been no interim analysis for efficacy of the phase 3 trial. He said that the DMC has not provided any access for the Company to any clinical trial data. He said "that it is surprising and troubling to see inaccurate claims being made by commentators (the prominent blogger AF) who seem to lack a fundamental understanding of clinical trial monitoring. I have been on DMCs for more than 60 clinical trials, and I have never experienced this type of attack." Even though this blogger (AF) was shown to be utterly wrong, he did not acknowledge his mistake but just shifted to other bearish arguments.

    This same blogger (AF) also maintained that the release of interim data from the DCVax Direct trial was unethical and that M.D. Anderson was very upset with NWBO. This strawman argument was also destroyed when two M.D. Anderson doctors appeared on a National Geographic documentary that focused on interim results of the pancreatic cancer patient.

    Without these highly misleading and factually inaccurate attacks on NWBO that were curiously accompanied by aggressive short selling, I don't think that the degree of stock weakness we have seen would have occurred. These were totally unwarranted reasons for the stock to decline. However, we are seeing widespread weakness in small emerging biotechnology stocks and NWBO is in a financial position that will require it to bring in more cash, probably by yearend. These are two legitimate reasons for the stock weakness.

    Adam Feuerstein Comment

    Aroused by my comment, F-stein came back with a comment that attacked me personally. He essentially reiterated prior charges made by Richard Pearson that accused me of securities fraud, stock manipulation and being paid to write on Northwest Biotherapeutics. Pearson's article was based on conjecture and innuendo with no objective facts. I have challenged him to provide objective evidence; he has remained silent. Pearson shorted NWBO and then published his article on Seeking Alpha recommending sell.

    The F-stein comment was deleted by Seeking Alpha because they considered it abusive and not germane to the discussion. Feuerstein then launched into a series of challenges to sections of my comment which created the opportunity for a dialogue.

    Dialogue on the Lack of an Interim Analysis of the Phase 3 Trial of DCVax-L

    The most important allegation that Feuerstein has made against Northwest Biotherapeutics is that an interim analysis for efficacy was conducted in the phase 3 DCVax-L trial, that management of Northwest saw the data and hid the results from investors. He then states that they then resized the trial in a desperate effort to account for the lack of efficacy that they saw in the interim efficacy analysis.

    Anyone who understands how clinical trials are conducted immediately recognizes the absurdity of this allegation. Companies sponsoring clinical trials are blinded to results until the trial has concluded. Any breaking of this blind would be seen by regulatory agencies as introducing bias into the study and would mean that the study could not be a pivotal study for regulatory approval.

    Although many commentators have pointed out to Feuerstein that this is a ridiculous statement, he has reiterated it over and over. The "missing or flawed or hidden" interim efficacy analysis is the cornerstone of his bear case. F-stein once more reiterated his position in the comments section.

    adamfeuerstein Comment

    Larry -- is there a functioning brain cell in that heads of yours? An interim efficacy analysis was clearly designed into the study. NWBO issued two press releases which mentioned an interim efficacy analysis, and as Robert informs you, the study protocol also includes an interim efficacy analysis?

    Where are the data? If NWBO decided not to conduct the interim analysis, why? When was this decision made? Clearly, it must have been after issuing two press releases about it, so what changed?

    And if there was no interim efficacy analysis, why did NWBO radically resize the study? Do you think Linda woke up one morning and just decided to add patients and require a s--tload more PFS events to trigger the final analysis for kicks? Or, do you think NWBO had some information -- data from an "interim analysis" -- which told them to resize the trial?

    adamfeuerstein Comment

    You don't resize a study without a reason. And the DCVax study wasn't just resized, it was radically altered by increasing by 125% the number of PFS events required for the final analysis. If you believe these changes were made without an interim analysis, you know nothing about clinical trial design and conduct and should not be invested in biotech or drug stocks.

    NWBO issued two press releases in which it stated clearly, definitively, that an interim efficacy analysis was underway. It's been almost a year, where are the data?

    SmithOnStocks Comment

    In response I quoted what the chairman of the Data Monitoring Committee for the phase 3 trial of DCVax-L publicly stated.

    "As the Company has stated clearly and specifically in its public announcements, the DMC has not conducted any efficacy analyses and the DMC has not provided any access for the Company to any clinical trial data," commented Dr. Curt Furberg, Chairman of the DMC. "The DMC adheres to established clinical trial monitoring procedures and does not release any data while the trial is ongoing. This is an important issue, and it is surprising and troubling to see inaccurate claims being made by commentators who seem to lack a fundamental understanding of clinical trial monitoring. I have been on the DMCs for more than 60 clinical trials, and I have never experienced this type of attack."

    The above quote from Dr. Furberg was from this NWBO press release.

    Adam, Dr. Furberg doesn't think very highly of you and I think that based on your continued hammering on the point that the efficacy analysis has been done and in your words was buried, that you believe that the Chairman of the DMC is lying. Hmmmm

    Summary On Interim Efficacy Analysis Not Being Performed

    F-stein has not responded to my comment, but clearly there has been no interim efficacy analysis. He has been extremely irresponsible in using this allegation as a cornerstone of his bear argument that the phase 3 trial is doomed to failure. It says a lot about F-stein. Clearly, he does not understand how clinical trials are run. More importantly, it speaks to his lack of research integrity and his eagerness to put forth straw man arguments that are clearly wrong. He doesn't like to be bothered with facts that contradict his conclusions. And finally, when shown that he has made a mistake, he will not admit it and would not even consider correcting it.

    The German Early Access Approval for DCVax-L

    F-stein has either ignored or labeled as insignificant the German hospital exemption early access program. This German approval by the PEI (the German equivalent of the FDA) was one of the most stunning events in biotechnology this year. PEI essentially made the drug broadly available to brain tumor patients before the phase 3 results are in. This was an absolutely stunning validation of the DCVax-L technology and a major coup for tiny Northwest Biotechnology. The MHRA (the UK equivalent of the FDA) has just made a similar decision for early access that is also stunning. F-stein quickly launched a series of misleading blogs to try to turn these positives into non-events and amazingly, he was successful

    Here is what he commented on the early access programs.

    adamfeuerstein Comment

    How many companies can you name which generate significant revenue from compassionate use of an unapproved drug? Let me help you: None. Zero. It doesn't happen. It won't happen. Doctors are not going to prescribe an unapproved drug. There is no compelling reason to use DCVax under compassionate use because no credible data exist demonstrating any benefit.

    The only reason NWBO has pursued these meaningless compassionate use designations in Germany and the UK is to throw up a smokescreen to hide the fact that it cannot complete the phase III study.

    adamfeuerstein Comment

    Ha! Again, Smith's lack of functional brain cells is stunning. I'm sure Linda is scouring the earth for a brain tumor patient who can be duped into paying for DCVax. Maybe a rich Russian oligarch will fall for it. Then, NWBO can issue a press release when his check clears. That will be so exciting!

    Sorry, Larry. Early access and compassionate use are the same, and they're both meaningless.

    Keep trying!

    SmithOnStocks Comment

    Northwest Biotherapeutics has been granted a hospital exemption in Germany. This allows DCVax-L to be used to treat patients for five years who have any grade of glioma, not just glioblastoma multiforme. It also allows treatment of lower grade gliomas, both newly diagnosed and recurrent. This is a major validation of the promise of the technology.

    The applicable law for the hospital exemption program went into effect in the summer of 2011. For 2 ½ years there have been numerous applications submitted. However the Paul Ehrlich Institute (the German equivalent of the FDA) has only approved three products. Two were products which were on the market prior to the passage of the hospital exemption and were grandfathered. These were non-systemic products used in regenerative medicine. DCVax-L is the first product to be approved that was not grandfathered. It is the first immune therapy approved by PEI, the first systemic therapy (the two German products were regenerative medicine products) the first cell therapy product, and the first product approved for a non-German company.

    DCVax-L also received a separate and quite favorable approval from the central reimbursement authority in the German system. This is another validation of the technology. Under the hospital exemption, NWBO is not allowed to request reimbursement, only hospitals can apply. The investment significance and still another validation of the DCVax-L technology is that six major hospital centers applied for reimbursement of DCVax-L.

    It is extraordinary for a product that is still in clinical trials to be approved for reimbursement. It is unheard of for a product to get reimbursement while still in clinical trials. The usual reimbursement path is to finish the clinical trial, gain regulatory approval, introduce the product and then seek reimbursement. This is a process that takes one to two years.

    Before reimbursement is gained the hospital has to request and negotiate reimbursement on a patient by patient basis. With reimbursement, each patient treated is reimbursed at a set price negotiated with the payor. With the hospital requesting reimbursement, NWBO can now negotiate the price with the health care plans. This is all while the phase 3 trial is not completed. This process is tantamount to receiving full approval and full reimbursement as would be the case with a newly approved drug. The only difference is that NWBO cannot directly promote the drug, but with the high awareness of glioblastoma patients and physicians, not much promotion will be needed.

    Some bloggers have stated that this is just compassionate use and on tweeted "compassionate use, who cares". This reflects lack of understanding of the German system. The first difference between the older compassionate use system (commonly referred to as named patients) is the number of patients that can be treated. With named patient compassionate use, only one patient can be treated at a time. The specific patient has to be named and the physician or hospital has to prepare a regulatory document comparable to an IND. Moreover, it is usually restricted to patients who are ineligible for approved drugs or drugs in clinical trials.

    Then you have to seek regulatory approval for just that one patient and for each subsequent patient the process has to be repeated. In contrast, the hospital exemption allows the treatment of all patients with newly diagnosed and recurrent gliomas (not just newly diagnosed glioblastoma). Hospitals do not have to prepare paperwork for each individual patient. Moreover, the hospital exemption allows them to do this for five years. At the end of five years, they can apply for another five years.

    The second difference is that under compassionate or named patient use, the payor, hospital or patient cannot be charged. Under some conditions, the drug sponsor can seek reimbursement for cost incurred. Very importantly, NWBO will be paid a price which is in line with that usually given for important new cancer drugs; they are usually priced at $50,000 to $100,000 per course of therapy. And of course, DCVax-L will receive reimbursement in the same way as a drug approved through the normal regulatory process.

    Summary Comment On Early Access Programs

    The denial of the importance of the German hospital exemption in validating the technology of DCVax-L and the potential for revenues from Germany as a result of this has been another key element of the Feuerstein bear case. I think his comments show total confusion on his part about what these programs are all about.

    What Can We Conclude About Adam Feuerstein

    It is interesting to see how other people who made comments on this article interpreted the dialogue between F-stein and SmithOnStocks.

    diamondjim61

    Wow! Quite the dialogue. This really shows how immature and illogical Adam Feuerstein is... I had only thought this previously, now I know... The difference is several educated well thought responses vs. the name calling of school child. you guess who is who.

    rkmatters

    AF formulated his opinion on dendritic cell technology on day one. He's been dead set against the merits of the science and that's why he continues to write one sensational blog after another. He unfortunately let his dislike for Linda form a cataract over his eyes. He can't see straight, and as such, he lost his judgment ability to be both rational and objective. He sees himself as a Sherlock Holmes hero and instead he's a foolish man on a vengeful mission. Clearly if the DMC, the MHRA, and the PEI can't get him to change his warped view, nothing will.

    flipper4

    Adam, The Chairman of the DMC called you out. Now you are also calling him a liar? Do you have proof a DMC analysis was conducted? No. Do you have proof they are hiding a DMC analysis? No. Do you have proof NWBO cannot complete their phase III trial? No.

    By implication you would be calling the FDA and International Regulators liars as well. Do you have proof of this? No.

    You are making very serious allegations and doubling down. Let me know how that works out for you.

    slapa

    AF: your comments are comical, and very stupid. You are either very smart to create constant controversy, which will generate internet traffic to s.....com, or you are very very stupid. I think you might have some "issues" and you probably should seek professional help...

    jgons2014

    The purpose of AF article is probably to add another straw to push the price a little further south, in order to let the shorts cover. This could be the last chance, or one of the last chances, for the shorts to retreat without much damage. Starting from the end of the year to 2016, NWBO has many important events: German pricing, UK FDA final decision, treatment income from German and UK, Direct I results, Direct II ongoing, L enrollment completion, L two interim studies, L final results, etc. With the arrival of these events, not just long-term holders like us watch the stock, many short-term bio-traders will also swamp in. At that time, it will gets more and more difficult for the shorts to cover, unless the clinical trials are bust.

    karlef

    "The only reason NWBO has pursued these meaningless compassionate use designations in Germany and the UK is to throw up a smokescreen to hide the fact that it cannot complete the phase III study."
    and Germany and the UK equivalents of our FDA went along with it???

    "How many companies can you name which" have gotten such approval from Germany and/or the UK?
    none, zero, zilch -- ONLY Northwest has ever received such designation or approval which is NOT compassionate use. i repeat, NOT compassionate use. Northwest will absolutely be receiving a negotiated payment which will include a profit margin.

    "no credible data exist demonstrating any benefit."
    so the PEI in Germany is just winging it, and exposing patients to pure shot-in-the-dark medicine? and the UK erred in granting Northwest PIM designation which specifically REQUIRED them to make such a finding???

    adam, why do you keep working so hard to find such off the wall paranoid conspiracies and alternative explanations instead of simply trusting what the DMC and Germany and the UK are saying?

    jgons2014

    Resizing is also designed into the study. It's understandable to stop the early-projected interim analysis after a decision of resizing. The two interim analyses are still there after resizing.

    AF, you are intentionally to turn the cause and effect upside down, in order to reach your shorting target. If not because of knowing your stand, I would suggest you to see a doctor and check whether you have brain tumor or not, which could be the cause of your irrational thinking and persistent bash. Unbelievable 20 bashing articles from you to such a tiny biotech company!

    karlef

    had to copy your post this time so i would have a record of it before it was deleted, but want to make a few points about process that you still seem confused about even after the clarifications from the DMC.

    -- designing an efficacy analysis into a study does NOT make it mandatory, and the decision is entirely up to the DMC. i repeat, entirely.
    -- Northwest issued press releases based on expectations that an interim analysis would be or was being done. the fact that they did this is evidence that Northwest was NOT in communication concerning an interim analysis.
    -- however, Northwest was in contact with the DMC concerning the trial expansion which had been proposed months before in an effort to make the trials more inclusive, meaningful, and definitive. that had absolutely nothing to do with data from a stillborn interim analysis because Northwest, as just explained, had no knowledge of the data.

    Adam, it is way past time for you to look deep inside and ask whether you want to keep doing this or if instead you might want to redeem your soul and start speaking the truth about Northwest rather than posting more of your creative distortions and denial of the facts.

    Final Comments On How People Feel About F-stein

    In an effort at fairness, I would like to include comments that support F-stein. Not surprisingly, there weren't any.

    Disclosure: The author is long NWBO.

    Tags: NWBO
    Sep 25 11:20 AM | Link | 7 Comments
  • Discovery Laboratories: Surfaxin Launch Is Slow; Aerosurf Outlook Is Key To The Stock

    At the time of launch of Surfaxin on November 8, 2013 Discovery Laboratory's (NASDAQ:DSCO) stock was selling at $2.00. By February 2014, it had climbed to $2.65, but has since slid to as low as $1.60 and is now selling around $1.80. This weakness was due to disappointment with the Surfaxin launch. The ever growing difficulty in gaining quick Pharmacy and Therapeutics (P&T) committee approval to add a new product to the hospital formulary has caused most new product launches in the hospital to be slow and disappointing. This has proven to be the case with Surfaxin. Initial expectations for Surfaxin were for sales of $8 to $10 million in 2014, but 1H, 2014 sales were only $70,000 and full year sales are unlikely to reach $1 million. This has been the major factor in the price decline. New management has tried to be cautious in guiding expectations, but was still too optimistic.

    At the time of launch, I had hoped that the launch would be encouraging and provide a boost to the stock in 2014. Obviously, I was wrong. However, the over-riding reason for my interest in the stock, then and now, has been the potential for Aerosurf. With the disappointing launch of Surfaxin, most of the stock price movement over the next year will probably relate to investor interpretation of how the phase 2 trials of Aerosurf are progressing.

    I see Aerosurf as a very unique product in biotechnology. It meets a very significant unmet medical need in neonatal intensive care by allowing a significant expansion of the use of surfactant replacement therapy in babies with RDS. Currently, only about 45,000 of the sickest babies are given surfactant replacement therapy because administration requires the use of intubation and mechanical ventilation which can cause serious lung damage. Given as an aerosol, Aerosurf may allow surfactant replacement therapy to be extended to an additional 120,000 babies in whom currently the benefit of surfactant replacement therapy does not offset the risk of intubation and mechanical ventilation.

    Based on my estimated selling price of Aerosurf of $5,000 to $10,000 per each use in these 120,000 babies, the potential addressable market is $600 million to $1.2 billion in the US. The potential is perhaps the same or twice as much in international markets. I am not aware of any other competitive product in human trials. Because of the great unmet medical need, a strong benefit to risk ratio and favorable pharmacoeconomics, I would expect Aerosurf to have a swift uptake if it comes to market-unlike Surfaxin- and to penetrate 60% of the market in a four to six year time.

    Aerosurf has very unique and desirable characteristics for a pipeline product. In many other drug categories, most notably oncology, there are seemingly an endless number of new products in development. An investor has to be concerned not only that the product is safe and effective, but also has to make a decision on how it will fare against competitive products. With Aerosurf, the concern is only if it is safe and effective because of its uniqueness.

    Aerosurf carries a lesser development risk than a drug based on a new molecular entity. The active drug components are the same as Surfaxin, which has been shown to be safe and effective in clinical trials. We know the drug works. Similarly, the manufacturing process has been validated; problems with manufacturing sometimes lead to long delays as was the case with Surfaxin.

    The key uncertainty is whether Aerosurf can effectively disperse the active ingredients throughout the lungs. The company licensed in a device called a capillary aerosol generator nearly eight years ago and has refined the device significantly. Studies in the lungs of lambs, which are a good animal model, have shown that Aerosurf can deliver a therapeutically effective dose of aerosolized active ingredients of Surfaxin. If phase 2 and 3 trials substantiate this, Aerosurf has a high probability of being approved.

    The Company will complete a phase 2a trial of Aerosurf in 4Q, 2014 which is the first trial in humans. The trial is primarily to evaluate safety and tolerability in a small 42 patient trial. It is possible that investors may see some signal of therapeutic benefit in this trial, but this is uncertain. The phase 2b trial scheduled to complete in 4Q, 2015 is large enough and is designed to show provide proof of concept. If successful, this would be an enormous catalyst for the stock. Putting odds on success of phase 2b is difficult. However, the small amount of preliminary information coming out of phase 2a on safety and tolerability along with animal studies makes me hopeful that Aerosurf will be the success we are all hoping for.

    The next potential catalyst for the stock will probably be the announcement of phase 2a results in 4Q, 2014. The most likely outcome of this trial is that safety and tolerability are shown which is the objective of the trial. There is a chance that some signals of efficacy may be seen, but they are not likely to be conclusive. There is some possibility of an inflection upward in sales in the Surfaxin launch that would be positive for the stock; expectations are very low at present. The truly major event for the Company is the reporting of phase 2b results in 4Q, 2015. If these results are successful, I would look for a substantial, positive impact on the stock.

    The Company states that it has enough cash to see it through to the release of topline phase 2b results in 4Q, 2015. However, this would reduce cash levels to an uncomfortable level and I would look for the Company to bring in more capital in 2015.

    In looking at the stock, I don't see any pending catalysts that would cause me to say you just have to buy the stock now. However, the current market capitalization of $150 million seems extremely low relative to the potential for Aerosurf. I am certainly maintaining my stock position.

    For a more detailed explanation of the fundamentals for Aerosurf, you can follow this link.

    Disclosure: The author is long DSCO. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

    Additional disclosure: My only source of revenues from my articles is subscription revenues from my website. I do not receive any compensation from companies or investor relations firms to write articles. I do not receive any direct or indirect compensation from hedge funds, other investment managers or any entity to write articles. I consider direct compensation to be cash compensation that is directly or indirectly tied to my writing articles. I also do not receive compensation in the form of content. I believe that it is not uncommon for some writers to receive content from hedge funds, other investment managers or any entity that are critical components of the articles that they write. I consider this as non-cash compensation. I do not receive advertising revenues from my website so there is no incentive to be sensational in order to create page hits. I only get paid if my subscribers believe that my articles are of value to them and they then decide to subscribe to my services.

    Tags: DSCO, long-ideas
    Sep 03 10:56 AM | Link | Comment!
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