The Fabrus-Senesco (SNTI) merger has been creating a lot of hype, primarily because of Dr. Phillip Frost's position as Chariman of Fabrus, along with chairing Teva Pharmaceuticals (NYSE:TEVA), Opko (NYSEMKT:OPK) and Frost Gamma Investments Trust. He is a bit of a busy man. Frost has a long record of achievements, but the involvement of even a particularly green thumb should not be the sole criterion for making investment decisions, nor does it need to be in the case of Senesco.
Fabrus and Frost together bring two critical additions to Senesco. The first is, of course, money, which Senseco has been chronically short on. In one fell swoop, Senesco has gone from a peewee biotech with less than a million dollars back in September on its latest balance sheet (not counting recent financings which I will get to later) to a powerhouse backed by giants. The second is technology. I believe that in a matter of months or perhaps even sooner, Senesco will announce a new series of clinical trials combining SNS01-T with Fabrus's nanocage delivery system. Such an announcement could also have a fairly large positive effect on SNTI. We've seen an announcement of new clinical trials closely follow a merger just recently in the trial stage biotech world, an example I will get to shortly. First, a bit of background on Frost.
More on Frost's Beginnings
Worth around $3B now according to Forbes, Frost started his meteoric rise to pharmaceutical fame more than forty years ago, when buying nearly-bankrupt Key Pharmaceuticals, along with Michael Jaharis. At the time Frost was also serving as Chairman of the Department of Dermatology at Mt. Sinai Medical Center of Greater Miami.
Key Pharmaceuticals was trying to win approval for an asthma drug that had a very low chance of approval because it included a cough suppressant. As a general rule, doctors want asthmatics to cough out mucus, thereby clearing their airways, rather than just keeping it all there.
Frost came up with the simple idea of simply dropping the cough suppressant, and isolating Theophylline, the major component of the asthma drug. The only problem was that Theophylline only works correctly at a very narrow dosage range, and regulating the dosage for theophylline through an inhaler was not precise enough. Frost's solution: package the asthma drug in a capsule so that it could be released over time in the proper dosage.
Frost compounded the success with a smart marketing strategy that focused on explaining the drug's benefits in technical terms, and targeted doctors, rather than the average consumer. In doing so, he saved money on marketing, and beat Pfizer's sales when the pharmaceutical giant tried to market the same drug using a large sales team and a conventional marketing strategy. The new and improved asthma capsule, known as Theo-Dur, was a hit on the market, becoming the number one asthma treatment for a time. Frost eventually cashed out of Key Pharmaceuticals for $100 million.
From the success with Key Pharmaceuticals we can make two observations about Frost. First, as a doctor, he has the expertise necessary to manage the scientific aspects of running an up-and-coming pharmaceuticals company. He understands the science behind biomedical research, and knows how to intervene in order to package together a product with a good chance for FDA approval.
On the Possibility of a New Series of Clinical Trials
From an interview with Fabrus President Dr. Vaughn Smider, it seems that the main goal of this merger is to see if Senesco-Fabrus can put together a product that utilizes Senesco's SNS01-T, which activates the self-destruct mechanism in cancer cells, and combine this with Fabrus' Nanocage delivery system, which may be used to deliver SNS01-T's destructive payload directly, and only, to cancer cells. Nanocage can encapsulate drugs or different payloads which are then unlocked by the correct antibody, sort of like a lock and key. They key would be on the targeted cancer cells to open the nanocage and deliver the drug.
Obviously, Senesco-Fabrus is planning to merge Nanocage and SNS01-T in clinical trials, or at least some combination of their technologies. Otherwise the companies wouldn't have merged. The question is when. I believe the announcement will come soon, probably in a few months' time after cohort 4 is completed for SNS01-T. Cohort 4 has already begun and is scheduled to complete by the first half of this year. Cohort 4 will be given the highest dose of SNS01-T of .375 milligrams per kilogram, the dose that was most efficacious in preclinical trials.
There are two reasons why I believe combination trials will start sooner rather than later. First, the last case of a small biotech merging with a private company to acquire new technology was Agenus (NASDAQ:AGEN), which merged with 4-Antibody in order to combine Prophage with antibody checkpoint technology on January 13. One day later, Agenus announced a new phase 2 trial of Prophage on late stage melanoma patients, combined with Yervoy, another checkpoint antibody cancer treatment.
In the case of Agenus, the announcement of the new trial was made immediately because Yervoy is already approved. Combining Prophage with 4-Antibody technology in a clinical trial, however, will take longer to organize. In the case of Senseco, which will have to combine two new technologies, I believe new trials combining the two will be announced once cohort 4 is finished, or perhaps even immediately after the merger officially closes. This brings me to my second reason, and that is that Dr. Smider hinted at this possibility in a recent interview where he was quoted as saying,
"In the very short term we will be focused on the merger. However, in the longer run we intend to build a biotech company with multiple breakthrough products and technologies. The strategy and key catalysts I can't comment on now, but of course I expect more information to emerge after the transaction with Senesco."
Risks, Cash, and Conclusion
Despite recent developments and the positive financial implications for Senesco, there is still much risk involved in investing in trial stage biotech companies in general. One cannot assume that Frost's reputation alone will bring Senesco to success, however, it may work in this case as it did with Key Pharmaceuticals and other Frost projects. What it will do is make it easier for Senesco to pay through its clinical development. Whether the technologies will work or not is a totally separate matter that nobody can foresee with certainty.
And though we all know what Frost brings to the table, Senesco will still need $26 to 28 million according to estimates by Larry Smith to bring SNS01-T through phase 2. Senesco's latest offering consists of 180,000 units, each unit consisting of 10 shares of common stock at $2.92, a 6-month warrant to purchase 10 shares at $3, a 6-month warrant to purchase 10 shares at $4, and a 3-year warrant to purchase 10 shares at $4. $5.4M was already raised, and if all warrants are eventually exercised, that is an additional 5.4M shares and $25.2M, just the amount needed to bring SNS01-T through phase 2.
On the one hand this could be seen as dilutive, but on the other hand, 1.8M shares were already issued as of December 12 and the share price has been quite steady. Additionally, the structure of the offering is such that if cohort 4 shows positive results in the next few months and SNTI starts to break higher, warrants will be exercised and the company will automatically raise cash without having to reentering the market, as so many other biotechs are forced to do in order to stay afloat. This may be followed by or concurrent with, a la Agenus, a trial combining Fabrus's and Senesco's technologies.
Bottom line, there will be a lot of activity and price movement surrounding the progress with cohort 4. The first half of 2014 will be very significant for Senesco's shareholders and will provide a big hint as to where the stock is going in the long term.
Disclosure: I am long SNTI, AGEN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.