Is Fortress Staging To Buy Out Its Former Partners?

| About: Fortress Biotech, (FBIO)

Summary

Last December Coronado raised $40M in a blank check company which might be used to buy-out TSO partners.

Manufacturing blunder may be to blame for failed trials.

Former partner Ovamed has gone bust, killing structured deals and leaving TSO patent up for grabs.

Is there anything much riskier than to suggest taking stake in an offshore "blank check" company which may or may not be used to acquire other companies involved in the production of a failed product? It sounds foolish, but that may be where an opportunity lies.

After nearly a decade developing its biome-restoration product for treatment of autoimmune diseases, Coronado Biosciences quickly changed gears last month as they filed notice with the SEC for abandonment of its TSO program, ceased ongoing clinical trials, and changed their name to Fortress Biotech (NASDAQ:FBIO). In doing so, the company's TSO-development partners are being left in the lurch. Could CEO Lindsay Rosenwald be maneuvering to starve out his partners to buy them for cheap?

A "blank check" company is pretty much exactly what it sounds like: money raised for an unknown future merger/acquisition. Typical targets for blank checks tend to be distressed companies which need new management. It's a relatively obscure financing vehicle, but last year, Coronado created a blank check company which quickly raised $40M on the open market. Fortress holds 23% ownership and now has less than a year to make a deal - otherwise the money is returned to investors.

The Arrangement of Partners is Complex - So Trim the Fat and Consolidate

The target market for TSO may be worth tens of billions in annual revenue. Supply-side partners with intellectual property, undoubtedly, would want a piece of the action. Yet, positive clinical results have not been seen for a long time - Crohn's and ulcerative colitis in 2005 and a small trial for relapsing remitting multiple sclerosis in 2011. Since then, Coronado both sponsored and designed nearly all TSO trials and still holds much unpublished data. However, Coronado issued enough negative PR around it's own product, that no other intermediary financing company would want to develop it. The decision to halt development leaves its partners very weakly positioned.

Table of Partners
Parasite Technologies A/S: a Danish company producing the raw materials. They have a GMP facility to produce pharmaceutical-grade TSO and patented computer vision for high-speed assessment of TSO. Their technology allows them to produce vast quantities of TSO and store in clean, stable conditions for years.
Ovamed GmbH: a German company with a GMP-licensed facility that contracts its raw materials purchases from Parasite Technologies. Ovamed had an exclusive license granted in 2005 by the University of Iowa Research Foundation(UIRF) covering inventions and related intellectual property rights that arose as a result of research relating to TSO performed by Dr. Joel Weinstock and his colleagues while employed by the University of Iowa. Coronado payments to Ovamed, as well as reimbursement for UIRF's $250,000 licensing fee, were based on TSO-meeting development and regulatory milestones. As of June 4th 2015, Ovamed is officially "dissolved." If the license fee goes unpaid, UIRF will likely reassign to anyone who will pay it.
Dr. Falk: a privately-owned German pharmaceuticals firm specializing in drug development for IBD. In 2011, Falk sold all TSO (pre-)clinical data to Coronado as well as territorial rights to North America, South America, and Japan. Falk has its own competing product that won FDA approval last year through one of its licensees (Salix). Likely, they'll want to soak up those revenues before pushing any further with TSO.

An Axe to Grind with Ovamed

In 2007, a lawsuit was filed by Sunset Cliffs Therapeutics, Inc. against Ovamed GmbH. Sunset was a licensee of Collingwood Pharmaceuticals which later became Asphelia (then Coronado, and now Fortress). Sunset claimed Ovamed failed to provide TSO for a needed toxicology study. Ovamed claimed breach-of-contract because the conglomerate tried sourcing TSO from a different supplier and failed to pay the UIRF licensing fee per their agreement. The suit was soon dropped for undisclosed reasons...but surely the episode must have made business relations touchy. Per the term sheet, Ovamed could only be paid when TSO met regulatory milestones. When the studies failed, so too did Ovamed; and now they find themselves bankrupt and out of business.

About TSO

TSO stands for Trichuris Suis Ova - otherwise known as pig whipworm eggs - and have shown safety and efficacy in modulating the immune system in small trials. The science is based on the old friends theory, which hypothesizes dramatic increase of autoimmune disease in developed nations is due to lack of exposure to parasites - something human immune systems had evolved with over many thousands of years. The relatively recent invention of flush toilets and sewer systems means we have removed much of what the immune system is accustomed to fighting. So, the theory goes: our immune system starts looking for worthy opponents in normally-ignored foreign-bodies (allergens) or the body itself. Human-adapted species of helminths (eg. human whipworm) normally live in the gut for years, whereas the pig whipworm survive in humans for only a couple weeks and, thus, allow for controlling dosage. Dr. Joel Weinstock pioneered the early studies with TSO and an in-depth video interview of him is available online.

Why TSO is Worthwhile

The successes of early trials have not been recreated, so it's reasonable to wonder why anyone would want anything more to do with TSO. The points below emphasize why it's still worth pursuing:

  • Academic research overwhelmingly shows importance of restoring "lost organisms" from the gut. Much focus has been on bacterial repopulation using probiotics or FMT, but the promise of helminths as therapeutic agents continues to swell.
  • Safety of TSO has been proven. Clinical trials, to date, demonstrate the product is well-tolerated and without severe adverse effects.
  • The chances for meeting FDA approval are favorable, as the regulatory body has existing familiarity with the product. (The Denmark facility maintains GMP status.)
  • Effectiveness of helminths have been well-demonstrated in animal studies. A paper published last year by Dr. Edward Mitre, "Worms as therapeutic agents for allergy and asthma: Understanding why benefits in animal studies have not translated into clinical success", contains a table of over sixteen studies where helminths have demonstrated positive effect in animals.

The pH Issue: A Plausible Wrong-Turn in Manufacturing

Last year, a revealing news post surfacing from Tanawisa Company, a TSO manufacturer based in Thailand, described a conceivable theory for the failed trials. They say the liquid buffer solution of the vials containing the ova was modified from the original low pH(2.7-3.0) used in the earlier, successful trials, to a higher pH(5.0) in order to satisfy typical pharmacological practices which require a more "neutral" solution. The pH change, they argue, was enough to trigger egg development, but without any healthy nutrients to metabolize, the larvae would grow weakened and be less effective. A quick fact-finding mission lends some credence to the argument: the pilot RRMS study did use the low pH formula, the patents do describe raising the pH for the final product, and pH changes do indeed cue egg development. If it sounds unusual that there happens to be another TSO manufacturer, it's no coincidence: the Thai company was first founded by Detlev Goj and has been in operation for years prior to the now-dissolved Ovamed which he had also founded.

This month, Drs. Weinstock and Fleming published a paper objectively proposing factors for confounding trial results: host genetics, subject selection, dosing, schedule, etc. They additionally mention "the process of manufacturing may alter the longevity and vitality of the organism." Another paper, by Dr. Parker at Duke University, studies a population of over two hundred self-treaters and also nods acknowledgement to the pH issue.

Reality Check on the Blank Check

Nothing indicates that Coronado/Fortress actually intends to use its blank check company to acquire TSO partners. Many of the patents licensed by UIRF will lapse in 2018. Quite a bit of hustle would be needed to bring TSO to market before the patents expire. To accomplish that, they probably need big-pharma money for a big phase-3 study or, alternatively, they could secure orphan drug status and just run a phase-2. If TSO can get FDA approval prior to patent expiration, the patent could be extended another five years under the Patent Restoration Act. Forty million dollars could be a reasonable price to acquire Parasite Technologies and Falk's territorial claims. If that is the true game plan for the blank check company, and the pH issue is legitimate, then investors weary on TSO might find renewed faith by having identified both a screw up and blameable party (Ovamed). Time will tell whether this theory holds true.

The warrants, unrestricted, restricted and common shares of the blank check company are publicly traded as CNMLW, CNLMU, CNLMR, and CNLM.

Disclosure: I am/we are long FBIO.

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.

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