Celsion: A Great Asymmetric Trade

Summary

• CLSN has two products in development; GEN-1 and ThermoDox, each one targeting a billion-dollar market.
• At CLSN's present market cap ($45 million), if you subtract its cash position, and subtract what CLSN paid for GEN-1 back in 2014, you get ThermoDox for $5 million.
• ThermoDox is CLSN's lead candidate, a drug targeting liver cancer, currently in an international Phase III trial, with interim results expected in approximately one year.

I originally submitted this article about two weeks ago when Celsion (CLSN) was trading at $2.15 a share. At that price, I argued investors were essentially getting CLSN's lead drug, ThermoDox, for free. Since then, the share price has moved up to $2.50. The 15% move in share price was undoubtedly the result of further insider buying and a recent presentation wherein it was stated the progression free survival (PFS) rates for patients enrolled in CLSN's GEN-1 OVATION Study are now at almost twice the historical average, 21 months. Notwithstanding the increase in share price, most of which I would attribute to the various insider buys and the presentation on GEN-1, CLSN remains a great asymmetric trade, and the rationale for the article remains intact.

At $2.50, the market is valuing Celsion Corp.'s lead drug candidate ThermoDox for less than $5 million. ThermoDox is in a Phase III international trial, and if approved could produce between $300 and 500 million annually. It seems rather extraordinary, but it is true, and it is one of the reasons that Oppenheimer's analyst Hartaj Singh has an initiated coverage of the stock with a buy rating and a $9 price target, which is actually low based on the average of the three analysts currently covering the stock (the average price is $12.33). Before we get to ThermoDox, let's begin with CLSN's other assets, in particular, GEN-1, purchased from EGEN Corp. back in 2014, and CLSN's cash position. It should become apparent after reading this that the risk/reward at the present share price offers a very compelling opportunity and it's undoubtedly why insiders have begun purchasing shares.

GEN-1

Interleukin-12 (IL-12) has emerged as one of the most potent agents for anti-tumor immuno-therapeutic treatment. The problem with IL-12, however, has been the lethal toxicity associated with its administration. Delivered as a protein, IL-12 rapidly enters the bloodstream and has limited expression requiring more and more dosing which increases the risk of toxicity. CLSN's GEN-1 provides a means of administering IL-12 locally and more persistently allowing the patient to receive all the advantages of IL-12 (activation of both innate (natural killer cells) and adaptive (cytotoxic T Lymphocytes) immunities; reversing the immunosuppressive environment via the inhibition of PD1, PDL1; and angiogenesis- the blocking of the blood supply to the tumor) without the adverse effects. The key to this lies in the structure of GEN-1 which delivers IL-12 not as a recombinant protein, but rather, as a gene inside a plasmid which allows the cells to take up the IL-12 for a longer period of time. Moreover, as the plasmid DNA is degraded quickly inside the body, it is protected with a polyethanol glycol amine cholesterol polymer which is condensed with the plasmid forming nano-particles which are reconstituted with sterile water and infused directly into the local tumor area via catheter. A video demonstration of how GEN-1 works in ovarian cancer can be viewed here. The idea is that with GEN-1, IL-12 can be delivered locally, persistently, and safely where it can modulate the tumor environment and produce an effective immune response.

GEN-1 OVATION Study

CLSN has been researching GEN-1 in ovarian cancer. Similar to brain cancer (a second possible indication for GEN-1), ovarian cancer presents a challenge as the complete resection of the tumor is difficult and therefore recurrences are frequent. For this reason, both brain and ovarian cancer have been targets for immunotherapy (see e.g., NorthWest Biotherapeutics (OTCQB:NWBO); Celldex Therapeutics (CLDX); ImmunoCellular (OTCPK:IMUC) et. al.). After some very impressive pre-clinical data, which was summarized succinctly by the lead investigator for GEN-1, Dr. Premal Thaker, Associate Professor of Oncology at Washington University School of Medicine, CLSN commenced a small IB Study, the OVATION Study.

Although the Phase IB OVATION Study consisted of only 14 patients, the results were impressive: two (2) patients demonstrated a complete response, ten (10) patients demonstrated a partial response and two (2) patients demonstrated stable disease, as measured by RECIST criteria. This translates to a 100% disease control rate ("DCR") and an 86% objective response rate ("ORR"). Of the five patients treated in the highest dose cohort, there was a 100% objective response rate with one (1) complete response and four (4) partial responses (as a comparison, OncoSec Medical Inc. (ONCS), which has a market cap of $80 million, is also testing its technology with a DNA based IL-12 delivery system. In a multi-center Phase II trial with 29 patients, ONCS's DCR was 48% and 14% showed a complete response. It was, however, a Phase II trial with double the patient population of CLSN's OVATION Study).

The progression-free survival of all the patients in the IB OVATION Study continues to be followed and of the 13 patients who received GEN-1 treatment in all 4 dose escalating cohorts only four patient's cancer has progressed. The progression-free survival rates for all of those who participated in the IB OVATION Study were summarized as follows:

• Cohort 1 (36 mg/m²) - All patients have progressed; Average PFS was 19.25 months; Longest progression-free patient in 1st cohort was 24.8 months.
• Cohort 2 (47 mg/m²) - No patients have progressed after 21 months.
• Cohort 3 (61 mg/m²) - One patient has progressed after 14 months; Two other patients in 3rd cohort are progression free over 17 months.
• Cohort 4 (79 mg/m²) - No patients have progressed; Average PFS for these five patients in 4th cohort is 14 months.

As of January 15, 2018, only 4 patients' cancer has progressed which the company broke down per cohort:

• Cohort 1 (36 mg/m²) - All patients have progressed; Average PFS was 19.25 months; Longest progression-free patient in 1st cohort was 24.8 months.
• Cohort 2 (47 mg/m²) - No patients have progressed after 21 months.
• Cohort 3 (61 mg/m²) - One patient has progressed after 14 months; Two other patients in 3rd cohort are progression free over 18 months
• Cohort 4 (79 mg/m²) - No patients have progressed; Average PFS for these five patients in 4th cohort is 15 months.

In a recent presentation, CLSN revealed that the PFS has now approached twice the historical average, 21 months.

Beyond PFS, the OVATION study was designed to demonstrate evidence of cellular signaling associated with an immune response and to determine whether GEN-1 was safe, something of great interest given the toxicity concerns associated with IL-12. As GEN-1 is an intra-peritoneal treatment (it is delivered directly into the peritoneal cavity where, in cases of ovarian cancer, 90% of the cancer ends up), samples of peritoneal fluid were taken from the patients and analyzed. In particular, investigators looked for changes in IL-12, IFNg (immune activation), VEGF (anti-angiogenesis) as well as immune markers like interferon gamma, (INF-g), in biological fluid (a discussion of the findings begins at the 1:50 mark in the video linked above). The peritoneal fluid, moreover, was compared to serum samples taken from each of the patients to determine the localized effect of the treatment i.e., were spikes in IL-12 limited solely to the peritoneal fluid or did it also make its way into the bloodstream and pose a risk of toxicity. Scans of immune cells inside the peritoneal cavity were also analyzed for cellular activity associated with immune response.

In each of the cohorts, this was a dose escalating trial, an analysis of the peritoneal fluid demonstrated a rise in IL-12 showing gene transfer and a rise in IFN-g and inhibition of VEGF showing anti-angiogenic response. Importantly, molecular dose followed dose trend and the molecular dose trends were primarily local as opposed to systemic. An analysis of the cells inside the peritoneal cavity clearly showed (the slides can be found at 1:54 on the video) a high concentration of T-cells (CD3, CD4, and CD8). In summary, the OVATION Study demonstrated that GEN-1 was safe and produced effects which were consistent with the biological activity expected in an immune response.

Recently, on January 4, 2018, CLSN announced that the FDA provided clearance for CLSN's OVATION II Study, a Phase I/II clinical trial of GEN-1 for ovarian cancer. The study is now registered, and the start date is listed as April 30th, 2018. The OVATION II Study is designed with a single dose escalation phase to 100 mg/m², followed by a continuation at the selected dose in a Phase II, open label, 1:1 randomized design for up to 90 patients with Stage III/IV ovarian cancer at up to 15 U.S. centers. The study is powered to show a 33% improvement in the primary endpoint, progression-free survival (PFS), when comparing GEN-1 with neoadjuvant chemotherapy versus neoadjuvant chemotherapy alone. The Phase I portion of the trial is expected to commence in the 1st half of this year (April) and the Phase II portion in the second half of the year. It is important to note that as CLSN continues to follow up on the 14 patients in the OVATION Phase IB Trial, and as the progression-free survival rates continue to outpace the historical mean for those with Stage III/IV ovarian cancer, the company may use this data to seek Break Through Designation and/or expand the Phase II portion of the trial and make it a Pivotal Phase II. This is something investors should keep an eye on as the last time CLSN presented its GEN-1 data, the stock soared from $2 to $5.

CLSN acquired GEN-1 and its therapeutic technologies platform TheraPlas through its purchase of EGEN Inc. in June 2014 (EGEN's former president, Dr. Khursheed Anwer, is now Executive Vice President and Chief Scientific Officer at CLSN). At the closing, CLSN issued $8.5 million worth of common stock, representing approximately 15.8% of its outstanding shares, paid approximately $3.0 million in cash to EGEN, and held back $2.1 million worth of common stock until August 2, 2016, for expense adjustment and certain indemnification claims of CLSN. Therefore, $14 million was paid upfront for EGEN's assets and potentially $30 million more in milestone payments. The milestone payments outlined in the EGEN Purchase Agreement are as follows: $12 million payable (in stock or cash) upon achieving certain development milestones relating to an ovarian cancer study of GEN-1; $12 million payable upon achieving certain specified development milestones relating to a GEN-1 brain cancer study; and $6 million payable upon achieving certain specified milestones relating to TheraSilence. As CLSN's has not announced any plans regarding the last two developments (GEN-1 in brain cancer and TheraSilence), the only future milestone payment is $12 million, and although it's not clear what the "certain specified development milestone" is, it can be assumed that the recently announced Stage I/II trial may be the trigger. Therefore, for purposes of simplicity, CLSN paid $26 million for GEN-1 as it relates to ovarian cancer ($14 million up-front and a $12 million milestone payment).

CLSN's Cash Position And Market Cap

Last quarter CLSN's raised approximately $28 million after engaging in various equity capital initiatives (one raise was via the exercise of warrants with an average price of $3.41, and another was via a private placement done at $2.50 with an accompanying 1/2 warrant priced at $3.0). Notwithstanding conducting an international Phase III trial (ThermoDox), and commencing a Phase I/II trial (GEN-1), CLSN burns an astonishingly low amount of money - $4 million a quarter. Moreover, although the company raised approximately $28 million last quarter, much of it was done in a non-dilutive fashion. The share count on a fully diluted basis sits at approximately 19 million shares. In January, CLSN provided a business update and stated that as of the end of 2017, its cash position was $25.5 million (enough to see it through the 1st Quarter of 2019).

CLSN's current market cap is approximately $45 million. CLSN has no debt. CLSN does, however, have an upcoming $12 million milestone payment due for GEN-1. As of the start of the year, CLSN had $25.5 million. Therefore, CLSN's enterprise value is $31.5 million (market cap ($45 million) + liabilities ($12 million milestone payment) minus CLSN's cash position ($25.5 million)) which is approximately $5 million more than what CLSN paid for GEN-1 ($14 million in 2014 plus the $12 million milestone payment). In other words, at CLSN's current share price, investors get CLSN's lead drug candidate ThermoDox for $5 million - a drug that, if approved, could conceivably turn CLSN into a billion-dollar company (assume peak sales of $300 million and times that by 3 - a back-of-the-envelope calculation used to determine the fair market value of biotech companies). This is why CLSN, at its current share price, along with the design of the Optima trial (discussed more below), is a great asymmetric trade.

ThermoDox

ThermoDox uses CLSN's LTSL (Lysolipid Thermally Sensitive Liposome Technology, the worldwide exclusive rights CLSN acquired from Duke University) to encapsulate doxorubicin, a proven and commonly used chemo drug. The heat-sensitive liposome rapidly changes structure when heated to 40-45ºC, creating openings in the liposome that release doxorubicin directly into and around the targeted tumor. The idea is essentially this: doxorubicin, a standard chemo agent that has been used for years (although CLSN's LTSL technology could conceivably work with any chemo agent and any heating mechanism) is inserted into the liposome which, when heat activated, is released either directly into the tumor and/or the surrounding areas. With ThermoDox, 25 times more doxorubicin can be circulated in and around the tumor as 1) tumors are permeable to liposomes, and 2) when heated, tumors become even more permeable as a result of their vasculature. So, for example, if the cancer is recurrent chest wall breast cancer (this is CLSN's Phase I/II Dignity Study), ThermoDox is injected intravenously, and the targeted area, the chest, is heated with an external microwave device. Click here to see a video demonstrating how the procedure is performed. In cases of liver cancer, Hepatocellular Carcinoma (HCC), the tumor and the ThermoDox are heated together with a probe. The probe is called RadioFrequency Ablation or RFA, which, on its own, is a treatment for those with liver cancer where surgery is not an option. The probe creates a focal heat that kills the cancer cells surrounding the electrode. In the case of ThermoDox, the heat from the RFA kills not only the cancer cells it touches, but it has the dual effect of heating the liposome that encapsulates the chemo agent, doxorubicin, allowing for the surrounding areas where the cancer may have metastasized to be killed as well.

ThermoDox And CLSN's OPTIMA Study

CLSN is currently conducting a large international Phase III trial, the OPTIMA Study, to test ThermoDox in combination with optimized RFA (RFA=> 45min) in primary liver cancer. The trial is to enroll approximately 550 patients at up to 75 sites in North America, Europe, China, and the Asia-Pacific region. The primary endpoint is overall survival (OS). The study is powered to demonstrate a 33% improvement in OS. In the last conference call, CLSN provided an update on the OPTIMA Study:

So now our highly de-risked, Phase III OPTIMA study of ThermoDox plus RFP standardized for 45 minutes in newly diagnosed HCC patients is on track and on budget. The guys report that all of the major costs and heavy lifting for this trial are now behind us.

Additionally, on August 7, the OPTIMA study's independent Data Monitoring Committee completed a pre-planned interim review of the first 275 or 50% of the patients randomized in the trial as of April 2017. Based on their assessment of safety, data quality, protocol compliance and trial risk, the DMC unanimously recommended that the study continue according to protocol to its final readout without revision. By the way also note that the data presented at the DMC indicated that there has been 99% plus compliance with minimum 45 minutes RFP heating time as required in the protocol.

Also note that the 14 regulatory authorities across the globe including Europe, North America and Asia, in all major HCC markets have reviewed and approved the OPTIMA Study protocol. We have engaged internationally recognized world-class CROs and data management teams to ensure good clinical practice, ICH compliance, protocol adherence, and high quality data analytics and we have a proven and highly reliable supply chain with not one, not two, but three redundant contract manufacturing organizations, that's CMO, who are registered and capable of producing ThermoDox in all regions of the world, providing a cost structure that guarantees high gross margins, regardless of the country or the local economy.

Currently, enrollment in the trial is approximately 74% complete, and the Company projects full patient enrollment by the 3rd Quarter and the first pre-planned efficacy analysis after 118 overall survival events by the first quarter of 2019. As stated above, if successful, ThermoDox could generate between $300 and $500 million in annual revenue. Given the status of the Optima trial i.e., 74% enrolled, DMC review, the organizational structure supporting it, and most importantly, the proximity to an interim analysis (1st quarter 2019), or in the words of the CEO: "with all the major costs and heavy lifting for this trial behind us", one would think that CLSN's market cap would be closer to $200 million or about $10 a share. Instead, the share price is $2.50, and the market cap of CLSN is $45 million. ThermoDox is being assigned the paltry value of $5 million despite enrollment coming to a close in less than 6 months. It is essentially priced for failure, and the reason for this is that a similar study conducted by CLSN did fail. But the past is not always prologue.

CLSN's HEAT Study

In January 2013, CLSN stock hit a record high giving the company a $370 million market cap (approximately $20 a share with today's share count) as investors pinned their hopes on ThermoDox and the company's multinational, double-blind, placebo-controlled, pivotal Phase III HEAT Study of ThermoDox in combination with RFA for HCC. The Phase III trial was granted a Special Protocol Assessment by the FDA, and the primary endpoint was progression-free survival. The HEAT Study was a 701-patient trial - one of the largest controlled studies in HCC. The enthusiasm and share price waned, however, a few weeks later, when CLSN announced that the trial had failed to meet its primary endpoint.

Post-Hoc Analysis

Subsequent to the failure of the HEAT Study, CLSN conducted a post-trial analysis, and what it discovered from computer simulation studies is that the longer the target tissue is heated, the greater the doxorubicin tissue concentration. Specifically, that when ThermoDox is used in combination with RFA standardized to a minimum dwell time of 45 minutes (sRFA ≥ 45 min), it may increase the overall survival (OS) of patients with HCC. Of course, post-hoc analysis of a failed trail never inspires much confidence, especially when performed by the company which conducted the trial. It often appears as a futile exercise in biased data mining. However, in addition to CLSN's post-hoc analysis, another independent study was conducted by the National Institutes of Health (NIH) - a study which confirmed the findings in CLSN's post-hoc analysis, findings which were submitted to and published in the peer reviewed medical journal Clinical Cancer Research.

In an independent study of the HEAT trial, the NIH sought to evaluate the correlation between RFA burn time per tumor volume (min/ml) and clinical outcome and concluded that increased burn time per tumor volume significantly improved overall survival in patients with solitary lesions treated with RFA + ThermoDox compared to patients treated with RFA alone. More specifically, the analysis showed that a one unit increase in RFA duration per tumor volume improved OS by 20% in patients treated with optimized RFA + ThermoDox compared to RFA alone.

The NIH analysis included a large well bound subgroup of 437 patients with a single lesion from CLSN's HEAT Study, the same patient population being treated in CLSN's Phase III OPTIMA Study. These findings were consistent with CLSN's own analysis of the HEAT Study data which demonstrated that over a 3.5-year period, there was a statistically significant 2-year survival benefit for patients treated with ThermoDox plus optimized RFA over the optimized RFA-only group.

In fact, when CLSN analyzed a subgroup of 285 patients from the HEAT Study (41% of the 701 patients enrolled), where the RFA was greater than 45 minutes dwell time, the results were astonishing. It provided an average 58% improvement in OS compared to standardized RFA alone. The Hazard Ratio at this analysis is 0.63 with a p-value of 0.0198. In this large subgroup, median OS for the ThermoDox plus standardized RFA group translated into a 25.4 month (more than 2.1 year) survival benefit over the standardized RFA only group. In other words, patients who received ThermoDox plus standardized RFA survived approximately 80 months, or 6-1/2 years, which is considered a curative treatment for HCC.

In conclusion, both CLSN and the NIH found that when ThermoDox is used with RFA > 45 minutes the result was essentially curative. This is an incredible achievement given that over the last decade very little (11:50 mark in linked video) to zero progress has been made to increase the overall survival of liver cancer patients. Of course, only time will tell if these results are replicated in the OPTIMA Study. Regardless, the post-hoc analysis by CLSN, and the confirmatory study by the NIH, at a minimum, demonstrate that the OPTIMA Study is not a futile exercise. On the contrary, the OPTIMA Study merits both attention and some nominal value above which it's currently trading which, one would think, the market will begin to recognize as various trial milestones are achieved, in particular, the closing of enrollment in approximately six months' time, and thereafter, the first interim analysis, expected in the 1st quarter 2019 (The OPTIMA Study was designed to have interim analysis to invoke the early stopping rule. As mentioned, post-hoc analysis of the HEAT study subgroup (single lesion, RFA>45 minutes) showed a hazard ratio of .065. Once the number of events have occurred, 118, expected in the 1st quarter of 2019, The OPTIMA Study is designed to be stopped for efficacy should the hazard ratio be < .061 -the 24:45 mark in video link).

Summary

Based on CLSN's post-hoc analysis and the confirmation study conducted by the NIH, CLSN has undertaken the OPTIMA trial. The trial protocol incorporates the findings from the post-hoc analysis conducted by CLSN and the NIH, namely; insuring that the RFA is 45 minutes; limiting the OPTIMA trial to single lesion patients as they were shown in the HEAT Study to benefit greater than multiple lesion patients; and changing the endpoint from PFS to OS. Will the OPTIMA Study succeed? We will know more in about a year when interim results are unveiled. However, it is rare that investors get the chance to see what is behind the door of a Phase III trial for such a large and lucrative market (there are 850,000 new cases of liver cancer each year growing 5% annually and expected by 2030 to be the 3rd leading type of cancer - 9:30 mark in the video link) for the paltry sum of $5 million.

The NIH confirmatory study of a sub-group of patients from the HEAT trial was neither small (437 patients) nor biased (it was an independent study), and the results were too overwhelming to justify the market's current value of ThermoDox. Not only were the data published in one of the most revered journals in cancer research, Clinical Cancer Research, a high impact, peer reviewed medical journal, but so too was the analysis supporting the OPTIMA trial. Even if the market assigns just a 50% chance of succeeding (the p value from the post hoc analysis would suggest closer to an 80% chance of success) using the market cap of CLSN at its peak, before the HEAT trial results, (1/2 of $370 million), then CLSN's market cap should be around $165 million or $8 a share, and at that price, the discussion turns to why are we assigning such a nominal value to GEN-1 given the progress that's been made and the promise demonstrated.

Like all clinical stage biotech companies, despite having a war chest of $25.5 million since the start of the year and burning only $4 million a quarter, CLSN will do at least one more raise before the final results are known from the OPTIMA trial (unless it's stopped early in January 2019). However, CLSN will not dilute at the current share price. In fact, in July of last year, with the enterprise value about where it is now, CLSN pulled its registration refusing to dilute at a price the company deemed unreasonable. CLSN's current cash reserves allow it the means to wait until the market begins to realize that at its current share price, it's offering investors a gift, a free one, and like all things offered for free they don't last long.

Notwithstanding the above, CLSN is a small cap biotech company that has all the associated risks. In the end, ThermoDox may once again fail, and it's too early to claim victory for GEN-1 which has not even begun a Phase II trial. Moreover, I would never advise anyone to hold a large position into the date of the actual trial results as it's too risky. In this case, however, I do think the risks of holding shares of CLSN into the 1st interim analysis are mitigated by both the design of the trial and the findings from the previous trial. A trial with interim analysis, such as the OPTIMA Trial, or the HEAT trial that preceded it, can be stopped for 3 reasons: safety, futility or efficacy. In the HEAT Trial, ThermoDox was "well-tolerated with no unexpected serious adverse events". Moreover, notwithstanding the ultimate failure of the HEAT Study, the Data Monitoring Committee recommended continuation at the planned interim analysis. Therefore, the odds are that at the 1st interim analysis for the OPTIMA Study, the recommendation will be either a) stoppage for efficacy, or b) continuation until the 2nd interim analysis planned for after 158 events and expected around June 2019. The former recommendation would result in the stock soaring as it would essentially translate into a successful trial and the latter recommendation would be interpreted as a sign that the trial is progressing on schedule with no undue safety concerns. Lastly, investors should take note that as a small cap company exaggerated moves in both directions should be expected.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I am/we are long CLSN. 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.