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CEL-SCI: The Homestretch

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About: CEL-SCI Corporation (CVM)
by: North Shore Research
Summary

Top line results are imminent, and the CEO is still buying stock.

H.C. Wainwright initiates coverage on CEL-SCI to Buy.

The American Cancer Society just published a new report and says oral cancer death rates have increased over the past decade.

We believe that the trial has a high probability of being successful and that the stock is deeply undervalued.

CEL-SCI Corp.'s (NYSEMKT:CVM) Phase III clinical trial of Multikine is about to end soon. We believe, through the due diligence that we have carried out, there is very little risk the primary endpoint won't be met. However, the risks of investing in a small biotech with limited cash resources and a small pipeline are well-known. The upside of a breakthrough oncology drug is what makes CEL-SCI so attractive.

History

About CEL-SCI and Multikine

CEL-SCI is a small-cap market (~$300 million) clinical-stage cancer bio-pharmaceutical company. Multikine, a cocktail combination of cytokines and chemokines, is a prospective neoadjuvant treatment and an investigational drug candidate in Phase III Event-Driven clinical development for newly diagnosed advanced primary head and neck cancer.

The goal of Multikine is to boost the body's immune system prior to Standard of Care (“SOC”). The Event-Driven Phase III study is fully enrolled with 928 patients, and the last patient was treated in September 2016.

To prove an overall survival benefit, the study requires CEL-SCI to wait until 298 events (deaths) have occurred among the two main comparator groups. We believe that this 9-year Phase III trial has just ended or will end very soon. Thus, top line results are imminent.

About The Current CRO

The current CRO, Ergomed, has a co-development agreement and has invested $12 million in this trial. The company stands to make 4x its investment if this trial is successful.

A few years into the study, Ergomed's CEO, Miroslav Reljanovic, stated:

At this point in the clinical trial we have decided to increase our investment in the development of Multikine, as we believe that it holds the potential to treat head and neck cancer in a new way. Our potential returns from this agreement will increase in line with our investment.”

It's safe to assume Ergomed's leaders have a sense of the trial's progress, and the increase in the co-development speaks volumes. With Ergomed stock more than doubling recently and significant insider buys, we believe this is a "tell". Read about it here.

About The Arbitration

A bit more history. The study took six years to enroll instead of the planned two years. The original CRO, Inventiv, did not perform; in fact, it was negligent in its duties. CEL-SCI “sued” Inventiv, and Inventiv was found guilty of material breach of contract - a first in the biotech industry.

This is a final and binding decision and to CEL-SCI’s knowledge, marks the first ever decision in favor of a biomedical company against a CRO for breach of contract"

Inventiv really messed up the first few years of the trial. This had serious ramifications and effected many things, as well as the length of this study. We will discuss some of these ramifications below.

About The FDA and IDMC Issues

CEL-SCI has had a bumpy journey, to say the least. There was a brief clinical hold in 2016. The FDA reviewed the study and then released the hold with no changes to the protocol. It was lifted as it had a "likelihood of meeting the statutory requirements for marketing approval".

This is no small thing. Remember, the FDA is responsible for protecting public health by ensuring the safety, efficacy, and security of human and veterinary drugs, biological products, and medical devices. The FDA doesn’t release holds without a very good reason.

However, the "shorts" will decry that the hold was released because CEL-SCI would no longer dose patients with Multikine due to safety concerns. This is categorically wrong.

This is our take: This CRO transition was likely messy due to the multiple clinical sites across the globe and the lack of incentive for the first CRO to make a smooth hand-off. The Independent Data Monitoring Committee ("IDMC") has a regulatory and professional responsibility to monitor the integrity of the trial and safety of the participants. During one of the early IDMC reviews, they were provided data that indicated that the first CRO (Inventiv) deviated from protocols that the new CRO (Ergomed) was in the process of cleaning up.

The result of Inventiv's mismanagement was that the IDMC may have seen some adverse events and protocol deviations. Due to the potential that the data may have been unreliable, they were unable to confidently discriminate the causal factor of the adverse events, and therefore recommended to halt the trial out of an understandable abundance of caution.

The IDMC made their recommendations and the FDA got involved.

Meanwhile, CEL-SCI was trying to manage the Inventiv debacle, so it recruited more than the 880 in the original protocol and subsequently attempted to amend the protocol to increase recruitment further. FDA rules specify that sponsors are expected to submit protocol amendments before implementation of the changes and can only implement changes after the protocol amendment has been approved.

In addition to the other deficiencies noted in the hold letter, the FDA apparently didn’t like this protocol breach. The partial and subsequent full hold was initiated until CEL-SCI explained the protocol deviations from the approved IND and proved that the deviations do not materially affect the validity of the statistical analysis. The FDA knew that the hold would not affect the current progress of the study, rather, it simply wanted to ensure that CEL-SCI would not continue to enroll participants outside of the approved IND protocol.

In August 2017, the FDA reviewed the available data and the hold was fully lifted. A few months later, in December 2017, the IDMC saw no evidence of any significant safety questions and the IDMC recommended to continue the study. In this same month, CEL-SCI announced the study was fully enrolled and all patients have been treated with the investigational therapy and are being followed.

After 3 recent reviews (August 2018, March 2019 and October 2019), the IDMC recommended to continue the trial until the appropriate number of events have occurred.

The takeaway from this is that the IDMC and FDA appropriately investigated irregularities in the study and equally appropriately elected to allow the study to continue after the questions had been addressed.

The Study Is Still Ongoing After 9 Years

Standard of Care and Our Analysis

Some readers might say that the reason for this "delay" is because Overall Survival ("OS") for head and neck cancer has improved over the years. This is categorically wrong.

Basic internet searches will not provide the exclusion/inclusion criteria that are needed to determine the estimated OS. One must dig deep into the SEER database. CEL-SCI recently hired an "External Statistical Group" to do just that: Determine the exact OS using the exact study population.

OS

The biggest takeaways here are the "terrible" OS statistics for this study population: 3-Year OS - 47% and 5-Year OS - 37%. The trial assumed a survival rate of 55% at Year 3. The actual OS is 8% lower than what was estimated.

This is consistent with the American Cancer Society's recent declaration on 1/8/2020:

Death rates rose over the past decade for...sites within the oral cavity and pharynx."

CEL-SCI's independent analysis is consistent with the American Cancer Society's assessment: survival for the study population has decreased and can't be the reason for the "delay".

Our own survival analysis is striking and we can't avoid the obvious. The statistics are showing an efficacy well over 10% in every one of our scenarios.

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Yervoy All Over Again

Bristol-Myers Squibb (BMY) faced a similar "delay" in its Phase III trial for the blockbuster cancer immunotherapy drug, Yervoy. Yervoy is an entirely different immunotherapy and indication than Multikine, but there are striking similarities. Both are Event-Driven studies, for example.

BMY became keenly aware of the challenges associated with Event-Driven studies. In February 2016, Tai-Tsang Chen, PhD Executive Director of Global Biometrics Sciences at BMY, gave a keynote presentation about Event-Driven studies.

In the presentation (slide 10 shown above), Dr. Chen made the following observations:

  • BMY anticipated that all the events were to have occurred within three years.
  • Three years into its study, only 85% of the events had occurred.
  • However, what is most telling is that it took two additional years for the remaining 15% events.
  • Events began to trickle in and showed a very different survival curve than "standard" cancer treatments.

This is what we believe is happening with Multikine: a decreasing event rate due to the “delayed clinical effect”.

Dropouts

Clinical trials can experience some degree of patient dropouts. While this trial has been going on for a very long time, we believe that dropout rates have been contained for a few reasons.

Some people have suggested that the increased survival of the patients in this trial is related to the dropout rate of patients, since that would reduce the sample size. CEL-SCI management does not think so, nor do we. On October 24, 2019, the company issued a shareholder letter and addressed dropouts:

While we are blinded to the study results, we have never heard from the CROs who run the study that the dropout rate is a problem. In addition, the actions by the IDMC speak against that as well. As recently as October 14, 2019, the IDMC recommended to continue the trial until the appropriate number of events has occurred. In their letter to us they said that they reviewed progression free and overall survival and limited demographic and safety data available for the aforementioned protocol. This language tells us that they are following the guidelines expected from the IDMC. If the dropout rate was too high and the sample size was reduced, they could recommend that we enroll more patients. They have not."

Furthermore, Ergomed prides itself on increased patient retention and more evaluable patients. It shows real-world examples of the company keeping dropout rates far below the global standard. We believe it is doing the same with this trial.

ergo

Some speculate that it is a burden to stay in a clinical trial that has been going on for over 9 years. Patients would have to continue coming in for follow-up visits and checkups until the trial is over. Some argue that patients would grow tired of this and want to be done with all the extra effort.

But let's look at it from a different angle. CEL-SCI is providing free SOC for all 928 patients in the trial. Each time a patient goes in for a follow-up, it is for a free, high-quality and thorough checkup. Which, in itself, is far superior to any V.A. Hospital, Medicaid/Medicare, and to many countries' interpretation of SOC. For the patient, there are no co-payments and no bills sent. There is no way patients in this trial would not want to return for followup visits. It would be perhaps burdensome, but essential and not to be missed. Patients would jump at the chance for a free checkup that addresses any concerns and catch small problems before they become bigger problems. This bodes well for favorable clinical results.

With all this taken into account, it would seem highly unlikely that Multikine patients in this trial would not want to return for follow-up visits. It might get tiring and repetitive over time, but for anyone who has battled cancer and faced high medical bills, it's well worth it. This benefits the patient and the company running the clinical trial immensely. Patients essentially want to stay in the trial for free checkups, and CEL-SCI gets to keep dropouts to a lower level.

Recent News and Tidbits

Analyst Coverage

On January 13, 2020, H.C. Wainwright initiated coverage On CEL-SCI to Buy with a PT of $18. This is a 231% gain from last week's closing share price.

Skeptics might say this means an offering is pending. Two counterpoints to this: 1) CEL-SCI has plenty of cash until the end of the trial (see discussion below), and 2) the recent offering had a 45-day lock-up clause. Thus, no offering can occur for 45 days after the secondary closed. While we do not expect another offering until after data is released, one can't occur before February 10, 2020.

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Insider Transactions

With CEO Geert Kersten's recent purchase on January 13, 2020 of another $50K, he continues to add to his 1.1 million shares. Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise.

Geert has not seen the unblinded information, but he has seen various reports from the IDMC, the CRO, and has anecdotal evidence from doctors and patients.

He believes.

Cash Position

With the recent offering and subsequent greenshoe, CEL-SCI has enough cash to get to the end of the trial. The offering was clean, with a low discount and no warrants. It was as good as it gets. But this raise could have been much bigger.

With the stock near its 52-week high, it's very curious that the company only sought out ~$6 million, not $10 million+. Surely, it needs the money. Even a $10 million offering wouldn't have been too dilutive. CEL-SCI is a small biotech with no revenues. It needs the cash. So, only obtaining $6 million raises questions.

Geert knows that once positive data is released, he can raise as much as he wants. He just wanted to ensure the company had enough cash to get to the end of the trial and show the market he can do clean deals. He was successful in this.

CEL-SCI has $14.5 million in cash to work with ($8.5 million cash on hand, plus the offering amount). Given the cash burn rate of ~$1.3 million per month, the company has enough money to get to at least the Summer, but for sure to the end of the trial.

Potential investors no longer have an excuse. Geert has removed the biggest concern: pending toxic financing. He can do clean deals.

Note: The recent offering had a 45-day lock-up clause. Thus, no offering can occur for 45 days after the secondary has closed. While we don't expect another offering until after data is released, one can't occur before February 10, 2020.

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Recent IDMC Review

On October 15, 2019, CEL-SCI announced that the October meeting of the IDMC had occurred. In the press release, the company said a few things:

  • At the most recent IDMC meeting in October 2019, the IDMC reviewed progression free and overall survival and limited demographic and safety data available for the aforementioned protocol.
  • The IDMC recommendation is to continue the trial until the appropriate number of events has occurred.

With 96% of the events occurring, the IDMC could have determined that the trial was futile, but they didn't. More details here.

In layman's terms, this was a review of efficacy. The IDMC apparently reviewed efficacy and said it was okay to continue. After 9 years of data, with about 96% of the data available to them, we believe that the IDMC would not make the recommendation to continue if this was futile. They see something here.

Remember, this Event-Driven study can't end early. It must reach the 298th event for the trial to be completed. Then and only then would they have the statistical power to review the data.

CEL-SCI Hires Lobbyists

CEL-SCI contracted with The Petrizzo Group late last year to lobby the FDA/US government about "FDA approval issues of innovative drug therapies".

They lobbied the U.S. Senate, the U.S. House of Reps, the FDA, the Office of Management & Budget and Health & Human Services. This ain't cheap. They spent $50K in Q3 2019!

Manufacturing Facility Modifications

Cash is a challenge for CEL-SCI and most small biotechs. Thus, the company spending its limited resources to modify its manufacturing facility raises an eyebrow. It isn't manufacturing Multikine. This implies the company is getting ready for something. See below from the 10-K.

favilty

Institutional Ownership

Institutional ownership is way up in the third quarter. The two largest holders are BlackRock and Vanguard. Over 1.7 million shares were added last quarter, and most firms held or increased their positions.

Short Interest

Short interest as of December 31, 2019 is 6.00 million and the short float percentage is at 17.5%. This is pure, 100% rocket fuel. A massive, epic short squeeze is imminent.

The shorts do not know more than us longs. This increase in shorted shares was always about the next round of financing, not the trial. They got trapped in the $3s and $4s and needed an exit ramp. The exit ramp they needed was toxic financing with warrants. The exit ramp never came. They are trapped.

In-The-Money Warrants

There is no secret that CEL-SCI has had a dubious past when it comes to its past fund-raising efforts. Wash, rinse, repeat.

As a result of these cash raises, the company provided potentially lucrative warrants. With a company of CEL-SCI's past, many warrant holders wondered if the stock price would ever meet the high warrant strike prices. Over the years, there have been countless lost opportunities because warrants expired worthless.

We reviewed the recently released 10-K. What stuck out for us was the large "in-the-money" warrants that are still outstanding. Nearly $8.6 million of "in-the-money" warrants still haven’t been converted. This makes no sense.

With all the "red flags", with all the ups and downs, with all the "pump and dumps", this run-up was finally the warrant holders' opportunity to cash out and "make bank".

The share price has hit multiple new 52-week highs this year. Finally, after all these years, the warrants are worth a lot of money. At a $9.00 share price, these warrant holders would stand to gain over $24 million.

The stock could tank at a moment’s notice on bad IDMC news or bad data. But they haven't converted, and they are leaving over $24 million at risk and on the table. Surely, they haven't forgotten about the "red flags" and all the "pump and dumps". To us, it's simple. They too believe.

Valuation

There are 165K new head and neck cancer cases each year in the U.S., Canada, and Europe. Of these, 110K are "advanced" Stage III or IV and are Multikine-eligible.

The average new oncology drug cost is between $200K and $400K. Let us assume a market penetration between 20K and 50K a year, and Multikine only receives $50K per treatment. Annual sales would be between $1 billion and $2.5 billion.

Assuming a multiple of 4x sales, which is extremely conservative, the value of the company would be between $4 billion and $10 billion. Fully diluted by all possible shares plus future potential dilutions (50 million shares), this equals around $80-200 per share.

We are suggesting a fair valuation between $80 and $200 per share, if Multikine is successful. We believe this drug will be a blockbuster.

Given this is a binary event trial, if the trial is not successful, we believe the share price will be around $1.

Risks and Conclusion

Biotechnology is risky, and so is investing in it. A majority of all biotech trials fail, and they always need cash.

As the primary endpoint is the open door to approval by the FDA, we believe there is a very high probability of success for this drug and that CEL-SCI is currently deeply undervalued given the potential of the drug and the probability of success. A plethora of items are pointing to success:

  • Both the American Cancer Society and CEL-SCI confirm our due diligence: OS has decreased for the trial's patient population.
  • Based on our statistical analysis, we expect to see an efficacy well over 10%.
  • The "delayed clinical effect" has prolonged the length of study.
  • The clinical hold ultimately had nothing to do with the safety of Multikine, and both the FDA and IDMC said the trial should proceed.
  • IDMC has reviewed the data and could have determined that the trial was futile, but they said to continue. They see something here.
  • Dropouts are not an issue and appear to be contained.
  • Other clues like the recent stock purchases by the CEO, lobbying efforts, upgrades to the manufacturing facility, and the large amount of in-the-money warrants are pointing towards success.

While we strongly believe that this trial should be a tremendous success, there are many aspects of a clinical trial that could be the cause of failure.

Failure could be due to many factors, such as, but not limited to:

  • SOC showing an extraordinary capacity to heal patients.
  • High level of dropouts during the study (well above 20%).
  • Violations of the protocol not detected or reported properly by the investigator.
  • Considerations due to the fact that the trial happened in many countries outside of the USA.

Speculation on this stock may be prudent from the information presented, as it seems likely this treatment will succeed. Those a little less confident may choose to go along for the ride up, if it continues, and sell as anticipation builds closer to a release of information. Those with the opposite belief may cite the company's past and obstacles to approval.

All those risks do remain, and a wise investor will consider them before making an investment decision. If the trial fails, we would expect the share price to be less than $1.

However, we believe this will succeed. We are again suggesting a fair valuation between $80 and $200 per share.

Disclosure: I am/we are long CVM. 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.