| 2018 | 2019 | ||||||
| Price: | 0.90 | EPS | 0 | 0 | |||
| Shares Out. (in M): | 23 | P/E | 0 | 0 | |||
| Market Cap (in $M): | 21 | P/FCF | 0 | 0 | |||
| Net Debt (in $M): | 0 | EBIT | 0 | 0 | |||
| TEV (in $M): | 21 | TEV/EBIT | 0 | 0 | |||
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It is generally known that drug development takes a long time but the wild story of Cel-Sci (CVM) is one of the most extreme examples that I have encountered. This cancer immunotherapy company has been working to secure FDA approval for its first-line head and neck cancer drug since 1991! With a tiny market capitalization and a history of brutal shareholder dilution and retail stock promotion, few institutional investors are focused on the fact that the company’s 900+ patient global Phase III trial could readout early next year. Or they don’t care anymore: if someone is familiar, they probably hate it and would say that the company hasn’t accomplished anything ever. When coupled with multi-year delays of an already unusually long trial due to the need to build a manufacturing facility followed by a CRO switch mid-Phase III and then a clinical hold, you have to admire the persistence of the management team.
Other headline facts: there is a peer reviewed Phase II but its design as well as the design of the Phase III remain open to criticism because they are not double-blinded placebo controlled for the investigators. Also noteworthy is that Teva is a regional partner. Finally, the company’s liquidity is tight and it will need to raise at least $12 million to reach the middle of next year (by which time there should be a data readout based on expected survival time which is a grim reality).
From the current valuation of approximately $20 million for a Phase III asset near the end of its trial, there is a path to large upside while, based on other preclinical assets and a longer-term alternative use for the company’s manufacturing facility, a failure should not mean a complete zero. Skepticism certainly abounds however.
Business Description
CVM’s lead product, Multikine, is an immunotherapy that targets head and neck cancer. Multikine is a mixture of biologically active natural cytokines (which are signaling molecules in the immune system) that are derived from human blood through a complex manufacturing process. Multikine functions by clearing micrometastases from areas around the tumor’s margin (edges) as well as from within the regional lymph nodes. In doing so, it decreases the likelihood that cancer cells would remain after surgery, and in turn, increases the likelihood for successful treatment. With a smaller threat from micrometastases, CVM anticipates that fewer patients may need to receive the highly toxic, follow-on combined radiation/chemotherapy regimen that would routinely be administered. However, if concurrent chemotherapy and radiation therapy is still needed, CVM believes that it may be possible to administer these therapies in less intensive regimens, and thus, spare patients the severe toxicities with which these therapies are commonly associated. As a result, Multikine may further enhance the efficacy of these follow-on treatments.
CVM is not completely alone in this endeavor. Its regional partners for Multikine include:
1. Teva Pharmaceuticals – 2008 Exclusive License for Multikine (head and neck cancer); territory: Israel, Turkey, and Serbia + Croatia were added in 2011 (Cel-Sci manufactures, Teva markets and distributes drug – revenue split)
2. Orient Europharma (OEP) (GreTai in Taiwan: 4120 TT: US$180 million market cap)– 2000 (amended in 2010) Exclusive License for Multikine (head and neck cancer); territory: Taiwan, Singapore, Hong Kong, Malaysia, Australia, New Zealand (Cel-Sci manufactures, OEP markets and distributes drug – revenue split).
In addition to Multikine, CVM also has several other drug development efforts that are much earlier stage: this roster of compounds includes a pre-clinical rheumatoid arthritis drug which has recently received $1.5 million in NIH grants.
Timeline:
By 2002, the company had successfully completed 7 trials in head and neck cancer when progress appeared to grind to a halt (although its Phase II study was published in 2005 in the Journal of Clinical Oncology see: Timar et al, JCO, 23(15): May 2005 which can be found here http://ascopubs.org/doi/pdf/10.1200/JCO.2005.06.005 ). The company made little observable progress until 2007 due to (1) the lack of funding and (2) the development time required to respond to the FDA’s suggestion that CVM build its own manufacturing facility.
In 2007, the FDA granted Multikine Orphan Drug Status. This will give Cel-Sci seven (7) years market exclusivity (in the USA) after marketing approval for the drug. The FDA also approved a Phase III clinical trial for Multikine in advanced primary head and neck cancer (which is characterized by large tumors that cannot be completely excised by surgery alone) the success of which would represent the final regulatory requirement before commercialization. In its Phase III, CVM is administering Multikine prior to the currently accepted standard of care treatment: surgery followed by radiation/chemotherapy. CVM believes that a positive Phase III outcome could enable Multikine to be routinely included as part of the standard of care for all advanced primary head and neck patients. It also has potential applications in other solid tumors.
In October 2008, the company took delivery of its 73k square-foot manufacturing facility designed to produce Multikine for the Phase III trial and for commercial sales. This facility also has the capacity to, simultaneous with Multikine production, perform final low temperature fill and finish services for other drug companies which could be an alternative use if the Phase III fails.
So a decade later, what is the story? First, the company survived a credit-crisis induced near-death experience. Next, in 2010 Cel-Sci signed up Contract Research Organization (CRO) PharmaNet, (bought by inVentiv which then became Syneos Health), to enroll 880 untreated patients in 15 to 18 months, starting in January 2011 (yes it took them 4 years to start a trial). Over two years later, the clinical trial had only enrolled a total of 117 patients, including patients brought in by the regional partners Teva and Orient Europharma. Ouch!
In April 2013, CVM replaced inVentiv with CROs ICON and Ergomed to compete the trial. Meanwhile, CVM filed an arbitration lawsuit in October 2013 against inVentiv, for $50 million (more on this later).
Patient enrollment sped up with the change in CROs with 928 patients enrolled by September 2016. But the bad news continued: FDA issues with the trial emerged. After receiving a partial clinical hold in September 2016 (this means no new enrollments but patients on the trial can continue), CVM met with the agency and later submitted an updated investigator’s brochure and a list of major protocol deviations. However, during that subsequent review the FDA said it found additional issues with the submission and upgraded its order to a full clinical hold (i.e. stop the trial all together). This debacle is covered here: https://www.fiercebiotech.com/biotech/cel-sci-trying-to-escape-clinical-hold-creates-new-problems-for-multikine-r-d-program-at The hold was finally lifted in August 2017. That is a long time to not be able to enroll or service enrolled patients so CVM announced in December 2017 that the trial was fully enrolled. CVM determined that the existing 928 patients were enough as the trial had originally been designed for 880 patients but was then expanded to be overpowered. Nevertheless, this still was far from the ideal outcome and perhaps can help explain the current valuation.
Thus, the trial has been in follow-up mode since 2016. According to its meta-analysis, overall survival for the standard of care is expected to be 55% after 3 years. The endpoint of the trial is a 10% increase in overall survival (compared to 33% observed in the Phase II) and data will be triggered after 298 deaths in the comparator arm of the study. Sadly, this should be soon (early 2019).
As a denouement, CVM “won” its arbitration against its former CRO in 2018 but it was only awarded $2m not the $50m it has conditioned the market to expect. As a result, the stock fell violently as investors rightly became concerned about the company’s liquidity profile. The stock is down approximately 60% year-to-date.
The Phase III Drug:
In summary, Multikine overcomes local immune-suppression (induced by the tumor), breaks tumor-tolerance to tumor antigens, changes tumor cellular immune infiltrate and affects the tumor
microenvironment allowing for an effective and sustainable local anti-tumor immune response. More information on the mechanism can be found in the Timar et al, 2005 article cited above.
The main findings in tumors of Multikine treated patients consisted of increased infiltrating CD4 cells and a dramatic change in the CD4/CD8 ratio in favor of CD4 cells which resulted in
tumor bed destruction, neutrophil infiltration, and massive tumor cell (and tumor bed) necrosis. This is extremely important because the tumor is able to shut down the infiltrating CD-8 cells,
but is unable to shut down the CD-4 cell attack. (Typically, the immune system sends CD-8 T-cells to combat cancer.) In addition, CD-4 cells help break "tumor tolerance,” thereby allowing the
immune system to recognize, attack, and destroy the tumor. The normal immune system is “blind” to tumor cells because the tumor cells are derived from the body's own cells, and thus the
body “thinks” of the tumor as “self”, a phenomenon also known as “tumor tolerance”. Multikine also induces dendritic cells activation and recruitment of dendritic cells to the tumor and
lymph node adjacent sites. In contrast most head and neck patients’ tumors have mostly CD8 cell infiltrate and a lack of tumor bed destruction.
In its Phase II trial, after 3 weeks of Multikine injections:
In English, Multikine is mixture of different immune warrior molecules, just like the natural immune system: due to its long development history, it was a combination immunotherapy long before the current combination paradigm. In contrast to many other targeted cancer therapies which are comprised of a single active ingredient, Multikine is composed of a defined mixture of biologically/immunologically active and naturally occurring molecules. Indeed, Multikine contains multiple components, which studies have shown activate all of the immune pathways known to be necessary for destruction, killing and “rejection” of a tumor. This allows Multikine to be a “multi-targeted” therapy: this is a more powerful approach than those therapies such as monoclonal antibodies or cancer vaccines which are directed towards only one target. Rather its multiple and different immune components can each target a different part or parts of the immune response. Simultaneously, other components are directed against the tumor cells themselves.
The cytokines IL-2 and IFN-alpha are used to treat cancer so there is some precedent for Multikine: see https://www.cancercenter.com/treatments/cytokines/ for example. (Multikine has 14 cytokines)
Separately and distinctly, Multikine has also been shown to render cancer cells more susceptible to radiation (and chemotherapy). The drug places 75% of cancer cells in a proliferative state vs. the standard 5-10%. When cancer cells are in a proliferative cycle, radiation can kill them. It follows that the effectiveness of radiation will be substantially more when an increased number of cancer cells can be targeted. This benefit is above and beyond what Multikine does on its own and demonstrates its complementary position to the standard of care (which includes radiation therapy). See Timar et.al. The Laryngoscope, December 2003, Vol. 113 Issue 12 for more on this which can be found here: https://onlinelibrary.wiley.com/doi/pdf/10.1097/00005537-200312000-00031 .
The increased sensitivity of the Multikine-treated tumors to radiation was derived from a dramatic increase in the number of proliferating (those that are in cell cycle) cancer cells. Following Multikine treatment, the great majority of the tumor cells were in a proliferative state, as measured by the well-established cell proliferation marker Ki67. The control patients (not treated with Multikine) had only low expression (near background) of the same proliferation marker (Ki67) in this study. These findings were statistically significant (p<0.05).
This is an important finding because the ability of radiation therapy (and chemotherapy) to kill tumor cells is dependent, in large part, on the proliferative state of the tumor cells at the time of radiation (and chemotherapy) treatment. As seen in the control group in this study, and also in many other tumor types, the great majority of tumor cells (about 90% or more) are in a "resting" state (non-proliferating). It is generally accepted that tumor cells in the "resting" state are by-and-large resistant to radiation and chemotherapy. However, Multikine treatment induced a reversal of this non-proliferative state of the tumor cells and caused the great majority of the tumor cells to enter into the proliferative state, thereby rendering the tumor highly susceptible to radiation therapy (and chemotherapy).
The drug is intended for the neoadjuvant/adjuvant treatment (meaning prior to the main treatment) of previously untreated (treatment naive) patients with (locally – not metastatic) advanced primary, squamous cell carcinoma of the head and neck. The drug is administered percutaneously/via a needle ( both peritumorally/around the tumor and perilymphatically/around the lymph nodes) to elicit a maximal immune response. The lymph nodes are an important part of the immune system thus an immunostimulatory drug like Multikine can be particularly helpful in summoning the body’s own immune system when injected there.
One of the reasons surgery fails to cure cancer is that it fails to get to the “micro-metastases.” These very small extensions of the tumor into healthy tissue are nearly impossible to detect. Consequently, when a tumor is removed, very small parts of it are left in the body which allows the cancer to return and ultimately spread. CVM believes that by injecting Multikine peritumorally, it can help eradicate the micro-metastases and thereby increase the chance for survival. Concurrent radiation and chemotherapy is used in cases where the tumor has spread and the margins are not clean but it can be highly toxic to patients and cause severe side effects such as oral mucositis.
Cancer drugs are often administered after cancer is very advanced and the immune system is already depleted from radiation and chemotherapy. Moreover, cancer surgery can include the removal of lymph nodes which are a key part of the body’s potential immune response to cancer. CVM asserted this traditional method make no sense and is a partial explanation for why immunotherapies can fail in clinical trials. Rather, the FDA is allowing Multikine to be administered before surgery, radiation and chemotherapy as a first-line treatment to previously untreated patients. The existing approved targeted therapies, Erbitux and Foscan, are not used prior to surgery as first line treatments, and also have other challenges (i.e., extreme toxicity). CVM believes that Multikine’s lack of toxicity will be a differentiating factor and that its use while the immune system is still intact will help explain why the drug could work.
A list of scientific publications related to Multikine (and the preclinical efforts) can be found here: http://cel-sci.com/scientific_publications_presentations.html (Some of the papers have links to them)
Management:
There has been very low turnover at the company over the years and the scientific team is excellent. The CEO joined in 1989 and assumed his current role in 1995. Yes he is “promotional” (see the link to the shareholder letter below) and the company has been linked to retail stock promoters in the past (see Casper’s terrific write up of TPIV as a short that just came out). To the CEO’s credit he has kept the company alive throughout the adversity with largely a retail and pipe fund investor base. Unlike the stereotypical “scheme” he also has invested his own capital as recently as $500k in convertible notes in 2017, deferred salary when necessary and is not a seller of stock. Critics cite his cash comp of $400k to $500k as high (company as personal ATM blah blah) and that is debatable but he also serves as the company’s CFO. Not that it matters but I have spoken to him and actually quite like him.
For reference, here is the latest shareholder letter:
Investment Concerns:
Ok here we go - if this was a slam dunk then the Company would not be available at the current price. Here are some of the issues to think about:
Capitalization
Including shares from a July 2018 offering, there are 23.4m primary shares outstanding. At the current market price of approximately $0.90 per share, the market cap is only $21.1 million (this is interesting in relation to the $48.7 million that the Company has spent on its Phase III through March). In addition there are 933k options at a strike of $2.17 (and about 400k at higher strikes) and slightly less than 19.4m warrants outstanding (some recently exercised for proceeds of $2.1 million according to a recent press release but the number of warrants exercised was not disclosed) at an average strike price of $5.75. (Since some warrants are far out of the money, there are 16.2m warrants with strike prices of $5.00 or less with an average strike of $1.92)
Note that the company also issued $2.7m of convertible notes in 2017 they converted to equity plus warrants subsequent to the last quarterly filing.
Also note that the company issued 600k shares to its CRO in May 2018 to potentially (depending on ultimate cash proceeds) offset its payables balance with them of $1.7 million. That is on the margin positive.
Valuation
Obviously, if the Phase 3 readout is positive, the company will be worth a lot more. Let’s do the math with some punitive assumptions.
If there are sadly approximately 63,000 new cases of head and neck cancer annually in the US and 250,000 in Europe (550k globally) [citations are here: https://www.uptodate.com/contents/epidemiology-and-risk-factors-for-head-and-neck-cancer ], then US and Europe addressable market would be 313,000 patients per annum and let’s say only 2/3 would be considered “advanced primary” so that would be an addressable market of 208,000 cases. Not included: the company has a patent in China and over half of all oral cancers are found in Asia. The market also could ultimately expand to other solid tumors but let’s exclude the option value from that as well.
Even though Multikine is a biologic and checkpoints Keytruda and Opdivo cost approx. $150k year, let’s assume CVM charges $20k for the treatment. Then, there is a market opportunity of over $4 billion.
Next, even though the Phase 3 trial was set up to allow Multikine to be used as a first-line treatment, let’s assume that its penetration is very low due to checkpoints approved for metastatic head and neck cancer So at an arbitrary 10% penetration (low for “first line”), it would be a $400m drug.
Now let’s assume a low for biotech 50% gross margin and a large $100 million SG&A budget assuming the company goes it alone without a US or European partner and needs a huge global sales force. That would be approximately $100m of pre-tax income and $79 million of after-tax net income. If that market share was flat, let’s say that it would be worth a P/E of 10x. After including option and warrant proceeds, that would be an approximately $875 million of market cap. Let’s also assume that the 40.5 million shares that would be outstanding doubled to 81.1 million ( At $3m of burn per quarter and an expected readout before the end of 1H19, $12m raised at a 50% discount to the current stock price would be 26.7m additional shares). Under this scenario, the stock would be worth over $10 compared to under $1.00 today.
But what if the trial fails? The stock will likely go down. If the trial meets its survival endpoint but the FDA still requires another trial that goes head to head against checkpoints then it is hard to imagine that the market cap would remain where it is.
In the failure case, there are two other assets that could be worth at least $10 million (they could be worth more). If that were the case, downside would be 50% from here.
First, CVM has stated that it could use its facility as a cold-fill and finish site for third parties. This is not a unique capability but it is a business that even at a low utilization could generate $5 million of revenue at a 60% contribution margin. Capitalizing that $3 million of EBITDA at 5x would be $15 million. Since that is not the business today, let’s say it’s worth $5 million. Also worth noting, there is a pre-tax NOL of approximately $195 million ($41 million after-tax) that might receive some sort of credit if there was even a small cash flow positive business although there has not been a Section 382 evaluation.
Second, there are other patented preclinical assets. CVM is developing a treatment for rheumatoid arthritis and currently has animal / in vitro human cell data and $1.5 million of support from the NIH. Management has stated its intention to begin Phase I trials but I suspect the cash situation has always precluded that. Let’s assume these assets are also worth $5 million.
Finally, here is a link to a recent presentation:
http://www.cel-sci.com/CEL-SCI%20Microcap%20Presentation%204-3-18%20FINAL.pdf
(Apologies for the formatting issues as a non google docs user but that random box around the description of the drug is pretty cool!)
Disclosure
We make no claims, promises or guarantees about the accuracy, completeness or adequacy of the contents of this document and expressly disclaim liability for errors and omissions in the document. We have no obligation to update this document. We may change our position at any time without posting an update. The views expressed here are merely the opinion of the author. Readers should do their own research.
Securing additional capital, even on disadvantageous terms, and Phase III data readout early next year
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