Description

TapImmune (TPIV) represents an actionable opportunity with a similar thesis to LFIN and INNT: a company with a highly questionable past that has seen an extraordinary short term run, with plenty of insider stock to be sold from a lower cost basis.

The Setup

TPIV has had a +420% run from it’s low of $2.58 in April of this year to a high of $13.55 in June. The move was sparked by their announced merger with little known private company, Marker Therapeutics, and some clear front running and then algo/day trading momentum buyers that after they left the stock has gotten stuck with low volume. At $9.32 today, the stock remains +260% above its lows and +130% above the $4.00 price where it recently executed a $70M private placement. My thesis is that the run up has been unjustified, and a wave of insider selling will pound the stock back to the $4.00-$5.00 range in a matter of months if not weeks, providing short sellers with an opportunity for a 50% gain from here.

I admit to not being a biotech expert in the sense that I’m not a former clinical researcher or attending industry conferences every month; I don’t have a PhD’s understanding of the science. But I’ve successfully traded biotech stocks for years by recognizing points where market valuations are carried away by speculation and retail investors who lack knowledge get greedy hoping for a home run. Valuing a clinical stage company with nothing but a formula and prayer is difficult but understanding the motives and actions of the insiders who understand the company’s prospects best is not rocket science.

TPIV Background

TPIV began trading on the Nasdaq in November 2016 after a decade plus of OTC obscurity. The company conducted Phase I trials in 2015 with the Mayo Clinic for their immuno-oncology compounds TPIV 200 and TPIV 100, which had encouraging safety data according to their own press releases but only consisted of data from 10 patients, which even they had to admit was hardly significant. Phase II trials for TPIV 200 began in 2016 with an ovarian cancer study at Sloan Kettering and another in 2017 for breast cancer with the Mayo Clinic. According to company PRs, initial results from the Mayo Clinic study were expected in the first half of 2018 after the first patient (yes, singular) was enrolled in December 2017. I have been unable to find any updates on the trial since. The Sloan Kettering study that began in April 2016 has only provided enrollment and safety updates so far. It would appear that TPIV’s studies are going, well, nowhere.

As of March 31, 2018, the company held $2.8M of cash and was burning roughly $2M/quarter. The equity was essentially a deep out of the money call option on the compounds. As of May 1st, the market appeared to be appropriately reflecting this as the stock traded at a market cap of approximately $33M (not fully diluted for warrants that were out-of-the-money at the time).

The Deal

On May 15, 2018 TPIV made the big announcement that they would undergo a merger of equals with private clinical stage Marker Therapeutics, a Minnesota based startup founded in 2016 that was aiming to ride the CAR-T wave. Marker’s latest fundraising round was a Series A from Index Ventures on June 5, 2017, which assigned a $45M post-money valuation to the company. Before this announcement, Marker was an obscure research group and hardly a heavily sought-after asset; in the words of industry rag FierceBiotech.com:

“Marker largely flew under the radar during its three-year existence…company co-founder Ann Leen, Ph.D., presented data on non-engineered T cells at 2017 ASCO-SITC Clinical Immuno-Oncology Symposium without capturing the sector’s attention. The data came from Hodgkin lymphoma patients who took multi-tumor-associated antigen-specific T cells. Of the 12 patients with active disease, five had complete responses. Some patients who took the cells have been relapse-free for more than two years, emboldening TapImmune to talk up the potential to better CAR-Ts.”

On June 8, 2018 more details emerged as the private placement was announced, a $70M deal consisting of stock and warrants being sold to New Enterprise Associates, Aisling Capital and Perceptive Advisors among other new and existing investors, set to close with the merger of Marker and TapImmune.

·     17.5M shares of TPIV to be issued at $4.00 (closed at $5.95 the previous day)

·     13.125M warrants for common stock at a price of $5.00

According to the preliminary proxy filed by TPIV on July 13, 2018, Marker will be issued an equal number of shares as TPIV has outstanding (after the exercise of warrants, more on that to come). The new company will subsequently issue the above private placement to presumably fund the enterprise through 2020. Closing expected end of Q3 2018. In summary, the NewCo equity structure will like this:

Something Stinks

Just three days after the deal was announced, TPIV thought it was an ideal time to sell 1.3M shares for $2.40 in a private placement with existing investor, Eastern Capital Limited, to keep them afloat until the larger deal closed. At the same time the company elected to reduce the exercise price on the Series C, D, E and F warrants from $6.00, $9.00, $15.00 and $7.20 respectively, to $2.50 across the board! All those different strike prices were too complicated anyways. Naturally the warrant holders took the gift and immediately registered for 782,506 shares.

Backing up to December 29, 2017, TPIV had registered a shelf of equity to unload 4,408,014 shares from existing holders and registering another 6,458,411 of common issuable from exercise of warrants (originally filed when the stock was trading below $4.50. On June 15^th and 21^st we saw two amendments to this prospectus emerge, after the stock had risen to over $9 and then $13 per share, as more insiders decided the time to cash in was at hand. These included Michael Bigger’s aptly named “Bigger Capital Fund, LP”. It should be noted that Mr. Bigger’s personal shares were originally registered back in December with the stock under $4.50, but when the stock had risen to nearly $14 it was even a good enough price to let his LPs out of TPIV.

It should also be noted there has been some promotional material published on TPIV. Shortly after the deal was announced, Michael Sheikh wrote a piece on May 30^th for Seeking Alpha titled, “The Kite Killer – TapImmune and Marker Merger Challenges Gilead”. For those of us who aren’t PhDs but often trade biotechs, a lot of alarm bells are going off at this point. Whenever a company that has traded sub $100M for years is suddenly being mentioned in the same sentence as a Gilead, or blockbuster deals are being used as valuation comps…we know something isn’t right. Mr. Sheikh has also written positive pieces on dubious biotechs including Galectin Therapeutics (GALT), Oramed Pharmaceuticals (ORMP) and Ampio Pharmaceuticals (AMPE). His M.O. appears to be spreading rumors of imminent takeovers, none of which have materialized to date. Sheikh makes the dramatic comparison of Marker to Kite, noting the $11.9B Gilead paid for Kite in August of 2017. He also seemed to vastly underestimate what the market was valuing the TapImmune/Marker merger at, citing a $74M mkt cap when it was trading at $3.91, either not accounting for the existing warrants or the additional $70M financing (details of which hadn’t been released yet in fairness to him).

Well before the Marker deal was conceived, another favorable TPIV article was published on Seeking Alpha by Sharon di Stefano in February 2016. For those of you who don’t typically wade in biotech filth, here is an article by well regarded analyst, Adam Feuerstein in which he details a bewildering conversation with Sharon di Stefano (https://www.thestreet.com/story/14117285/1/a-neurotrope-stock-promotion-scheme-is-underway-but-who-s-paying-for-it.html). Ms. di Stefano claims to be a healthcare consultant who seems to be bouncing from firm to firm and maybe on welfare, or she just uses that as a euphemism for her divorce settlement? It’s all very unclear, but since the Feuerstein article was published, Seeking Alpha has taken down the majority of her content. Besides Neurotrope (NTRP), this same “author” (more likely a paid promoter) has previously pumped Cel-Sci Corp (CVM) which recently had an epic collapse from $3.66 to $0.85 in June of this year. Surely her association with TPIV does not speak highly of the company’s Board, management team and legitimacy of their claims.

Valuation

After adjusting for the stock and warrants sold in May, TPIV today has 12.8M shares outstanding. At a market price of $9.43 that is a market cap of $120M. As the proxy statement notes, TPIV shareholders will ultimately own 27.5% of the NewCo, which means current TPIV shareholders are valuing the new enterprise at $438M. Again, I’m not a biotech analyst, but how does combining a sleepy Phase 2 company like TPIV, that has been trading at cash + OTM call value, with a little known private company such as Marker, that recently was valued at $45M by sophisticated private investors and only conducted a Phase 1 study on 12 patients, create an enterprise worth nearly half a billion dollars? The smart money has already cast their vote on this company, when insiders filed to dump the vast majority of their holdings back in December around $4.00 per shares, and then again when new investors stepped up to take the private placement at $4.00 to $5.00. Yet the reaction from the momentum crowd and news reading algorithms managed to take the stock to over 3X the private placement valuation, and it remains not far off the highs today.

I suspect that the original round of insider selling is complete; however, the more recently sold shares and warrants are still to come. When the deal closes in Q3, the private placement buyers will have 30M shares of stock from $4.00-$5.00 that they will be eager to dump as well. Based on the current trajectory of both TPIV and Marker’s studies, there are likely few positive catalysts coming before 2019 to interrupt the decline.

Catalyst

Insider sales

Deal closing in <2 months