It's been a super busy week with so many mid-cap and small-cap biotech names filing earnings and holding Q2 conference calls. Catching our attention this week in particular were the speculative run in Inovio, Mannkind earnings, Immunocellular earnings, Synergy's End of Phase 2 meeting, spinoff and earnings, and Amarin earnings and short interest. Let's go over these stories.
Inovio Pharmaceuticals (NYSE:INO)
This past April at the Future Leaders in Biotech conference, we had a face to face meeting with the Inovio management team. Among other things, the CEO mentioned that sometime this summer they would be announcing a partnership for one of their pre-clinical programs with a major pharmaceutical partner. Given the fact that this was disclosed at a conference, we assume that the CEO has been touting such a deal to buysiders and sellsiders alike. This Monday Inovio saw a huge speculative run in it's stock based on a Seeking Alpha article suggesting that Merck should partner with the firm. Whether or not there is any merit to the speculation, the fervor was fanned because the official Inovio Pharmaceuticals twitter stream tweeted a link to the Seeking Alpha piece - implying that a deal was indeed in the works. That tweet was later deleted and replaced by a message that the company does not endorse or refute third party opinions.
INO stock climbed 44% on Monday in the post market, giving the company a $700 million market cap (counting all warrants and stock options). Clearly, even if a partnership for a pre-clinical program were in the works, it would not add hundreds of millions of dollars to INO's intrinsic value. A quick look at various deals for preclinical programs show upfront payments typically in the $5 to $25 million range meaning that much of INO's run on Monday was overdone based on speculation.
Here is a twitter exchange with someone who happened to luck out on being long INO on Monday before all the fuss started:
Later n the week we received the following tweet from the same user:
The move in INO was clearly overdone in our view and calling a sell after a 44% 1-day gain on no real news was, in our minds, a no-brainer. Hopefully others took similar advice and booked gains, INO ended the week at $1.92 which is 8% below it's closing price the Friday before.
We have no position in INO.
Synergy Pharmaceuticals (NASDAQ:SGYP)
On Monday SGYP announced that it had completed an end of phase 2 meeting for Plecanatide in Chronic Idiopathic Constipation (CIC). The wording of the press release, particularly the following sentence, suggests that two phase 3 studies may be necessary:
Agreement was reached with the FDA on design, duration, size and primary and secondary efficacy endpoints for the pivotal phase 3 studies.
We reached out to Bernard Denoyer, SGYP's CFO to get some details on the expected impact on cash guidance based on the go-forward plan. Given that SGYP was very close to filing their Q2 report, the CFO was not able to offer much in therm of details. He suggested that the company has never put out guidance on cash spend, which is in direct opposition to what was said during their road show for the latest capital raise as we noted in our Weekly Review for the week ending April 12th. The more interesting part of the conversation however, was his response to our question about whether or not the phase 2b/3 trial completed in January 2013 would be counted as a registration trial. His answer was along the lines of "It may be counted, but we still have some work to do in order for it to be counted as a registration trial". Later in the week SGYP initiated a long-term extension study of Plecanatide in CIC. This open-label extension study targets enrolling about half the patients from the original phase 2b/3 trial for 52 weeks to gather long-term safety and efficacy data. Based on these developments, it appears as if the company will be using the phase 2b/3 trial and the open-label extension to meet the long term exposure testing requirements for registration. This still leaves open the question of whether or not there will be 2 separate phase 3 trials and whether or not doses higher than 3mg will be tested in the registration trials.
On Thursday SGYP filed a form-10 registration statement for it's wholly owned subsidiary ContraVir pharmaceuticals. ContraVir will hold Synergy's FV-100 assets and liabilities and the plan is to distribute the shares of ContraVir to SGYP shareholders and eventually to hire a new CEO for the company. So last year, SGYP acquired the FV-100 assets from Bristol-Meyers, and underwent a merger with it's related company Callisto Pharmaceuticals. The reason for the merger with callisto was ostensibly to reduce unnecessary expense from having two separate publicly traded companies; yet, this year SGYP is in the process of recreating a similar structure. File this under the dumb corporate moves department. We believe that what may really be going on here is a separating of the FV-100 asset because the late phase 2 results are lees promising than originally hoped. When the FV-100 acquisition was announced here is how SGYP characterized the asset and it's ongoing phase 2 program:
FV-100 earlier completed a Phase 2a clinical trial in shingles patients, in which the drug was given to a total of 230 patients comprised of two cohorts of 115 patients dosed at 200 mg and 400 mg, respectively, and found to be well tolerated at both doses. Clinically meaningful reductions in time to resolution of clinically significant pain and in incidence of post-herpetic neuralgia were noted.
In the form 10 for ContraVir here is how the data are described:
The Phase 2 clinical trial for FV-100 was completed in December 2010. This trial represented the first clinical trial of FV-100 in shingles patients, and was a well-controlled; double blind study comparing two different dosing arms of FV-100 to an active control (valacyclovir). A total of 350 patients, aged 50 years and older, were enrolled in one of three treatment arms: 200 mg FV-100 administered once daily; 400 mg FV-100 administered once daily; and 1,000 mg valacyclovir administered three times per day. In addition to further evaluating its safety and tolerability, the main objectives of the trial were to evaluate the potential therapeutic benefit of FV-100 in reducing the severity and duration of shingles-related pain, the incidence of PHN, and the time to lesion healing. There were no statistical differences observed on the primary endpoint, which was the reduction in the severity and duration of shingles-associated pain over the first 30 days after lesion appearance. There were, however, numerically favorable treatment differences, and in particular in those patients that received 400 mg FV-100, as compared to valacyclovir, for the primary endpoint of the study.
Notice that there are 100 additional patients in the data, and that the results, while indicating lower pill burden, do not seem that great in the efficacy department.
Synergy paid $1 million upfront for FV-100 plus unspecified milestones upon approval and upon reaching $125 million in sales. These liabilities get transferred to the new company. All told, our view is that the market is not really assigning much value to the FV-100 asset; therefore, the spinoff while it may cause a temporary dip in SGYP stock, should not result in a meaningful change in SGYP's stock price.
There was some immediate speculation on social media channels about SGYP lining itself up for acquisition by spinning off the FV-100 asset and becoming a "pure-play" gastric disease company. While this is a facile argument, the reality is that an acquirer who sees value in Plecanatide and SP-333 will not let a minor issue such as FV-100 stop a deal. Therefore, we would not read too much into the spinoff in this direction.
When SGYP spiked to $5 on Monday, we pared back our position by 50%. We expect that the news flow for SGYP will be relatively calm until late Q4 when people begin positioning themselves ahead of the Q1 top-line results from the IBS-C trial. Between now and then, it is Ironwood Pharmaceuticals' (NASDAQ:IRWD) performance with commercialization for Linzess that will have the most meaningful read-through for SGYP. Should IRWD begin direct to consumer advertising, and should this lead to a meaningful up-tick in sales, this would drive the value of SGYP higher as the overall market size for both drugs is validated.
Mannkind Corporation (NASDAQ:MNKD)
Mannkind issued their Q2 report on Friday, and did not hold their conference call immediately afterward. As indicated in the press release for the quarterly filing, the company:
will hold a conference call to discuss the financial results when the results of Studies 171 and 175 are available. The analysis of these studies is expected to be completed shortly.
We indicated that this would be the case in our Red Acre insight about MNKD which was sent to subscribers on Monday and published on redacre.com on Tuesday. We received quite a bit of spirited debate from high-conviction MNKD bulls when we published the MNKD analysis. The gist of the debate was along the lines that 1) our cash analysis was inaccurate because we assumed no partnership deal would emerge for MNKD's lead drug Afrezza, and that; 2) given the large market size those in the high-conviction camp suggested that a buyout of MNKD may be occurring prior to NDA resubmission; and finally that 3) given the timing of our analysis, just before a major data release, we "must be short and worried". While option 3 is amusing (and baseless), let's spend some time reviewing the new facts that the 10-Q filing brings to light:
1) The Mann group promissory note is subordinated to the Deerfield financing. According ot the 10-Q:
The Mann Group’s right to repayment under the promissory note is subject to a subordination agreement between The Mann Group and affiliates of Deerfield Management Company L.P. (“Deerfield”), pursuant to which The Mann Group has agreed not to accept repayment under the note until the Company’s borrowings under its debt facility with Deerfield are repaid.
in other words, the $119.6 million owed to the Mann Group will not be repaid on January 1st, 2014 (when it is due) because MNKD must first repay the Deerfield debt.
2) As of June 30, 2013, MNKD has received $25.1 million in cash due to exercise of October warrants. $64.6 million worth of warrants remain unexercised.
3) The company's cash position at June 30 2013 was $28.5 million, which is higher than we expected, primarily due to the $25.1 million in warrants exercised.
4) The purchase price for the first tranche of the Deerfield notes was $21.1 million due to original issue discount. Read that one again: MNKD received only $21.2 million in cash for the first $40 million tranche due to "original issue discount". As we commented when this deal was originally announced, the Deerfield financing is not on good terms for the company. Just by purchasing the deal, Deerfield stands to make nearly 50% on the first tranche. Retail longs who believe that "Deerfield gave MNKD a vote of confidence by purchasing convertible debt" need to understand that Deerfield is, in many ways, a lender of last resort for biotech firms.
5) In addition to the debt, MNKD sold to Deerfield for $18.9 million, the rights to receive milestone payments of up to $90 million. Conveniently when the $18.9 million is added to the $21.2 million from tranche 1 above, one finds the total is $40 million. In other words, for $40 million , Deerfield gets convertible notes, which, due to the conversion rules are guaranteed to convert into at least $40 million worth of equity regardless of the outcome of the trials, AND they also get $90 million in milestone payments should the trials come out successful and Afrezza make it to market and achieve certain sales goals. Once again, this deal is heavily favored towards Deerfield.
While some called into question our analysis of MNKD's cash position, our overall point was that further financings will be required prior to the end of 2013. To wit, here is an excerpt from the 10-Q
The $115.0 million aggregate principal amount of 2013 notes mature in December 2013, and our cash and cash equivalents as of June 30, 2013 is insufficient to repay these notes. Accordingly, we will need to raise additional capital, either through the sale of equity or debt securities, the entry into a strategic business collaboration with a pharmaceutical or biotechnology company, the establishment of other funding facilities, licensing arrangements, asset sales or other means, and/or refinance our indebtedness under the 2013 notes, in order to repay the 2013 notes and continue the development and commercialization of AFREZZA and other product candidates and to support our other ongoing activities. There can be no assurance that we will be able to do so on favorable terms by the applicable repayment date, or at all.
(emphasis added).
Clearly, the sub-title of our Red Acre Insight "Positive trials but Further Capital Raises Ahead" was well justified.
We started a poll regarding how MNKD's stock will react to the data release. You can vote in the poll, and see voting results. We will leave it up until the Q2 conference call (and by implication the data release) are announced. Please cast your vote and pass along the poll link to others as well - the more response we get, the more accurate a representation of investor sentiment the poll will be.
Our position in MNKD is just 5% of our original position size, we would not recommend buying at these prices; however, we are long MNKD.
Immunocellular Therapeutics (NYSE:IMUC)
On Wednesday IMUC held it's Q2 earnigs results conference call. The press release for the earnings announcement revealed that the company expects the time from the occurrence of the 64th patient death to the reporting of the top-line results in the ongoing phase 2 trial for ICT-107 will be 3 to 4 months. This was a poorly worded description of the process for closing out the trial and caused some immediate consternation and commentary on twitter. The company expects that, once the data monitoring committee reports the 64th event, their teams will 1) verify that 64 events have indeed occurred, 2) travel to each trial site and verify that case records for each patient are complete 3) lock the database and 4) analyze the data according to the trial protocol. Steps 1 - 3 will take between 6 to 8 weeks and step 4 will take 6 to 8 weeks. IMUC could have avoided all of this commotion by simply stating that top-line results would be out 6 to 8 weeks after database lock.
We participated in the IMUC conference call and focused our questions around the company's current cash position, project cash burn, and use of their At-the-market (ATM) facility. (Notice a pattern here? This is the same type of analysis we did for MNKD - cash is key in a development stage biotech). The company has guided that cash burn should be around $1 million per month this year. During the first six months of the year they were below this level, but the second half of the year may bring total spend to this level. As of June 30th 2013, the company had $25.4 million cash on hand. The company has sold 943,496 shares under the ATM facility. All told, the company has sold $2.59 million worth of stock under the ATM facility. This represents just over 10% of the total amount of the facility.
Regarding the timing of top-line results and related announcements, the company indicated that it does NOT expect to announce the 64th event, or the DB lock, but rather that it intends to directly announce the top-line results when available. Given that there is an ATM facility in place, this is a rather stupid decision on management's part. Announcing db-lock or the occurrence of the 64th event would trigger a potential run-up as traders expect data in 3 to 4 months from the event or 6 to 8 weeks from the db-lock. This would let the companmy use the ATM facility at very favorable prices. (We hate ATM facilities, but if one is being used it should be used properly.)
Since IMUC will have it's Q3 conference call sometime in early November, the company may be compelled to answer questions regarding whether or not the 64th event has occurred by this time frame; therefore it is likely that traders will get some signal as to top-line results timing when the Q3 call comes around.
All in all, our impression from this conference call was that the new CEO, Andrew Gengos, was trying to reset inflated expectations created by IMUC's previous CEO. While his answers to some questions may have seemed disappointing to some bulls, they were level-headed and realistic which was a refreshing change. IMUC is in the process of trying to become a legitimate company, and management setting proper expectations is a major part of being taken seriously by the buy side.
Amarin Corporation PL/C (NASDAQ:AMRN)
Amarin reported Q2 results on Thursday. The company recognized $5.5 million in Vascepa revenue, and deferred $1.8 million in revenue which represents product sold to wholesalers but not yet sold through to retail users. During the call, management took a fair bit of time to lay out their reasoning for why Vascepa was likely to get a favorable Advisory Commeittee recommendation, why the REDUCE-IT trial results absolutely do not (in management's view) have to be submitted prior to approval for the ANCHOR indication (high triglycerides with mixed dislipidemia), and why recent studies regarding OTC fish oil supplements miss the mark regarding Vascepa's likely effectiveness. AMRN management clearly believes that the JELIS study is the proper indicator for the likelihood of success in the REDUCE-IT study. Our view is that JELIS is definitely the most directly comparable study in that the patients therein were taking pure EPA as opposed to fish oil supplements with EPA in combination with other omega-3 fatty acids. Whether or not this means that REDUCE-IT will succeed remains to be seen.
AMRN burned $18.7 million/month in the first half of the year. while the 10-q indicates that the company expects cash burn in the second half of the year to be significantly lower than in the first half, this remains to be seen. AMRN had $149.4 million in cash as of June 30th. The financing completed on July 12th brought in another $121.1 million, bringing current cash to approximately $251.8 million (remember, AMRN likely burned $18.7 million in July). AMRN indicates that the current cash position should be sufficient to last for 12 months.
On August 9th, the July 15th short interest information was publicly disseminated. This data is of interest because, to some extent, a run-up ahead of an advisory committee meeting depends upon the level of short interest vs the expected outcome of the advisory committee meeting. In this light it is instructive to look at the AMRN short interest over the last 12 months as charted below (data from NASDAQ - click to enlarge):
Clearly, short interest spiked when the "go-it-alone" strategy was announced, and has been declining since AMRN dipped below $8. While the recent financing resulted in a 1.3 million share decrease in short interest, there is still room to cover back down to the 20 million shares short level. We believe that, since AMRN's short interest remains above 20 million shares, traders will begin to anticipate a run-up in AMRN later this month and into Septmebr. Volatility in AMRN will likely pick up this week given both options expiration and another Orange Book update (remember those?). Once the data results for MNKD are in, an uptick in daily volume for AMRN may ensue.
Last week we went long the AMRN $6 September calls. this was a tiny position and a purely speculative trade. Our thesis being that AMRN is likely to revisit $6 prior to September options expiration as this will be just one month before the advisory committee meeting. While we currently do not own shares of AMRN, through these calls we are net long AMRN.
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