What is a bargain purchase option
- A recent press release* lists MBVX’s market cap at just $18 Mil. This number is misleading.
- Shares have taken off since it was announced that Dr. Frost bought shares. However, his purchase was at a huge discount to the market price and includes additional perks.
- The recent insider buying along with the private placement, which should provide adequate funding for the next year or two is a significant endorsement of the company's drug development pipeline.
MabVax (OTCQB:MBVX ) first caught my eye when I was alerted to the "insider buying" by the Chairman/CEO of Opko Health (NYSE:OPK ), Dr. Phillip Frost. Once I discovered the insider buying was actually a private placement at a very sizable discount to the market price, I put the stock on my back burner and held off on doing any due diligence until recently. If you were one of the lucky ones who impulsively bought it based on Dr. Frost's endorsement, your blind faith has been amply rewarded as the stock has shot up 55% since the news broke on Monday morning about the private placement. However, the burning question is, is the stock still a buy after this recent run-up?
The current MabVax Therapeutics was created through a reverse merger in July 2014 between the private predecessor company and the public company Telik Inc. with a subsequent name change and 8:1 reverse stock split coming a few months later. The name change was a breath of fresh air to Telik, whose lead drug Telcyta was halted in Phase 3 trials for ovarian cancer when it was discovered that patients in one of the treatment arms survived around 5 months less on average than patients in the control arm who were receiving doxorubicin and topetecan. The difference was statistically significant by a wide margin and implied that Telcyta directly contributed to their early demise. Similarly disappointing OS results were observed in the Telcyta Phase 3 trial for Non-Small Cell Lung Cancer where the control group outlived the Telcyta patients by an average of 1.5 months (FDA Halts Telik's Telcyta ).
The FDA later lifted the hold but the drug failed in 3 separate Phase III trials for ovarian cancer and non-small cell lung cancer and some analysts accused the company of deliberately withholding the final data (see Telik Share Price Plummets ). Telik's other drug candidate, Telinta, targeted toward myelodysplastic syndrome (MDS) and neutropenia, was supposed to enter Phase III trials in 2013 but remains on hold for quote unquote "business reasons."
Given the failure of their lead drug and the fact MabVax has yet to continue with the development of Telinta, the acquisition appears to have been primarily a vehicle to obtain a public NASDAQ listing, a maneuver that backfired when only two days after shareholders approved the merger, the company received a notice of delisting. The notes to the 10-K regarding the goodwill assumed as a result of the reverse merger are also quite interesting, stating "Factors contributing to a low implied value of the Company on the stock exchange include thinly traded stock and significant stock sales from a significant investor, as well as lack of visibility on public exchanges of potentially dilutive securities that are disclosed in the Company's public filings, that if converted would show substantially more shares outstanding than reported on public stock exchanges ."
So What is the Market Cap Really?
So just how many shares of MBVX actually exist and what is the market cap based on the stock's recent closing price of $4.62 on April 10? According to the most recent SEC filings, there are 19,146,662 shares of common stock issued and outstanding as of April 4 (including the annual restricted stock award granted to Philip Livingston on the same date), 237,647 shares of series D preferred stock outstanding that are convertible into 23,764,700 shares of common stock. and 46,666 shares of Series E preferred stock outstanding convertible into 4,666,666 shares of common stock without giving effect to any beneficial ownership limitation. While I haven't seen any data showing the average exercise price of the series E preferred convertible shares, the series B shares, which were converted into series D, had an average exercise price of just $1.57, so most if not all of these convertibles should be firmly in-the-money.
The total number of shares issued assuming the conversion of all Series D and E preferred convertible stock is 47,578,028, which equates to a market cap of $219.8 Mil based on the most recent closing price. Additionally, the 10-K shows a total of 242,893 options outstanding with 154,877 of them fully vested and exercisable at an average price of $3.77. I have not included these shares in my calculations. Since the notes in the 10-K for "Subsequent Events" also mention that the company has agreed to issue and sell additional units for an aggregate private placement of up to 21,333,333 shares of common stock, the prospect of additional dilution is still out there.
The company has provided a comparison to other companies in the same space with a similar therapeutic focus. Keep in mind however that all of these companies trade on the NASDAQ, while MabVax trades on the OTC Pink Sheets (reprinted from the company's presentation at the Rodman & Renshaw conference in Sep. 2014).
The Recent Private Placement and Insider Buying
Dr. Frost's ownership now stands at 1,333,333 shares (6.86%) and an additional 666,667 shares if he converts all his warrants (+3.43%). These shares were acquired at $0.75/unit where each unit represented 1 share of common stock along with a 30-month warrant to purchase one half share of the common stock at an exercise price of $1.50 per share. MBVX sold $11,614,501 of units in the private placement with Opko purchasing $2.5 Mil of them. Price protections are built in so that on the earlier of a) 24 months following the placement, or b) the date the company concludes a financing raising a minimum of $10 Mil, or c) the company's stock is listed on a national exchange, if the PPS dips below $0.75/share the original purchase price is adjusted so the private placement investors receive the benefit of the lower price.
Prior to the private placement there was a cluster of insider buying in December that was meaningful in several respects (widespread buying, significant increases in holdings) even if the overall dollar amounts weren't that impressive. Director Kenneth Cohen bought 6,500 shares for his family trust at prices ranging from $1.80-$2.41 per share, raising his holdings to 17,616 shares (an increase of 58% in his holdings). Director Robert Hoffman purchased 10,000 shares at $2.40 per share, raising his holdings to 21,116 (an increase of 90% in his holdings), VP of Product Development and Operations Paul Maffuid made an initial purchase of 5,000 shares at $2.85 per share, and CFO Gregory Hansen made an initial purchase of 3,000 shares at $2.50 per share.
Due to the huge discount from the market price, the "bonus" warrants received, and the price protection clause built into the deal, I put a lot more weight on the insider buying by several VPs and Directors than I do on the purchases by Dr. Frost and Opko. I agree that the private placement provides a validation of MabVax's drug development platform and a belief the company has some viable shots on goal but at a roughly 75% discount on the market price, Dr. Frost is being richly rewarded for providing urgently needed funding.
Cash on Hand and Burn Rate
The 10-K shows MabVax burned through $7.66 Mil in cash for operating activities in FY2014 and had a cash balance of $1.48 Mil at the end of the year so the private placement should provide enough additional funds to support operations for roughly another year and a half assuming a similar cash burn rate. That the company was in a precarious situation prior to Opko and Dr. Frost stepping up to the plate should be obvious from the end of year balance sheet, which showed current assets of just $1.91 Mil versus current liabilities of $2.97 Mil. This yields a current ratio of 0.64, which indicates a short-term liquidity crunch. The balance sheet shows accounts payable of $1.31 Mil versus accounts receivable of just over $84,000, suggesting figuratively that it was only a matter of time before the lights got turned out. As of the end of 2014, the company had built up an accumulated deficit of $24.55 Mil, up from $13.97 Mil at YE 2013.
Obviously, as the company's pipeline expands into Phase 2 and 3 trials, the burn rate can be expected to increase. However, this increase will be limited as Memorial Sloan Kettering Cancer Center (MSKCC) funds all vaccine drug development through Phase I trials and the Phase II ovarian vaccine trial is being fully funded by the National Cancer Institute (NCI). The company has also indicated that all patients have been fully vaccinated in both of their ongoing Phase II trials and they will incur minimal expense for the remaining survival follow-up.
The Phase I neuroblastoma trial is being funded by Kids for Cancer. Most of their funding needs
can be attributed to the Phase I trial for HuMab 5b1 which commences later this year and they received some assistance in the form of an NCI grant for $1.75 Mil for the companion PET imaging agent that's expected to last through June 2016. The deal MabVax signed with Juno Therapeutics (NASDAQ:JUNO ) in August would also have a positive effect on their burn rate if Juno exercises the option to use MabVax's human antibody candidates as targeting agents for its CAR-T cell platform. The agreement, which lasts until the earlier of June 30, 2016 or 90 days from the date MSKCC completes its research on the patents, provides for the payment of milestones and royalties.
The company is trying to outlicense their legacy Telik programs, which if they're successful doing would help reduce their cash needs. However, Telintra, which has Orphan Drug designation and is ready for Phase III development, is the only asset that would be likely to generate any significant proceeds. The other programs, which include VEGFR2 and Aurora/VEGFR2 kinase inhibitors and a mitotic inhibitor, are all in the pre-clinical phase. The company is hoping also to outlicense the sarcoma and ovarian cancer vaccines following eventual successful Phase II results rather than incur the substantial costs of a Phase III trial (see Introducing MabVax Therapeutics ).
The bottom line is the existing arrangement with MSKCC pre-funding early stage development of vaccine antibody candidates and the existing grants from NCI and several other sources, along with potential milestone payments and license fees from Juno should help defray the cost of upcoming clinical trials and limit the amount of additional dilutive financing needed.
The Management Team
The management team has been revitalized with several new additions since the reverse merger with Telik. While not a "star-studded" line-up, their backgrounds are impressive with the CEO (David Hansen), VP of Antibody Discovery (Wolfgang Scholz), and CFO (Gregory Hanson) all having senior roles at Avenir, the Baker Brothers hedge fund holding that was recently acquired at a huge premium by Otsuka Pharmaceuticals. Recent addition Paul Maffuid, the VP of Product Development and Operations, has extensive background including a stint as the Director of Pharmaceutical Development at Amylin, while CSO Phillip Livingston was the head of the Tumor Vaccinology Lab at MSKCC. He is the owner of the patents MabVax has licensed from MSKCC and is an extensively published authority in the field. While the track record of Telik is not particularly impressive, this is a completely made-over management team with a new pipeline of products and strong partners in Juno and MSKCC.
I should also add that I'm impressed with what I've seen on the company's professional-looking website. The presentations they've delivered recently at several medical conferences have done an outstanding job of providing a very compelling argument for investing in the company.
The Company's Pipeline and Development Progress
MabVax has an exclusive license for antibody vaccines developed by MSKCC. The company is pursuing a unique, first-in-class approach that combines the safety profile of a vaccine with the more selective targeting of a monoclonal antibody. Unlike engineered mAbs, the company's fully human antibodies are screened from the patients' protective immune responses that have the highest potency against a particular cancer and are less likely than engineered mAbs to trigger severe adverse reactions from a patient's immune system.
Their lead vaccines, which target recurrent sarcoma and ovarian cancer are currently in Phase II multicenter clinical trials with the OS endpoint expected to be reported for both vaccines in the first half of 2016. A visit to the clinicaltrials.gov website however suggests that the data readout from the sarcoma vaccine trial was once expected much sooner as it's showing final data collection in September 2013 and study completion in June 2014 (see Trivalent Ganglioside Vaccine in Metastatic Sarcoma Patients ).
Phase I results on the sarcoma vaccine were encouraging with a 98% immune response recorded (March 2015 Roth Capital Presentation.) Their vaccine for childhood neuroblastoma, which received Orphan Drug status from the FDA, has completed Phase I testing and an IND filing and Phase II trial should kick off later this year. The company reported very encouraging results on a small group of difficult-to-treat patients with recurring relapses prior to treatment. 12 of the 15 patients in the Phase I trial were free of disease and still alive at 29-40 months (March 2015 Roth Capital Presentation.).
Phase I trials in melanoma, breast cancer, and small cell lung cancer (SCLC) have also been completed and the company is waiting on the readouts from the sarcoma and ovarian cancer trials before deciding whether to continue with their development.
The company's lead antibody candidate, HuMab 5b1, is planned to go into Phase I clinical trials at MSKCC in the second half of this year with early data results expected to be announced before the end of the year. The trials will investigate the fully human antibody and its companion radio-labeled PET imaging agent for the diagnosis and treatment of pancreatic and colon cancer. The animal model studies showed it to be potent and highly specific at eradicating cancer cells in pancreatic, colon, and small cell lung cancer.
The imaging agent is also promising as studies in animal models showed it to be very effective at defining tumor margins and identifying metastasized pancreatic cancer cells. This is important in this type of cancer as over 50% of diagnosed patients already have metastases.
Altogether, the company expects to have two products in Phase IIb trials, a product entering Phase II, and two more entering Phase I with four out of the five providing clinical data readouts by the end of 2016.
The company estimates the market potential for the ovarian cancer and sarcoma vaccines from $200-400 Mil and $150-300 Mil annually, respectively, while they estimate the potential annual sales for the HuMab 5b1 antibody at $1B based on a target market of 96,000 treated patients with metastatic pancreatic and colon cancer (Jan 2015 Biotech Showcase Presentation). The neuroblastoma vaccine is targeted toward an orphan indication with only around 700 new cases a year but would achieve premium pricing and orphan drug protection by the FDA.
The company's shares presently trade on the OTC Pink Sheets. MBVX previously traded on the NASDAQ but received a notice of delisting back in July 2014 based on the fact that shareholders' equity fell just barely short of requirements ($2.44 Mil versus the requisite $2.5 Mil). Following the reverse merger with Telik the company met this requirement and currently exceeds the NASDAQ Capital Market (NCM) initial listing requirement for shareholders' equity. If the company's shares can maintain a bid price of at least $4.00 for the next 90 days, they would fulfill the NCM's Market Value Standard and qualify for relisting (see NASDAQ Listing Center Guide ).
At a market cap of around $220 Mil I believe investors are already pricing in a listing on the NASDAQ in spite of the fact that this is close to 90 days away from happening (assuming the bid price remains above $4.00 during that period). The recent run-up appears to be over enthusiasm about the Frost/Opko investments. While I like the company's prospects longer term, I believe the current market valuation is a little high for a company with no completed Phase II or III trials trading on the speculative OTC Pink Sheets.
I would advise long-term investors to wait for a better entry point before initiating a position and would consider accumulating shares on any significant pullback.
Update: I opened a small new position in MBVX this morning as the shares retreated up to 19%.
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