Biotech Stock Mailbag: Celsion Short Thesis, Hemispherx

BOSTON ( TheStreet) -- The second-to-last Biotech Stock Mailbag of 2012 begins with an email from Simon K.

" Celsion ( CLSN) has been a great run-up stock lately, but do you think this momentum will last into next year?" he asks.

Celsion is a fantastic and profitable example of the "biotech run-up" strategy espoused by traders, including TheStreet contributor Mark Messier, who runs a subscription trading service built around profiting from biotech stocks that run up in value ahead of catalysts like clinical-trial results and FDA drug-approval decisions.

Messier nailed the trading opportunity in Celsion, with shares up 63% since this Nov. 14 column.

If the surge in Celsion's value is attributable to traders' run-up into the Thermodox phase III trial results in January, remember to heed the rest of Messier's advice: Take profits before the event. If Thermodox blows up, you don't want to kick yourself for not reducing risk exposure and banking easy returns.

Messier on Celsion:

Cautious run-up traders should exit positions before the end of the year to avoid being caught long when the Thermodox results are announced. If you're thinking about holding a position through the results, I recommend taking profits on your initial trade and keeping "free shares" only. Those who like to trade using options can roll run-up profits into calls that expire after data are expected. Because we don't know exactly when in January Celsion will release Thermodox data, it's safest to use your profits to buy calls that expire in February 2013.

Investors get intoxicated on explosive stock runs like we're seeing with Celsion, making it easy to forget the significant risks attached to the Thermodox clinical trial. So let's sober up a bit with a few words from a Celsion short.

I spoke this week with one of my favorite fund managers who focuses almost exclusively on biotech shorts. He is prohibited by his fund's rules from using his name in print. Most recently, he scolded me for being bullish about Clovis Oncology's ( CLVS) pancreatic cancer drug CO-101. He was short and right. He was also very early and right about Elan's Alzheimer's drug bapineuzumab. This guy isn't always right, but he always brings a well-researched perspective to support this bearish views.

Before I get into the reasons he believes the Thermodox phase III study in liver cancer will fail, let's go over some background on the therapy.

Thermodox consists of tiny, heat-sensitive spheres of fat that contain a payload of the chemotherapy drug doxorubicin. When injected into the body, Thermodox accumulates at the site of the tumors. When the tumor site is heated to about 107 degrees using radio waves (radiofrequency thermal ablation, or RFA), the Thermodox spheres melt, bathing the tumor and adjacent tissue in high levels of doxorubicin.

Celsion is conducting a phase III study in which 600 patients with hepatocellular carcinoma, also known as primary liver cancer, are being treated with Thermodox plus RFA or RFA alone. The primary endpoint of the study is to determine if the addition of Thermodox to RFA can significantly delay the re-growth of liver tumors compared to treatment with RFA alone.

RFA is a procedure often used by doctors to ablate, or remove, relatively small tumors from the liver that can't otherwise be excised surgically. While RFA can be curative, liver cancer can and does recur because some cancer cells remain in the surrounding tissue and start growing again. Celsion believes the addition of Thermodox to RFA will kill enough of the cancer cells in the liver adjacent to the tumor to prevent or delay the return of the cancer.

The Thermodox study will fail, my "short Celsion" fund manager source predicts, because more often than not, tumors grow back in distant parts of the liver away from the lesion(s) that's been ablated using RFA and Thermodox.

"Thermodox is like shooting at a rhinoceros with a pellet gun," he says.

A 2008 paper published in the Journal of Gastrointestinal Surgery (Ng, et al.) followed 192 primary liver cancer patients who had successful and complete tumor ablation following RFA procedures. With a median follow-up of more than two years, only 15% of patients had local tumor recurrence, meaning the cancer returned at the same spot in the liver targeted by the RFA ablation. The majority of patients (56%) experienced liver tumor regrowth in parts of the liver that were not targeted by RFA ablation. Ten percent of patients developed cancer metastases outside the liver while 18% remained recurrence-free. Full citation: J Gastrointest Surg (2008) 12:183-191

If this pattern of distant liver tumor recurrence holds true in Celsion's study (and Mr. Short Celsion thinks it will), Thermodox will be unable to demonstrate a significant benefit on delayed tumor progression in the phase III study.

The use of doxorubicin as the cancer-killing payload in Thermodox is also suspect given the drug's failure to produce any positive benefit on disease-free survival in previous liver cancer trials, he says. A 2011 study published in Hepatology International (Jing-Houng, et al.) showed pegylated liposomal doxorubicin administered intravenously in conjunction with RFA had no beneficial impact on tumor progression or survival compared to RFA alone.

The authors do caution intravenous doxorubicin may have limited drug exposure at the tumor site. Thermodox might increase doxorubicin concentration in the tumor but, again, success would break a long losing streak for any chemotherapy in primary liver cancer. Full citation: Heptatol Int (2011) 5:567-574

These are the main reasons why my fund manager source believes the Thermodox still will fail. He is short Celsion. I don't expect everyone to agree with him, but if you're a Thermodox believer and are betting on success in the phase III trial, it's still vital to know what the other side of the trade is thinking.

Celsion is expected to announce top-line results from the Thermodox study in January.

Ted starts his email quoting previous comments I made skeptical of Hemipsherx Biopharma ( HEB):

The only attention Hemispherx is getting comes from day traders and biotech "run-up" traders anticipating the Dec. 20 FDA advisory panel for the company's chronic fatigue syndrome therapy Ampligen. At 5%, Hemispherx has even less institutional investor support than Galena Biopharma. This FDA panel isn't likely to end well for Ampligen, just like Hemispherx's previous stabs at getting Ampligen approved based on overly massaged data from a failed clinical trial.

Ted disagrees:

"You are so bleeping biased!" he writes. "What makes you think FDA panel will vote against Ampligen? How about those millions of people suffering from CFS? Have you had any conversation with any of them to better understand Ampligen? Drug is safe and has no side effects. Why would the panel vote against it?"

Ampligen is already available to people suffering from chronic fatigue syndrome today, but it's barely used. If Ampligen is safe and effective, as the relatively few Hemispherx bulls contend, why aren't more CFS patients being treated with it?

Since May 1997, FDA has allowed Hemispherx to administer Ampligen to CFS patients under a "compassionate use" exception. Hemispherx is even allowed to recoup costs associated with Ampligen so that compassionate use isn't a financial burden on the company.

In the first nine months of 2012, 33 CFS patients were on Ampligen therapy, according to Hemispherx regulatory filings. In 2001, the number was 36. In 2010, 21 patients took the drug. In 2009, Ampligen was used by 18 patients, according to Hemispherx.

The availability of Ampligen today torpedoes the bull thesis that insists, falsely, that FDA will grant the drug full approval under newly enacted provisions in the FDA Safety and Innovation Act (FDASIA.) FDA long ago took steps to make Ampligen available but patients don't want it!

Don't assume Ampligen will be approved just because it has no side effects, either. Here's what Hemispherx says about Ampligen safety:

"We believe that Ampligen has been generally well-tolerated with a low incidence of clinical toxicity, particularly given the severely debilitating or life threatening diseases that have been treated. A mild flushing reaction has been observed in approximately 15%-20% of patients treated in our various studies. This reaction is occasionally accompanied by a rapid heart beat, a tightness of the chest, urticaria (swelling of the skin), anxiety, shortness of breath, subjective reports of 'feeling hot,' sweating and nausea. The reaction is usually infusion-rate related and can generally be controlled by reducing the rate of infusion. Other adverse side effects include liver enzyme level elevations, diarrhea, itching, asthma, low blood pressure, photophobia, rash, transient visual disturbances, slow or irregular heart rate, decreases in platelets and white blood cell counts, anemia, dizziness, confusion, elevation of kidney function tests, occasional temporary hair loss and various flu-like symptoms, including fever, chills, fatigue, muscular aches, joint pains, headaches, nausea and vomiting. These flu-like side effects typically subside within several months. One or more of the potential side effects might deter usage of Ampligen in certain clinical situations and, therefore, could adversely affect potential revenues and physician/patient acceptability of our product.

What's worse, Ampligen's side effects or CFS? Sounds like a toss up.

I wrote previously on the ways in which Hemispherx has improperly massaged data from Ampligen clinical trials. I also warned about the company's recent use of at-the-market stocks sales.

The FDA advisory panel convened to review Ampligen is scheduled for next Thursday, Dec. 20. The FDA's briefing documents on Ampligen will be posted to the agency's web site on Tuesday, Dec. 18.

Unlike Celsion, Hemispherx has been a poor "run-up" stock into the panel meeting -- not a reassuring sign.

Next week's Mailbag will be the last for 2012 before I take a short break and re-energize for 2013.

-- Reported by Adam Feuerstein in Boston.

Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback; click here to send him an email.

More from Stocks

Trump's 'Space Force' Could Launch a $1 Trillion Industry, Morgan Stanley Says

Trump's 'Space Force' Could Launch a $1 Trillion Industry, Morgan Stanley Says

Abiomed Stock Should Rise Some 12% From Here, Piper Jaffray Analyst Says

Abiomed Stock Should Rise Some 12% From Here, Piper Jaffray Analyst Says

Video: Here Is Why Carvana Isn't Worried About Amazon

Video: Here Is Why Carvana Isn't Worried About Amazon

Video: What Oprah's Content Partnership With Apple Means for the Rest of Tech

Video: What Oprah's Content Partnership With Apple Means for the Rest of Tech

REPLAY: Jim Cramer on the Markets, Oil, Starbucks, Tesla, Okta and Red Hat

REPLAY: Jim Cramer on the Markets, Oil, Starbucks, Tesla, Okta and Red Hat