Blame for Northwest Bio Collapse Lies With CEO, Not With Mythical 'Wolfpack'

Correction: ImmunoCellular Therapeutics' brain cancer vaccine failed a randomized, placebo-contolled phase II study, not a large phase III study as the column stated originally.

Defrocked Wall Street analyst Larry Smith blames "the wolfpack" for the collapse of the tiny cancer biotech firm Northwest Biotherapeutics (NWBO) .

He's wrong.

What is "the wolfpack"? It's the term coined by Smith to describe an "extremely powerful and malevolent group of hedge funds who have banded together to attack the stock."

Northwest Bio closed Wednesday at 58 cents per share. The company's stock price has plunged 95% since last July.

Smith, writing on his "Smith on Stocks" blog Monday:

I believe that manipulation of stock prices by wolfpacks (groups of hedge funds working in concert to drive the stock price down) is a large and highly profitable criminal scheme that adversely affects hundreds of small and medium sized companies. I think that wolfpack profits are measured in the tens of billions of dollars annually.

Smith's sensational accusation harkens back to the days when Overstock CEO Patrick Byrne blamed his company's troubles on the Sith Lord. Then, like now, the conspiracy theories are bunk.

I wanted Smith to explain how (or why) "the wolfpack" is hell-bent on destroying Northwest Bio and hundreds of other companies, but he didn't respond to messages left on his blog. Had he contacted me, I would have also asked him for proof to back up his rant, which includes bizarre accusations that unidentified hedge fund investors steal and manipulate clinical trial results, bribe scientists, hack into company email systems and compromise the FDA.

Smith provides no proof to substantiate anything he says.

Northwest Bio is not even a heavily shorted stock by biotech standards. With 18% of its float borrowed and sold by short sellers, Northwest Bio ranks 61st among all health care stocks, according to FinViz. If you need an example of a heavily shorted biotech stock, Sarepta Therapeutics (SRPT) has 48% of its float sold short.

Smith, a former sell-side analyst who was barred from the securities industry in 2003 by FINRA, is correct about one thing, and only one thing: Northwest Bio is struggling to survive. The blame, however, lies within.

The deep plunge in the value of Northwest Bio shares coincides with the "temporary" halt to the company-sponsored phase III study of its brain cancer vaccine DCVax-L. Since last August, Northwest Bio has been unable to enroll patients into the study. Without patients to complete enrollment, the DCVax-L study has been effectively shut down for almost one year. More recently in regulatory filings, the company admits the study may never reopen for enrollment.

The conduct and outcome of this phase III study is the most important drug-development activity at Northwest Bio. Yet incredibly, Northwest Bio CEO Linda Powers and her executive team have remained silent on the reason(s) for the study's freeze. Demands for answers from supporters and critics of the company have been met with stony silence from management. The company doesn't hold conference calls or present at health care investor conferences. The company has been basically news free since last summer, outside of announcing a series of desperation rounds of financing at lower and lower prices.

There's your primary reason for the collapse in Northwest Bio's stock price.

I could mention some contributory factors like an interminable and unresolved internal investigation into questionable management practices, profligate spending, a lack of cash, an opaque relationship with a private company controlled by the CEO and an admission by the company that it is in violation of Nasdaq rules, but the company's demise starts and ends with the unraveling of its pivotal phase III study.

Later in his blog post, Smith writes:

It is a paradox that investors have showered way over $1 billion of capital and awarded market capitalizations of billions to the CAR-T companies like Kite  (KITE) and Juno  (JUNO) and have disdained investments in Northwest and ImmunoCellular Therapeutics (IMUC) . In my mind, the signals of activity seen in the data created by the dendritic cell vaccines of NWBO and IMUC warrants the same type of respect and support, but they have been the subject of investor indifference or disdain. Why is that?

Because investors view Kite and Juno as credible players in the race to develop new cancer immunotherapies, stacked with piles of peer-reviewed clinical data presented at top-notch medical meetings by leading scientists in the field. Kite and Juno are not without their critics, but the companies operate with a level of investor transparency magnitudes larger than Northwest Bio. As for ImmunoCellular, its cancer vaccine already failed a randomized, placebo-controlled phase II study. Smith must have forgot. 

Smith brushes off the serious problems weighing on Northwest Bio. Instead, he jacks the tired "blame the shorts" excuse to another level. He conjures up a fantastical and non-existent hedge fund wolfpack because he's trying to provide cover for his atrocious stock call. Rather than demand transparency and answers from Northwest Bio's management, he's an apologist and an enabler of their bad behavior.

It is puzzling that the Securities and Exchange Commission, which has a duty to protect shareholders, is allowing Northwest Bio to continue trading with such a lack of transparency. The stock should be halted until Northwest Bio offers a full and public accounting of the phase III study.

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

Tapestry CEO Talks Trade, Kate Spade Revival and Selena Gomez

Tapestry CEO Talks Trade, Kate Spade Revival and Selena Gomez

Rewind: Jim Cramer on Home Depot, Tapestry, Nordstrom and Square

Rewind: Jim Cramer on Home Depot, Tapestry, Nordstrom and Square

What to Expect From Nordstrom on Thursday

What to Expect From Nordstrom on Thursday

Stocks Post Solid Gains as Turkey Crisis Stabilizes

Stocks Post Solid Gains as Turkey Crisis Stabilizes

Abercrombie & Fitch's Stock Has Mysteriously Skyrocketed 13% in One Month

Abercrombie & Fitch's Stock Has Mysteriously Skyrocketed 13% in One Month