Last Friday Lodge Partners initiated coverage on Novogen (ASX : NRT).
Many readers have been anxiously waiting for me to comment on Marc Sinatra’s research report and I have certainly been watching the share trading platforms where there has been a moderate level of “high-fiving.” Probably the most intelligent comment I saw was on HotCopper where “WangChung” (no relation) noted that:
My broker reckons they would likely be corporate advisors to NRT therefore make use of the information but ignore the price target.
That is unusually sage advice for a stockbroker. I am impressed and I would love to know who it was. And yes, it is absolutely true. Lodge is a firm that is trading in NRT and this is an analyst report that is designed to support trading. It is not an independent opinion. Having said that, I have respect for Lodge and I like Marc and his writing very much. He is one of the few – of a dwindling pool – of healthcare analysts in Australia that still possess the magical touch of being able to spruik a turd on behalf of his corporate masters, while still making sure that the intelligent reader understands that it’s still a turd (or at least the risk of it being a turd). As such, if you were expecting me to lambaste this report, you are going to be sorely disappointed.
There are a few things, however, that I think need to be drawn to your attention in this report in order to fully understand the implications of it. I’m not talking about linguistic pseudoscience, like how many speculative sentence constructions were used (er…. like every sentence). I’m not talking about analysing the number of phrases that begin with words like “Novogen believes” (10) or sentences that incorporate limiting words like “may” or “might” – for example, “Trilexium is active against tumours of neural crest origin and may hold potential” (15) or conditional constructions that are moderated by the word “if” (9). Although if you do read the report, there is essentially not a single statement that is made with any assertive independence from the company’s claims. This is because Novgen is at such an early stage, none of the company’s claims are in fact able to be independently validated.
No … what, I am talking about are the meaty and rancid issues with Novogen that need to be carefully “interpreted” if you are thinking about taking Lodge’s report onboard, and parting with your hard-earned cash.
This is an incredibly early-stage company that has not created much value with its capital
None of NRT’s “new” programs to date have yielded any significant data. None of NRT’s data has been published. NRT continues to expand is clinical candidate pipeline but does not even seem to do the basic level of complete pre-clinical development required to take drug candidates into the clinic. I loved the sentence in the report “Overall, the company has the engine to keep on producing development candidates almost indefinitely” (page 1). Well, that’s not strictly true. Eventually the company’s burn rate (i.e. the management team’s salaries and not much else) will deplete their financial resources but while NRT continues to do the paltry level of development that it seems to be doing, the management team is onto a good gig. In fact, it’s such an early stage company that the only way to value it is on the basis of comparable companies, most of whom I personally wouldn’t invest in either (Page 11). That means, per Wang Chung’s comment above, the crystal ball gazing around future share price in this report is utterly meaningless.
Incidentally, please do read the introduction to Novogen on Page 2. It’s fascinating, sort of the pharma equivalent of Mexican daytime television (I admit it, I am a sucker for telenovelas).
Long Tail Interpretation #1 : Don’t invest in this company until it can demonstrate that it can do something useful with its capital other than cover payroll and crank out a few dinky experiments.
Certain NRT shareholders face a massive dilution event in the (near?) future
A lot of punters think that NRT’s healthy cash balance means that it has a huge amount of firepower to get things done, and ordinarily that would possibly be the case for a company that actually had the integrity to develop a clinical product. Unfortunately, although NRT’s structured finance was designed to ensure that the company had plenty of funds available for development in the future, it is also a bit of a disaster for new shareholders, for example the “Mum and Dad” investors who read the hubbub on HotCopper and reckon they should put a few shares into the super fund. This is because there is a significant unexercised option pool (Page 2) with an extremely low strike price that, when exercised, is going to cram down the hell out of anyone not part of that option program. In fact, arguably, at the time of the last financing, the “free” options were worth more than the shares that were subscribed.
The result is that NRT’s financing structure is hugely nepotistic and essentially defeats the purpose of being a publicly-traded company because the “public” can’t actually buy into this company without getting shafted. I mean, who in their right mind would bother buying in properly until all those options are cashed? In fact, I would argue that this financing structure creates an incentive for the management team to do nothing to not maximise shareholder value, but instead to keep making slow, unsubstantiated progress (like maybe another mouse model?) with enough mainstream media noise and “CEO Corner” reports to keep the punters excited. Think about it, if you are NRT, you actually don’t want to do a proper clinical trial or even do something as humdrum as a toxicology study because if you get ANY negative data whatsoever, it is going to slam the brakes on the option gravy train.
By the way, this strategy is evidently working because half the 30 cent and a bit less than half of the 40 cent options have already been exercised. I note from the Lodge report that “Novogen’s share price has been responding very positively to Novogen’s new/old management and the announcements they have been making with their development projects, pushing the share price from approximately 10 cents per share to as high as 45 cents per share.” I love the “new/old” management comment (subtle and sophisticated sarcasm, Sinatra…) but can you believe it?!! A 3.5x price range without actually producing anything of value. I note that the financing math in the Lodge report is probably wrong – I think the total financial pool is $61m and not $81m, but the issue remains the same in terms of overall proportion of market cap.
Long Tail Interpretation #2 : Don’t invest in this company until all the options are exercised.
NRT has a $100m market cap and no programs actually in the clinic
I’m just reminding you in case you forgot.
And this is not some kind of revolutionary company that has a completely new game plan for human disease. We are talking about a “chemo” company and an new/old management team with a long and robust history of playing around with incredibly toxic drugs that go nowhere. Not only does NRT not have any programs in the clinic yet (Page 3), it hasn’t done sufficient pre-clinical development to actually warrant the decision to file an IND (or equivalent). Then it pootles off and announces that it has expanded its pipeline of “candidates” with the Operation Jacob Hope program. Honestly, my bile rises when I read this stuff – it’s just smoke-and-mirrors with a little heart string tugging thrown in for good measure. This is not strategic progress, it’s just tactical noise.
Long Tail Interpretation #3 : Don’t invest in this company until it can show that it is actually capable of getting something into the clinic, instead of just talking about it.
NRT has a track record of working with shitty drugs, Anisina is probably no different
Cantrixil and Trilexium are cool names, but there is absolutely nothing exciting about either the science or the market potential of these drugs. I’ve discussed this in the past and I am not going to re-hash it here. In my opinion the Lodge report also spells this out very clearly (for example, consideration of the market performance of Removab on Page 6). The most “interesting” program is the Anisina program, at least according to the Lodge report (Page 7/8), and I agree. I think the concept is there, but I also think that there is every reason to believe that Anisina is going to be incredibly toxic in vivo at therapeutic doses. Like not a little bit toxic, but really toxic, especially in combination with a taxane (something the company has not yet reported). This is one of the problems that I have with Novogen, they don’t even have the basic courtesy and caution to note that although their drug development hypothesis has potential, it is also hugely risky. It’s just all hype. The Lodge report correctly notes (Page 8) “In vitro, but not in vivo evidence supports targeting microfilaments”. The basic animal data that Novogen has only just started to generate isn’t compelling enough for me to revisit that statement in any positive light, I am sorry.
By the way, I am not saying that Anisina will not succeed, it might. But right now Novogen’s communication strategy is nothing except sensationalism, presumably to keep its financing (option exercise) program on track.
Long Tail Interpretation #4 : The most promising program is also the most controversial – and they don’t even have toxicity data yet.
Novogen is going at this alone…
It would be incredibly arrogant of me to suggest that a small company, doing something unique, couldn’t undertake the requisite innovation to transform healthcare. In fact, it is more likely that the next big innovation in treating cancer comes from a small company, precisely like a Novogen. I think the challenge is that the scientific pedigree of the company is questionable (including some of its recent in-licensing deals like Genscreen … yawn) and it doesn’t seem to be doing anything to improve it. I think the historical experience with Novogen’s clinical vision raises serious doubts as to whether the management team or the pipeline is any good. But for me – and this may sound like I am a bit of a lemming – Novogen’s whole game plan for cancer just doesn’t fit with where the field is heading. I do actually believe that “chemo” drugs will play an important role alongside cancer immunotherapy and I have previously stated as much, but we are at the cusp of actually understanding how to control cancer with durable mechanisms of action. As such there is increasingly little room for truly speculative and unproven biology like this. The ultimate proof will be not in an IND filing, but in getting quality clinical investigators and patients behind the technology.
I think Novogen will struggle mightily.
Possibly the only thing that I didn’t like in the Lodge report was the comments around IP. Yes, Novogen appears to be the only company looking at this space, but I don’t necessarily see this as a “selling point” and it certainly doesn’t guarantee that there isn’t an IP conflict at some point in time. Even just a cursory glance at the USPTO database suggested that there has been quite a bit done by others. Let’s not be complacent about this.
When the IP survives a successful opposition because Novogen’s drugs are blockbusters, I’ll eat my words. I am sure you will all remind me…