Imagine this scary scenario. A dirty bomb, set off by terrorists, explodes in midtown Manhattan around noon, in the process triggering a good deal of radioactive radiation.
Micael Kurman, the chief medical officer of Cleveland BioLabs, Inc., raised this frightening possibility at a get-together I had the other day with a couple of top officials of the biotech company, the other being CEO Michael Fonstein.
Kurman figures if such an event were to occur, about 350,000 people would die and another 150,000 would be very sick.
Cleveland BioLabs, a money-losing drug discovery and development company headquartered in Buffalo, N.Y., has more than passing interest in the subject of radiation through one of its pursuits, a drug it temporarily calls CBL 502. An injected drug, it's designed to protect the human body from radioactive radiation and nuclear fallout. One dosage, I'm told, will repair radiation damage and promote regeneration of cells. The injection, it's said, would also increase the chances of survival three-fold.
The product, developed by some American and Israeli scientists, has generated big investor interest in the money-losing biotech company, which was founded in 2003 and is also involved in anti-cancer drug development.
The firm went public in July of 2006 at $6 a share, then more than doubled to a high of $13.99 a year later, and subsequently dived to a recent 52-week low of $1.15. It's currently trading at $3.93. The stock generates a fair amount of trading activity, with its latest 30-day volume averaging 223,000 shares. The company recently did a financing and currently there are 34.3 million shares outstanding fully diluted. A potential near-term problem for the stock is the selling pressure
The $64,000 question: What's ahead for Cleveland BioLabs with what seems to be a revolutionary drug? For now, at least, judging from conversations with a number of biotech industry trackers and health officials, it appears to be a toss-up. The skeptics -- numerous in number -- say the company is basement bound. Management, not surprisingly, suggests the penthouse.
The extent of the skepticism about the company's prospects can be seen in a sizable short interest of 665,845,000 shares. The non-believers are quick to point out that the concept of this drug is not new (some potential rivals, in fact, have abandoned such drug development); likewise, there are competing vaccines. The skeptics also question whether CBL 502 will ever get the green light from the Food and Drug Administration, which must approve the drug. Some also express doubt that Cleveland BioLabs will ever make money or ever get a sizable contract from Uncle Sam.
The reaction from one biotech analyst: "We're in a biotech cycle where risk aversion is leaving us and the company is benefitting from that. It also bothers me that this is principally a rumor-driven stock, not the kind of stuff you want to own in what's now becoming again a frothy market."
Says one of Wall Street's top biotech minds: "Like those dice throwers at the gaming tables, you've got investors betting on the come, but the problem in the case of Cleveland BioLabs is that what's on the come may never get to come."
Michael Fonstein, Cleveland BioLabs' CEO, pooh-poohs the skepticism. For starters, he notes the anti-radiation drug has shown promising results in tests with monkeys and mice. The drug, currently on an accelerated route in seeking FDA approval, has also been tested on 50 health volunteers in Florida with little or no side effects (such as headaches, muscle aches and fatigue, which pass after a few hours). A second test of 100 volunteers will begin in about a month. In late 2010, the company plans to submit the drug for FDA approval.
So far, at least, the government has been shelling out money to the company to help keep it afloat. Since its inception, Cleveland BioLabs has received about $40 million from various government agencies, with the Department of Defense doling out $11 million. As Fonstein explains it, the government pays 100% of the development costs and a little bit of the overhead. "They keep giving us money and more each year," he says.
Speaking of money, the company is hardly flush with cash. As Fonstein notes, the firm has about 16 months of cash and is burning it at the rate of $300,000 a month.
What's his reaction to the huge short interest? Fonstein attributes it to the lack of understanding as to what the company is all about. "The shorts just don't understand our business model." he says. This also applies, he notes, to 99% of the biotech funds, which, he observes, "don't like our story. They don't get it," he complains. "It takes too much effort to think about it."
Fonstein thinks the doubting Thomases are all wet. He expects the company to begin generating commercial revenues in 12 to 18 months and he rates as potential initial buyers of CBL 502 the Department of Defense, the Department of Health & Human Services and the State of Israel. He notes, too, that the company is actively engaged in talks with Canada and the United Kingdom.
Fonstein declined to say when the company might begin to turn a profit. He did say, though, that he viewed as reasonable a recurring annual revenue stream of $500 million or more from CBL 502 in say 3 to 5 years after the drug wins approval. He views the defense market as a $500 million annual volume producer, but notes it will take time to penetrate it.
Also cited was the prospect of lofty profit margins on the drug of around 90%. The basis of such high margins: the company's charge to the buyer will run a few hundred dollars a dose, while the cost of production is less than 10% of that or around $20 a dose.
As for rivals in anti-radiation drugs, Fonstein notes there's maybe a handful of them, but they offer nothing promising.
One health official familiar with the company's drug and who has talked to the company may sum it up best: "If it's for real, sure it has home-run potential. But with all the outstanding ifs, I'm not sure whether this a biotech beauty or a biotech beast."
Write to Dan Dorfman at Dandordan@aol.com