Corbus Pharmaceuticals (CRBP -5.74%) completed a $46 million equity financing on Feb. 11. This is great news for the company, as it provides funding to support ongoing clinical trials.
For those new to the biotech company, Corbus is pioneering the use of synthetic cannabinoids as pharmaceuticals. It currently has late-stage clinical trials with its lead drug candidate, lenabasum, and an early safety trial with its second drug CRB-4001.
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The good news
Data from key clinical trials will be available this summer. For those investors familiar with biotech stocks, the unveiling of results, particularly late-stage clinical trials, has the potential to catapult the stock if positive or tank it if negative.
This summer, Corbus plans to release data from its phase 3 clinical trial of lenabasum in systemic sclerosis. This rare, life-threatening autoimmune disease attacks connective tissue and skin, and no drug is approved to address it directly. Lenabasum's phase 3 trial focuses on patients with diffuse systemic sclerosis, a population of 20,000 to 30,000 in the U.S. and roughly the same or more in Europe.
The company heightened investor angst when it issued a press release in August announcing it was switching a secondary endpoint to become the primary endpoint for its ongoing phase 3 trial. The updated outcome measure -- the American College of Rheumatology Combined Response Index in diffuse cutaneous Systemic Sclerosis (ACR CRISS) -- provides a composite score of five different parameters of the disease. One of the five components was the modified Rodnan Skin Score (mRSS), the former primary endpoint. Drug developers typically have buy-in from the Food and Drug Administration (FDA) before embarking on a costly late-stage trial. However, Corbus stated that the change followed discussions with the FDA.
The trial compares lenabasum to placebo, which, while necessary from a regulatory perspective because there's no approved treatment, does not reflect real-world practice. Patients currently receive immunosuppressive drugs despite the potential for toxicities. Therefore, to be a success, lenabasum needs to beat placebo in the trial and outperform historical immunosuppressive treatments. Faring well against current, albeit not approved, treatment options will be important for doctors and insurance companies. Ideally, lenabasum will demonstrate fewer and less severe side-effects compared to the alternatives.
Corbus also expects results this summer from a phase 2b clinical trial of lenabasum in cystic fibrosis (CF). According to the Cystic Fibrosis Foundation, more than 70,000 people globally live with CF, including 30,000 people in the U.S. Corbus' trial aims to compare lenabasum to placebo in CF patients, irrespective of prior or existing treatments. Currently, several options exist from Vertex Pharmaceuticals, depending on the type of genetic mutations the CF patients harbor. Lenabasum seeks to tamp down acute episodes of inflammation called pulmonary exacerbations which occur in all types of CF.
Investors should look at two trials as a positive: They mean that not all the company's eggs are in one basket. Of course, failures in both would have devastating consequences for the company and its shareholders.
The bad news
Corbus only raised $46 million, even after the underwriters exercised their option to sell 15% more stock. The company needed to raise more cash; Corbus spent $27 million to $28 million per quarter through the first three quarters of 2019 (we haven't yet seen year-end financials). If that rate continues, this new capital infusion might only cover 1.6 quarters -- not quite five months' worth of expenses.
Let's look at the cash position. As of Sept. 31, Corbus stated it had $55 million on the books. Now subtract the burn rate of $28 million per quarter. Since it's mid-February, let's call that 1.5 quarters and multiply the quarterly rate to get $42 million. The $55 million on the books minus $42 million in expenses leaves $13 million. Then we add the $46 million in new capital to get $59 million. Again using that prior burn rate, this funds the company for a little over six months.
Now, let's review the recent stock performance. Prior to the financing, the stock had traded in a range close to $7 per share. The deal priced at $6 per share, for a discount of around 15%. For an emerging biotech in the research and development stage, it wasn't the best or the worst in terms of pricing.
For days following the offering, the stock traded around $6.30; trading above deal price can signal demand for the stock. Perhaps investors in the financing didn't receive the full allocation of shares they wanted and went into the market to buy the remainder. However, that was short-lived: The stock dropped through the $6 offering price and now trades below $5. Granted part of the decline is likely due to the recent broad market sell off driven by fears of the coronavirus outbreak.
Risk-tolerant investors may view the stock as a buy at the current price; it's a 15% to 20% discount to what "professional" investors paid earlier in the month. If the lenabasum trials report positive results in the summer, this could make investors at current prices look like geniuses. But if you're considering buying shares, note the risk associated with that.
What to look for
Corbus expects its clinical trials for lenabasum will have results this summer; these will be critical. However, the company faces a major challenge. Should it raise additional cash before the data are available, or after? If the data are positive, the stock will likely soar, allowing for a more favorable financing. If one or both trials fail, the stock will get crushed and the company will need to do a major reorganization; it will not be able to raise as much capital.
Lastly, if the company elects to raise more money prior to the data, institutional investors will want to be compensated for the extra risk of investing in front of a binary event. This means either a greater discount from the current stock price or a significant discount and a "sweetener" in the form of a warrant. Warrants are essentially stock options that companies sometimes give to investors to make an investment more attractive.
I am rooting for lenabasum to succeed, and hope that it provides a new, meaningful option for patients with systemic sclerosis. As an investor, though, I will wait on the sidelines: Corbus' stock will be hampered from appreciating until the company raises more money.
I don't see another company stepping in to license the drug right before pivotal trial data; big pharma companies can wait and pay up afterwards once the data proves out. If the results are positive, Corbus can raise more capital at a better valuation and will have a greater chance of attracting non-dilutive money from a big pharma partner.
