Don’t Be Fooled By Celsion’s Latest Rally

Celsion (CLSN) has issued a glowing but arguably immaterial press release reminding investors that, yes, there is another company on earth that has a small interest in Thermodox. Although nothing has changed fundamentally, the stock is up a remarkable 20% as a result.

As we’ve said before, we’re quite skeptical of the data mining taking place at Celsion in relation to the failed Phase III HEAT Study, which tested ThermoDox in patients with hepatocellular carcinoma (HCC). A number of authors have done a nice job of debunking the current bull thesis — that Thermodox works if Radio Frequency Ablation continues for at least 45 minutes — herehere and here. Celsion is working on a post-hoc analysis to flesh out this theory.

Let’s take a look at Friday’s press release and consider whether the rally is justified.

The press release states that China-based Zhejiang Hisun Pharmaceutical Company and Celsion entered into a “Memorandum of Understanding” to pursue ongoing collaborations for the continued clinical development of ThermoDox. That does sound important.

But the Hisun-Celsion relationship goes back to May of 2012 (Celsion erroneously states June of 2012 in Friday’s press release) when the two entered into a commercial supply agreement for the production of ThermoDox. At the time, that was it — the ThermoDox Phase III HEAT study was in full swing and Celsion was lining up a manufacturer for the heat-activated liposome-encapsulated doxorubicin. Hisun would supply ThermoDox at agreed-upon prices for sale in the greater China area and would be responsible for studies required by Chinese regulators for the approval of Thermodox. However, the deal stipulated that Celsion would pay Hisun for the aggregate amount of those development costs, which it estimated at $2M. The company is a supplier of active pharmaceutical ingredients in China, and according to Celsion, is one the largest manufacturers of chemotherapy agents globally and a leading manufacturer for multinational pharmaceutical companies. It should come as no surprise, then, that Hisun was on board with manufacturing Celsion’s product. In fact when the deal was announced, the stock didn’t move; the Hisun deal is standard operating procedure.

Then, on January  22 of this year, Celsion announced that Hisun had paid Celsion $5M in a new Technology Development Agreement. Here’s how the press release reads:

“Under the terms of the agreement, Hisun will pay $5 million to Celsion immediately, while Celsion will provide Hisun with support for its ThermoDox manufacturing development program.”

Here’s how it looks in Celsion’s 2012 10-K filing, however:

“Hisun paid us a non-refundable research and development fee of $5 million to support our development of ThermoDox and we will provide research data and other technical support in relation to a regulatory filing by Hisun. . .”

It’s not really clear who asked who for help, but it looks like Celsion approached Hisun with its cash problems. It became clear almost immediately after the Thermodox failure that Celsion needed to firm up its balance sheet. The company had already done some behind-the-scenes common stock sales through its ATM facility in February, raised $15M later that month, and raised an additional $10M in May — read Mr. Patel’s assessment here.

In addition, the January agreement gave Hisun a 60-day window in which it could pay another $5M to secure the option on a definitive licensing agreement for Thermodox in China. In other words, Hisun had the chance to pay a $5M upfront payment on a $25M upfront payment due to Celsion if it signed the  license agreement for China. The deal would have given Hisun the rights to commercialize ThermoDox in the greater China area, with Celsion eligible for $55M in total upfront/regulatory milestones, $45M in sales milestones, and escalating double-digit royalties on net sales of ThermoDox in the territory.

Less than a month later on February 5th, Hisun decided not to exercise its option to license ThermoDox for China, no surprise following the January 31st announcement that ThermoDox had failed to reach its primary endpoint in the HEAT Study. Nevertheless, the technology development [manufacturing] agreement remained in place. Hisun would still manufacture the product and might participate to a greater degree if the post-hoc analysis mentioned above pans out.

Now, Friday’s press release reveals that the two companies have entered into a Memorandum of Understanding “to pursue ongoing collaborations for the continued clinical development of ThermoDox as well as the technology transfer relating to the commercial manufacture of ThermoDox for the greater China territory.” That’s saying a lot without saying a whole lot. Here are the details from the July 19th press release:

Screen Shot 2013-07-19 at 12.09.45 PM

Wait, that looks familiar. Here’s what Celsion said in May of 2012:

Screen Shot 2013-07-19 at 12.11.23 PM

It looks to us like Celsion’s PR team struggled to find anything new to say. Remember that Celsion, prior to the HEAT results, wanted Hisun to pay $5M just for the option to license ThermoDox in China. Now they’re giving Hisun that option. Celsion also says that “the expanded collaboration will focus on next generation liposomal formulation development.” What that means is unclear, but it should not be misconstrued as more than it is. Hisun is already on the hook for $5M with a product that is, in our view, a complete failure. We don’t expect any amount of digging into the ThermoDox data to uncover a viable oncology product, and we don’t expect Hisun to go out on a ledge for another, similar asset.

Friday’s press release might as well read “Nothing’s changed, but we lowered our standards, and we’ve all put our names on some expensive legal documents that say the same thing they have since day one.” Does that merit Friday’s pop, which added $10M+ to Celsion’s valuation? Not at all. We understand that many investors are underwater in CLSN and are willing to grasp any ray of hope of a come-back, but we urge investors to heed the red flags and avoid Celsion for anything more than a trader’s tool.