Research

Echo (ECTE) Note 09-18-14

downloadreportPlatinum Seeks Return of $5M Calling Echo “Worst in Class Governance
Platinum Finally Sues as Echo Refuses to Submit Books & Records
Nobody in Charge? 2nd Interim CEO Steps Down – No Replacement Announced
Reiterating Avoid/Sell as the Echo Therapeutics Meltdown Continues

Download Full 8-Page Note with Important Disclosures: Morning Note 09-18-14 ECTE

Following last week’s lawsuit filed last week by Platinum seeking Echo’s Books & Records, Platinum is now seeking the return of their $5M investment made December 10, 2013 stating that Echo defrauded them out of the $5M in bad faith and entered into the Securities Purchase Agreement with no intention of performing its obligations or using the funds for the intended purposes. The complete rescission letter filing with the SEC can be found at:
http://www.sec.gov/Archives/edgar/data/1031927/000101359414000594/echo13da-091714.htm

Since Echo has refused to turn over their Books & Records to Platinum to review (and for which Platinum filed suit last week), Platinum is also now attempting to “take away the punchbowl” by seeking a return of their $5M investment. We reiterate our Avoid/Sell rating as the continuing meltdown of Echo Therapeutics progresses.

Full Text of Letter from Platinum Sent to Echo Board of Directors:
Gentlemen: As you are aware, in December 2013 affiliates of Platinum Management (NY) LLC (collectively, “Platinum”) came to Echo’s rescue by both providing $5 million in funding and identifying additional funding and technical help in the form of a highly qualified Chinese development partner, Medical Technologies Innovation Asia, LTD. (“MTIA”). The goal was to refocus Echo’s efforts on commercialization of its promising medical device products. Platinum provided its $5 million and entered into the December 2013 Securities Purchase Agreement (the “Securities Purchase Agreement”) on condition that Echo receive simultaneous funding from MTIA. Platinum’s understanding was that MTIA would help Echo address the Board’s and management’s past failures by jointly bringing the Company’s promising medical device products to commercialization without similarly burning through copious amounts of cash. Prior to funding, we were given clear assurances that the Echo Board was committed to refocusing the Company on prompt commercialization, was excited about working with MTIA and would, on an expedited basis, add an independent director identified by Platinum who would participate in oversight and decision making. We were induced to provide funding based on these (and other) assurances, without which we would not otherwise have invested.

Yet almost immediately after taking the funds, Echo began reneging on its obligations:

• Instead of simply withdrawing its S-1 registration statement, the Company asked for a delay of that major obligation, which Platinum properly rejected.

• Instead of evaluating and adding Platinum’s highly qualified nominee to the Board in the manner and time frame required by the Securities Purchase Agreement, Echo and its Board soon thereafter breached its obligations. In an irony that highlights the poor judgment of Echo’s pre-2014 directors, the Platinum nominee that the Board rejected is precisely the director who stockholders elected at Echo’s June annual meeting by a nearly 4 to 1 margin.

• Instead of embracing the crystal clear mandate for change the stockholders voted for at the annual meeting, lingering directors William Grieco, Vincent Enright and James Smith took steps to maintain the status quo. Since the annual meeting, the lingering directors and their counsel, in a tribute to worst in class corporate governance, have operated the Board to exclude the two independent directors from information and decision making, thus interfering with the ability of the new directors to discharge their fiduciary duties for the benefit of all stockholders. This profoundly frustrates one of the purposes of Platinum’s investment.

• Instead of fully cooperating with MTIA, we understand that the failure of the Company to pursue commercialization and its propensity to squander vast amounts of money on lawyers, lawsuits and lingering director entrenchment has frustrated and alienated MTIA, leading to a failure to start development cooperation and a suspension of funding that Echo is not properly disclosing to the market.

• Instead of spending Platinum’s funding on developing products that will raise the stock price and benefit all stockholders, the lingering directors have busily spent unknown sums on unwarranted and self-interested increases in their gold-plated indemnities and bylaw changes. These actions appear designed to silence input from the newly and overwhelmingly elected independent directors and make it punitively expensive for stockholders to exercise their litigation rights against the Company, which is now seemingly being operated for the good of the lingering directors and not stockholders.

Taken together, this points to a lengthy and ongoing pattern that establishes that the Company entered into the Securities Purchase Agreement in bad faith, with no intention of performing, and with the purpose of fraudulently separating Platinum from its money while denying it the benefits of its bargain. As such, we have instructed our attorneys to prepare a lawsuit to rescind the Securities Purchase Agreement and recover from both Echo and the lingering directors the funds that the Company induced Platinum to invest.

Frankly, we are astonished at Echo’s continuing conduct. It is a real shame because with some responsible, independent fiduciary oversight, we feel the Company’s technology has great promise and the potential for exponential returns for stockholders. The stranglehold of the lingering directors, however, is rapidly extinguishing that promise. We expressly reserves our rights against those who have brought Echo to this sad and unnecessary situation.

Download Full 8-Page Note with Important Disclosures: Morning Note 09-18-14 ECTE

StemCells Inc. (STEM) Downgrade 09-18-14

downloadreportDowngrading to Neutral – Stock Facing Headwinds
Raises $18.7 Million – Has $37M Cash Pro Forma
Phase II Trial Starting for Cervical Spinal Cord Injury
Phase II Trial Also Starting for Dry AMD

Download Full 35-Page Research Report with Important Disclosures: STEM Downgrade 09-18-14

Downgrading to Neutral: While we remain enthusiastic about StemCells Inc.’s science and clinical prospects, we note the stock price will now be facing headwinds during our next 12-18 month forecast period. Based on our estimated events and milestone timelines, we do not foresee significant upward news catalysts during our forecast period. We also believe that the company will be required to raise additional funds before results from their controlled Phase II trials become available. Finally, the company has had difficulty maintaining the stock price over $2.00 during the past 3 years as capital requirements have created constant pressure on the stock due to dilution. Finally, we believe investor sentiment for the company’s shares has turned cautious due to these factors and we expect it to remain so until the controlled Phase II data is announced. Our Neutral rating and 12-18 month target price of $2.00 is based on 35x estimated 2020 EPS discounted 50% for cumulative risks.

StemCells Inc. Raises Funds: The company added $18.7M in net cash from their July offering, which combined with the June 30th cash balance of $17.8M and July warrant exercises results in a pro forma cash position of $37.8M. Investors should note that $3.7M of the $12.1M loss for the quarter was a non-cash cash charge for change in warrant liability. StemCells Inc. reiterated guidance for 2014 cash burn of $30M-$34M. (see Recent Financing Activity)

Initiating Controlled Phase II Trial for Cervical Spinal Cord Injury: StemCells Inc. will begin a controlled Phase II trial of their HuCNS-SC cervical spinal cord injury during this quarter. The trial will enroll patients with cervical spinal cord injuries in the C5 to C7 region (representing the majority of cervical spinal cord injuries). The patients will be randomized to either a HuCNS-SC treatment arm or a non-treatment arm with blinded outcome assessment in approximately 12 centers in North America. It is expected to complete enrollment within one year with endpoints measured at one year post-transplantation. (see Human Trials of HuCNS-SC® for Chronic Spinal Cord Injury)

50% of Thoracic Spinal Cord Injury Patients Show Long-Term Improvement in Phase I/II Trial: On May 17, 2014, interim results on 5 additional patients were presented in their Phase I/II trial for thoracic spinal cord injury. Of particular note is that the significant gains in sensory function previously seen in 2 out of 3 patients in the 1st cohort were also seen in 2 additional patients in the 2nd cohort. With 50% (4 out of 8) of the patients with 6 to 12 month follow up experiencing segmental sensory improvement, which would normally be unexpected in these patients, we believe these results are very significant and fully support the Phase II cervical spinal cord injury trial. (see Human Trial of HuCNS-SC® for Chronic Spinal Cord Injury) Enrollment has been completed and the company expects final results from this trial to be released mid-2015.

Initiating Controlled Phase II in Dry AMD in Q4: StemCells Inc. stated they expect to initiate a controlled Phase II efficacy proof-of-concept study by year-end 2014 and complete enrollment in approximately one year. Trial design details have not yet been disclosed. Investors should note that 85% of all AMD patients currently have the Dry form and 100% of patients with the more serious Wet form progressed from the initial Dry form. The dry form can also cause vision loss without turning into the wet form. (see Human Clinical Trial of HuCNS-SC for Dry AMD)

Positive Phase I/II Interim Dry AMD Data – Enrollment Now Closed: The first interim data from 7 of the 8 patients in the 1st cohort (20/400 vision, 4 patients receiving 200,000 cells and 4 patient receiving 1 million cells) was presented at ISSCR on June 18th. The interim results showed a reduction in geographic atrophy (GA) of 65% in the treated eye when compared to the expected natural history of the disease as well as a 70% reduction in the rate of GA versus the control eye. Contrast sensitivity was improved in 4 of the 7 patients and remained stable in the remaining 3 patients. Based on the interim results, StemCells Inc. closed enrollment in the Phase I/II Dry AMD trial with the 1st cohort of 8 patients (20/400 vision, 4 patients receiving 200,000 cells and 4 patient receiving 1 million cells) and 7 patients of 2nd cohort of 20/200 to 20/100 vision receiving 1 million cells. Final results are expected to be released mid-2015. (see Phase I/II Positive Interim Results)

Patent Infringement Suit Against Neuralstem Scheduled for December: StemCells Inc. ongoing patent infringement lawsuit against Neuralstem (NYSE MKT:CUR) has now completed the discovery phase and the first phase of the bench trial is expected to commence in December 2014. Investors should note that there are no claims of patent infringement against StemCells, Inc. by Neuralstem. (see Intellectual Property)

Download Full 35-Page Research Report with Important Disclosures: STEM Downgrade 09-18-14

Echo (ECTE) Note 09-15-14

downloadreportPlatinum Finally Sues as Echo Refuses to Submit Books & Records
Nobody in Charge? 2nd Interim CEO Steps Down – No Replacement Announced
Reiterating Avoid/Sell as the Trainwreck Continues

Download Full 6-Page Note with Important Disclosures: Morning Note 09-15-14 ECTE

After the market closed Friday, Platinum Management, Echo’s largest shareholder (owning 20% and 30% on a fully converted basis) announced a lawsuit based on Echo’s refusal to provide the company’s books and records as requested by Platinum on July 23rd under Section 220 of the Delaware General Corporation Law. Platinum stated that they have reason to believe based on input from a former service provider that certain directors, officers and other employees may have been involved in, and/or may have attempted to cover-up potentially improper conduct and “…serious concerns that the Lingering Directors’ actions may be the result of more than mere incompetence.. The full press release can be found at http://prn.to/1ANZQLM and Platinum’s original July 23rd request can be found at http://prn.to/1nEa3J1. Delaware Section 220 Inspection of Books and Records can be found at http://delcode.delaware.gov/title8/c001/sc07/

Nobody In Charge? Ms. Burke, Echo’s general counsel, was named interim CEO on June 30th for 60 days expiring August 30th. Echo’s website indicates she is no longer interim CEO and the lack of SEC filings since August 19th appears to confirm that Echo has not had a CEO for the past 2 weeks. We note that Echo has not had a permanent CEO for the past 11 months and has now gone through 2 interim CEOs (there is an interim CFO). We find it ironic that the only members of Echo’s management/board with actual CEO experience are Platinum’s representatives.

Running Out of Cash: As of June 30, 2014, Echo had just $4.1M in cash. So far this year, Echo management has spent $560K in failed Board battles that were clearly unwinnable and represent a poor use of shareholder money. Echo is now warning about a potentially dilutive offering stating “The Company continues to explore a variety of funding alternatives which it believes, together with the cost reduction initiatives, is necessary to permit the Company to ultimately achieve its clinical trial and regulatory approval objectives.

Symphony Development Delayed? We note that Echo reduced headcount by 35% and stated “In the absence of a financing or strategic transaction, Echo’s ability to achieve its previously stated product development timelines will be negatively impacted by the Company’s effort to preserve cash and reduce expenses.” We believe the absence of specific development progress in their Q2 press release and 10-Q along with a lack of Q2 investor conference call indicates to us that little progress has been made on the GEN2 system needed for CE Mark and FDA approval. As a reminder, on May 9, 2014, Echo stated that their CE Mark notifying body requested additional data as a result of individual patient variability and that Echo stopped GEN1 development to work on a GEN2 system instead.

Chinese Partner Balks: Medical Technologies Innovation Asia (MTIA) had agreed to make a $5M equity investment in Echo in exchange for licensing the Symphony technology. After making an initial payment of $2.4M of the $5M earlier this year, MTIA still has not paid the remaining $2.6M, which we believe is likely due to lack of confidence in Echo management.

No Response to Alternative Game Plan: On July 18th, Echo’s largest shareholder, Platinum, held a shareholder forum and presented a credible product develop game plan including a fast-to-market strategy for the Symphony tCGM system in the rapidly growing wearable technology space for dieters, athletes and pre-diabetes markets. Also presented was a development plan for gestational diabetes, which currently affects 4% of all pregnant woman but new guidelines from the IADPSG (International Association of Diabetes Pregnancy Study Groups) could increase glucose monitoring for up to 20% of all pregnancies. The plan would also continue the current critical care pathway but focus on a more commercially-viable lower-cost system incorporating GEN2 features. Finally, an informal non-binding vote taken during the forum, estimated at representing >50% shareholders called for, among other things, the resignations of legacy directors, Mr. Enright, Mr. Grieco and Mr. Smith (see all voter referendums at http://prn.to/1neYSFy)

Reiterating Avoid/Sell Rating: Echo has been financially rewarding for management, the Board, their lawyers and proxy advisors but for shareholders, not so much. After a disastrous 3 years where Echo’s stock has declined 95% due to multiple poorly executed financings, an incredibly ill-timed 1 for 10 reverse-split, lawsuits, and losing two Board battles with Platinum, their largest shareholder, Echo finds itself with no permanent CEO or CFO, no product, low cash, a spooked Chinese partner, a split Board and a great deal of investor animosity. We continue to believe Echo Therapeutics remains uninvestable unless dramatic changes are undertaken to refocus on developing the Symphony tCGM system and its Prelude and wireless biosensor components.

Download Full 6-Page Note with Important Disclosures: Morning Note 09-15-14 ECTE

Navidea (NAVB) Note 09-04-14

downloadreportNavidea Licenses Lymphoseek® in China – 2nd Partnership in 2 Months
FDA PDUFA Date October 16th for Enhanced Lymphoseek® Usage
European Approval for Lymphoseek® Expected by Year-End

Download Full 7-Page Note with Important Disclosures: Morning Note 09-04-14 NAVB

This morning, Navidea announced an exclusive agreement with a wholly-owned subsidiary of Hainan Sinotau Pharmaceutical Co., Ltd., a pharmaceutical organization with a broad China focus in oncology and other therapeutic areas. The agreement allows Sinotau to develop and commercialize Lymphoseek® (technetium Tc 99m tilmanocept) Injection in China (excluding Hong Kong, Macau and Taiwan). Sinotau is responsible for costs and conduct of clinical studies and regulatory applications to obtain Lymphoseek approval by the China Food and Drug Administration (CFDA). Upon approval, Sinotau will be responsible for all Lymphoseek sales, marketing, market access and medical affairs activities. Navidea and Sinotau will jointly support certain pre-market planning activities with a joint commitment on clinical and market development programs pending CFDA approval.

Navidea received a $300,000 upfront payment and will receive revenue based on unit sales to Sinotau, a royalty based on Sinotau’s sales of Lymphoseek. In addition, Navidea is eligible for $700,000 in milestones up to and through product approval, and an additional $1,500,000 in sales milestones.

Hainan Sinotau Pharmaceutical Co., Ltd. is a pharmaceutical company focused on the registration and commercialization of imported and domestic generic formulations in the mainland China market. Hainan Sinotau commenced operations in 2002 with the purpose of providing access to quality medicines to patients across China. They have experienced strong growth throughout its lifespan with coverage of all of the mainland Chinese market. Hainan Sinotau’s strategic focus lies in developing a product portfolio centered on Oncology, Antiretroviral, Central Nervous System and Cardiovascular System therapies in partnership with leading multinational pharmaceutical firms.

Reiterating Strong Speculative Buy: We note that this is the second partnership deal in 2 months (on July 15th Navidea formed a joint enterprise called R-NAV, combining Navidea’s Manocept CD206 macrophage targeting platform and Rheumco’s proprietary Tin-117m radioisotope technology.) We also note that Navidea has a number of catalysts over the next few months including an FDA PDUFA date of October 16, 2014 for their sNDA to expand the label claims to include lymphoscintigraphy (sentinel lymph node mapping) and flexible procedure timing allowing for up to 2-days post-injection of Lymphoseek. In addition, we expect a positive European CHMP recommendation and an EMA approval for Lymphoseek in Europe by year-end. Our model values the Lymphoseek program at $3.00 per share based on a 35x multiple on projected fiscal year 2018 EPS and discounted 20% for cumulative risk plus $0.25 per share based on our estimated upfront cash licensing values assuming deferred clinical trial enrollment ($15M NAV4694, $10M NAV5001, $3M NAV1800, $7M Manocept). Investors should note that there is significant upside to our financial model if Navidea successfully reduces cash burn on NAV4694 and NAV5001 while increasing Lymphoseek sales to become cash flow positive.

Download Full 7-Page Note with Important Disclosures: Morning Note 09-04-14 NAVB

Echo (ECTE) Update 09-02-14

downloadreportMaintaining Avoid/Sell Rating
No Permanent Management, No Game Plan, Low Cash
Recalcitrant Board Stokes Investor Animosity

Download Full 22-Page Update Report with Important Disclosures: ECTE Update 09-02-14

No Permanent Management: We note that Echo has not had a permanent CEO for the past 11 months and is now on their second interim CEO and more recently, an interim CFO. After a disastrous 3 years where Echo’s stock has declined 95% due to multiple poorly executed financings, an incredibly ill-timed 1 for 10 reverse-split, lawsuits, and losing two Board battles with Platinum, their largest shareholder, Echo finds itself with no product, low cash, a spooked Chinese partner, a split Board and a great deal of investor animosity.

Running Out of Cash: As of June 30, 2014, Echo had just $4.1M in cash. So far this year, Echo management has spent $560K in failed Board battles that were clearly unwinnable and represent a poor use of shareholder money. Echo is now warning about a potentially dilutive offering stating “The Company continues to explore a variety of funding alternatives which it believes, together with the cost reduction initiatives, is necessary to permit the Company to ultimately achieve its clinical trial and regulatory approval objectives.

Symphony Development Delayed? We note that Echo reduced headcount by 35% and stated “In the absence of a financing or strategic transaction, Echo’s ability to achieve its previously stated product development timelines will be negatively impacted by the Company’s effort to preserve cash and reduce expenses.” We believe the absence of specific development progress in their Q2 press release and 10-Q along with a lack of Q2 investor conference call indicates to us that little progress has been made on the GEN2 system needed for CE Mark and FDA approval. As a reminder, on May 9, 2014, Echo stated that their CE Mark notifying body requested additional data as a result of individual patient variability and that Echo stopped GEN1 development to work on a GEN2 system instead.

Chinese Partner Balks: Medical Technologies Innovation Asia (MTIA) had agreed to make a $5M equity investment in Echo in exchange for licensing the Symphony technology. After making an initial payment of $2.4M of the $5M earlier this year, MTIA still has not paid the remaining $2.6M, which we believe is likely due to lack of confidence in Echo management.

No Response to Alternative Game Plan: On July 18th, Echo’s largest shareholder, Platinum, held a shareholder forum and presented a credible product develop game plan including a fast-to-market strategy for the Symphony tCGM system in the rapidly growing wearable technology space for dieters, athletes and pre-diabetes markets. Also presented was a development plan for gestational diabetes, which currently affects 4% of all pregnant woman but new guidelines from the IADPSG (International Association of Diabetes Pregnancy Study Groups) could increase glucose monitoring for up to 20% of all pregnancies. The plan would also continue the current critical care pathway but focus on a more commercially-viable lower-cost system incorporating GEN2 features. Finally, an informal non-binding vote taken during the forum, estimated at representing >50% shareholders called for, among other things, the resignations of legacy directors, Mr. Enright, Mr. Grieco and Mr. Smith (see all voter referendums at http://prn.to/1neYSFy)

Reiterating Avoid/Sell Rating: Echo has been financially rewarding for management, the Board, their lawyers and proxy advisors but for shareholders, not so much. As a result of management’s actions, Echo now finds itself with no product, low cash, a spooked Chinese partner, a split Board and a great deal of investor animosity. We feel like the U.S. Major in the battle for Ben Tre during the Vietnam Tet Offensive who stated “‘It became necessary to destroy the town to save it“. We continue to believe Echo Therapeutics remains uninvestable unless dramatic changes are undertaken to refocus on developing the Symphony tCGM system and its Prelude and wireless biosensor components.

Download Full 22-Page Update Report with Important Disclosures: ECTE Update 09-02-14

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