Cytodyn Inc (CYDY)

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Raising target to $3.75 following update 10/18/2016
We are increasing our target to $3.75 for CYDY following this clinical update. The overall takeaway, in our view, is that the hurdles to clearance of PRO 140 for combination therapy for HIV have been reduced, and we have therefor adjusted our probability discount factor, resulting in the new target of $3.75. CytoDyn remains an attractive, speculative biotechnology company with a bold goal of transforming the quality of life for HIV patients in the United States.


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Update (October 18, 2016)
Equity| Healthcare / Biotechnology
CytoDyn Inc.
(OTCQB: CYDY, Target Price: $3.75)
Based in Vancouver, WA, CytoDyn Inc. (OTCQB: CYDY, “CytoDyn”) is engaged in the development of humanized monoclonal antibodies for the treatment of Human Immunodeficiency Virus (HIV), and other diseases. CytoDyn’s lead drug candidate is PRO-140, a viral entry inhibitor which seeks to block HIV from entering a cell by binding to a molecule called CCR5. CytoDyn has a Phase 3 clinical trial underway with PRO-140 for HIV in combination with Highly Active Anti-Retroviral Therapy (HAART). The company is also initiating an advanced stage trial of PRO-140 for long-term monotherapy as a replacement for HAART for patients who have completed initial antiretroviral therapy (ART). If approved, PRO-140 would be the first, self-administered, injectable antibody therapy for HIV. Indeed, whether approved as a combination therapy or first line therapy, PRO-140 promises to be a significant advancement in the treatment of HIV, which could dramatically improve the quality of life for HIV patients while sharply lowering toxicity, offering fewer side-effects, and lowering costs versus existing treatments.
Investment Highlights
PRO-140 combination therapy pathway appears on track
CytoDyn CEO Nader Z. Pourhassan, PhD, held a call with investors on October 11, 2016, in he provided an upbeat outlook for the company’s advanced clinical program for PRO-140 for HIV. Following discussions with the FDA, CYDY was able to reduce the number of patients required for its Phase 3 trial of PRO 140 for HIV in combination with ART to 30 patients from 150. Clearly this development should reduce the cost and shorten the timeline for BLA submission for this trial, which we had previously thought was the most likely approval pathway for CYDY.
Updated Primary Endpoint for combination therapy trial
Additionally CytoDyn management stated that it was updating the primary endpoint for the Phase 3 combination therapy trial following conversations with the FDA. The new primary endpoint appears to have lower risk than before, with CytoDyn now needing to show a viral load reduction of 0.5log (threefold) from PRO 140 in combination with ART in week one, versus the originally planned endpoint of a 0.7log (fivefold) reduction. Management stated that prior studies have shown a tenfold reduction in week one, versus minimal change in the placebo group, which suggests that the endpoint would be achievable if the new trial has similar results.
CytoDyn reports FY1Q17; raises $9mn in offering
CYDY raised net proceeds of $9mn in a private offering in September 2016, which included the issuance of 13.3mn shares and 7.7mn warrants (6.7mn of which are exercisable at $1.00) in order to advance its clinical program. We continue to expect the company will need to raise capital to advance ongoing trials. At the end of FY1Q17 CytoDyn had cash on hand of approximately $4.4mn and no debt, so the raise would make for pro forma cash available of $13.4mn. The company used $6.3mn of cash in operating activities during the quarter, so we estimate this amount would take the company into calendar 1Q17.
Raising target to $3.75 following update
We are increasing our target to $3.75 for CYDY following this clinical update. The overall takeaway, in our view, is that the hurdles to clearance of PRO 140 for combination therapy for HIV have been reduced, and we have therefor adjusted our probability discount factor, resulting in the new target of $3.75. CytoDyn remains an attractive, speculative biotechnology company with a bold goal of transforming the quality of life for HIV patients in the United States.
Stock Details (10/17/16)
OTCQB:
CYDY
Sector / Industry
Healthcare / Biotechnology
Price target
$3.75
Recent share price
$0.66
Shares o/s (mn)
138.2
Market cap (in $mn)
91.2
52-week high/low
$1.57 / 0.63
Source: Thomson Reuters,;
Key Financial (mn, unless specified)
FY14
FY15
FY16
Revenues
0.0
0.0
0.0
EBITDA
(7.8)
(19.2)
(20.8)
EBIT
(8.1)
(19.6)
(21.2)
Net income
(12.4)
(25.1)
(25.7)
EPS ($)
-0.27
-0.43
-0.27
Source: SeeThruEquity Research,
Key Ratios
FY14
FY15A
FY16
Gross margin (%)
NM
NM
NM
Operating margin (%)
NM
NM
NM
Net margin (%)
NM
NM
NM
P/Revenue (x)
NM
NM
NM
EV/Revenue (x)
NM
NM
NM
Source: SeeThruEquity Research
Share Price Performance ($, LTM)
Source: Thomson Reuters
0.000.000.000.00
0.500.500.500.50
1.001.001.001.00
1.501.501.501.50
Oct-15 Oct-15 Oct-15Oct-15
Dec-15 Dec-15 Dec-15Dec-15
Feb-16Feb-16Feb-16Feb-16Feb-16Feb-16
Apr-16Apr-16Apr-16Apr-16Apr-16Apr-16
Jun-16 Jun-16Jun-16Jun-16Jun-16
Aug-16Aug-16Aug-16Aug-16Aug-16Aug-16
Oct-16 Oct-16 Oct-16Oct-16
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CytoDyn, Inc.
Equity | Healthcare / Biotechnology
October 18, 2016
CytoDyn provides upbeat update on pathway for PRO-140
? Positive Clinical Update: CytoDyn held an upbeat call with investors and stakeholders on October 11, 2016, following positive development with its ongoing Phase 3 clinical study for PRO-140 for combination therapy with existing anti-retroviral therapy (ART) for the treatment of HIV.
? Reduced costs, time to market for PRO-140 for combination therapy. We were pleased by the update presented by CytoDyn, during which management indicated that favorable conversations with the FDA would enable the company to significantly cut the cost of its ongoing Phase 3 combination therapy trial for PRO-140, and allow for key safety data for this indication to come from its monotherapy trial.
? Reducing Patient Requirements to 30 to show efficacy in combination trial: According to management, the FDA agreed to allow CytoDyn to reduce the number of patients in its Phase 3 PRO 140 combination therapy trial from 150 to 30. This reduction should save substantial costs for CYDY and increases the probability that the company is able to make its BLA submission in 2017.
? Lower Efficacy Threshold in Primary Endpoint for PRO-140 in Combination Therapy; In addition to the lower costs related to the fewer patients required for combination therapy for PRO 140, CytoDyn should also benefit from a change in the primary endpoint. Following conversations with the FDA, CytoDyn will now need to meet a lower threshold in viral load reduction to show the efficacy of PRO 140 in combination therapy with ART. The new threshold is a 0.5log (threefold) reduction of viral load in week one, which is down from 0.7log (fivefold) reduction originally planned.
? Although the outcome of the Phase 3 trial is uncertain, CYDY CEO Nader Z. Pourhassan, PhD, stated on the call with investors that PRO 140 had reduced the viral load by tenfold in earlier studies, versus minimal change in the placebo group, suggesting that he felt confident in the trial’s prospects.
? This change to the primary endpoint clearly improves the chances that PRO140 will be approved for combination therapy, and hence we are adjusting the probability factor in our model from 55% to 65%, which is the primary driver for the increase to the price target.
? CytoDyn to take safety data from monotherapy Phase 3 trial for combination therapy: In our last update we noted that the conversations with the FDA had led to the decision to increase the patient pool for the company’s PRO-140 monotherapy trial from 300 to 400, which will clearly impact the cost of that trial. However, the FDA will allow CYDY to use patients from its monotherapy trial to meet the requirements for the safety data in its combination trial. The net effect of these actions should shorten the pathway for potential approval of PRO-140 for HIV in combination therapy with ART.
Increasing price target of $3.75 to CytoDyn
? We are increasing our price target of $3.75 for CytoDyn to reflect lower cost assumptions for PRO 140 combination therapy with ART Phase 3 clinical trials and a higher probability factor due to the reduced threshold for approval resulting from a reduced patient pool.
? We had felt that combination therapy represented the fastest potential pathway for FDA approval, management now expects to be in a position to begin BLA submission in 2017.
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CytoDyn, Inc.
Equity | Healthcare / Biotechnology
October 18, 2016
QUARTERLY FINANCIAL SUMMARY Figures in $’000, unless specified F1Q17 F1Q16
Revenues
0
0
YoY growth
NM
NM
Research & Development
3,685,473
5,309,241
General & Administrative
1,366,016
856,660
Amortization & Depreciation
92,584
90,191
Other Items
214,047
401,389
Total Operating Expenses
5,358,120
6,657,481
YoY growth
(19.5%)
Operating Income
(5,358,120)
(6,657,481)
Operating Margins
NM
NM
Interest Expense
0
-2,300,220
Other
3,735
62,686
Net income/(loss)
(5,354,385)
(8,895,015)
YoY growth
NM
NM
Diluted Shares
124,411,980
71,984,053
EPS
($0.04)
($0.12)
Source: Company earnings release
Additional Notes
? CytoDyn filed its 10-Q for FY1Q17 on October 12, 2016, including FY1Q17 quarterly results, which we are summarized in the tables above. As expected, CytoDyn did not report revenues and continued to invest in research and development to advance its clinical program. Operating expenses declined in the period to $5.4mn. Funding permitting, we would expect operating expenses to rise from this level as the company advances two advanced clinincal trials for PRO-140.
? CytoDyn reported a loss of ($5.4mn) during FY1Q17, or ($0.04) per share, versus a loss of ($8.9mn), or ($0.12) per share, in FY1Q16.
? Balance Sheet Review: At the end of FY1Q17 CytoDyn had cash on hand of approximately $4.4mn and no debt. CytoDyn had current assets of $7.1mn, versus $3.0mn in current liabilities. CytoDyn used $6.3mn in operating activities during the quarter.
? On September 12,2016, following the end of the quarter, CYDY raised net proceeds of $9mn in a private offering, which included the issuance of 13.3mn shares and 7.7mn warrants (6.7mn of which are exercisable at $1.00). We continue to expect the company will need to raise capital to advance its ongoing trials.
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CytoDyn, Inc.
Equity | Healthcare / Biotechnology
October 18, 2016
MANAGEMENT TEAM
Nader Z. Pourhassan, Ph.D. President and CEO
Dr. Pourhassan became CytoDyn’s Managing Director of Business Development in June 2011. Prior to that, he was the Chief Operating Officer from May 2008 to June 2011. Born in Tehran, Iran in 1963, Dr. Pourhassan immigrated to the United States in 1977 and became a U.S. citizen in 1991. He received his Bachelor of Science from Utah State University in 1985, his Masters of Science from Brigham Young University in 1990 and his Ph.D. in Mechanical Engineering from the University of Utah in 1998. Prior to joining the Company from 2006 to 2008, Dr. Pourhassan was an instructor of Mechanical Engineering at The Center for Advanced Learning in Oregon, and from 2005 to 2006 was an instructor at Mount Hood Community College. Over the past twenty years, Dr. Pourhassan has also managed a family-owned export/import and manufacturing business.
Denis R. Burger, Ph.D. Vice Chairman and Chief Science Officer
Dr. Burger was appointed a Director in February 2014, named Vice Chairman in August 2014 and Chief Science Officer in January 2016. He is a life sciences executive with over 30 years of extensive scientific, operational and financial experience in the biotech industry. As CEO or chairman of several biotechnology companies, Dr. Burger has led numerous corporate financing transactions and public securities offerings and has experience leading R&D, GMP manufacturing and clinical development functional areas. Dr. Burger is currently a Director of Aptose Biosciences Inc., a cancer therapeutics, NASDAQ-listed company. Dr. Burger co-founded Trinity Biotech, a NASDAQ-listed diagnostic company, in June 1992, served as its Chairman from June 1992 to May 1995, and is currently lead independent director. Until March 2007, he was Chairman and Chief Executive Officer of AVI Biopharma Inc. (now Sarepta Therapeutics), a NASDAQ listed RNA therapeutics company. He was also a co-founder of Epitope Inc. (now Orasure Technologies, NASDAQ listed), serving as its Chairman from 1981 to 1990. Dr. Burger previously held a professorship in the Department of Microbiology and Immunology and Surgery (Surgical Oncology) at the Oregon Health and Sciences University in Portland. Dr. Burger received his undergraduate degree in Bacteriology and Immunology from the University of California in Berkeley and his Master of Science and Ph.D. degrees in Microbiology and Immunology from the University of Arizona.
Michael D. Mulholland, Chief Financial Officer, Treasurer and Corporate Secretary
Mr. Mulholland brings to CytoDyn more than 25 years of senior level financial leadership for public companies in the business services, retail and manufacturing industries. His broad experience includes strategic planning, corporate finance, including raising debt and equity capital, acquisitions, corporate restructurings, SEC reporting, risk management, investor relations and corporate governance matters. In addition to his financial management experience, Mr. Mulholland has also managed IP-asset development for the chemical inventions of a leading European scientific inventor for improving human health, working with IP counsel to evaluate and prosecute domestic and foreign patent applications. Most recently, from 2011-2012, he served as Chief Financial Officer of Nautilus, Inc., a NYSE-listed developer and marketer of fitness equipment. He previously was Co-Chief Financial Officer of Corporate Management Advisors, Inc., a private holding company of various businesses and investments, including a majority interest in a publicly held manufacturing company, from 2010 to 2011; Vice President of Finance of Gevity HR, Inc., a former Nasdaq-listed professional employer organization, from 2008 to 2009; Chief Financial Officer and Secretary of Barrett Business Services, Inc., a Nasdaq-listed business services firm, from 1994 to 2008; and Executive Vice President, Chief Financial Officer and Secretary of Sprouse-Reitz Stores Inc., a former publicly held retail company, from 1988 to 1994. He began his career with Deloitte & Touche LLP. Mr. Mulholland received a B.S. in accounting and a M.B.A. in finance from the University of Oregon. He is a certified public accountant.
Nitya G. Ray, Ph.D., Senior Vice President - Manufacturing
Nitya G. Ray, Ph.D. joined CytoDyn in November, 2015 and is responsible for Process Development, Manufacturing, Supply Chain and Quality. Dr. Ray is an accomplished leader with 30 years of progressive, hands-on experience in diverse manufacturing platforms and product development, including biologics, antibody drug conjugates, engineered
© 2011-2016 SeeThruEquity, LLC. Important disclosures appear at the back of this report. 5 | P a g e
CytoDyn, Inc.
Equity | Healthcare / Biotechnology
October 18, 2016
tissue therapeutics, small molecule and radiopharmaceutical drugs. Prior to joining CytoDyn, Dr. Ray served as Senior Vice President of Manufacturing at Progenics Pharmaceuticals, Inc. where he was responsible for Process Sciences, Manufacturing and Quality control. Prior to that, he served as Director of Bioprocess Development at Ortec International
and held positions of increasing responsibility at Hoffmann-La Roche in the areas of GMP manufacturing and process development for engineered tissue therapeutics and biopharmaceuticals, and at Verax Corporation where he developed process technology for biopharmaceutical manufacturing. Dr. Ray received a Ph.D. and M.S. in Chemical & Biochemical Engineering from Rutgers University and a B.S. in Chemical Engineering from Jadavpur University, India.
Anthony D. Caracciolo, Chairman
Mr. Caracciolo was appointed Chairman of CytoDyn in June 2013, previously serving as a Director since December 2011. He also serves as Chair of the Compensation Committee. Mr. Caracciolo was formerly employed at Gilead Sciences, Inc. ("Gilead"), a research-based biopharmaceutical company that discovers, develops and commercializes innovative medicines in areas of unmet medical need, from 1997 until retiring in October of 2010. During his tenure, Mr. Caracciolo served as Senior Vice President, Manufacturing and Operations and was a senior member of Gilead's executive committee, which was responsible for the strategic and operational direction of Gilead. During Mr. Caracciolo's tenure at Gilead, Gilead grew from 300 employees to approximately 4,000 worldwide, with commercial activities in 38 countries. In addition, Gilead's sales rose from $200 million to over $7 billion. While at Gilead, Mr. Caracciolo had responsibilities of directing operational and strategic imperatives for two manufacturing sites, development of a portfolio of contract manufacturing organizations, producing over fifty percent of Gilead's commercial products, informational technology, compliance assurance associated with aseptic processing, product development, optimization, technology transfers, and supervision of over 600 employees at six global locations. Mr.Caracciolo received a B.S. in Pharmaceutical Science from St. Johns University in 1978.
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CytoDyn, Inc.
Equity | Healthcare / Biotechnology
October 18, 2016
About PRO-140
PRO 140 belongs to a new class of HIV/AIDS therapeutics – viral-entry inhibitors – that are intended to protect healthy cells from viral infection. PRO 140 is a humanized IgG4 monoclonal antibody directed against CCR5, a molecular portal that HIV uses to enter T-cells. PRO 140 blocks the predominant HIV (R5) subtype entry into T-cells by masking this required co-receptor, CCR5. Importantly, PRO 140 does not appear to interfere with the normal function of CCR5 in mediating immune responses. PRO 140 does not have agonist activity toward CCR5 but does have antagonist activity to CCL5, which is a central mediator in inflammatory diseases. PRO 140 has been the subject of seven clinical trials, each demonstrating efficacy by significantly reducing or controlling HIV viral load in human test subjects. PRO 140 has been designated a “fast track” product candidate by the FDA. The PRO 140 antibody appears to be a powerful antiviral agent leading to potentially fewer side effects and less frequent dosing requirements as compared to daily drug therapies currently in use.
About CytoDyn, Inc.
CytoDyn is a biotechnology company focused on the clinical development and potential commercialization of humanized monoclonal antibodies for the treatment and prevention of HIV infection. The Company has one of the leading monoclonal antibodies under development for HIV infection, PRO 140, which has completed Phase 2 clinical trials with demonstrated antiviral activity in man and is currently in Phase 3. PRO 140 blocks the HIV co-receptor CCR5 on T cells, which prevents viral entry. Clinical trial results thus far indicate that PRO 140 does not negatively affect the normal immune functions that are mediated by CCR5. Results from seven Phase 1 and Phase 2 human clinical trials have shown that PRO 140 can significantly reduce viral burden in people infected with HIV. A recent Phase 2b clinical trial demonstrated that PRO 140 can prevent viral escape in patients during several weeks of interruption from conventional drug therapy. CytoDyn intends to continue to develop PRO 140 as a therapeutic anti-viral agent in persons infected with HIV and to pursue non-HIV indications where CCR5 and its ligand CCL5 may be involved. www.cytodyn.com.
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CytoDyn, Inc.
Equity | Healthcare / Biotechnology
October 18, 2016
Contact
Amit Tandon
SeeThruEquity
www.seethruequity.com
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[e-mail]
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