For institutional holders, the biggest gains in terms of percentage per holding are made in the smaller companies. For obvious reasons, a hedge fund cannot exclusively rely on small-cap gains and usually save the bulk of their capital for more traditional investments. It is impossible to sink many millions of dollars in a company with a market cap in the tens of millions. Nevertheless, following the small-cap positions of the big players and their respective insiders can help increase the success rate of small-cap picks.
Over the last quarter, we’ve seen a large amount of activity in both insider and institutional buying related to a small-cap biotech called Corbus Pharmaceuticals Holdings, Inc. (NASDAQ:CRBP). While these stocks are notoriously risky, by following the lead of both insiders and institutions, it’s possible to mitigate this risk. With Corbus, the increase in insider and institutional holdings is coming at a time when the company is just beginning to dose patients in three separate phase II efficacy trials for its flagship candidate, Resunab.
Corbus is focusing almost entirely on Resunab. The drug is currently undergoing three phase II trials in three separate indications – cystic fibrosis, systemic sclerosis and dermatomyositis. We’ll look at the trials individually shortly, but before that, let’s look at the drug and its mechanism of action.
Resunab is what’s called an endocannabinoid-mimetic drug, which essentially means it is a synthesized drug that targets the endocannabinoid system. This system consists of receptors in our brains and nervous systems that control and regulate inflammation and immune response, among other things. When the immune system responds to a pathogen, one of the most common responses is inflammation. Inflammation is usually beneficial short term as it concentrates immune cells to a particular area, but in certain diseases, it is detrimental and overexpressed, leading to debilitating symptoms such as the fibrosis in cystic fibrosis sufferers.
With Resunab, Corbus is attempting to switch off the inflammation process. It does so by activating the CB2 receptor, which is one of the cannabinoid receptors that make up the endocannabinoid system. The CB2 receptor is found on the surface of nearly every immune cell.
Without letting the confusing abbreviations deter us from understanding the drug, activating the CB2 receptor activates signaling molecules called eicosanoids. Two of them, PGE2 and LTB4, are responsible for inflammation. Another two, PGJ2 and LXA4, are responsible for tissue healing. We know that activating the CB2 receptor increases the production of the tissue-healing molecules and decreases the production of inflammatory eicosanoids. That means less inflammation and more tissue healing.
While all CB2 agonist molecules elicit this response, Corbus’s trump card is that Resunab is up to 100x more potent than the naturally occurring cannabinoids meant to pull off the same job. That means Resunab could be especially effective in stopping the inflammatory cycle in patients where inflammation only hurts the underlying disease rather than helping it.
As for the specific trials, Corbus kicked off a phase II in cystic fibrosis in October this year announcing the first dosing on October 15. The trial is operating at 20 sites split across the US and Europe totaling 70 patients with a primary endpoint of safety and tolerability. It’s a relatively short trial, which is common in these early, dose escalation trials, and top-line results are expected by December 2016, exactly one year from now. Corbus is sponsoring this trial so we can expect cash burn rate to rise next year.
The systemic sclerosis phase II dosed its first patient a week earlier than the CF trial, with the company announcing on October 7 that it had dosed the first patient. This one spans 10 sites totaling 36 patients. Again this is a dose escalation study with a safety primary endpoint, but it also has a co-primary of change in Combined Response Index in diffuse cutaneous Systemic Sclerosis, or CRISS, which is an industry standard measurement used to determine severity and progress of the disease. This is a relatively short trial with top line expected also by December 2016, one year from now.
The final indication for dermatomyositis dosed its first patient back in July. Just like the systemic sclerosis trial, Corbus is going for two primaries endpoints on this one. The first is safety and tolerability, the second, a Cutaneous Dermatomyositis Disease Area and Severity Index (CDASI) measurement from baseline. The CDASI measurement is essentially a measurement of skin damage (dermatomyositis is associated with collagen degeneration), that will provide insight into the efficacy of the drug that the company can use to build on its safety data in determining the ideal dose for a phase III, assuming we get that far. This trial, though it began slightly earlier, will be complete the first half of 2017. It is funded by the National Institute of Arthritis and Musculoskeletal and Skin Diseases of the National Institutes of Health, so Corbus won’t be using its own capital.
And what about the recent insider and smart money buys? Over the past couple of months, Sean Moran, CFO of Corbus, has bought 15,000 shares, at a strike rate between $1.56-1.79. At the start of November, his total holding amounted to 60,250 shares, and now sits at 75,250, as per his latest December 12, 2015 purchase. A CFO would not increase his exposure to the company he leads if he did not believe it had some upside potential, and Moran’s consistent buying is a good sign that Corbus could be set for an upside revaluation near term.
The individual with the biggest position in CRBP is Sumner Burstein, whose total holding now comes in at 3,594,471 shares, giving him a 9.5% stake in the company. Burstein is the man behind the technology on which Resunab is based, and is the founder of Corbus. That he is willing to hold such a large position shows his belief that the drug will successfully make it to the market.
Another insider owner of interest is David Hochman, who sits on the board of directors at Corbus. Hochman is the man that cofounded, built and eventually sold Prolor Biotech to Dr. Phillip Frost’s OPKO Health (NYSE:OPK). He currently owns 657,200 shares of the company, amounting to a 1.75% stake.
From an institutional perspective, the organization with the biggest exposure to Corbus is Knoll Capital Management, LLC, which, during the third quarter of 2015, increased its holding by 1 million shares, to bring its ownership to 2.75 million shares, or 7.31% of the company. The second largest holding comes from Perceptive Advisors LLC, which increased its exposure by 380,000 shares last quarter, bringing the total holding to 1.25 million shares, or 3.3%.
Other notable funds that increased their exposure during the quarter include Vanguard Group (increased by 91,036 shares), BlackRock Int. Trust (increased by 180,607 shares) and Geode Capital Management (bought 91,235 shares to initiate a position). Full institutional ownership data is available here. Institutions that have maintained small positions in the company, but are worth mentioning by nature of their reputation in the space, include Morgan Stanley, DAFNA Capital Management and UBS Group AG.
Financials and Timing
Corbus is well capitalized at the moment with over $13M in cash and a quarterly burn rate of less than $2M. That gives it about a year and a half before it needs to refinance, and given the amount of institutional interest, private placements look likely in the future. To that extent, dilution is likely. But one year from now, two out of the three phase 2 trials will be completed barring unforeseen delays, and how Resunab performs on these will have a much more magnified effect on the stock than any dilutive financing.
We can expect cash burn to increase as Corbus is funding two out of the three trials itself. The third trial for dermatomyositis will be the last to be completed, but since the trial is paid for already, it is not a financial drag. Assuming quarterly cash burn rate doubles this year as a result of funding two of Resunab’s three trials, Corbus still has three quarters of runway, which should get it through September, just on the cusp of completion of the cystic fibrosis and systemic sclerosis trials. We can expect some dilution then to get the company through December, and then it all depends on the results.
As a point of reference, the company has issued 11,666,802 shares (see page 11) so far in 2015 to a float of 25.46M. Since then, the share price has correspondingly been cut nearly in half year to date, which is to be expected. I don’t believe dilution to that extent will be necessary in 2016 as the company already has over $13M, but there may be some. Anticipation as December nears could bring shares up and counteract any dilution as well.
To put it simply, if Resunab fails the first two trials, it will likely fail all three, which could result in a total loss for investors. If it succeeds in one or more, especially for the cystic fibrosis indication for which it has both Orphan and Fast Track status, just take a look at Vertex Pharmaceuticals (NASDAQ:VRTX) for a sense of how valuable effective CF drugs are. That’s your risk/reward profile.
As Insider Monkey states, the smaller companies that comprise a hedge fund’s portfolio are generally where the big gains are made. However, due to high competition and the large amounts of capital under management, the majority of hedge funds cannot allocate solely to small caps as liquidity in these stocks is too low. Instead, they must pick up stock in larger, slower growth companies to park capital. As individual investors who generally don’t control hundreds of millions of dollars, we don’t have this problem.
Conclusion
Corbus is a development-stage biotech with just one pipeline candidate. This makes it a very risky allocation, as if it fails to successfully demonstrate efficacy in at least one of its three phase II indications, or if Resunab trials reveal safety issues, it will not have any clinical assets to fall back on. However, we can look at the latest insider buying, as well as the increased institutional ownership as an indication that professional analysts and those familiar with the company’s inside operations have faith in Resunab’s potential.
Editor’s Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
This article was written by Austrolib and was originally published on Seeking Alpha. The author is long CRBP.
