Cleveland BioLabs: A Future In Oncology

Cleveland BioLab’s (CBLI) near-term investment case rests on its ability to successfully develop Entolimod (CBLB502) as the first FDA-approved medical countermeasure to reduce death from total body irradiation. A major near-term catalyst, and critical to Entolimod’s chances of securing substantial US government procurement contracts in 2015, is a BARDA development contract award in Q213. The BARDA contract, worth up to $50m, would fund the final pivotal studies (animal efficacy and human safety) required to submit a BLA in Q414. We value Cleveland at $102m ($2.30/share), mainly based on winning a BARDA supply contract in 2015 worth >$200m.

Animal efficacy, human safety required
Entolimod (a Salmonella flagellin derivative that inhibits apoptosis in healthy cells) is being developed under the FDA’s Animal Efficacy Rule, created in 2002 to encourage and enable the development of products when human efficacy studies are not ethical or feasible. Cleveland has conducted extensive animal efficacy studies and human safety trials with Entolimod, the most advanced radiation countermeasure candidate.

US government = gatekeeper
Over the next few years Cleveland is heavily reliant on winning development and procurement contracts from the US government, specifically the Department of Defense (DoD) and BARDA. The Project BioShield Act (2004) has provided $1.8bn to support the development of, and $2.6bn to purchase, medical counter-measures (mainly for anthrax/smallpox). Entolimod already has a $30m purchase order from the DoD and we estimate a three-year BARDA procurement contract of $240m.

A future in oncology
Entolimod’s mechanism of action as a TLR5 agonist, with an ability to mobilise an innate immune response especially against TLR5+ tumours, indicates potential as a targeted anti-cancer agent. A Phase I study of Entolimod in 48 patients is ongoing (results H114), while a Russian subsidiary is conducting Phase I studies with two further anti-cancer candidates, pointing to Cleveland’s long-term future in oncology.

Valuation: $102m ($2.30/share) with upside potential
We value Cleveland at $102m, or $2.30 per share, based on a sum-of-the-parts DCF valuation. We use a standard 12.5% discount rate and include end-2012 consolidated net cash of $28m. The bulk (80%) of this valuation is derived from Entolimod’s potential as a biodefence agent, with the key sensitivities being the timing and size of the BARDA development and procurement contracts.

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