Bob Flaherty Rides Again! Celebrate FFN's 7th birthday with us by reviewing our  latest stock pick in Flaherty Special Situation Newsletter #38. Thank you all for giving meaning to our lives by being our readers. To join our financial family please visit our website www.flahetyfinancialnews.com and opt in as a reader to receive your  FREE issues of Flaherty Special Situations and also our sister Flaherty Financial News Newsletter. You can opt out any time.

So far I've been right on the upward direction of the stock market for the third consecutive year. In spite of global turmoil my optimistic view that 2015 will again be a good year for U.S. equities is holding up. Except for India the rest of the world looks like a mess. Besides bonds aren't yielding enough to be a current alternative to stocks. Where can the frightened funds sloshing around the globe go? In terms of growth and safety America is the place to be.   

At 81 I still need to prove to myself that I haven't lost my touch. My first story idea as a cub reporter at Forbes was unknown Haloid Xerox destined for greatness. I wrote the first highly positive story on money losing start- up FedEx after Busy Week predicted now famous founder Chairman Fred Smith would be sacked. After Barron's wrote 13 consecutive negative hatchet jobs on SafeCard Services I took the other side as the stock increased over 1,000%. Six times starting with a stock price of $1 and ending when Paid Legal Services was bought out for a ton of cash I successfully defended against six different attacks by abusive short sellers joined by most of the media. When Digital Switch Corp. went public with the most negative IPO prospectus in the history of the SEC I took on all the famous publications including my alma mater Forbes to write "Hope for the Horrible Example."  None of the good things taking place were in the prospectus. A new management team with a record of success had taken over. Backers raised a new bankroll and the technology was real and disruptive. That stock went on to rise over 10,000%.

My contrarian pick of Wholesome & Hearty rose a sizzling 546%- more than any other stock on NASDAQ that year! Short sellers instantly flattened this brand new IPO. They  smeared its entrepreneur as an evil doer. Instead he was a young crusader. As a sickly teenager he learned our meat diet was causing heart attacks and strokes. To reduce obesity and save lives he created his vegetarian Gardenburger. Some bad guy. We reported his charge that all of the huge short position had to be naked. That was because none of the shares required to be borrowed before anyone could short legally had been deposited yet. Overnight the entire short position vanished and the secret shorts disappeared.  

In the real world things never go as expected. Besides being bargains judged by relative stock price all my big winners possessed dedicated good management. Each could turn negatives into positives and always found new financing. Each was led by a dreamer.  At this moment my spirits are high. I have found another incredibly undervalued stock for you.

Turnaround CEL-SCI Corporation (NYSE: CVM-0.90) is trying to do something never done before. It wants to pioneer a revolutionary new way to activate the immune system to fight cancer and infectious diseases. Overcoming worry over changing the status quo hasn't been easy and has taken years. Worse this corporate change agent is recovering from the mother of all credibility gaps.

Everyone loves a turnaround and so do we. Nearly all of CEL-SCI's focus rests on conducting the largest Phase III trial in the world for the treatment of head and neck cancer where its immunotherapy drug Multikine regimen is being administered to patients. A successful 10% improvement in patient overall survival compared to those receiving just the existing standard treatment could increase its stock price by $ billions in a single day. In 2014 following other final Phase III trial immunotherapy drug announcements shares of Puma Biotechnology (PBYI) jumped $5 billion and shares of Bristol Myers (BMY) almost $7 billion. The primary endpoint for CEL-SCI's Multikine Phase III trial results should take place sometime during 2017 when the 298th enrolled patient dies as our following opus will explain. 

CEL-SCI (NYSE:CVM) Is Going To Make It!

http://www.cel-sci.com

 CEL-SCI (NYSE: CVM) is arguably the most undervalued developmental Phase lll biotech in America. Upcoming is possible settlement of its $50 million arbitration suit against a clinical research organization which it fired for breach of contract and fraud with a May 4th trial start scheduled with possible final judgment including hundreds of millions in punitive damages. CEL-SCI's lead drug Multikine regimen is being administered to strengthen immune systems for three weeks before cancer treatment commences instead of when it is debilitated by surgery and/or toxic radiation and chemotherapy. Their boosting of an intact immune system makes sense, but has never been done before. This revolutionary approach is designed to extend patient lives. Before yearend it aims to enroll 880 head and neck cancer patients in over 100 sites in 21 countries for its global Phase III trial. Success could trigger a one day stock jump of $ billions, which happened in 2014 after two other immunotherapeutic drug success announcements. A production plant capable of turning out $3 billion in sales already has been built. A second plant will be needed if Multikine is used to help to other varieties of cancer sufferers. An important program with the U.S. Navy to treat Human Papilloma Virus related anal warts in HIV infected patients could extend Multikine treatment to viruses. Other long term tantalizing possibilities include a vaccine for rheumatoid arthritis. Dreamer CEO Geert Kersten's undervalued turnaround is a keeper. 

By Robert J. Flaherty and Brian D. Flaherty

Buy Recommendation

*Derivative accounting for options and warrants.

The Mother of all Credibility Stock Market  Value Gaps: Presenting at the February 9th BIO CEO & Investor conference in  New York City CEO Geert Kersten of Vienna, VA -based CEL-SCI Corporation (NYSE: CVM-0.90) explained his dilemma. "For full disclosure last year I bought a huge number of shares raising my family's position to almost 10%. We have the only cancer immunotherapy company in the last two years that has completely underperformed. It's nothing to be proud of but if I am going to turn around a problem I am going to make some money out of it."

From this CEO's inside perspective everything is going well. In the world's largest global  Phase III Head and Neck Cancer trial its investigational immunotherapy regimen Multikine (Leukocyte Interleukin, injection) has been cleared to commence at clinical sites in leading medical research institutes, universities and hospitals in 20 countries. Out of an anticipated 880 patients over 350 patients (40%) have already been enrolled with the aim of full enrollment by the end of 2015. Assisting are top notch partners including Teva Pharmaceuticals and U.S. National Cancer Institute.

Of $250 million raised since l983 over $100 million was invested in the full validation of the Multikine manufacturing process of this complex biologic. To ensure closer product quality control CEL-SCI has built a $25 million drug manufacturing facility in Baltimore, MD, not some faraway third world country. The plant already has passed inspection twice by European regulators. Intriguingly the plant has an annual capacity to generate an estimated over $3 billion worth of Multikine. Actually Kersten thinks future revenues will be bigger and they may need a second plant. Supplying Multikine for just head and neck cancer by itself will use up the first plant.

Close to 100 medical publications and presentations on Multikine have been published which included exciting research data. With $10 million in cash and 91 million shares outstanding, the stock trades decently with average daily trading volume of 498,782 shares. Why isn't late- stage CEL-SCI already selling for a market cap of at least $1 billion? "Obviously I think we are extremely undervalued," Kersten contends. On a table six biotech cancer drug developers only in Phase I and/or II trials sport lofty market caps ranging from $369 million to $4 billion. The seventh at the bottom is CEL-SCI in Phase III, the final Phase with a ridiculously anemic $77 million back on Feb. 9th and $82 million recently. Why does its lead Phase III drug Multikine suffer from the mother of all biotech credibility problems?

Back in Jan 2013 everything looked rosy. Laidlaw & Co initiated coverage of CEL-SCI extoling in bold "Multikine has Blockbuster Potential" and "Positive Phase III Data Expected." Suddenly disaster! A prestigious self-proclaimed best of breed Clinical Research Organization CEL-SCI had hired to run its Phase III was acquired and rolled up into another CRO by a powerful private equity firm. As key personnel running the study left this CRO was having trouble landing vital clinic trial sites. Because it was only enrolling a few patients per month among other reasons, Kersten fired them in April 2013.

"It was the beginning of a long journey down" says Kersten. While his new choices as replacement CROs went on to perform spectacularly well enrolling new patients Wall Street hates surprises and has little patience. The stock fell from about from $8 (adjusted for a reverse stock split) to $0.54. That's a devastating decline of 93%.

"Wall Street assumed we would never finish the study and we were dead," says Kersten. "We've fallen off the radar screen. It's as if we don't exist." The lower stock price created lasting and serious shareholder dilution because CEL-SCI had to issue new shares at sharply lower prices to raise new capital.  

A lawyer who is also married to a lawyer who is a former crime-fighting Assistant U.S. Attorney, Kersten dedicated five months of his life to prepare a $50 million arbitration suit for breach of contract, fraud in the inducement and common law fraud. He believes they have a very strong case. In June 2014 the arbitrator denied the CRO's motion to dismiss. If a settlement is not reached, a trial is scheduled to start on May 4th. If CEL-SCI wins, a final judgment could include hundreds of millions for punitive damages.  

An infusion of new funds without causing additional shareholder's dilution would be very welcome. But is that enough? "We need to show it was not our product that was responsible for the problems," stresses Kersten. "When our enrollment was so slow, the assumption by Wall Street was the product doesn't work. We suffered an amazing reputational loss which is the explanation for our pitiful present stock valuation. Delayed trials are always tarnished. We're doing a rescue! Can you believe that as a late stage Phase III company our stock was near our all- time low? We didn't have a product failure. Only our stock is broken, not the science."

How much more money does CEL-SCI need to reach an end point announcement if the Phase III trial continues as anticipated? It is spending roughly $2 million a month and will need to raise more capital. Our guestimate ranges from another $10 million to $15 million in 2015, $20 million to $25 million in 2016 and a similar sum in 2017.  These are not huge amounts for a typical late stage Phase III biotech.  But they are for an enterprise with a tiny battered down market cap like CEL-SCI. "That's where we come back to the arbitration," says Kersten, who hopes for a reputational reset where CEL-SCI would become valued like other Phase III companies. "Once our reputation is restored we ought to become valued like other cancer immunotherapy companies, which could be billions of dollars."   

 Outside the court room management's focus must remain on moving ahead. "The only thing that matters to our company is the successful execution of the Phase III clinical trials" says Kersten. It is encouraging recent presentations to institutional investors have resulted in increased daily share trading of over 100,000 shares and a higher stock price. "With this- and I think it is slowly starting- we will regain the trust of shareholders who have written us off."  

A Very Big Dream: In this issue's lead we stated we preferred CEOs who are dreamers. CEO Geert Kersten's big dream is that CEL-SCI's lead drug regime Multikine will someday be adopted as a fourth gentler treatment modality to be considered and intermixed with the existing current three modalities of surgery, radiation and chemotherapy to help newly diagnosed cancer patients worldwide.

German-born Kersten states CEL-SCI is being built the German way- to last. He has spent 25 years of his career on its lead product Multikine. We like his determination, leadership and desire to build a company for the long run. Instead of seeking quick profits by selling out to a large pharma he wants to remain to tackle other huge unmet health needs. How old fashioned. How wonderful.

CEL-SCI plans to turn conventional cancer treatment upside down starting with its lead drug Multikine! The corporate mission is focused on finding the best way to activate the immune system to fight cancer and infectious diseases. "We're doing something that has never been done before," says Kersten. CEL-SCI will administer its Multikine drug regimen five times during a three week window before standard cancer treatment begins when the immune system is healthiest. In contrast, today's global standard of cancer care is to first do surgery and then decide if it will be followed by  toxic radiation and/ or chemotherapy. Only then attempts to restore the debilitated immune system to do its job begin after the patient's immune system is weakened or perhaps nearly destroyed.   

Turning immune therapy completely in reverse by doing it first is a revolution! It will offer new hope to people who have just been diagnosed with cancer- a new less toxic fourth added weapon. Fortunately CEL-SCI' Phase I and II trials showed no toxicity calming regulatory concerns of harming the patient by administering an experimental drug first. Still, ethically, doctors are not allowed to delay the surgery until Multikine has been approved for sale. This left only a three week window-21 days- to administer Multkine in its Phase III trial.  

Why chose head and neck cancer? In earlier trials about 450 people have been treated with Multikine, which showed activity against several types of tumors. Why did CEL-SCI choose advanced (which means late stage) primary (which means not yet treated) head and neck cancer as their best choice for a global trial? Head and neck cancer is a huge unmet medical need for which the last drug approval in the U.S. was 60 years ago. Nothing was on the horizon for this group of patients. So CEL-SCI received coveted FDA Orphan Drug designation. The success rate of Orphan Drugs is substantially higher than ordinary drugs. Another factor was head and neck cancer which makes up 6% of the world's cancer cases is a multi-billion annual market.  

Advanced primary head and neck cancer has only one world-wide standard of care and every country follows it. It is surgery usually followed by a decision to use radiation alone or radiation and chemotherapy concurrently. A Phase III trial win should translate into Multikine becoming the first treatment in a new worldwide standard of care- Multikine regimen administered for three week prior to surgery followed by a decision on using radiation and/or chemotherapy. Success should result in Multikine approval all over the world and trigger lucrative massive buy-out offers.   

The Product potential and how Multikine works: A copy of the immune system, Multikine is defined mixture of 14 cytokines which are proteins which send signals to other cells, especially to the immune system. Essentially your body is making the same product now. By injection the Multikine treatment regimen supplies from the outside those cytokines that a patient is naturally able to produce when rejecting a tumor. The main goal is not to eliminate the tumor since that is an unrealistic goal in only 21 days even though that could (or could not) happen in 12% of the patients in the new Phase III trial. The aim is to reduce local regional cancer recurrence and so increase patient survival. The obstacle is not that the immune system is weak. It is that the immune system does not know that you have a tumor which makes itself invisible to hide from your killer cells. When the Multikine regimen makes the tumor visible to a healthy immune system that is still intact because it has not yet been debilitated by surgery, radiation and/or chemotherapy, micro- metastases and the tumors in the lymph nodes can be cleaned up in only three weeks! 

CEL-SCI should learn if Multikine achieved the primarily goal of 10% improvement in overall survival over existing standard of care sometime in 2017. A final Phase II study approximated a 33% increase in overall survival for patients who had been administered Multikine over other patients who just received the existing standard of care at 3.5 years after surgery. For Phase III the FDA indicated it would be satisfied with a 10% improvement. Upon the death of the 298th of at least 680 measurable patients enrolled survivability can be measured. Only then will CEL-SCI learn if it has succeeded or failed to achieve the Gold Standard of Survivability in the Phase III trial.

It will be important not to observe an increase in toxicity since the existing radiation and chemotherapy are already so toxic that the addition of more toxicity might kill patients. None occurred in earlier trials. In Phase II consulting pathologists agreed that 12% of the patients in only three weeks of receiving the Multikine regimen experienced a complete tumor remission. That meant not having a single cancer cell left in the tumor, surrounding tissue and the lymph nodes. The other cancer patients saw a 50% reduction in the number of cancer cells.

Phase III Partners: If achieved, positive results will be used to support applications which will be submitted to regulatory agencies in order to receive commercial   marketing approvals around the world. CEL-SCI has retained key rights in lucrative North American and Europe. Teva Pharmaceuticals has marketing rights in Israel, Turkey, Serbia and Croatia and is enrolling Phase III patients in Israel. Taiwan-based Orient Europharma has nine centers in Taiwan and is setting up centers for Malaysia, Philippines and Thailand. U.K.'s Ergomed, which replaced the Clinical Research Organization fired in 2013, is performing spectacularly enrolling new Phase III patients.  Ergomed also invested $10 million of its own money in exchange for participation in royalties capped at a certain amount on future Multikine revenues. There are many other participating partners. One, The U.S. National Cancer Institute, is trying to figure out what patients are most likely to benefit from the Multikine therapy.

Revenue: Typically insurance will pay for standard of care. For a new cancer drug, particularly one that increases survival, $100,000 would not appear to be a high price. There are 600,000 new head and neck cancer cases annually in the U.S. and Europe. If 10% received the Multikine regimen, revenues would be $6 billion a year.  

That's only the beginning. It could be a blockbuster. If Phase III proves Multikine can increase survival, why not take that same concept of administering Multikine first to breast cancer, melanoma, cervical cancer and lots of other diseases? There is even more potential. CEL-SCI's Multikine treatment could also be applicable for many other types of cancer and also in viruses such as Human Papilloma Virus. (In a program with the U.S. Navy described in a later section Multikine is showing promise in early trials for the treatment of HPV in HIV infected patients whose immune systems are usually severely compromised.)  

Right now when a person learns he or she has cancer they have nowhere to go but brutal surgery, radiation and chemotherapy. What if a three week Multikine regimen turns out to improve survivability? In 12% of the cases it might eliminate tumors and make surgery unnecessary in just three weeks. In head and neck cancer it would become the standard of care. Many cancer patients would flock to it, not just those with head and neck cancer. 

Orphan Drug Status: CEL-SCIhas composition of matter patents in the key countries until 2024. The FDAdesignated Multikine with Orphan Drug status in the U.S. so by law CEL-SCI only has to do one Phase III clinical trial. It qualifies CEL-SCI for seven years marketing exclusivity from the date Multikine is approved or licensed. Other benefits include the possibility that approval time could be expedited; opportunity to apply for an Orphan Grant which would provide up to$350,000 per year for up to three years and tax incentives of up to 50% of clinical investigational costs associated with Multikine's development. Orphan Drugs also have much higher chances of being approved for sale.

Being located in the Washington, D.C. area has been beneficial. CEL-SCI has lots of government collaborations. A number of preclinical technologies have been mostly developed with government funds.

"We are also working with the U.S. Navy on Multikine in a completely different disease," says Kersten. "It is an unchanged product. This is one immunotherapy that can potentially be used against different cancer tumors as well as a virus. So the exact same product that we are using against head and neck cancers is also being used by the U.S. Navy at the San Diego Naval base in the treatment of peri-anal warts in HIV/HPV co-infected men and women. These co-infected patients have about a 30-fold increased risk of developing anal cancer because of their compromised immune system."

The latter indication is now a Phase I trial in conjunction with the U.S. Navy under a CRADA (Cooperative Research and Development Agreement). Under the CRADA the government pays for the clinical trials, but does not take any rights or royalties. CEL-SCI, which is responsible for the manufacturing and contributing of Multikine will retain all rights to any currently owned technology and will have the right to exclusively license any new technology development from this collaboration.   

Additional clinical indications for Multikine are being investigated. A Phase I trial has been completed at the University of Maryland relating to pre-cancerous cervical (the area of the uterus that joins the vagina) dysplasia in HIV/HPV co-infected women. The disease was not a big deal 10 years ago because patients tended to die before slow growing HPV caused problems. Now with new treatment extending lives unless they never have sex many are going to catch HPV in their lifetime. This is a big problem in the HIV population because their immune system is not strong enough to kill the HPV causing all kinds of HPV related diseases including cancer. It affects about 25% of the HIV infected population, 300,000 in the U.S. and 500,000 in Europe. There are no current effective approved therapies and CEL-SCI appears to be the only company that can deal with HPV in an HIV infected patient. 

About 2 or 3% of women cannot control HPV. It requires continued cutting, scrapping or burning. It can affect ability to have children and can lead to cancer. People think with the new HPV vaccine HPV is no longer a problem. But only 32% of the girls actually receive the three required shots that protect against all strains. Most guys don't get it. So HPV, the #1 sexually transmitted disease, will continue to be a serious national problem.  

A Rheumatoid Arthritis Vaccine? CEL-SCI is developing its Ligand Epitope Antigen Presentation System (LEAPS). This patented T-cell modulation process stimulates the immune system to fight bacterial, viral and parasitic infections, as well as autoimmune, allergies, transplant rejection and cancer. One program aims at developing a treatment of pandemic influenza. A Phase I SBIR Grant from the National Institutes of Health is being used to develop a potential vaccine for rheumatoid arthritis with researchers from Rush University Medical Center. CEL-SCI very interested in taking this effort into human studies.  

This LEAPS technology allows determining in advance the kind of immune response the body will make to the antigen, which is any substance foreign to the body that evokes an immune response. Essentially LEAPS tries to redirect a faulty immune response from a person into a correct one. The theory is the body would no longer attack itself. Some of the diseases where LEAPS showed animal challenge protection are H1N1, malaria, herpes, tuberculosis and breast cancer.  

The Management Team:   

Maximilian de Clara, 85, Director, Chairman and President, founded CEL-SCI in March l983 and has been its president since July l983. Previously he personally funded research in the fields of biotechnology and biomedicine. From l949 to l955 he attended the medical school of the University of Munich and during two summers worked as a research assistant at the University of Istanbul in cancer research. For his efforts in the fight against cancer and AIDS he was awarded the "Pour le Merit" honorary medal of the Austrian Military Order "Merito Navale" and the Honor Cross of the Austrian Albert Schweitzer Society.

Geert R. Kersten Esq., 56, Director and CEO, is also Principal Financial Officer, Principal Accounting Officer, Treasurer and director. Joining the company in l987, he has served in his current leadership role since l995. He has been involved in pioneering cancer immunotherapy for almost two decades and has successfully steered CEL-SCI through many challenging cycles in the biotechnology industry.

Kersten also provides CEL-SCI with significant expertise in the fields of finance and law. He has a unique vision of how its lead product Mutlikine will change the way cancer is treated. Previously he worked at the law firm of Finley & Krumble and at the investment banking firm of Source Capital in McLean, VA.

A native of Germany, he graduated from the Millfield School in England and completed his studies in the U.S. His undergraduate degree is in accounting. He received an M.B.A. from George Washington University and a law degree J.D. from American University in Washington, D.C.

Patricia B. Prichep, 64, Senior Vice President of Operations and Corporate Secretary, has over 30 years of experience in business operations and administration. Joining CEL-SCI in l992, she is responsible for all day-to-day operations of the company, including human resources and is the liaison with the auditing firm for financial reporting. From June l990 to December l992 Prichep was Manager of Quality and Productivity for NASD's Management Systems and Support Department. She was responsible for the internal auditing and work flow analysis of operations. Between l982 and l990 she was Vice President and Operations Manager for Source Capital, Ltd. She handled all operations and compliance and was licensed as a security broker. She received her B.A. from the University of Bridgeport in CT.

Dr. Eyal Talor, Ph.D., 59, Chief Scientific Officer, was promoted to his current position in 2009 after joining CEL-SCI in l993. Prior to this promotion Dr.Talor served as Senior Vice President of Research and Manufacturing. He is a clinical immunologist with over 19 years of hands-on management of clinical research and drug development for immunotherapy application: pre-clinical to Phase III, in the biopharmaceutical industry. His expertise includes: biopharmaceutical R&D and biologics product development, Good Manufacturing Practices manufacture, quality control testing and the design and building of Good Manufacturing and testing facilities. He has served as Director of Clinical Laboratories (certified by the State of Maryland) and has experience in the design of clinical trials (Phase I -III) and Good Clinical Practices requirements. His scientific expertise encompasses immune response assessment.

Before coming to CEL-SCI he was Director of R&D and Clinical Development at CBL, Inc., Principal Scientist -Project Director and Clinical Laboratory Director at SRA Technologies, Inc. Previously he was a full time faculty member at The John Hopkins University. He has invented technologies which are covered by two US patents; one on Multikine's composition of matter and method of use in cancer and one on a platform, Peptide technology (Adapt) for the treatment of autoimmune diseases, asthma, allergy and transplant rejection. He received his Ph.D. in Microbiology and Immunology from the University of Ottawa and had post- doctoral training in clinical and cellular immunology at The John Hopkins University where he holds an Adjunct Associate teaching position at their medical institutions.

Dr. Daniel H. Zimmerman, Ph.D., 74, Senior Vice President -Cellular Immunology, heads CEL-SCI's L.E.A.P.S. technology program. He has invented technologies which are covered by over a dozen U.S. patents as well as many foreign equivalent patents. He is the author of over 40 scientific publications in immunology and infectious diseases. He has been awarded numerous grants from National Institutes of Health and the Department of Defense. From l969 to l973 Dr. Zimmerman was a Senior Staff Fellow at NIH and continued on as a guest worker for 25 years. He received a Ph.D. in Biochemistry in l969, a Masters in Zoology in l966 from the University of Florida and a B.S. in Biology from Emory and Henry College in l963.

Risks

All of CEL-SCI's current momentum is riding on executing its disruptive global Phase lll Trial for using its lead drug Multikine to strengthen patients' immune system for 30 days before the existing global Standard of Care treatment for head and neck cancer is administered. Any unexpected toxicity or negative clinical results such as a disappointing extension of overall survival of Multikine trial patients would be a major setback. Like any development stage biotech regulatory approval cannot be taken for granted. Breakthroughs by competitors are always a threat. That tantalizing infusion of non-dilutive funds from arbitration cannot be counted upon until its $50 million arbitration is settled or a final judgment is ordered and any resulting funds are in the bank. Still uncertainty is part of business. If CEL-SCI achieves its major milestones in 2015 the future looks bright.   

COMPANY CONTACT INFORMATION

CEL-SCI Corporation

Gavin de Windt

Associate Director of Operations

 8229 Boone Boulevard, Suite 802
Vienna, VA  22182
Phone:  (703) 506-9460

For more information please visit www.cel-sci.com

http://www.cel-sci.com/