• Pulse failed to achieve an FDA 510(k) clearance which it had previously described as a “foundation for future clearances”. The current direction of the company seems highly uncertain.
• The company and several directors have been subpoenaed as part a newly disclosed SEC investigation into potential insider trading around a company news release.
• Any future avenues are likely to be capital-intensive. Per the 10-K, “…we plan to raise additional capital in the future”.
• Bottom line: Pulse is focused on a technology that doesn’t seem to work well. Limited oncological studies show poor to mixed results. Aesthetic applications thus far have insignificant potential.
• We think Pulse is stuck in a precarious position, and the current stock price in no way reflects the risks, capital needs, and the looming regulatory overhang facing the company.

Introduction

Virtually, all of Pulse Bioscience’s (NASDAQ:PLSE) eggs are in one basket: The company is focused on developing its “Nano-Pulse Stimulation” (NPS) technology, which exposes cells to electrical pulses in an effort to kill them.

The technology doesn’t appear to work all that well, as recent oncological data on humans and canines has shown.

Further underscoring questions around the efficacy of the device, the company withdrew its 510(k) application with the FDA and then recently disclosed that it would not be resubmitting the application. A 510(k) clearance would have given the Pulse a general indication for soft tissue ablation which the company at various times referred to as “the first step in our strategy”, the “foundation for future clearances” and an “important milestone en route to commercialization”. We believe the decision to not resubmit was made because the company was unable to produce data showing the device to be as safe and effective as other commercially available devices.

In the absence of the above foundational step, the company’s new “strategy” seems mired in uncertainty. In lieu of a general 510(k) indication, the company is instead seeking to pursue specific indications in either oncology or dermatology/aesthetics with no clear priority or timeline in place for any potential indications.

Chasing specific indications would likely be cost-intensive and resource-intensive, which could spell the need for further capital injections. The company plainly acknowledged plans to raise more capital in the recent 10-K:

…we plan to raise additional capital in the future.

In another troubling sign, Pulse has also acknowledged that the company and several directors have received SEC subpoenas in relation to potential insider trading ahead of a company news announcement. The investigation represents a significant new overhang.

Collectively, we think Pulse Biosciences is in a tremendous amount of trouble. We believe the current stock price in no way reflects the risks, capital needs, and the looming regulatory overhang facing the company.

Pulse’s Failure to Achieve FDA 510(k) Clearance Looks Like a Major Setback

In March 2017, Pulse submitted a 510(k) application to the FDA to approve its device for a general indication for soft tissue ablation. The CEO stated, as part of the announcement, that this was:

the first step in our strategy to pursue a general indication for soft tissue ablation followed by submissions for specific indications in the future.

The company reiterated the importance of the 510(k) clearance in its July 2017 Q2 conference call:

Our objective is to obtain a 510(k) clearance with an indication for soft tissue ablation, which we believe can serve as a foundation for future clearances for specific indications that we will pursue with the addition of clinical data. The 510(k) clearance for soft tissue ablation may also enable us to accelerate our pursuit of additional pilot studies.

…pending positive results from our study, we intend to submit study data to the FDA in support of a 510k submission sometime in 2018. Thanks to the efforts of our internal team and our network of clinical investigators. We are on schedule to achieve this important milestone en route to commercialization.

In September 2017, the company voluntarily withdrew its application due to the FDA’s “appropriate request for additional data that could not be provided within the Agency’s 90-day review period.” The company planned to refile the application and reaffirmed its commitment to submit the supplemental information in a subsequent 510(k) application in the coming months. Pulse’s CEO expressed optimism that it would achieve its objective:

Over the past several months, we have been engaged in very productive and positive conversations with the FDA staff, and we remain confident in our ability to obtain a 510(k) clearance for the PulseTx System and more broadly for Nano-Pulse Stimulation.

That confidence looks to have been completely ablated based on the recent filing and conference call information. The company is now reporting that it has shifted gears and no longer seeks a 510(k) clearance for a general indication. Per the conference call transcript:

Based on our ongoing dialogue with FDA, consultation with regulatory experts, recent clinical progress and our clinical program plans, we have decided to focus our regulatory efforts on directly obtaining specific clinical indications as opposed to first pursuing a general soft tissue ablation clearance followed by specific indications.

Minimal Clinical Data

The inference based on the company’s statements above seems to be that the data was simply not there to support a 510(k) clearance. Digging deeper on that subject, in looking at the minimal clinical data available on the technology, we see little reason for optimism.

In the human study referenced above, a total of 10 cancerous tumors across 3 patients were treated. The treatment failed to eliminate cancer in 2/3 patients and only eliminated 7/10 tumors, an inferior result relative to other commercially available alternatives.

In a recent study for the treatment of advanced canine oral melanoma, 3 out of the 5 canines treated were euthanized prior to the end of the 112-day study period due to progressive disease. Of the two canines that survived the study period, one had a visible tumor at the end of the study period and the other had “no visible tumor”. (2017 10-K Pg. 7) The company stated, as part of this release, that no definitive conclusions can be drawn from the study, given the limited number of animals, but nonetheless, the limited data doesn’t look promising.

An Uncertain Path Forward

The failure to achieve general 510(k) clearance is obviously a significant blow to the company’s original plan, but worse yet, there seems to be a lack of direction going forward. In the absence of a general clearance, the company must now decide whether or what specific indications it hopes to achieve.

The company’s statements on its own future seem mired in uncertainty on which path(s) it intends to pursue:

We believe the most efficient and effective use of our resources is to work with the FDA and pursue to the specific indication in immune-oncology and potentially other indications such as dermatology. These submissions may utilize the 510(k) de novo or premarket approval process, depending on the specific indication. We will provide additional details including timing on these submissions in the coming quarters.

The statement above seems to indicate that oncology is likely the favored route, but the studies above have shown that oncological results to date have been less than favorable. Furthermore, the recent 10-K couches the company’s oncological plans in language that is highly preliminary (Pg. 7):

We are in the early stages of planning to initiate our first human clinical oncology study in patients with unresectable in-transit melanoma. We continue working with our KOLs to finalize the study design in preparation for what will likely be an investigational device exemption filing with the FDA during the second half of 2018.

The company’s studies on dermatological/aesthetic treatment of benign skin lesions have produced more promising results, such as with its recent study on seborrheic keratosis lesions. However, the space has a very limited market that is expected to reach only $1.3 billion by 2026. Additionally, the niche is already crowded with alternatives such as a recently FDA-approved topical medication and other approaches such as cryoablation, curettage, electrocautery, and laser ablation.

We think the company is in a very difficult spot given the (i) questionable oncological data to date and (ii) the limited market size and existing competition in the dermatological/aesthetic arena.

While the company’s strategy remains uncertain, one thing seems almost definite: the company will need plenty of R&D investment to chase a potential multitude of specific indications.

The company had a cash burn of $3.9 million in the most recent quarter and $38.1 million in cash, equivalents, and investments as of quarter-end. Given the recent burn rate, the company would be able to keep the lights on for the foreseeable future but would need new capital to pursue clinical studies and commercialization of its device. As stated in our initial bullet points, the company left little doubt on this subject, stating quite candidly “we plan to raise additional capital in the future.” (2017 10-K Pg 53)

Newly Disclosed SEC Insider Trading Investigation Could Foreshadow a Death Blow

We think the above already puts the company on precarious ground, but a newly disclosed SEC investigation represents a major added uncertainty. Per the 10-K (Pg. 43):

We and certain of our directors have received subpoenas from the Securities and Exchange Commission requesting documents and other information in connection with an investigation into trading in our stock in advance of our September 2017 announcement of the stock purchase agreement executed between us and Robert Duggan. We are cooperating with the investigation. We cannot provide any assurance as to the outcome of the investigation or that such outcome will not have a material adverse effect on our reputation, business, prospects, results of operations, or financial condition.

We reviewed the trading action during that period and noticed clear oddities.

The company announced the withdrawal of its 510(k) application on September 11, 2017, which triggered a sharp and explainable selloff. Then, between September 14, 2017, to September 18, 2017, a large surge in price and volume took place on no discernible news.

Some of the purchases in that date range were from Robert Duggan himself, as was reported after the close on September 18th in an amended 13D filing which detailed his purchases from the 14th to 18th. Duggan represented only about 10% of the total volume on those two days, however (and less than 10% over the 3-day period.)

The volume on those days was aberrationally high, particularly on the 14th and 15th where volume was 9.3x and 3.8x higher than its 3-month averages. The implication therefore seems to be that others had also participated in the >50% price spike and did so in size.

Following this odd price action, weeks later, on October 2nd, the company changed its corporate bylaws to, among other things, amend the process for removing directors and also provide strong indemnification protection for any directors or former directors that may be subject to any civil, criminal, or administrative proceeding. Per the new amended bylaws:

…the Corporation shall indemnify, to the fullest extent permitted by [Nevada law], as now or hereinafter in effect, any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (a “Proceeding”)…

The new language also protects directors and officers in the case of a no contest plea “or its equivalent”, and other adverse outcomes:

The termination of any Proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that such person’s conduct was unlawful.

This seems to suggest that, for example, a potential settlement common to the SEC where directors “neither confirm nor deny” wrongdoing could be covered under the above language.

The language looks to be a significant departure from older indemnification language. A registration statement filed just months earlier in June was less forgiving:

…we shall not be required to indemnify any director or officer in connection with any proceeding, or part thereof, initiated by such person unless such indemnification: (a) is expressly required to be made by law, (b) the proceeding was authorized by our board of directors, (c) is provided by us, in our sole discretion, pursuant to the powers vested in us under Nevada law or (d) is required to be made pursuant to the bylaws.

The old language detailed protections offered to officers and directors but also carved out additional exceptions to liability protection, including (Part II-1):

(a) a willful failure to deal fairly with the company or its stockholders in connection with a matter in which the director has a material conflict of interest; (b) a violation of criminal law, unless the director had reasonable cause to believe that his or her conduct was lawful or no reasonable cause to believe that his or her conduct was unlawful; (c) a transaction from which the director derived an improper personal profit; and (d) willful misconduct.

In short, the new amendments to the corporate bylaws look designed to protect officers and directors in the event of the very type of proceeding that could result if the SEC investigation leads to an enforcement action. It could all be a coincidence, but given that the amendments were made right on the heels of the issue that triggered the investigation, we can’t help but find the timing to be prescient. In either case, the changes to look incredibly unfriendly to common shareholders should any director or officer be subject to an enforcement action going forward.

Given the revised language, a potential regulatory action could represent a major drain on shareholder capital (along with a host of other ramifications.)

Conclusion

We don’t think Pulse Biosciences is a complex story. It boils down to a technology that sounds interesting but doesn’t seem to work that well. It happens. The poor study results, the failure to secure a 510(k) clearance, and the need to pursue more expensive specific indications are all symptoms of that core issue.

We think investors in Pulse had been enamored by the support of a billionaire and have likely stopped paying attention to the failures of the company along the way since that point.

The SEC investigation and the events that both apparently triggered and followed the triggering events give us concerns about a potential looming regulatory liability. Given the new indemnification language, such a potential liability now seems more likely to be shouldered by shareholders rather than those responsible.

At this point, the stock doesn’t seem to reflect the weight of current realities, and we believe fair value to be closer to $4 per share in the absence of meaningful new positive clinical data. We wish the best of luck to all.

Disclosure: I am/we are short PLSE.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Use of Hindenburg Research’s research is at your own risk. In no event should Hindenburg Research or any affiliated party be liable for any direct or indirect trading losses caused by any information in this report. You further agree to do your own research and due diligence, consult your own financial, legal, and tax advisors before making any investment decision with respect to transacting in any securities covered herein. You should assume that as of the publication date of any short-biased report or letter, Hindenburg Research (possibly along with or through our members, partners, affiliates, employees, and/or consultants) along with our clients and/or investors has a short position in all stocks (and/or options of the stock) covered herein, and therefore stands to realize significant gains in the event that the price of any stock covered herein declines. Following publication of any report or letter, we intend to continue transacting in the securities covered herein, and we may be long, short, or neutral at any time hereafter regardless of our initial recommendation, conclusions, or opinions. This is not an offer to sell or a solicitation of an offer to buy any security, nor shall any security be offered or sold to any person, in any jurisdiction in which such offer would be unlawful under the securities laws of such jurisdiction. Hindenburg Research is not registered as an investment advisor in the United States or have similar registration in any other jurisdiction. To the best of our ability and belief, all information contained herein is accurate and reliable, and has been obtained from public sources we believe to be accurate and reliable, and who are not insiders or connected persons of the stock covered herein or who may otherwise owe any fiduciary duty or duty of confidentiality to the issuer. However, such information is presented “as is,” without warranty of any kind – whether express or implied. Hindenburg Research makes no representation, express or implied, as to the accuracy, timeliness, or completeness of any such information or with regard to the results to be obtained from its use. Note also that we are definitely not lawyers, so have tried our best with the reading of indemnification sections in order to try to highlight differences in language that we believe could be important. All expressions of opinion are subject to change without notice, and Hindenburg Research does not undertake to update or supplement this report or any of the information contained herein.