Kerrisdale Capital short thesis on Pulse Biosciences Inc (PLSE) – high-voltage hype set to short-circuit.
We are short shares of Pulse Biosciences, a ~$400mm medical-device company with 13 employees, zero revenue, and one focus: developing and commercializing a technology it calls
“Nano-Pulse Stimulation” (NPS), in which cells are exposed to very strong electrical fields for very brief periods of time in hopes of killing them. Pulse claims that this method of killing cells constitutes a “novel therapeutic tissue treatment platform” with the potential not only to destroy tumors directly but also, in the words of the company’s chief scientific officer, to “essentially transform[ them] into vaccines to direct the immune system to destroy them.” On the basis of this high concept (as opposed to any significant commercial or technical progress), Pulse’s stock price has increased six-fold since its May 2016 IPO.
This run-up is senseless. Contrary to Pulse’s highly selective narrative, even if NPS one day performed as advertised, it would still have little value. For one thing, an existing ablation device called the NanoKnife, which has been on the market for a decade, also kills cells by exposing them to very strong electrical fields for very brief periods of time. While Pulse Biosciences insists that its technology, by using somewhat stronger fields for somewhat briefer periods, generates wildly different effects, the scientific literature argues otherwise: many allegedly unique benefits of
NPS, like the induction of apoptosis (a form of programmed cell “suicide”) and the stimulation of the immune system, apply not just to NanoKnife but to a wide range of other run-of-the-mill treatments. From a clinical perspective, Pulse’s NPS is nothing special, especially relative to
NanoKnife – which, in turn, is a perennial flop with less than $20 million in annual revenue.
Worse still, our review of published NPS results reveals that the technology doesn’t perform as advertised. To the contrary, it’s often appallingly ineffective. For instance, in the only formal NPS clinical trial published to date, Pulse Biosciences researchers treated three patients with skin cancer and – in an outcome far worse than standard surgery – left two with residual cancer and a third with discolored and anomalous-looking (but supposedly, for the time being, benign) lesions. Very recently, new research funded by Pulse itself concluded that “even after the most intense treatments” a sizable fraction of human cancer cells across a range of cancer types simply cannot be killed by NPS – an alarming phenomenon whose cause remains a complete mystery.
The unexpected discovery of this “residual resistivity” or “tolerance” – published online in December, headed for print in May, yet, to our knowledge, never mentioned by Pulse management – may by itself wipe out what little commercial value NPS might have had. What’s the point of a method for killing cancer that can’t kill cancer?
Pulse’s technology has barely made it off the drawing board, yet it’s already proven itself to be weak, unreliable, and undifferentiated. Investors with high expectations are in for a shock.
Investment Highlights
Pulse’s NPS technology is far less special than it claims. Pulse contends that “NPS will provide unique benefits to patients in a wide variety of medical applications,”1 asserting that, while other ablation modalities using extreme heat or cold to destroy tumors “generally lead[] to cellular necrosis” (uncontrolled cell death driven by physical injury), NPS “offers a non-thermal and non-ionizing ablative technology that can be selectively tuned to induce apoptosis,” or programmed cell death. “[T]his less destructive approach,” according to Pulse, “lends itself to a number of applications including tumors which would otherwise be inoperable because of proximity to critical structures” (emphasis added).2
However, irreversible electroporation (IRE) – a technology very similar to NPS and already commercialized for years under the brand name NanoKnife – has been pitched in almost exactly the same way, as this selection from a 2012 marketing presentation demonstrates:
Furthermore, while Pulse Biosciences uses limited evidence from animal models to suggest that NPS can prevent cancer recurrence, irreversible electroporation produced similar results four years ago, when a team of researchers found that, after using IRE to destroy tumors in mice and then injecting the mice with a second batch of cancer cells, “growth of the second tumors was…significantly reduced or prevented entirely” (1). Indeed, more broadly, what Pulse claims to be NPS’s most important benefit – its purported ability to cause cell death in a way that stimulates the immune system – is shared by a wide range of therapies, including cryoablation, photodynamic therapy, radiation therapy, focused ultrasound ablation, radiofrequency ablation, and more. If NPS can’t “provide unique benefits” like Pulse says, then it makes no sense for such an early-stage technology – years away from generating meaningful revenue, and supported by published data from only four human patients – to command such a high valuation.
Similar technologies have repeatedly fallen short of expectations. While Pulse’s marketing message closely resembles that of NanoKnife (manufactured by AngioDynamics, which acquired the technology in 2008 for just $25 million3), that should come as no comfort to Pulse Biosciences shareholders, since NanoKnife has proven to be a serial disappointment both clinically and commercially. For instance, in a surprising failure, a clinical trial testing the use of NanoKnife in lung cancer ended early when it became clear that the treatment failed to eradicate many tumors (2) – notwithstanding preclinical evidence, like Pulse’s, of positive immune effects. A decade after launching, NanoKnife still produces less than $20 million of annual revenue – a small part of a relatively small yet crowded market for nonsurgical tumor ablation.
Similarly, while some animal models have suggested that radiofrequency ablation stimulates significant immune benefits, a randomized controlled trial in humans with liver cancer proved that the therapy delivered results that were significantly worse than those of conventional surgical resection (3). Another technology, high-intensity focused ultrasound (HIFU), has likewise shown signs of enhancing immune responses to cancer, yet its results in humans were so weak that it struggled to achieve FDA approval, and the technology’s leading manufacturer, a
French company called EDAP, earns almost zero profit from it. In general, tantalizing hints that new ablation modalities might confer meaningful anti-cancer immunity have failed to translate into real-world success, an outcome that we fully expect to repeat for Pulse. There’s no room in the marketplace for a NanoKnife “me too” when the original NanoKnife has failed to gain much traction. Even if Pulse’s technology did what it was supposed to do, it would have no realistic value proposition.
Pulse’s data indicate that NPS is impotent and unreliable. In the only formal study of NPS in humans yet completed and published, Pulse researchers treated ten small tumors caused by basal-cell carcinoma (a type of skin cancer) across three patients. While Pulse has spun this study as an early win, three out of the ten tumors remained cancerous 15 weeks after treatment; by contrast, the most effective treatment for this cancer, a technique called Mohs surgery, almost always succeeds, with recurrence very rare even five years later. Not only did NPS fail to eliminate 30% of the tumors; it failed on two out of three patients. The third, while judged cancer-free on the basis of histological data, was likely unhappy with the “improvement” of her two lesions, which in our view look even more troubling after treatment (last row of photos) than before treatment (first row of photos):
For one of the other two patients, not only did NPS fail to rid him of cancer; it also appeared to give rise to two instances of seborrheic keratosis, a benign skin growth that looks like skin cancer – an unpleasant result not just for the patient but for Pulse Biosciences, which hopes to one day treat this condition4 yet may somehow cause it.
These startlingly bad results are consistent with a longer track record of weak and inconsistent NPS data. The latest and perhaps the most worrisome example is a study paid for by Pulse itself that shows for the first time that, across a variety of healthy and cancerous human cell lines, sizable (10%+) fractions of cell populations exposed to NPS boast “an unusual level of…tolerance” and simply don’t die, no matter how many times they’re zapped (5). Disturbingly, while the authors of the study tried to take the sting out of this discovery by blaming it on some artifact of the experimental methodology, they concluded that the phenomenon of NPS resistance or tolerance is quite real – yet its cause remains a mystery.
When NPS failed to completely kill tumors or prevent their recurrence in previous studies, as it often did, researchers could always fall back on the excuse that they just hadn’t used enough pulses. The new study, however, exposes that excuse as hollow and underscores just how poorly the effects of NPS are still understood. Since cancer is, by definition, a disease of aberrant growth, and other existing ablation modalities can in fact reliably kill cells, a treatment like Pulse’s NPS that unaccountably only kills some parts of tumors some of the time is worthless.
If Pulse’s technology were as good as it claimed to be, it would still falter in a market already full of technologies with similar stories. But with so much evidence quickly stacking up against NPS, we believe it’s dead on arrival.
Company Overview
Though technically founded in May 2014, Pulse Biosciences grew out of an entity formed in 2000 (initially called RPN Enterprises and later renamed BioElectroMed) created by Richard Nuccitelli, a former UC Davis professor and now chief scientific officer of Pulse Biosciences who retired from academia to pursue his fortune. In the early 2000s, Nuccitelli grew excited about early animal studies showing that strong but brief electrical pulses (on the order of 100 nanoseconds in duration) could eliminate tumors. While research findings in this area, many of them co-authored by Nuccitelli and funded by government grants, trickled in over the years, the field remained obscure, with only a handful of groups involved and no apparent outside commercial interest. By 2008, Nuccitelli’s BioElectroMed entity seemed to be more focused on an unrelated technology called the Dermacorder, designed to assess wound healing and even diagnose cancer by measuring electric fields; an old version of BioElectroMed’s web site boasts that the device was “featured on Star Trek Tech [on the] History Channel.”
But the Dermacorder apparently amounted to little, and by 2013 BioElectroMed returned its focus to what it then called “Nanosecond Pulse Ablation.” A “Partnering” page on its site noted, “We seek corporate partners…To inquire about partnering opportunities, please contact us.” But no partners emerged. Ultimately the small investment bank MDB Capital – a firm with a checkered past that includes packaging and taking public many companies that proved disastrous for long-term shareholders – helped BioElectroMed roll up a number of patents related to nanosecond pulsed electric fields, some of which were previously held by a handful of universities, including Old Dominion and Eastern Virginia Medical School. A November 2014 private placement infused the new roll-up entity with $8 million in cash and valued it at $20 million in total, or $2.67 per share (88% lower than the current price). Finally, what was now called Pulse went public in May 2016 at a price of $4 per share.
Little happened in Pulse Biosciences ’s first several months as a public company, and its stock price ranged between $4 and $6. On February 10, however, Pulse issued a press release announcing that Robert Duggan, a serial entrepreneur who became a billionaire after selling the drug company Pharmacyclics to AbbVie, and Maky Zanganeh, a former dentist and Duggan’s COO at Pharmacyclics, bought significant stakes in the company, including purchasing $5 million of newly issued shares directly from the company at a price of $6.10. Investors, acting as if this shift in ownership somehow altered the value of Pulse’s underlying technology, drove the stock dramatically higher from there. Indeed, the price has become so frothy that Pulse recently announced that MDB Capital had waived lock-up provisions a month early for pre-IPO holders of 28% of the company’s shares; apparently these holders were so eager to sell at current prices that they didn’t want to risk waiting even one more month, despite the ugly optics.
While the past successes of Pulse’s new minority shareholders deserve respect, they can’t change what the technology is or how well it works. To be sure, NPS is still very early in its development, having been used on only a handful of human patients to date, but, with no meaningful edge over alternative ablation modalities and an accumulating body of evidence highlighting its weakness and inconsistency, Pulse Biosciences cannot, in our view, justify anything close to its current valuation – no matter who owns its shares.
Pulse Biosciences’ Technology Is Nothing Special
Out of context, Pulse’s story sounds good. The first page of the company’s IPO prospectus sets out the official line:
For the treatment of cancer, we believe that we can trigger a signaling cascade within the tumor cells that ends in immunogenic apoptosis. Immunogenic apoptosis is a process in which cells are induced to die in a natural way, initiating their own programmed cell death, engaging the immune system to clear damaged, diseased, or aged cells and enrolling cytotoxic T cells to recognize and eliminate cells of the same tumor type. We believe we are the only medical device company with the intellectual property, technology, and know-how to be able to produce this natural cell death using NPES5 to initiate cell signaling that induces the targeted adaptive immune response.6
Not only can Pulse’s device kill cells, the story goes; it can also kill them in a unique way that recruits the patient’s own immune system to join the fight.
But is Pulse truly “the only medical device company” with these abilities? Pulse is at pains to distinguish its “nanosecond” pulses (which, in clinical applications, have actually been ~100-nanosecond pulses) using electric field strengths of tens of thousands of volts per centimeter from the characteristics of another technology, irreversible electroporation (IRE), which uses pulses ~100x longer at electric field strengths ~10x weaker. According to Pulse, irreversible
electroporation – marketed by the publicly traded medical-device company AngioDynamics under the name NanoKnife – “cause[s] cell membranes to irreversibly permeabilize, resulting in necrosis (death) of the tumor cells,” while Pulse’s technology, by contrast, “transiently permeabilizes internal organelles which can lead to a signaling cascade ending in immunogenic apoptosis rather than necrosis.”7
The scientific literature, however, paints a different picture: irreversible electroporation is generally regarded as causing apoptosis. Consider the following passage from a study of IRE in human prostate cancer (emphasis added) (6):
Unlike other [focal therapy] modalities, [IRE] relies on a non-thermal mechanism to induce cell death. IRE uses needle electrodes placed in or around a targeted volume of tissue to deliver a series of brief direct-current electrical pulses with the intention of inducing a permanently porous cell membrane. This disrupts cellular homoeostasis resulting in apoptosis.
This summary is not meant to be controversial; rather, it merely states the consensus. Another recent IRE study used similar language (7):
Unlike RFA [radiofrequency ablation] and MWA [microwave ablation], IRE induces apoptotic cell death in the (relative) absence of thermal damage. … IRE thus offers the advantage of preserving underlying structural integrity and architecture due to the absence of necrotic cell death…
Moreover, while Pulse harps on NPS’s ability to induce apoptosis, this emphasis is overblown.
What exactly NPS does to cells remains murky. As one 2014 paper explained (emphasis added) (8):
With the complexity of the cellular response to nsPEF [nanosecond pulsed electric fields], the mechanisms and specific pathways leading to cell death have only been partially understood. The early studies focused on the apoptotic response and only recently early necrosis was reported by several groups as a separate or even a predominant mode of nsPEF-induced cell death.
In short, AngioDynamics’ NanoKnife IRE technology causes apoptosis, not just necrosis, while Pulse Biosciences’s NPS technology causes necrosis, not just apoptosis. To depict itself as unique, Pulse has no choice but to gloss over the deep similarities between IRE and NPS, but these efforts are misleading. However interesting the different effects engendered by variations in pulse duration and field strength may be from a scientific perspective, their practical impact on cancer cells appears to be small.
Indeed, more broadly, there is nothing unusual about non-surgical ablation modalities or other cancer treatments causing cell death by apoptosis. As one 2016 review put it, “Induction of apoptotic programmed cell death is one of the underlying principles of most current cancer therapies,” including radiation and chemotherapy (emphasis added) (9). While cells directly exposed to intense heat may die in an uncontrolled, necrotic manner, that’s not the whole story.
In the words of another recent review (emphasis added) (10):
Heat-ablated lesions can be thought of as having three zones: the central zone, which is immediately beyond the application tip and which undergoes ablation-induced coagulative necrosis; a peripheral or transitional zone of sublethal hyperthermia, which mostly occurs from thermal conduction of the central area that is either undergoing apoptosis or recovering from reversible injury; and the surrounding tissue that is unaffected by ablation.
As the same review also points out, a similar pattern results from cryoablation, which kills cells via intense cold:
Direct cold-induced coagulative necrosis occurs at the centre of cryoablative lesions, whereas apoptosis has been observed at their periphery.
Thus, what Pulse Biosciences cites as a key point of differentiation – NPS’s ability to induce apoptosis – is anything but different. A company with an undistinguished hypothetical product that has barely taken the first steps toward commercialization in a crowded market doesn’t deserve a $400-million valuation.
Many Other Cancer Treatments Stimulate the Immune System
Ironically, Pulse Biosciences’s rhetorical focus on apoptosis runs counter to its other focus: the potential immunological benefits of NPS. In general, apoptosis is thought to stimulate immune responses far less than necrosis – or even to suppress immune responses. A 2009 review of immune responses to cryoablation summarized the traditional view (11):
Necrosis occurs with mechanical tissue damage, such as cryoablation, and is characterized by cellular breakdown and release of intracellular contents. Many of these intracellular contents can be immunostimulatory. … Apoptosis, or programmed cell death, results in several steps that allow the uptake of cellular debris by both macrophages and dendritic cells, but without causing inflammation and thus stimulat[ing] an immune response. Apoptotic cells do not release their contents…as do necrotic cells.
In fact, several studies have shown that apoptosis not only does not stimulate immune recognition, but quite the opposite.
To be fair, over time, further research has demonstrated that in some cases apoptosis can give rise to so-called immunogenic cell death (ICD). However, it would be bizarre to suggest that
Pulse Biosciences’s NPS has a monopoly on stimulating the immune system. To the contrary, decades of research show that a wide range of ablation modalities and other treatments can lead to ICD. This is not some special new power that makes Pulse’s technology superior to the status quo; it’s already widespread.
A recent review by researchers from University College London entitled “Harnessing the Immunomodulatory Effect of Thermal and Non-Thermal Ablative Therapies for Cancer Treatment” gives a sense of how many such therapies appear to enhance immune responses:
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