August 23, 2011
Entest to use veterinary practices as revenue driver, research venue
Concerns about setup point to potential conflicts of interest
By: David DeKok
For The VIN News Service
A small biotechnology firm headquartered near San Diego plans to acquire 10 veterinary practices to generate research revenue as well as patients for clinical trials testing a canine cancer drug in its pipeline.
This novel approach to drug research comes from Entest BioMedical, a start-up that's created ImenVax, an immuno-therapeutic cancer treatment for canines that's in testing and development phases. According to the company's website, the treatment consists of a vaccine composed of tumor samples, which are then encapsulated and implanted back into the tumor with the intent of inducing an immune response to kill it.
Right now, Pfizer's Palladia is the only drug approved by federal regulators to treat canine cancer, specifically mast cell tumors.
If Entest has its way, that soon won't be the case. Entest scientists are conducting target safety studies on two dogs, both suffering from oral melanoma, and hope to expand that number to 10 by year’s end. The U.S. Food and Drug Administration (FDA) has several requirements for drug approvals, such as field trials, toxicity studies, research and experimental trials, dose refinement studies and efficacy studies.
However, because Entest is developing a vaccine, its regulation falls under the Center for Veterinary Biologics within the United States Department of Agriculture's Animal and Plant Health Inspection Service (USDA APHIS). The FDA could get involved, especially if the treatment becomes available beyond Entest-owned clinics.
With either agency, vetting a drug's safety and efficacy for regulators can be an onerous expense. According to the Animal Health Institute, costs tied to bringing a veterinary drug or biologic through regulatory approval processes can reach upwards of $50 million.
To ease that burden, Entest is taking a unique route to testing the efficacy of ImenVax. Within the practices Entest buys, the company plans to use ImenVax to treat and assess the medical outcomes of canine cancer patients.
David Koos, Entest chairman and CEO, believes that a loophole exists within USDA's Code of Federal Regulations that will allow ImenVax, if proven effective, to be used in the animal hospitals acquired by the company but not sold market-wide. Koos explained if a veterinary biologic is manufactured by veterinarians and intended solely for use with their clients' animals via a veterinary-client-patient relationship (VCPR), it can be administered conditionally, without the USDA's formal go-ahead.
The USDA APHIS confirmed with the VIN News Service that the regulatory exemption Koos refers to exists and covers tumor-derived vaccines. The code "provides an exemption for products produced under a VCPR to become licensed. It doesn't exempt them from compliance with the regulations," spokeswoman Lyndsay Cole said. "It's a subtle difference, but a fairly significant one."
Entest is not the first company to administer an unlicensed veterinary biologic to its own patients under a VCPR, Koos said. He added: "Of course, Entest eventually plans to market ImenVax outside the veterinary exemption, and to do so would require us to obtain a U.S. Veterinary Biologics Product License and U.S. Veterinary Biologic Establishment License. Entest plans to obtain these required licenses and has no intention of marketing or administering ImenVax in any unlawful manner."
He noted that so far, there's been no notable adverse effects tied to the implantation device or the treatment. "We have not detailed the efficacy of the treatment itself because what we’ve got now is anecdotal evidence. ...If you have two dogs and you want to extrapolate to the entire canine population, that’s a difficult thing to do,” Koos said.
But some practitioners expressing their views on the Veterinary Information Network (VIN), an online community for the profession, question whether Entest's avenue for attaining more test cases crosses ethical boundaries. The company's plan involves clients paying for its research, a setup that could breed bias. "In human medicine self-referral (referring your patient to another facility in which you also have a financial stake) is considered a serious conflict of interest and is actionable by medical boards. This sounds a lot like that to me," wrote Dr. Cynthia Harre, of Camp Springs, Md., in a VIN discussion.
Last December, Entest acquired McDonald Animal Hospital in Santa Barbara, Calif., and the company has letters of intent out to three other practices. These deals typically involve Entest purchasing a practice and paying the former owner to remain on staff. In return, Entest reaps the practice's profits and facilitates the use of ImenVax.
Koos acknowledged that the second and third generations of ImenVax likely will require formal FDA approval. And if Entest seeks to gain approval for use of ImenVax on human cancer patients, as Koos hopes will happen, research and development costs for the company will skyrocket.
“Our approach has always been to focus on the veterinary market first, and then at some point, to joint-venture with a large pharma company that would have the wherewithal to absorb the financial burden of going to the human market,” he said. “I think we would probably either license the technology or joint-venture it with another entity.”
Entest's hospital acquisitions are paid for mostly with the company's stock, which recently traded at 39 cents a share, down more than 88 percent from its February high. The stock trades on the OTCQB Market Tier, which is home to almost 4,000 small and emerging companies that are current in their reporting obligations to the U.S. Securities and Exchange Commission (SEC). Practice owners who sell to Entest buy into the company’s market success or failure in a big way.
That’s how Koos wants it. The veterinarians he buys practices from are expected to stay on for a period of time to manage the medical side of the business. Koos said in a news release a year ago that he wants to ensure that their interests are “aligned with those of our shareholders.” To the VIN News Service, he admitted that this type of relationship isn’t for every veterinarian.
“The reason you come to Entest is because you want to build something, you want to be a part of something,” Koos said.
Dr. Gregory McDonald is all in. Last December, he became the first and only veterinarian, so far, to complete the sale of his hospital to Entest. In exchange, Entest agreed to pay McDonald $70,000 in cash and $210,000 in Entest stock, which appears to be about 100,000 shares based on its price at the time of the sale. Entest also agreed to pay the hospital's debts totaling about $100,000. Another $50,000 in cash was paid to McDonald after three months, and another $70,000 in stock goes to the veterinarian after one year, provided hospital revenues exceed $700,000.
Still on staff, McDonald speaks highly of Entest and describes Koos, his new boss, as "an interesting guy."
“It came along at a great time for me,” McDonald said of the Entest deal. “I just turned 66, and he hired another vet to work here and opened the practice up seven days a week. So I’m working less hours but the practice is busier.”
He added: “They’re new at running hospitals, but I’ve been an integral part in teaching them how to do it. It’s been good for us and kind of a fun thing to be involved in. I’m on their board for their vaccine that they’re developing for cancer, so it’s kind of fun.”
McDonald has assisted Koos in finding and evaluating other veterinary practices to purchase. Entest has issued letters of intent to buy three practices in Orange County, Calif., and Titterington Veterinary Services in Eugene, Ore. On Aug. 8, Entest announced it also seeks to purchase Rainbow Veterinary Hospital in Los Angeles. None of those other deals is finalized.
Koos said Entest is working diligently to meet a Sept. 1 deadline for acquiring the clinic in Eugene, owned by Dr. Ron Titterington and his wife, Dr. Kathy Snell. Titterington told the VIN News Service that he was concerned that the deadline might not be met, even though he has submitted all requested paperwork. They are supposed to receive $700,000, but it is not clear from the disclosure form filed by the company with the SEC whether it is all cash or all stock. The deposit by Entest was 700,000 shares of its stock at a time — July 19 — when the price of the stock was about a dollar per share. The stock closed Tuesday at 44 cents per share.
“We’re watching and waiting and seeing how it plays out,” Titterington said. “The deal seems intriguing, but we’re cautious, as anyone would be.”
When it comes to consumer demand for canine cancer treatments, Dr. Greg Ogilvie, a veterinary oncologist based in Carlsbad, Calif., acknowledges that there are no definitive, contemporary studies in print defining the prevalence of canine cancer. At the same time, "almost every major pharmaceutical company has decided that the size of the market warrants the investment of millions of dollars. The company you mention (Entest) is one of dozens trying to make it in the field," he said.
Behind Entest's scientific endeavors is Steven Josephs, a molecular virologist who once worked at the National Cancer Institute in the laboratory of famed AIDS researcher Robert Gallo, MD. Josephs came to Entest in 2009. Dr. Brenda Phillips, a boarded veterinary oncologist at Veterinary Specialty Hospital in San Diego, is another lead Entest researcher.
The company has limped along on stock sales, loans from Koos and a little bit of venture capital. It had about $55,000 in cash on hand as of May 31, according to its most recent quarterly disclosure form. On Aug. 8, Tammy L. Reynolds, Entest’s chief financial officer, resigned for what Koos said were personal reasons. Reynolds could not be reached for comment.
There is a “Going Concern” warning in the company’s 10Q, in which auditors state that there is reason to believe Entest will not financially survive. Koos explained that the warning is routine for developmental-stage companies like Entest and only can be removed when the company reaches a certain level of net income.
Then there is the matter of Koos’ salary. He originally took a $300,000 salary as chairman and CEO, high for a start-up. He insists he has actually taken no more than $1,500 a month from the company, which he used to pay for his insurance.
“I’m not lining my pockets with cash,” Koos said. “I guess my justification for the salary originally was I was not getting paid to do what I do, so I may as well be accumulating IOUs that could be exchanged at some point in the future for stock. It was pointed out to me by several people that maybe that wasn’t the most publicly desirable thing to do, either. So I said, look, I'm sacrificing to make this company work, and if that means I take a pay cut, I take a pay cut.”
On April 1, Koos did just that by agreeing to reduce his annual salary to $120,000, of which half was payable in restricted stock, according to the company's most recent quarterly disclosure statement to the SEC. He also canceled $259,058 in back salary the company owed him.
Koos blames the volatility of Entest stock on its low float, meaning the number of shares available for trading on a given day. That number is a little more than four million shares.
“There is a volatility factor in our stock,” he said. “If a person is uncomfortable with that they shouldn’t be a shareholder. ...I think as we get through our ten-dog safety study and we have our data, I think you’ll see that adds a certain level of stability.”
Jennifer Fiala contributed to this report.
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