A tissue treatment device that can participate in the biotech-driven immuno-oncology fervor of the last few years may sound too good to be true. That's precisely the case being made by long-short hedge fund Kerrisdale Capital Management LLC, which has issued a report critical of the science behind early stage Pulse Biosciences Inc. and holds a short position betting against it.

During February and March, the Burlingame, Calif.-based company saw its valuation jump from less than $100 million to more than $450 million after high-profile investors Robert Duggan and Mahkam Zanganeh, respectively the former CEO and COO of Pharmacyclics Inc., invested $10 million giving them a combined 17.1 percent stake as the latter also joined the Pulse board. Abbvie Inc. spent $21 billion in 2015 to acquire the immuno-oncology player Pharmacyclics.

NPS PROMISE?

"We'd seen the stock rise a lot over the past year, and we decided to look closer to what seemed to be the rationale for the increased stock price," Kerrisdale Chief Investment Officer Sahm Adrangi told Medical Device Daily. "When we took a deeper look, we came away feeling there's not much scientific progress and just generally, with respect to the NPS mechanism."

He added, "A wealthy individual has purchased shares, and I think people were just following him into the stock. Someone's wealth doesn't have a lot to do necessarily with the merits of the science. We just didn't think there was anything fundamental there that justified a $400 million valuation."

Last month, Pulse submitted its Pulsetx System to the FDA for 510(k) clearance. It's based on nano-pulse stimulation (NPS) for soft tissue ablation; it applies nanosecond electrical pulses designed to affect cell membranes and intracellular structures. It is intended to cause cell death with a minimal inflammatory response, as well as to induce a secondary immunogenic response via these dead cells that will trigger an adaptive immune response to the tumor.

In a study published in March in the Journal for ImmunoTherapy of Cancer, Pulse found that NPS stimulated the production of three danger-associated molecular patterns (DAMPs) that attract immune cells to a tumor site.

"Nano-Pulse Stimulation treatment at specific energies was able to trigger the emission of three key DAMPs at levels comparable to doxorubicin and mitoxantrone, two known inducers of immunogenic cell death. Therefore NPS is a physical modality that can trigger immunogenic cell death in tumor cells," the researchers, led by Pulse CSO Richard Nuccitelli, concluded. He was previously a longtime professor of Molecular and Cellular Biology at the University of California at Davis.

VALIDATION AND CRITIQUE

Duggan and Zanganeh were effusive regarding the promise of Pulse in a joint statement made at the time their investment was announced, "Along with a team of qualified scientists, we have studied Pulse Biosciences' core technology, strength of leadership and management, patent portfolio, breadth of engineering and research talent, as well as our perceived long-term sense of the robust potential of NPS technology in health care."

Both of these investors are longtime med-tech industry associates of Pulse President and CEO Darrin Uecker, who worked with them at Computer Motion Inc., which was acquired by competitive robotic surgery company Intuitive Surgical Inc. in 2003 for about $68 million in stock, or almost one-third of the resulting company.

In its report, Kerrisdale makes the case that Pulse's NPS technology is nothing special, highlighting other similar ablation tools such as Angiodynamics' marketed Nanoknife. It argues that a number of nonsurgical ablation approaches can be used to induce immediate cell death – as well as to trigger an immunostimulatory reaction.

The report also highlights that the triggering of DAMPs in the recent study was at insufficient levels to induce anything other than a weak effect. In addition, Kerrisdale's Adrangi notes that surgery already is highly effective at treating skin cancer, which is being targeted as an initial indication.

"Pulse is a tiny company that has made virtually no progress toward commercializing a technology that barely seems to work in the first place – yet the market is pricing it as if it were already 13x more valuable than its closest peer," concluded the Kerrisdale report. "In the years to come, Pulse will need to repeatedly raise capital to cover its cash outflows as it attempts to inch closer to becoming a real business. But we believe this money will be wasted."

PATH FOR PULSE

Pulse was founded in 2014 out of the ashes of CSO Nuccitelli's prior effort Bioelectromed Corp. In May 2016, Pulse went public with a $20 million IPO on Nasdaq at $4 per share.

Investors initially drove Pulse's share price down by more than 20 percent to below $19 on the Kerrisdale report, but that reaction moderated by day's end to less than a 5 percent decline to about $22, leaving its share price still 5x the initial IPO price.

Kerridale routinely uses public reports on both long and short positions to help stimulate a market reaction in its favor. Reuters reported that the small firm had a tough year in 2016, pushing it down to $170 million under management by yearend from $350 million over that summer. The firm has targeted several life sciences companies with its short activity and corresponding reports including Sage Therapeutics Inc., Zafgen Inc. and Unilife Inc.

Pulse did not respond to requests for an interview for this article. It did, however, report first quarter earnings late last week. There, CEO Uecker said Pulse is awaiting the next communication from the FDA on its 510(k) submission.

The company, which had a net loss of $3.2 million during the first quarter and no revenue and had $18.9 million in cash as of March 31, plans to gain a broad clearance for soft tissue ablation and then to expand upon that, with dermatology up first. It expects to continue researching specific indications, rather than head directly into a commercial launch, should it win a clearance in soft tissue ablation.

Pulse plans to start a benign skin lesion removal study for Pulsetx this quarter and to complete it this year. In 2018, that data could be submitted to the FDA in support of the 510(k) submission.