Pennyland Biopharma Stocks: Value Or Value-Traps?

Includes: ADXS, INO, OCAT
by: EnhydrisPECorp

I am a classic value investor vis-à-vis Benjamin Graham, Warren Buffett, and Charlie Munger. Like these intelligent investors, I do not attempt to time the market, trade stocks daily, or play momentum due to catalysts. My only strategy to beat Mr. Market is to find companies that are solidly undervalued at current prices, and will eventually appreciate with the passage of time. As such, the biggest nemesis to my investing strategy is falling into so-called "value-traps", i.e., stocks that look cheap because the stock has been trading at low price to earnings ratios, cash flow or book value.

And some of the most alluring value traps oft-fall under the category of penny stocks, especially in the biotechnology sector. Biotechnology penny stocks frequently have compelling stories of multi-billion dollar market valuations pending FDA approval of their therapies, but generally have current market caps of less than $200M. In the past, I have occasionally bought penny biotech stocks, and have fared well-enough given their inherent risks and unpredictability. In this article, I lay out the current list of penny biotechs that are on my watch list for 2013 and beyond. Furthermore, I outline why or why not the company is a buy for me in the near future.

Advanced Cell Technology (ACTC.OB) is a microcap, regenerative medicine company headquartered in Marlborough, Massachusetts. The company is presently in the midst of three Phase I clinical trials for dry age-related macular degeneration (dry AMD) and Stargardt's Disease (SMD) using human embryonic stem cell (hESC)-derived retinal pigment epithelial cells (RPE's), and has treated a total of 13 patients since the onset of the trials in July 2011. According to comments made by the CEO Gary Rabin on the November 10th, 2012 conference call, preliminary data from the trials are showing an excellent safety profile for the RPE's, and there is compelling evidence of efficacy (improved visual acuity), despite the low doses used thus far on patients with extremely limited visual acuity. The company is therefore looking to accelerate patient enrollment, and engaging the FDA about altering the Phase II component of the trials to include patients with less advanced stages of Macular Degeneration. Advanced Cell Technology also recently received a major infusion of non-dilutive capital from Lincoln Park Capital to the tune of $35M, which should enable the company to meet its financial needs through the cessation of the ongoing clinical trials.

Yet, the company's stock is trading at near all year lows of approximately 7 cents per share, and well off its highs of 27 cents a share immediately following the FDA approval of the trials. With a potential market value of over $30 B for AMD alone, this stock looks like the steal of the century. So the pertinent question is, why is the market valuing the company at only 157M?

The answer is that the company has a poor track record of destroying shareholder value through toxic, dilutive financing, multiple lawsuits by warrant holders, promises to shareholders going unfulfilled by the current and former CEO, and ill-timed insider sales that have blunted any movement to the upside. All of these factors have acted to create the value-trap that is ACTC. Even so, I would caution investors from completely writing off this company altogether. Gary Rabin, in his latest comments on the conference call, owned up to these missteps by the company, and vowed to create, instead of destroy, value for shareholders in the coming year. For value investors looking for bargains, I would suggest to look for the following events prior to investing in ACTC: 1) Final resolution of outstanding lawsuits, 2) Final resolution of the SEC investigation; 3) Hiring of a full-time CFO; and 4) Reverse split and subsequent up-listing to the NASDAQ. All or none of these events may occur in 2013, given the history of ACTC. However, I would caution potential investors to wait until all of these events have occurred prior to taking the plunge--then, and only then, would the company prove that it has the best interests of its shareholders at heart.

Advaxis (NASDAQ:ADXS) Advaxis is a biotechnology company developing cancer immunotherapies using live, attenuated Listeria monocytogenes bacteria. The bio-engineered bacteria secrete an antigen/adjuvant fusion protein that causes a powerful innate immune response to the bacteria, thus allowing the immune system to overcome the tumor suppressor cells (Tregs) that essentially 'cloak' the tumor. The biological function of this novel approach is twofold: firstly, the attenuated bacteria increase the number of killer T cells, and secondly, decrease the number of tumor immune suppressing Treg cells. Phase II clinical trial data for the company's lead construct ADXS HPV (ADXS11-001) for the treatment of cervical cancer has thus far been impressive. The preliminary data from an ongoing randomized 110 patient Phase II trial of ADXS-HPV being conducted in India in women with recurrent/refractory cervical cancer who have failed previous cytotoxic therapy has demonstrated a clear safety profile, and potentially game-changing efficacy for the treatment of cervical cancer. In terms of efficacy, the key takeaway from the data thus far is that the 12-month survival rate for patients treated with ADXS-HPV has increased by 11% (33% overall) compared to the historical benchmark of 0-22% for other treatments. The company has stated that they expect this 12-month survival rate to increase over time because of better patient selection in the latter cohorts of the study. Simply put, immunotherapies such as ADXS-HPV take time to ramp up the immune system, and are therefore most effective in patients with less advanced forms of a disease. The truly exciting part of this novel therapy is that six patients in the India trial showed a complete response (i.e., 100% tumor regression), and another six partial responses in this particular trial. The company also has four additional clinical trials being conducted on ADXS-HPV, as well as clinical trials on other constructs including osteosarcoma in dogs.

ADXS common shares, however, have not shared in the promise of the company's cancer immunotherapy constructs. ADXS common shares have dropped 80% in value since the first of the year, mostly on financing concerns. The company is burning approximately $800k per month, and was essentially bankrupt at the start of last month, causing a precipitous decline in price per share. Based on this rate of cash burn, I estimated the company needed approximately $10M in financing to meet its stated goals of completing the Phase II trials in mid-2013, and subsequently licensing out the ADXS-HPV construct to a partner for the Phase III trials. On October 31st, 2012, Advaxis indeed announced a new round of financing of exactly $10M from Magna Group LLC, plus an additional $1.4M from a combination of sources. While the new round of financing is far from optimal for current shareholders, it does provide the company with the crucial capital to keep the company afloat until the completion of its Phase II clinical trial in India. Nevertheless, the stock is now trading at all-time lows of 3 cents per share, and has been losing value at record pace since the financing announcement.

Up until now, I believe ADXS has been a classic value-trap. The company's story was quite compelling to bargain hunters that believed the CEO Thomas Moore would be able to secure a source of non-dilutive financing. Now that it's become clear that a partner won't be forthcoming until the end of the Phase II trials at the earliest, retail investors have hit the panic button, and sold off in stunning fashion. My argument here is that the stock has finally become what previous investors always thought it would be, i.e., a value stock. Mr. Moore has been forthright with investors, and has not given pie in the sky projections like many penny biopharma CEOs do in order to keep the common stock afloat. The news Mr. Moore has chosen to share with investors has been grounded in solid scientific progress, and I believe he is working diligently to license out ADXS-HPV upon completion of the Phase II trial in India. He has done what he has said, and hasn't promised more than he can deliver. I appreciate that kind of honesty under what can only be seen as a difficult economic situation. As such, I believe ADXS is a strong buy at these deflated levels, although retail investors may choose to push this stock into true pennyland (i.e., 1 cent per share). Thus, I suggest that investors should keep a close watch out on ADXS in the coming weeks to see if the stock finally finds a decent level of support in order to initiate a position. The main takeaway from ADXS is this: the science is unprecedented and is being validated by multiple clinical trials. The price per share will therefore appreciate substantially once the fog of uncertainly has dissipated. ADXS, to my mind, is an excellent value stock.

Inovio Pharmaceuticals, Inc. (NYSEMKT:INO) is a microcap biotech company based in Pennsylvania, and is the offshoot of Penn Professor David Weiner's career in DNA based vaccines. The company is headed by influential entrepreneur Dr. Joseph Kim, who also has an educational background in biochemical engineering. According to the company's marketing materials for investors, the company engages in "targeting unmet needs with multi-billion dollar potential such as cancers, universal flu, HIV, hepatitis B/C virus", and they currently have "multiple ongoing clinical trials in phase II and phase I".

The company's primary pitch to potential investors revolves around their Optimized Electroporation Delivery systems, and their patent protected SynCon® vaccines. The definition given on the company's website for their synthetic vaccines is the following : "SynCon® vaccines use a DNA fragment with instructions that enable cells in the body to produce ONLY the targeted antigen relating to a pathogen or cancer. The fragment cannot replicate and is not able to cause the disease."

Using their patented electroporation delivery systems, Inovio is generating a broad array of DNA vaccines aimed at preventing and treating cancer, HIV, hepatitis C, among other infectious diseases. Specifically, Inovio has nine vaccines currently in clinical studies, most of which are funded by third parties. One of the most promising therapies under development is Inovio's synthetic hepatitis B (HBV) vaccine. The animal data on mice recently showed that the vaccine generated a strong T cell response, whereby eliminating the targeted liver cells. Another exciting recent development in Inovio's platform was the announcement of positive results from a Phase I clinical trial of its VGX-3100 vaccine. VGX-3100 acts to trigger an immune response against antigens present in human papillomavirus (HPV)-affected cells that have mutated into precancerous cervical dysplasia. Although the trial only enrolled 18-patients, every patient in the trial responded to the vaccine by exhibiting an antigen-specific antibody response. Taken together, these two recent trial results on different diseases give broad validation for the company's vaccine portfolio. The primary risk facing this company is unexpected dilutive financing, and a negative trial result. At this point in time, I believe these risks are minimal, but investors should keep a close eye on INO.

Even so, the stock has traded down approximately 7% year to date, although it has had a strong run off of its summer lows of 40 cents a share. Moreover, the stock took a beating last Friday with a plunge of over 11%, which left investors wondering if bad news had leaked, or dilution was afoot. Based on the company's validated portfolio and limited clinical trial expenses, I look for the stock to begin to a form a base here in the 50 cent area, and move much higher in the coming months. To my mind, the recent dip in represents an excellent entry point for a long-term position. With all of the positive news coming out of Inovio, it is entirely plausible that INO doubles or even triples by this time next year.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in INO over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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