Celsion: Bullish Sentiment Ahead Of Phase III

Jan. 2.13 | About: Celsion Corporation (CLSN)

Celsion (NASDAQ:CLSN) has been volatile over recent weeks as bulls and bears play tug of war ahead of the Phase III Heat Study, a multinational, double-blind, placebo-controlled study of ThermoDox in combination with Radiofrequency Ablation (RFA) for the treatment of primary liver cancer. The study is designed to evaluate the efficacy of ThermoDox in combination with Radiofrequency Ablation when compared to patients who receive RFA alone as the control.

Furthermore, the technology underlying Celsion's ThermoDox treatment is best elucidated on their company website as follows: "Lysolipid Thermally Sensitive Liposomes, or LTSL's, are a unique liposomal technology that allows for the triggered release of a drug payload through low temperature (just above body temperature) heat activation. Used in combination with heat therapy, this concentrates therapy directly within the treatment area". With the ability of Celsion's technology to efficiently release the drug in targeted areas, minimizing negative side effects and potentially becoming a cure for advanced liver cancer, my view on bullish market sentiment should come to you as no surprise. The results from this phase of clinical testing are so pivotal that CLSN will likely soar or plummet on positive or negative results, respectively.

There's much speculation regarding CLSN's future as evidenced by the volatile swings in price and volume of the recent weeks. There are many articles on CLSN detailing the Phase III testing methodology, the scientific intricacies underlying the technology, among other important fundamental characteristics being weighed by market participants on both the long and short side of this "bet". As an advocate of the efficient market hypothesis, I believe the important and transparent factors have been priced into CLSN's share price; these are the very factors creating my bias that the cards are stacked in the favor of bulls. I've detailed the fundamental factors driving the bullish sentiment supported by market sentiment and technical analysis indicators below, concluding the article with a balanced and realistic view of the headwinds that create risk via uncertainty over the short term.

Underlying Catalysts Driving Bullish Sentiment

There's a reason market participants buy at the ask and sell at the bid - capitulating to market maker spreads, only to drive the price in the demanded direction. Like chaos theory, there are many market-moving catalysts rapidly discounted and factored into the price creating increasing, decreasing or sideways price action. Since May of 2012 CLSN has broken out of a long range-bound trading pattern, rising from $1.63 to a high of $8.86. A few important factors are the very fabric of recent bullish sentiment: Potential competitive edge, insider purchases, and partnership/acquisition prospects.

CLSN has the ability to change the landscape of oncology treatment delivery; specifically, treating breast cancer and advanced liver cancer. The patent on Celsion's Thermodox technology will secure their competitive edge and open doors for future company spin-offs and ventures once the drug is successful in passing regulatory hurdles. Moreover, the CEO stated "it's certainly a $1 billion dollar drug", referring to the expected annual revenue possibilities. When considering the P/E ratio of 16.30 in the medical equipment industry and Celsion's current market capitalization, even the most conservative projection of future revenues reveal this company to be extremely undervalued. Investors understand its potential, but also realize that the Phase III results are a "make it or break it" situation that could send this stock plummeting, skipping stop-loss fills and deteriorating the market values of investors' accounts. I'm confident that the majority of market participants consider the marginal benefit vs. marginal cost of this "bet" to be well worth the risk as I will support with a few sentiment and technical indicators later in the article.

Insiders have done their cost/benefit analysis and have been purchasing shares very actively over the past few months. Buying by insiders should never be taken lightly as they are normally privileged to more information than the public and are usually bound by 6-month lock-up periods and other SEC selling rules. Therefore, the fact that insiders are buying into the trend only adds more clout to my current and future bullish sentiment opinion. The recent insider buying details along with share and market value totals are detailed below.

Date

Name

Shares

Value

12/18/2012

Gregory L. Weaver MBA, CPA Chief Financial Officer & Senior Vice President

8,636

23,921

12/10/2012

Max E. Link, PhD Director

14,000

106,400

12/7/2012

Michael H. Tardugno President & Chief Executive Officer

17,271

47,840

12/5/2012

Alberto R. Martínez, MD Director

34,583

112,394

11/15/2012

Robert W. Hooper Director

11,600

60,320

10/15/2012

Alberto R. Martínez, MD Director

2,500

5,900

10/15/2012

Alberto R. Martínez, MD Director

34,542

95,681

9/20/2012

Max E. Link, PhD Director

18,735

79,061

9/20/2012

Max E. Link, PhD Director

34,542

95,681

9/20/2012

Max E. Link, PhD Director

17,083

55,519

9/20/2012

Max E. Link, PhD Director

35,000

95,200

9/14/2012

Michael H. Tardugno President & Chief Executive Officer

1,900

9,576

9/14/2012

Michael H. Tardugno President & Chief Executive Officer

3,100

15,593

9/14/2012

Jeffrey Wayne Church, CPA

2,000

9,860

9/10/2012

Robert W. Hooper Director

3,491

17,280

9/10/2012

Robert W. Hooper Director

1,549

7,698

9/10/2012

Robert W. Hooper Director

3,800

18,848

9/10/2012

Robert W. Hooper Director

100

494

9/10/2012

Robert W. Hooper Director

1,060

5,215

8/29/2012

Robert W. Hooper Director

2,500

11,625

Totals:

247,992

$ 874,106.00

Click to enlarge

Pfizer (NYSE:PFE) is early in the stages of creating a similar drug and as rumors suggest, is eying Celsion as a prospect for a partnership and eventually a future acquisition. A joint venture was actually signed with Pfizer on February 2012, so an indication of interest and relationships has been established. I know the first thought that comes to mind is possible share devaluation due to competition with Pfizer, an industry behemoth. This is a rational economic consideration, but within the short-term scope of bullish sentiment considered here, I doubt any significant competition will come from Pfizer as they are in the early stages and Celsion's Phase III results are just around the corner. Therefore, it may be better for Pfizer to partner with Celsion and 'piggyback' off their approval and eventually acquire the firm before their valuations increase. With that said, a partnership with or an acquisition by Pfizer would most likely occur after Phase III results come through and success is realized. Both a merger and acquisition would be bullish for CLSN, at least over the short run.

Market Sentiment - Open Interest on Options and Technical Indicators

Fundamental factors are great for defining the underlying strength or weakness of a company and the directional bias of a trend, but when it comes to entry and exit timing everything takes the back seat to technical analysis and sentiment indicators. Recently, CLSN options became available and a great tool for gauging the aggregate attitude of market participants is the change in open interest and volume figures of call and put options on the underlying stock. Since the scope of my analysis is over the short to intermediate-term, I focus on the January 19th and February 16th 2013 option expirations. As a quick refresher, options are contracts attached with the right but not the obligation to buy or sell 100 shares of the underlying stock at the issued strike price. For example, taking a long call position on CLSN with a strike price of 9 and expiration of January 19th 2013 (American Options), has the right but not the obligation to call 100 shares of the underlying stock away from the option writer (short party to the transaction) at the strike price any time before expiration. If expiration occurs and the underlying stock is below the call option strike price, then the option will expire worthless and the purchaser will be out the premium amount paid. The inverse is true for taking long positions in put options - the purchaser of these options pays a premium that allows them the right but not the obligation to "put" 100 shares of the underlying stock back to the writer of the option at the strike price any time before expiration. If the value is below the strike price before expiration, then the put option is in the money and the long party makes a gross profit.

As depicted below, both the January and February option contracts have volume and open interest. On the left hand side, Open interest corresponds to the call options at a given strike price. On the right side of the grid, open interest corresponds to put option contracts. After taking the net amount of open call and open put option interest at every strike price level and within each expiration month, you can see that the net amount increases from 9,854 to 16,871. This means that not only are there 9,854 open January call option contracts for every one put option contract, but the trend continues and increases into the February expiration - an increase of about 71%. This indicates that there are progressively more call option contracts being executed than put options, a bullish sign even if options are being used to hedge positions. Another interesting observation is the open interest of February calls at a $10 strike price; the amount of contracts is substantially higher than any other strike price level. This indicates the demand for contracts at this level and is actually the better bet for going long a call on CLSN.

Taking a long position in January 2013 calls would be too risky as this is the very month that the Phase III results are released and the risk of options expiring worthless due to regulatory delays is much greater than the reward in my opinion. Even though the premiums will be higher for February call options, it's worth the extra month to allow the market time to adjust and recalibrate to the results and any other developments. Furthermore, a $10 strike price is more optimal than say a $9 strike price as the further out of the money will offset a higher premium paid for a later expiration month. Since the Phase III results are truly a make it or break it situation, soaring above $10 dollars by February is not out of the question.

JAN 19 '13

CALLS

PUTS

Open Interest

Volume

Strike Price

Volume

Open Interest

Net Open

1,113.00

67.00

5.50

21.00

1,269.00

(156.00)

2,338.00

100.00

6.00

96.00

1,745.00

593.00

5,332.00

20.00

7.00

15.00

462.00

4,870.00

1,523.00

57.00

8.00

15.00

381.00

1,142.00

1,115.00

92.00

9.00

3.00

85.00

1,030.00

2,544.00

90.00

10.00

-

467.00

2,077.00

308.00

16.00

11.00

-

10.00

298.00

9,854.00

FEB 16 '13

CALLS

PUTS

Open Interest

Volume

Strike Price

Volume

Open Interest

Net Open

184.00

-

5.50

-

181.00

3.00

888.00

63.00

6.00

225.00

2,527.00

(1,639.00)

4,436.00

-

7.00

16.00

800.00

3,636.00

3,314.00

637.00

8.00

5.00

1,896.00

1,418.00

1,015.00

167.00

9.00

-

55.00

960.00

11,402.00

186.00

10.00

58.00

232.00

11,170.00

1,333.00

83.00

11.00

10.00

10.00

1,323.00

16,871.00

Click to enlarge

*Independent research tools available at http://www.etrade.com (account required to generate data a/o 12/25/12)

The candlestick chart below helps to zoom in on the real-time market action and paints a picture of the psychological and economic forces at play. The sideways action that we are currently experiencing as portrayed in the daily chart below is due to the uncertainty and temporary equilibrium that buyers and sellers are in. Market participants have been waiting for the Phase III results that are due in January and much of the positioning ahead of this announcement has been entered into by long and short traders. Visually, this indifference ahead of Phase III results can be seen on the upper right hand "triangle" pattern. As the resistance and support levels of the triangle converge, the last two candlesticks to develop are what technical analyst refers to as Spinning Tops. The short length of these candles indicates and the open and close of that day was very close together - in other words, low volatility. Times of contracting price usually happen during low volume periods, as can be seen on the lower bar chart. Low volume reflects the market's steady-state as most news, up to now, has been ascertained and participants are waiting for results.

Prior to the lower volatility and indifference, the stock price had a dip, which I'm confident, was and still is a great buying or dollar cost averaging opportunity. From a technical analysis point of view, this dip was revealed many days before by a pattern on the chart known as technical divergence. Mapping the line connecting the tops of the volume candles from late November to Mid-December with the line directly above connecting the lows of the candlesticks reveals that volume began to decrease as price made higher highs - This simply means that price was losing momentum as buyers cashed out their positions. I'm confident the catalyst for this dip was is the anticipated increase in capital gains taxes, a component of the looming fiscal cliff set to take effect on the first of January. Long parties are up quite a bit and many desired to cash in on these profits at a lower tax rate.

Click to enlarge

Some considerations

Negative EPS and the large amount of short positions on CLSN have been the focus of motivated bears and many unsure bulls. Negative EPS on a medical company relying on Research & Development outflows to secure patents and pass regulatory hurdles is common; even more so with a company such as CLSN that has dipped much less into dilutive capital raising methods, with the exception of minimal equity financing initiatives.

With regards to the high amount of short positions on CLSN, I'm confident this will work in the bulls' favor after Phase III results are made public. Shorts are already experiencing drastic draw-downs as CLSN posts a YTD return of over 300%. Therefore, if investors are assumed to be rational then the majority of these short positions has corresponding stop-losses above their short entry price.These are called "covers" once executed and are effectively buy transactions. Once CLSN breaks out and above the tight range it's currently in and more confidence and directional bias enters the market, the short position stop-losses will be executed and only add bullish fuel to CLSN.

Business relationship disclosure: CenturyFX Group is a team of market analysts. This article was co-written by Armando Izaguirre & Michael Gentilella, managing partners at CenturyFX. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.