With watershed clinical feedback due imminently for Celsion (CLSN), investors and analysts are understandably trying to read whatever tea leaves they can to gauge if the stock is about to double or halve in price. While there may be degrees of positive or negative feedback from the FDA or its European equivalent (EMA) in the coming days or weeks, odds are the stock is about to take off or tank.
That's pretty nerve wracking if you've been in shares of Celsion as long as we have, and have a hefty gain to show for it. Which is why we have taken at least half our position off the table in our InsiderInsights Newsletter, and the real-life accounts we manage.
We're not high-risk investors. Like most people investing for retirement or college tuition, we want a dependable return with reasonable risk. But that doesn't mean we have to eschew development-stage biotechs for us and our clients.
Both our back testing and experience have shown that buying beaten-down biotechs with significantly (stress on significantly) bullish insider profiles generates profits much more often than not. And the profit that generally does accrue is more than the losses that cost us when we're wrong with the strategy. More winners than losers, and winners that go up more than losers go down. That's what investing is all about as far as we're concerned.
Sure the risk/reward profile of a dev-stage biotech is degrees higher than, say, our stable dividend plays with low-risk/moderate-return characteristics. But we believe there is a place for dev-stage biotechs in a well-balanced portfolio even for relatively conservative investors. The trick to having biotech investments and sleeping well at night, however, is to play the odds when you enter a position, and not to get too greedy with the exit.
That last part can become difficult when things have gone so well with a biotech position, as they have for CLSN. But reasonable investors-as opposed to gamblers-should fight the urge to let such big winners "ride" into an event that could lose so much money for you so quickly, after earning it with one's good research and patience.
We also don't automatically buy into the simple concept that selling just half a winning biotech into its seminal event is ok because "I'm just playing with the profits anyway". The 200% or so we've garnered in CLSN at this point is all ours. There is no house money to "play" with. Just how much of the profits one wishes to keep at risk may reasonable differ between people. But the bottom line is that, for most normal investors, all-in until the end is usually all-wrong when playing biotechs. At the very least, prudent portfolio management considerations need to be accounted for when determining the size of the position one keeps when entering this very high-risk phase of a biotech investment.
To review, Celsion has developed Thermodox treatment therapy, which uses heat-sensitive nano-particles to precisely place cancer-treatment drugs within tumors. The company has secured patents in the U.S and Japan, and Thermodox has undergone Phase III trials for the treatment of hepatocellular carcinoma (HCC), aka primary liver cancer.
Although Thermodox is also in earlier clinical testing phases for the treatment of breast cancer and colorectal cancer, the "HEAT" trial for liver cancer is the main driver of CLSN's price right now. HEAT is a multinational, double-blind, placebo controlled, pivotal study of Thermodox in combination with radio frequency ablation for HCC. That study has been completed, and the all-important feedback from the FDA and EMA (the European Medicines Agency) is expected any day now.
We wrote previously on Celsion last May (Insiders Persistent at Celsion), but had already been in the stock for over 6 months. Even then, however, our exit strategy was to cull any profits we may garner before the actual HEAT results were released. For while the odds are very high that a biotech stock (especially one with a significantly bullish insider profile) will trade strongly into such an event, what the event actually delivers is so much less certain as to often be a crap shoot. For every three or four Threshold Pharmaceuticals (THLD), Exelixis (EXEL), and Sequenom (SQNM) home runs we've had with our insider biotech strategy over the years, there is inevitably a BioSante (BPAX) to remind one that nothing is a certainty when if comes to clinical results.
To be clear, we still believe that the odds are favorable that Celsion's HEAT study will generate results that allow the company to market product somewhere in the world that will justify further gains for its shares. We further believe the upside potential of CLSN that will result from good news regarding HEAT is much greater than the downside to this stock if regulatory bodies don't give a clear thumbs up to Thermodox for this indication. It remains perfectly reasonable for even conservative investors to keep some acceptable exposure to CLSN.
If there is a clear positive result for the HEAT study, CLSN will be an investment with legs for anyone who can stand the upside volatility that will ensue. We are obviously hoping that will be the outcome. Also important to our calculus for staying exposed, however, is that all may not be lost if HEAT results are not deemed significantly positive in the first feedback given. Recall that both the FDA and EMA have a say in this trial, and China-where a bulk of liver cancer sufferers are-could conceivably approve the treatment based on a lower bar than the FDA or EMA. And HEAT not being considered a success may not derail Thermodox' trials for other cancers.
These mitigating factors will not stop CLSN from tanking by 50-80% in seconds if the first feedback on HEAT is negative, but they do suggest that such a plunge may open up a very short-term trading opportunity depending on how bad any feedback is.
But while the excitement is hardly over for Celsion's stock, our overexposure to it is, as our insider/biotech investing system dictates. And if it turns out that it is all good for Celsion, we will not eat our hearts out thinking of the even larger gains we could have had if we didn't take any profits. For anyone who continually disregards the risk of biotechs entering a clinical event and always lets their full winnings ride, will eventually be the poorer for it.
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Additional disclosure: Clients of Insider Asset Management are also long CLSN, and SQNM.