The biotechnology industry is one of the favorite industries for investing in up and coming companies. A lot of them offer promise, but few end up making it to the finish line. In this article, I will discuss a biotechnology company that appears poised for big returns. Before we get to that, let's go over a few examples of how the biotechnology industry can provide big risk, but also big rewards.
Just recently, Celsion Corporation (CLSN) announced that its Phase III results for its main product used to treat primary liver cancer, ThermoDox, did not meet the primary endpoint. Before the announcement, the stock had been one of the biotech darlings of 2012. As the 1 year chart below shows, the stock had rallied several hundred percent over the year, making longs a lot of money.
It appeared that Celsion was poised for greatness based on the chart, the improving fundamentals, and the science. But it didn't work out. And unfortunately, that is a reality that most investors must understand. Most biotechnology companies will fail. So risk management is critical should an investor want to dabble in this space.
Celsion clearly demonstrates that companies can fail miserably. But what about success stories? Keryx Biopharmaceuticals Inc. (KERX) is an example of a shining success story. As the 6 month chart below shows, the stock made investors quite wealthy with its sudden pop in January.
On January 28, 2013, the stock popped roughly 40% on news that treatment for kidney disease, Zerenex, showed strong results in a late-stage study. Keryx actually ended up trading at $10.00 per share a few days after the announcement. It has pulled back since then since, as the company still faces a few hurdles such as FDA approval, which is never a sure thing, even with outstanding trial results. But nonetheless, the company has made it through the hard part and made investors a lot of money. Hopefully, the company below will have a similar path to Keryx, and not to Celsion.
Threshold Pharmaceuticals (THLD)
Profile: Threshold is a development stage company focused on the discovery and development of drugs for solid tumors and bone marrows of hematologic malignancies as novel treatments for patients living with cancer. Its main product, TH-302, used in the treatment of pancreatic cancer, has already successfully completed Phase II, and should announce Phase III trial results late this year.
Technical: As the 2 year chart below shows, Threshold has had an incredible run, which started in early 2012.
Before that, the stock had been trading between $1.00 and $2.80 a share for quite some time. The company started off 2012 with significant news that pushed it higher. The stock has since pulled back, but appears to have found a comfortable trading range between $4 and $5 per share. With plenty of news due this year, it appears to be a healthy entry point for investors.
Phase II Results: On February 21, 2012, Threshold announced positive Phase II clinical trial results for TH-302. TH-302 was well tolerated with a safety profile consistent with prior studies. The trial also demonstrated a 63% improvement in progression free survival. The response rate in the combination arms was 22% compared to 12% in the gemcitabine alone group. Results also demonstrated greater efficacy in the higher TH-302 dose group compared to the lower dose group.
Partnership: On February 3, 2012, Threshold announced a partnership deal with Merck KGaA to co-develop and commercialize TH-302. The agreement states that Threshold would receive $25 million as an upfront payment. Total milestones may total up to $525 million, comprised of $280 million in regulatory and development milestones and $245 million in sales-based milestones. As part of the deal, Merck will also pay 70% of the worldwide development costs for TH-302. This is absolutely huge news for investors, as it means dilution concerns going forward will be minimal.
Milestone Payment: On January 25, 2013, Threshold announced that it had received a milestone payment of $30 million for beginning the Phase III trial called MAESTRO, for TH-302.
Market Potential: Pancreatic cancer is a malignant neoplasm of the pancreas with current treatment options including surgery, radiotherapy and chemotherapy. It is estimated that approximately 279,000 cases of pancreatic cancer were diagnosed worldwide in 2008. Pancreatic cancer is the fourth most common cause of cancer death both in the United States and internationally. The American Cancer Society estimates that 44,030 people were diagnosed with pancreatic cancer in the United States in 2011, and approximately 37,660 people died from the disease. Currently, there are no effective treatments, which means that Threshold has a golden opportunity to be a market leader, and should have first mover advantages should it successfully complete its Phase III trials.
Competition: There are two main competitors to Threshold Pharmaceuticals for pancreatic cancer. The first company is Peregrine Pharmaceuticals (PPHM). It was thought to be a big threat until recently. The company announced that its Phase II results were not as impressive as it had hoped. In a study with just 70 patients, the combination of bavituximab and gemcitabine prolonged survival by just 12 days over gemcitabine alone.
The other main competitor, and the more real threat, is Celgene (CELG). Celgene had a recent Phase III study, which enrolled over 800 patients. Celgene's drug, Abraxane, when combined with gemcitabine, showed a median overall survival of 8.5 months. This is much better than 6.7 months for gemcitabine alone. The important thing to note is that Celgene's Abraxane extends life by 2 months, and Threshold's TH-302 was able to extend life by 2.2 months.
Financials: Financially speaking, Threshold continues to improve its financial condition, which is very impressive for a developmental biotechnology company. The company already received a $25 million milestone payment early last year, and just recently, received a $30 million milestone payment. The company is flush with cash, and as such, dilution concerns are minimal.
The company's last quarterly statement was filed on November 2, 2012. The numbers were impressive. As of September 30, 2012, the company's cash position stood at 8.6 million, up from 5.8 million at year-end 2011. Total assets had also increased by roughly $64 million. On the income side, the company generated $1.8 million for the quarter ended September 30, 2012, compared to $0 for the same period a year ago. And while the company was busy generating revenue, it was also making strides to reduce operating expenses. Operating expenses dropped by roughly $2 million from $7.8 million to $5.8 million.
The EPS for the company, while still a loss, was much improved. The company lost $.02 per share, compared to $.08 for the same period in 2011. A nice improvement for a company still trying to get its main product to market. What is a nice plus for the company is that it has zero long-term debt. So the company can focus on building the business and using cash to that end, rather than worrying about meeting interest payments on time.
Additionally, the company's current market capitalization stands at approximately $280 million. As shown earlier, the market for pancreatic cancer is immense. With 50,000 cases diagnosed in the U.S. alone each year, the company will have the ability to capture the entire market if it is shown to be a better option than Celgene's Abraxane.
Threshold is one of my favorite stocks for the future. It has basically hit the big three. First, it has successfully navigated through Phase II trials, which stop a lot of biotechnology companies dead in their tracks. Second, it has signed a partnership agreement with one of the largest European pharmaceutical companies. This will allow the company to proceed through trials without the worry of having to raise more money through additional stock offerings. Third, the company is in a space that has immense demand. Pancreatic cancer is the fourth most common cause of cancer death in the United States and internationally. So although the biotechnology industry is a volatile one, I believe this company has what it takes to make it to the finish line.
Disclosure: I am long THLD.
Additional disclosure: I own the Jan 2015 5 strike options. Options involve a great deal of risk and leverage, and as such, please consult your financial advisor to discuss risk and suitability for your portfolio.