Many investors spend a lot of time analyzing biotechnology stocks in the hopes that at least one of them will be able to produce a treatment/cure for a disease that ails many. Should the company succeed, investors will be rewarded, and more importantly, many people will have a better standard of life because of it. Many of these stocks will end up failing but occasionally a few will end up making it big. This article will analyze Cellceutix Corporation (CTIX.OB) and the reasons why it appears to be in good shape for the future.
Profile: Cellceutix is a clinical stage biotechnology company focused on discovering small molecule drugs for hard to treat diseases, including drug resistant cancers, psoriasis, autism, and inflammatory disease. The company's flagship product is Kevetrin, used in the treatment of advanced solid cancer tumors. The company also has an additional product, called Prurisol, used in the treatment of psoriasis. And lastly, the company has a third product called KM-391, used in the treatment of autism.
Technical: As the chart below indicates, Cellceutix stock has performed nicely over the past year.
The stock has rallied from a low $0.45 to a high of $2.47 during the past 52 weeks. During the past few months, the stock has been especially favorable for investors. As of Friday's trading session, the stock traded between $1.50 and $1.70 per share. It seems to have found a base of about $1.50 per share which presents an appealing entry point for new investors, right as the company is on the brink of major announcements regarding its progress with Kevetrin and Prurisol.
Fundamentals: Early stage biotechnology companies typically are not developed enough to begin applying fundamental analysis too. What is important though is to look at the company's progress as far as cash position and liabilities. Investors need to be sure that the company is managing its cash appropriately. If the cash isn't being burnt off too quick or being spent unwisely, the company will be forced to issue additional shares which will dilute existing investors and drive the share price lower to adjust the market capitalization.
Cellceutix filed its 10-Q for the period ended December 31, 2012 on February 13, 2013. The company reported that its cash position had increased to $222,862. This was an increase of almost $200,000 from the June 30 statement. Additionally, the company's accounts payable had only increased by 20,000 to roughly $1.98 million. Now a good question is how can the company pay its accounts payable with only $222,862 in the bank.
The company struck a deal with Aspire Capital to raise approximately $10 million through carefully timed equity offerings. Cellceutix has full control of when the shares are issued and they are retroactive. This means that Cellceutix, not Aspire Capital, gets to see where the share price finished before the shares are issued. Ideally this will allow the company to issue shares at favorable prices and reduce dilution for its existing investors. Deals like this are rarely struck for such an early stage, developmental biotechnology company.
Cellceutix currently has total liabilities of $8.2 million, as stated on its 10-Q filing. The $10 million that it was able to raise will help to pay down these debts and also allow the company to fund futures cohorts and trials. So financially speaking, the company appears to be on its way.
Additionally, the company's current market capitalization only sits at 153 million. Although the company is currently not generating any revenue, it does have 3 main compounds in development that have the potential to bring in billions of dollars of revenue each year.
Flagship Product Kevetrin: Kevetrin is a novel drug that has shown a great deal of promise in laboratory data as a potential cancer treatment. Trials have been in progress at Harvard University's Dana-Farber Cancer Institute and partner Beth Israel Deaconess Medical Center. The tests were designed to test Kevetrin against advanced solid tumors. The pre-clinical research showed that Kevetrin was effective against many different types of cancers, including lung, breast, colon, prostate, squamous cell carcinoma, leukemia, and brain tumors. The research indicated that tumor growth delay and tumor size reduction was shown.
Kevetrin works by targeting the p53 gene, known as the "guardian angel gene" because of its appearance in many different types of cancer. It is thought that if a treatment can target this specific gene, the treatment may prove effective against a multitude of cancer types. In fact, the p53 gene is found in more than 50% of human carcinomas. Because of its importance, several other companies have also tried to target the gene.
Risks: There are really 3 main risks to Cellceutix. First is the competition. There are 3 main competitors to Cellceutix and they are absolute giants in the world of biotechnology. The three companies are Merck & Co. (MRK), Pfizer (PFE), and Sanofi-Aventis (SNY). Merck and Sanofi are to soon begin FDA phase 1 trials for their compounds. The companies will closely inspect the safety profile to determine whether they should proceed further. There was an article in the NY Times which describes the competition and the p53 race. Unfortunately, the article leaves out the one company that has already begun phase I trials, Cellceutix. So although the 3 companies mentioned have unlimited resources and power in the biotechnology industry, Cellceutix is still in the p53 lead. If successful in Phase I, there is a great chance that one of these other larger companies makes a buyout offer for Cellceutix.
The second risk is that the company is still very early on in the process. The company has not even completed phase I trials yet, so at this point, anything can happen. Most biotechnology companies don't make it to the very end. The company hasn't demonstrated efficacy or safety at this point. The only reason why an investor would get in now is to potentially magnify their returns should the company perform well in the future. At today's prices, shares can be acquired much cheaper than they would as the company progresses in its development.
The third main risk is that company trades OTC. These companies don't face the stringent regulations that other listed companies face and as such, are more prone to fraud, manipulation, and dilution.
The fourth risk primarily is industry risk. Biotechnology companies are inherently very risky. Below are a couple examples of stocks that have been a disaster and also stocks that have soared.
Dendreon (DNDN) comes to mind as a biotechnology stock that didn't live up to expectations. On April 13, 2009, the company reported results from its IMPACT trial. Dendreon reported that its prostate cancer vaccine, Provenge, prolonged the overall survival of patients compared to a placebo. As the chart below shows, the shares soared more than 100% and the stock price ended up closing at $16.99 on April 14, 2009, compared to its close of $7.30 on April 13.
However, the chart also shows that the company was unable to maintain its share price after reporting positive results and receiving FDA approval. On August 3rd, 2011, the company reported earnings which were nothing short of a disaster. The stock closed August 3rd at $35.84 and tanked more than $24.00 per share on August 4th, eventually closing at a stomach turning $11.69 per share. It appears that expectations were too high and the company couldn't sustain them. Dendreon reported that its revenues missed the mark and that profitability would be years away. This is just one of the risks for biotechnology investors, even after receiving FDA approval. However, not all companies do poorly. Occasionally there is a diamond in the rough.
Keryx Biopharmaceuticals Inc. (KERX) is an example of a company that has so far managed to avoid the pitfalls that Dendreon fell victim to. The 6 month chart below shows that the stock had a huge pop in January 2013 causing investors to make a large gain in their portfolios.
Keryx popped roughly 40% on news that its treatment for kidney disease, Zerenex, produced positive results in a late-stage study. Keryx traded as high as $10.00 per share after the announcement. It has pulled back since then, as the company still faces a few questions such as FDA approval. However, the company has made it through the hard part and has made investors a lot of money in doing so. Keryx demonstrates that investors can do extremely well investing in biotechnology companies and hopefully Cellceutix will face a similar path.
Conclusion: There are a lot of reasons to believe in Cellceutix's future. First, the company sits in a strong financial position because of a recently inked deal that is very favorable for investors. Second, the company has three compounds that may generate revenues in the future including a potential cancer treatment for several different forms of cancer, a potential treatment for psoriasis, and a potential treatment for autism. Third, the company only has a market capitalization of roughly $153 million. This was recently as high as $240 million. The chart also shows that the stock seems to have found a nice base which presents a potential entry price for interested investors. Although the competition is stiff, the information for Cellceutix is compelling and should be considered.
Disclosure: I am long CTIX.OB.