The biotechnology industry is one of the hardest spaces to consistently identify stocks that will outperform. Many stocks seem to offer all the potential in the world, but very few seem to be able to capitalize on that promise. The hope is that the two stocks discussed in this article, Threshold Pharmaceuticals (THLD) and ImmunoCellular Therapeutics (IMUC), will be able to steer clear of the pitfalls that plague so many other small cap biotech companies like Celsion Corporation (CLSN). I chose these two stocks because of the following reasons:
- Each stock saw gains of at least 50% during 2012, giving them trading momentum
- Each stock is focused on a drug/therapy for cancer
- Each stock has average daily trading volume of at least 500,000 shares, providing ample liquidity for investors
- Each stock has upcoming catalysts during the next 12-18 months
The Celsion Disaster
Over the course of 2012, Celsion Corporation was one of the hottest names in the biotechnology industry. As the chart below shows, the stock moved from just under $2.00 to as high as $9.44.
It seemed as if everything was clicking for the company. The company announced a deal with a prominent Chinese pharmaceutical firm just ahead of its Phase III trial results in January. Many investors thought this meant the trial results would be positive. Unfortunately, on January 31, 2013, Celsion broke the hearts of investors all over the world when it announced that its treatment, ThermoDox, did not meet the primary endpoint for treating patients with primary liver cancer. As the chart above shows, the stock collapsed, and now currently trades just over $1.00 per share.
Superstar #1 - Threshold Pharmaceuticals
Company Background: Threshold Pharmaceuticals is a biotechnology company focused on the discovery of drugs targeting the micro environment of solid tumors and the bone marrows of hematologic malignancies (blood cancers) as treatments for patients living with cancer. The company is especially focused on targeting tumor hypoxia. Hypoxia is present in most solid tumor cancers, and represents a lack of oxygen.
Flagship Product: The company's future will depend on its most important current drug, TH-302. This drug is being tested in multiple studies for the treatment of pancreatic cancer, soft tissue sarcoma, and other solid tumors. The drug hopes to eliminate tumors while minimizing the toxicity to healthy tissues and organs.
Current Trials: TH-302 is currently being evaluated in clinical studies involving different tumor types (solid and hematologic) as well as in combination with marketed anti-cancer therapies, including chemotherapy and antiangiogenic therapies. The following clinical trials are currently recruiting patients:
TH-CR 406 is a Phase 3 randomized clinical trial of TH-392 in combination with doxorubicin compared with doxorubicin alone in patients with metastatic or locally advanced unresectable or metastatic soft tissue sarcoma. The primary efficacy endpoint is overall survival.
MAESTRO is a Phase 3 randomized, double-blind, placebo-controlled trial of gemcitabine in combination with TH-302 compared with gemcitabine in combination with placebo in patients with locally advanced unresectable or metastatic pancreatic adenocarcinoma. The primary efficacy endpoint is overall survival.
TH-CR 407 is a Phase 1 single-center, open-label clinical trial of TH-302 in patients with advanced leukemia.
TH-CR 408 is a Phase 1/2 open-label clinical trial evaluating the safety, tolerability and preliminary efficacy of TH-302 in combination with dexamethasone with or without bortezomib in patients with relapsed/refractory multiple myeloma.
TH-CR 410 is a Phase 1 dose-escalation clinical trial evaluating the safety of TH-302 in combination with sunitinib in patients with advanced renal cell carcinoma (RCC), gastrointestinal stromal tumors (GIST), and pancreatic neuroendocrine tumors (PNET).
Clearly, Threshold has a large and wide variety of trials that it is currently conducting. Therefore, Threshold would be an option for investors looking for more than a 1-trick pony.
Future Catalysts: According to the timeline chart below, investors can expect updates on TH-CR 406 and MAESTRO between 2013 and 2014. Investors can also expect updates on the Phase I trials for Leukemia and Multiple Myeloma later this year. Should they prove successful, the stock will see a significant rise in price simply for its potential.
Market Size: Estimates indicate that almost 280,000 cases of pancreatic cancer are diagnosed every year. It is currently the fourth most common cause of cancer globally. Since there are no current treatments for pancreatic cancer, the potential market size is immense for Threshold. Should the MAESTRO trial be a success, the sky is the limit for this company.
Fundamentals: It is also important to look at the current financial state of the company. Although the drug results are always more important than the current numbers, investors need to know whether the company has enough assets to continue paying its bills and progressing its trials forward.
The company filed its last quarterly statement on November 2, 2012. It appears that the company is making good progress in meeting its goals and moving forward. The company's total cash stood at $8.6 million, up from the 2011 year-end position of $5.8 million. On the income statement, the company was able to bring in roughly $1.8 million for the quarter ended September 30, 2012. For the same period in 2011, the company generated no revenue. Additionally, while generating revenue for the first time during the quarter, the company reduced its operating expenses to $5.8 million, a decrease of approximately $2 million from the same period in 2011.
Another positive for the company's financial position is its deal with Merck KGaA. The deal was to co-develop and market TH-302. The terms of the agreement state that Threshold would receive an upfront payment of $25 million, and total milestones may be $525 million. $280 million of that would be in regulatory and development milestones, and $245 million would be sales-based milestones. The deal also states that Merck will pay 70% of the worldwide costs for TH-302. This deal is absolutely huge, as it almost completely eliminates the risk of dilution, and provides the company with ample cash to complete all of its trials and eventually reach profitability.
Competition: There are three main competitors for Threshold: Ziopharm Oncology (ZIOP), Celgene (CELG), and Peregrine Pharmaceuticals (PPHM). Ziopharm Oncology will be releasing its Phase III results for its drug Palifofsamide towards the end of March. Its potential is to be used to treat soft-tissue sarcoma. Ziopharm currently trades for a market cap of $370 million. Because of the low market cap and the high potential for the drug, common wisdom would indicate that failure is more likely than success. Additionally, the Feuerstein-Ratain Rule also states that failure for Ziopharm is more than likely. University of Chicago oncologist and professor Dr. Mark Ratain and Adam Feuerstein examined 59 Phase III clinical trials of cancer drugs going back 10 years. They found that companies with micro-cap market valuations (companies with a market cap less than $300 million had a 0% success rate of producing positive Phase III results. In contrast, almost 80% of companies with market values greater than $1 billion achieved Phase III success. Companies between $300 million and $1 billion had a 17% success rate, and Ziopharm currently falls in this category.
The two other competitors will be competing in the pancreatic cancer space. Until recently, Peregrine Pharmaceuticals was considered a big threat to Threshold's TH-302. However, just recently, Peregrine announced that its Phase II results were not as impressive as it had hoped. The study, which combined bavituximab and gemcitabine, had just 70 patients. The combination was only able to prolong life by 12 days over gemcitabine alone. Not impressive, and not good enough to advance to a Phase III trial. Still, the company may try to redo the study, which would potentially give it some life down the road. This remains to be seen.
The other competitor is biotechnology giant Celgene. Celgene's drug is called Abraxane, and it is used to treat pancreatic cancer. Just recently, Celgene completed its Phase III trial, which had more than 800 patients. The results indicated that when combined with gemcitabine, the median overall survival was 8.5 months. That is obviously much better than the 6.7 months of survival that gemcitabine provides by itself.
Risks: My main worry for Threshold is the intensity of the competition. There are several companies vying to become the first to offer the primary treatment for pancreatic cancer, as the potential rewards are quite appetizing. Additionally, another risk is potential failures of the Phase III trials for either soft tissue sarcoma or pancreatic cancer. This would set the company back, and potentially force it to do an equity offering.
Conclusion: Threshold could prove to be one of the best-performing biotechnology stocks in 2013 and beyond. It has immense promise with its deep pipeline of trials, and I think the company will prove that its technology can be applied to a lot of other cancer types as well.
Superstar #2 - ImmunoCellular Therapeutics
Company Background: ImmunoCellular is a development-stage company seeking to develop and commercialize new therapeutics to fight cancer using the immune system. The product candidate portfolio includes cellular immunotherapies targeting cancer and cancer stem cell antigens, peptide based immunotherapies targeting cancer stem cells, and monoclonal antibodies to diagnose and treat cancers.
Flagship Product: The company's flagship product is ICT-107, a personalized, dendritic cell-based vaccine for the treatment of GBM. This product is currently in a Phase II study. The results of the Phase I study for ICT-107 showed prolonged survival with minimal side effects.
Current Trials: The company has several ongoing trials at the moment. ICT-121 is a dendritic cell vaccine that targets CD-133, which is a protein that is highly expressed on multiple tumor types. The company has also filed an IND for ICT-140, which is a dendritic cell vaccine that targets ovarian cancer antigens and CSCs.
Future Catalysts: The company plans to conduct a Phase IIa trial for ICT-140 in the second half of 2013. Additionally, and most importantly, the company expects to update investors on its ICT-107 Phase II trial by the end of 2013. This will be game-changing news for investors.
Technicals: As the 2 year chart below indicates, the stock has had some incredible volatility during the past 2 years.
During 2012, IMUC traded as low as $1.51 and as high as $4.00. It closed today at $2.80, which is right in between that volatile range. The good news on the technical side is that the stock does seem to be breaking out to new levels here at the beginning of 2013, and is doing on so on rather high volume. The stock increased today by over 6% on almost twice the average daily volume. It appears investors may be catching wind of the potential here.
Fundamentals: It is also important to look at the current financial state of the company. Although the drug results are always more important than the current numbers, investors need to know whether the company has enough assets to continue paying its bills and progressing its trials forward.
ImmunoCellular has an incredibly strong financial condition for a company so early on in the process. The company filed its financial results for the year and quarter ended December 31, 2012 this afternoon after the close. For the quarter ended December 31, 2012, the company reported net income of $484,000, compared to a net loss of $1,499,000 for the same period a year ago. Additionally, the company reports that it has $26.2 million in cash as of the end of 2012. Although the company did issue equity financing during the year, it nevertheless remains sufficiently funded to complete its trials in the future.
Additionally, the company has very little debt (both long- and short-term). The last thing investors want to worry about is having to make interest payments each quarter. Instead, the company can focus on what it should be focused on, completing its trials successfully. Another positive is that the company has a rather low burn rate of just $4.8 million per year.
Competition: The biggest competitor for ImmunoCellular is Northwest Biotherapeutics (NWBO). Financially speaking, ImmunoCellular is in a much better position. Northwest has almost no cash on hand, total liabilities of almost $53 million, and an accumulated deficit of roughly $300 million. On top of that, the company has a much smaller market cap of $46 million compared to IMUC's market cap of $134 million. I have trouble believing that a company with a market cap less than its debt has a strong future.
Risks: The biggest risk here is, of course, bad data for ICT-107. Although it may seem unlikely, stranger things have happened in the biotechnology industry. If the company were to release bad data for ICT-107's Phase II trial, the stock would likely drop below $1.00, and the company would need to do an equity offering to stay in business. This would dilute the investors and potentially cause the stock price to fall even further. Another risk would be if NWBO is somehow able to get itself in a better financial position and release positive data before ImmunoCellular.
Conclusion: ImmunoCellular appears to be on the right path for biotechnology greatness. It sits in a strong position financially, has a low burn rate, and is expecting results for its flagship product by the end of the year. With a market cap of only $134 million, I would expect the stock to appreciate rapidly once investors realize the potential here.
Disclosure: I am long THLD.
