Seeking Alpha
Long-term horizon, value, long/short equity, deep value
Profile| Send Message| ()  

Nuvilex (OTC:NVLX) is a company that I'd never heard of until about about a week ago when a client asked me to take a look.

At first glance, my reaction was something along the lines of "why should I be bothered with a $0.05/share microcap transformational/developmental stage biotechy company with downright scary financials and a strange history?" After doing a ton of reading and research, I'm starting to realize why I - and you - should care about this company, regardless of it being a volatile microcap OTC penny stock.

NVLX reminds me a bit of Dara (DARA) and other microcap bio stocks, insofar as it's essentially impossible to value with any degree of certainty. For that reason, I think it's more important to understand where the company is and where it's going, rather than attempt to quantify how much it's worth. (We could use several methods to attempt valuation, but we'd be throwing darts at a board, so why bother.)

You can read the firm's last 10-k to better understand the company on your own so I'm not going to rehash 50 pages here, for your sake and mine. I'd normally suggest going to the firm's website, but frankly, it's not very good so might as well go right to the source.

I'd like to begin by discussing the firm's offerings, of which there are a surprisingly diverse and large number for such a small company. I'm not so sure that's a positive, but I don't think it's a negative, either, so long as the relatively ancillary products/lines don't drain resources from what I think is the real future of the company. That said, not too dissimilar to Chromadex's (OTC:CDXC) BluScience line - albeit far more broad - Nuvilex has a Consumer Healthcare and Environmental Solutions Division with a variety of products including hangover "cures, " skin cream, surface cleaners, tattoo ink, and more. I'm not going to go into detail about these products because I don't think that's where the real value in the company lies, as natural supplements are pretty much a dime a dozen these days. These products may very well -- with the right mix of marketing, distribution and efficacy -- bring in some interim revenue, I think the real potential cash cow for Nuvilex is in the biotech/healthcare arena. The core driver(s) of future value are the trademarked Cell-in-a-Box (and similar Bac-in-a-Box) cell encapsulation technologies, for which the firm has established intellectual property rights. (Sidenote: one "competitor's" website even disclaims any responsibility for violation of others' IP rights and puts it solely in the customer's hands). Here's a simple example of one way the technology could be used to treat cancer:

A slightly more detailed explanation of the technology and its value proposition for not only cancer, but other conditions as well, can be found here. Another major use is for the treatment of diabetes, one of the fastest growing and most prevalent medical conditions today. The American Diabetes Association reported 25.8 million people (as of January, 2011), just in the U.S, have diabetes, with millions more being diagnosed each year. The ability to introduce insulin producing cells in diabetic patients could be a giant leap forward. Nuvilex has demonstrated - using their technology - that this is more than just a possible application, but a lucrative one, too. In terms of time to market, the technology has been through studies and phase I/II trials in Germany and has shown impressive results, although more and larger studies are still needed before commercialization/monetization. Those interested in more detailed information about the technology and its potential for use in cancer/tumor treatment/elimination should read this article from BioSpectrum Asia (pdf), written by the brains behind the tech. If you're not yet convinced why I think cell encapsulation is a big deal, consider some issues with current cell therapy approaches:

  • Cells do not always stay where they are injected or there is a limited time for their localised action before they wander off or are removed by micro-environmental influences
  • The cells may be rejected by the immune system
  • If the cells are not rejected by the immune system they can eventually trigger unwanted effects.
  • The cells themselves have the potential to turn tumourigenic

Cell-in-a-Box addresses these issues in several ways:

  • Due to the size of Cell-in-a-Box™ capsules, millions of cells can easily be fixed in one location, capsules can be infused, injected or implanted into almost any tissue, organ or location in the body
  • The Cell-in-a-Box™ capsule material is biologically inert, meaning that it doesn't cause any immune reaction or inflammation
  • The capsules protect the cells from the immune system; the pores are too small for an immune cell to get inside, and even too small to allow antibodies significant access
  • Once the cells have done their job the Cell-in-a-Box™ capsules can be removed (depending on implantation location) By being safely enclosed in the Cell-in-a-Box™ capsules they cannot potentially form tumors

Some people think NVLX makes for an obvious (and cheap) acquisition target/licensing partner by/with a larger biotech firm. I'm not going to speculate on that, although both are definite possibilities. More to the point, if you think, as I'm inclined to do, that stem cells and cell therapy are the next big things in medical technology and disease treatment, Nuvilex should get your juices flowing. That being said, as with every stock, there are several risk factors, and Nuvilex is certainly no exception.

Execution: If management fails to execute its strategy to monetize the firm's assets, none of the following will likely matter.

Competition: While Nuvilex appears to be on the cutting edge, cell encapsulation is not a brand new or unique idea, and as such, others may bring similar products to market faster than Nuvilex. The competition in natural products is incredible, so any success the firm gains with those products will be constrained accordingly.

Volatility: In the past year of trading, >10% on ~16% of days, >15% on 15% of days, and >20% on ~5% of days. If you're the type of investor who freaks out over intraday volatility, this might not be your cup of tea. The other side of the coin is that this is a longer-term play in my estimation. Sure, all that volatility could make it great for day trading, but at $0.05/share, good news over the next 6-18 months could see the stock rise 100, 200% or more, Don't put all your eggs in one basket. Practice prudent risk management and don't bet your entire retirement account on a relatively risky stock like this. Use protective orders to limit your downside risk and protect gains if you can. There is almost a 100% chance that you will be diluted as the company, barring earlier than expected asset monetization, will need to raise funds, most likely in the form of equity. The other side of this coin is that should the company succeed, returns on the stock should (key word) offset the dilution.

Solvency: Take a look at the firm's balance sheet. To say it's not exactly stellar is to put it very, very gently. Bankruptcy is possible if the firm can't start bringing in revenue and/or secure additional financing.

Liquidity: At/around the current price, a $10,000 investment will buy you around 200,000 shares, while the average daily 3-month volume is only around 700, 000 shares per day. Should you need/want to sell your stock, don't invest more than you can afford to lose, which is really a general rule for every investment regardless of asset class, market cap, etc.

Scientific/regulatory: Further trials could prove the technology less effective and/or riskier than previously thought. This would throw a major wrench in the company's gears, to put it mildly.

Penny stock manipulation: As with any penny stock, there's always the risk of "short & distort" or "pump & dump" schemes. Like I said though, if you can, avoid market orders at all costs, use stops/limits. Frankly, I wish the company would do a significant reverse stock split, 1 to get the stock above $0.50 if not closer to a buck, but there's some downside in doing that, a discussion for another time.

Ultimately, I think this company has more upside than down. Absolute worst case scenario, you invest some discretionary money and lose 100%, but if the company stays afloat and management delivers, you could make several times that ("could" being the key word.)

As always: CAVEAT EMPTOR

Source: Nuvilex: A Penny Stock That Could Be A Disease-Fighting Game Changer