With so many biotechnology stocks offering the world to investors, it can be extremely difficult at times to pick a stock that legitimately can advance science and consequently, earn an attractive return for early stage investors. I believe that Cellceutix (OTCQB:CTIX) is one stock that offers incredibly potential in the form of a 200% return over the next 12 months.
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 compound is Kevetrin. Kevetrin is a drug that has shown extremely encouraging signs in laboratory testing as a way to treat advanced solid tumors. The pre-clinical research also indicated that it was effective against many forms of cancer including lung, breast, colon, prostate, squamous cell carcinoma, a leukemia tumor model and brain tumors. All of the research showed tumor growth delay and tumor size reduction.
Kevetrin is currently in Phase 1 testing at Harvard Cancer Center's Dana-Farber Cancer Institute, one of the world's leading research centers. The trial has 3 primary objectives:
- To determine the maximum tolerated dose of Kevetrin
- To determine the dose limiting toxicities of Kevetrin
- To establish a safe dose level of Kevetrin that can be used for future studies
Cellceutix has indicated in previous press releases that they expected to release the results of the initial testing between March and April of this year. However, due to their clinical protocol, which only accepts Phase IV, terminal cancer patients with metastasized tumors that have become resistant to all other treatments, the trial has progressed a little more slowly than first expected. Some investors have expressed concerns with the delays and it remains to be seen if the company will meet their deadline.
It's important to understand the science behind Kevetrin and why it might change the entire landscape of cancer. Kevetrin is a small molecule that is different in structure from all currently marketed cancer drugs. It is water-soluble and simple to synthesize from commercially available starting materials. It will initially be administered as an intravenous product. Additionally, it is important to know what Kevetrin changes within the body. Its main purpose is to induce activation of p53. P53 is often referred to as the "Guardian Angel Gene," because of its important role in controlling cell mutations. P53 is a tumor suppressor protein that is encoded by the TP53 gene in humans and has been widely regarded as possibly holding a key to the future of cancer therapies. P53 has been shown to play critical roles in the homeostatic health of the human body by activating proteins required to repair DNA.
As the chart below shows, Cellceutix had a very strong 2012.
Last year, the stock rallied from $0.50 per share to as high as $2.47. It was an incredible move due to word getting about the company and its pending trials.
Now since the beginning of 2013, the stock has been in a downtrend. Cellceutix traded as high as 2.15 in the early part of January of this year but since that point, the stock has slid approximately 25%. There are most likely a couple reasons for this. First, early investors who had gotten in at the sub $1 level were most likely taking some profit as the stock had appreciated substantially resulting in large gains for the early investors. Second, at a price of $2.15, the company was being valued at approximately $210 million, which is probably a bit expensive for a company that needs to provide an update on its Phase I trial for Kevetrin and its Phase II trial to treat psoriasis.
One of the most important financials for development stage biotech companies is their cash. Typically these companies face extremely high cash burn rates and consequently, cash is at a premium. On December 10, 2012, Cellceutix signed an agreement with Aspire Capital for up to $10 million dollars in financing.
The deal was extremely favorable for Cellceutix based on the following conditions:
- Cellceutix controls the timing and amount of any sales of common stock to Aspire Capital
- Aspire Capital has no right to require any sales by the company but is obligated to buy shares when Cellceutix requires them to do so
- There are no limitations on use of proceeds, financial covenants, restrictions on future financings, rights of first refusal, participating rights, penalties or liquidated damages in the Purchase Agreement
- The Purchase Agreement may be terminated by Cellceutix at any time, without penalty
On the last quarterly financial statement for the period ended December 31, 2012, Cellceutix had long term debt of $275,229. The capital agreement with Aspire Capital will go a long way towards reducing that amount and continuing to fund the company's ongoing trials.
Additionally, the company has made strides in reducing operating losses. For the same period in 2011, Cellceutix had a loss from operations of $1.07 million dollars. For the same period in 2012, the loss was only $688,740 dollars, even in the face of expensive ongoing trials that the company has been pursuing. What's really interesting is that improved performance was due to a huge decrease in officers payroll and payroll tax expense. This cost was $646,582 for this same period in 2011, compared to just $113,975 for the last quarter in 2012. That shows dedication by the corporate executives and combine that with the fact that 72% of Cellceutix shares are owned by corporate insiders, and shareholders have a reason to be beyond excited about what the future may bring.
200% Return Potential
So now that we know how the science works, let's turn our focus to the potential of Kevetrin and how it can impact the company valuation. As of this writing, Cellceutix carries a market capitalization of $155.9 million. Not bad for a company that has the potential to treat several different forms of cancer.
In June 2010, it was reported a that a small private biotechnology company that has agents dealing with targeting the p53 gene signed a partnership agreement with the potential for milestone payments that could reach approximately $400 million in addition to royalties from sales. Additionally, that company was at an earlier stage than Cellceutix is now.
Upon positive test results, I would expect the stock to trade between $4.00 and $5.00 which would give the company a market capitalization of between $400 and $500 million. Based on the milestone agreement that was signed in 2010 and the potential of Kevetrin to treat several forms of cancer, this is an extremely reasonable expectation.
Several of the largest biotech giants are also competing to target the p53 gene. Although it appears that Cellceutix is in the lead, it is important to stay on top of this in order to monitor where Cellceutix stands in relation to its competitors.
Just recently, Merck began its study to find a safe dose. It is enrolling patients with acute myelogenous leukemia, a cancer in which p53 is almost always disabled by the blocking protein MDM2. Once Merck finds the best dose, it plans to give the drug to between 15 and 30 patients in order to evaluate efficacy.
Sanofi-Aventis is in a similar position. It just began its safety tests in Europe. Testing in the United States will be added next year. Similar to Merck, it will focus solely on patients who are most likely to respond to its own drug, which in this case, will be patients with liposarcoma.
Roche was actually the first company to begin testing a p53 drug in patients. Roche was extra cautious with the testing and as such, took a while to evaluate it. Much like Merck and Sanofi, the company has a ways to go before advancing its trials.
There are three main risks to the company. The first has to do with future financing agreements. As we know, biotech companies depend on high levels of cash to survive. Even with this recent $10 million agreement with Aspire, it is more than likely that Cellceutix will need to do a secondary in the future to raise more cash. Especially as Kevetrin progresses to a Phase II and potentially Phase III trial. This will likely result in pressure on the shares as the original investors lose a little bit of ownership. A second risk has to do with the fact that Cellceutix trades on OTC. Although many stocks have done extremely well here, these stocks are under less scrutiny than companies on the main exchanges, and thus are often subject to manipulation by traders. This can cause excess volatility in the trading price.
Additionally, Cellceutix had indicated in previous press releases that they expected to release the results of the initial testing between March and April of this year. However, due to their clinical protocol, which only accepts Phase IV, terminal cancer patients with metastasized tumors that have become resistant to all other treatments, the trial has progressed a little more slowly than first expected. Some investors have expressed concerns with the delays and it remains to be seen if the company will meet their deadline.
Cellceutix is one of my favorite stocks currently and I think its poised for a breakout year. The current consolidation in share price has been very healthy after an explosive and exciting 2012 and gives investors an opportunity to increase their exposure if they like. With a deep pipeline that includes a potential game changer in cancer and another potential treatment for psoriasis, the valuation is likely to hit $400 to $500 million this year giving investors at these levels the potential for a 200% return.