Biotechnology stocks offer investors the potential for exponential returns, but also carry a great deal of risk. Investors need to truly understand the risk/reward anytime they invest in a biotech stock. The biggest risk is volatility, which is usually highest around major upcoming events. In addition to evaluating biotech companies on their fundamentals and science, it is imperative to identify catalysts that could have an impact upon a company's share price. Below are a few companies that have upcoming catalysts that could cause large price moves in the share price. The companies were chosen based on the following criteria:
- Focus on treatment for cancer
- Upcoming Catalyst During Next 90 Days
- Average Trading Volume Of At Least 200,000 Shares Which Provides Liquidity
- Strong Fundamentals
- Market Cap Of Under $1 Billion
But first, let's look at how hot the biotechnology sector has performed recently.
Biotech Industry Performance
The biotechnology industry has become one of the hottest industries over the past 12 months. We can analyze the performance by looking at a commonly traded biotech exchange trade fund such as the iShares Dow Jones US Healthcare ETF (IYH). Over the past year, this fund has appreciated by approximately 35%.
Now while 35% seems impressive in its own right, it is a good idea to compare the trade fund to the broader market to really understand how hot the industry has been. For the broader market, let's look at the S&P Depository Receipts (SPY). Over the past year, the broader market has only advanced by approximately 27%.
So it is clear that the biotechnology industry has outperformed the broader market over the past year. So at the very least, investors know they are investing in an industry that is seeing strong returns. Below are a few companies that have upcoming catalysts with the potential for outsized returns.
Synta Pharmaceuticals Corporation (SNTA) is a biopharmaceutical company focused on discovering, developing, and commercializing small molecule drugs to treat aggressive forms of cancer. Its drug candidates are discovered and developed internally, using its chemical compound library and integrated discovery engine.
Synta has had an interesting past year of trading as the below chart shows.
Synta has had some incredible volatility, but has managed to rally from a low of $3.70 to a high of $11.88. Just recently it has sold off more than 20% on news that the company's president of research and development had resigned. I believe investors/traders overreacted to this news, especially considering that Dr. Sumant Ramachandra only worked at Synta for six weeks. Additionally, Dr. Ramachandra decided to return to his former employer, Hospira (HSP), citing personal reasons for his Synta resignation. Last but not least, the resignation has no bearing on the company's fundamentals or upcoming catalyst, both of which put the company in a nice position.
Fundamentally speaking, Synta is in a strong position. If we look at the company's 2012 annual statement, it was able to improve in a lot of different areas. The most important area for a development biotech company is the cash position. At the end of 2011, Synta only had $30.1 million cash. At the end of 2012, the company increased its available cash by more than 150% to $81.5 million. Additionally, the company was able to reduce long-term debt from $12.4 million to $4.5 million. The company suffered an operating loss in 2012 of $60.9 million, so the its cash position should be able to take Synta through at least the end of 2013 before any more secondary offerings have to take place.
Now as I mentioned, the company has an upcoming catalyst that will likely have a major impact on the share price. On June 3, at the American Society of Clinical Oncology, Synta will present data from its Phase II GALAXY-1 ganestespib lung cancer study. This particular study compares the combination of ganestespib and docetaxel against docetaxel alone in second-line non-small cell lung cancer.
The rationale for this particular combination in non-small cell lung cancer is the following:
· Inhibition of Hsp90 by G leads to the degradation of multiple oncogenic drivers implicated in NSCLC.
· Synergistic mechanisms including complementary cell cycle effects, suppression of anti-apoptotic factors, inhibition of tumor invasiveness and angiogenesis by G
· Synergy demonstrated in preclinical models
· Phase I trial of ganestespib and docetaxel in patients with solid tumors helped establish the recommended Phase II dose and schedule. It also demonstrated the combination was well tolerated with a safety profile similar to docetaxel alone.
The hazard ratio for the preliminary data was .688 meaning that there was a 31.2 % reduction in mortality rates because of this combination. That is not statistically significant, but rather just a trend. So investors will have to wait for the upcoming results on June 3rd to find out what the future holds.
As good as the future looks, Synta still faces a few risks. First and foremost, the big risk is bad data in the company's upcoming ASCO presentation. The shares are currently trading at $7.50 so we can use the option markets to get a sense of what kind of move the stock might see in June. The June 7.5 straddle is currently priced at $3.00 indicating that the market thinks a 40% move is coming. The stock may end up trading as low as $4.50 or as high as $10.50 after the data release. This is extremely volatile and offers the potential for large gains or losses. A second risk is the volatility associated with this name. Although the stock chart that was given earlier showed a positive trend in the share price, the stock has seen some dramatic swings. So it is imperative to manage one's risk and not risk more than one can afford to lose.
A second company that has an upcoming catalyst is OncoSec Medical (OTC:ONCS). OncoSec is a biotech company focused on creating treatments for advanced-stage skin cancer. The company focuses on three cure-resistant and normally fatal skin cancers: melanoma, Merkel cell lymphoma, and cutaneous T-cell lymphoma.
OncoSec's proprietary technology is based on electroporation, a process that opens temporary pores in the cell membrane of infected cells through which an anti-cancer agent can be transmitted more effectively. Using brief electrical pulses, the company can target tumor cells with greater accuracy and power. Electroporation not only increases the delivery of proven drug therapies, it narrows the target to reduce or eliminate toxicity.
The company has several ongoing clinical trials.
- OMS-I110 - This is a safety and efficacy Phase II trial using OMS Electro Immunotherapy, branded ImmunoPulse by the company, to deliver DNA IL-12 (a gene that triggers cells to attack and eliminate cancerous cells) in patients with local and metastatic Merkel cell carcinoma (OMS-I1110). This is an open-label, multi-center trial that will enroll approximately 15 patients with Merkel cell carcinoma. It is being conducted in collaboration with The University of Washington.
- OMS-I100 - This is a Phase II safety and efficacy trial using ImmunoPulse to deliver DNA IL-12 in patients with late-stage metastatic melanoma. This is an open-label, multi-center trial that will enroll approximately 25 patients with advanced-stage, cutaneous, in-transit malignant melanoma. It is being conducted in collaboration with The University of California at San Francisco.
- OMS-I120 - This is a Phase II safety and efficacy trial using ImmunoPulse to deliver DNA IL-12 in patients with early and late stage cutaneous T-cell lymphoma. This is an open-label, multi-center trial that will enroll approximately 27 patients with cutaneous T-cell lymphoma. It is being conducted in collaboration with The University of California at San Francisco.
On April 18, 2013, OncoSec announced that it was partnering with Smart Patients to form a new online community for patients. Smart Patients is an online community for cancer patients and caregivers. The community includes a clinical trial search engine that presents trial data from ClinicalTrials.gov in a patient-friendly format. Roni Zeiger, the former chief health strategist of Google (GOOG), is the co-founder and CEO of Smart Patients. OncoSec is working with Smart Patients to create a community for Merkel cell carcinoma patients. OncoSec is conducting the only active Phase II immunotherapy that is focused on this deadly disease. This partnership will allow for better collaboration with patients.
Fundamentally speaking, OncoSec is in an extremely strong position. The company filed its quarterly statement for the quarter ended January 31, 2013, on March 15, 2013. Cash is the most important component for these small cap biotech stocks and OncoSec has done a great job to improve its cash position. At the end of July 2012, the company only had $5.14 million in cash available. At the end of the last quarter, OncoSec had increased its cash by over 40% to $8.98 million. Another positive on the company's balance sheet is that there is no long-term debt. This means that all cash that comes in can be used to fund company trials instead of paying back a debtor. On the income side, the company is doing a great job at managing its expenses. As OncoSec does not have any products on the market, the company isn't generating any revenue. But what the company has been able to do is systematically improve its net income quarter after quarter. For this same quarter in 2012, OncoSec lost $2.67 million. For this last quarter, OncoSec only lost $1.62 million, an improvement of over 39%. Clearly management is making the right decisions.
In addition to all the positives already mentioned, the company will face an upcoming catalyst when it presents at the Sachs Cancer Bio Partnering Forum on May 21, 2013. The Sachs Cancer Bio Partnering Forum is a two-day conference that brings in leaders from cancer research institutes and patient advocacy groups. It is likely that the company will further explain its ongoing trials and perhaps announce some new developments. Additionally, investors can look forward to the next quarterly earnings report, which should be filed sometime in June.
Now as good as the company looks, it is not without risk. The company does trade on the bulletin boards, and as such, is prone to volatility in the trading price. Typically a concern of bulletin board stocks is lack of liquidity. However, OncoSec does not face this problem as it typically generates trading volume of over 1 million shares per day. A second risk is competition. One serious competitor is ImmunoCellular Therapeutics (IMUC), which will also be announcing some of its clinical data later this year. However, even with those risks, the promise of OncoSec can't be denied, and investors should watch it closely.
A third company that investors should be watching closely over the next several months is Cellceutix (OTC:CTIX). Cellceutix is an early stage biotechnology company focused on discovering small molecule drugs for hard to treat diseases, most notably hard to treat forms of cancer and psoriasis.
The company is primarily focused on their compound called Kevetrin. Thus far, Kevetrin has shown a lot of promise in laboratory testing while attempting to treat advanced solid tumors. The pre-clinical research also showed that it could be effective against a variety of cancers including prostate, breast, lung, and brain tumors. The research showed tumor growth delay and size reduction. Kevetrin is currently in Phase 1 testing at Harvard Cancer Center's Dana-Farber Cancer Institute. Cellceutix had expected to release results of the Kevetrin trial in April but 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 slower than expected. However, these results should be coming soon.
What makes Kevetrin special? 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. The main goal of Kevetrin is to activate 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.
One of the most important financials for development stage biotech companies is their available cash. Normally these companies face high cash burn rates and consequently, cash is at a premium. On December 10, 2012, Cellceutix came to 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 financial report 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.
Now while Cellceutix clearly appears to be making the right moves, the company is not without risk. First, the company trades on the bulletin board which means it can be prone to volatile price swings and market manipulation. Second, the competitive landscape in this area is extremely fierce. The company faces competition from several biotech giants including Merck (MRK0, Roche (RHHBY.OB), and Sanofi-Aventis (SNY). There was a recent article in the NY Times which detailed the p53 race and the competitors attempting to make history.
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. And while all of these companies are clearly making progress, it appears that Cellceutix is in the lead, although its a small one. But with the science and financials appearing strong, the promise of Cellceutix cannot be denied.