3 Reasons To Stay Far Away From Synta Pharmaceuticals Stock

Shares of Synta Pharmaceuticals (SNTA) have been climbing rapidly over the past month. Since its bottom of 3.77 in late June, shares have rallied over 100% to a recent top of 7.85.

The badly beaten shares of SNTA stock (still down 35% YTD despite rallying over 100% in the last month) have recently began to show signs of life. It's the half baked press releases and clinical updates that caused this sudden and rapid uptrend that make me very skeptical.

Along with the weak financials, this stock throws up three major red flags that have caused me to become very skeptical and doubtful it can sustain this recent run up.

The first red flag was the massive amount of insider buying in the past two months and the free shares issued to executives on July first. Your probably thinking ... insider buying ... that's a positive, right? Well, in this case, the insider buying was massive just two months before a half baked, out of the blue press release about the hardly completed Phase I results of their ganetespib monotherapy for breast cancer. According to yahoo finance, insiders have acquired over 3,200,000 shares through direct and indirect purchases since June 4, 2013. All insider purchases over the past 6 months have occurred since June 4, 2013. Over 2,500,000 of these purchased shares were bought indirectly or on the open market by insiders between the $4-$5 range.

Insider Transactions Reported - Last Two Years
Date Insider Shares Type Transaction Value*
Jul 1, 2013 REARDON WILLIAM SDirector 4,000 Direct Acquisition (Non Open Market) at $0 per share. N/A
Jul 1, 2013 GOLLUST KEITH RDirector 16,000 Direct Acquisition (Non Open Market) at $0 per share. N/A
Jul 1, 2013 KOVNER BRUCEDirector 10,000 Direct Acquisition (Non Open Market) at $0 per share. N/A
Jul 1, 2013 KUFE DONALD WDirector 8,000 Direct Acquisition (Non Open Market) at $0 per share. N/A
Jul 1, 2013 WILSON ROBERT NDirector 2,000 Direct Acquisition (Non Open Market) at $0 per share. N/A
Jun 28, 2013 BAHCALL SAFI ROfficer 10,000 Direct Purchase at $5.03 per share. 50,300
Jun 27, 2013 KOVNER BRUCEDirector 150,000 Indirect Purchase at $4.71 per share. 706,500
Jun 26, 2013 KOVNER BRUCEDirector 300,000 Indirect Purchase at $4.65 per share. 1,395,000
Jun 25, 2013 KOVNER BRUCEDirector 200,000 Indirect Purchase at $4.35 per share. 870,000
Jun 24, 2013 KOVNER BRUCEDirector 200,000 Indirect Purchase at $4.43 per share. 885,999
Jun 21, 2013 BAHCALL SAFI ROfficer 20,000 Direct Purchase at $4.12 per share. 82,400
Jun 21, 2013 KOVNER BRUCEDirector 50,000 Indirect Purchase at $4.23 per share. 211,500
Jun 18, 2013 KOVNER BRUCEDirector 200,000 Indirect Purchase at $4 per share. 800,000
Jun 14, 2013 BAHCALL SAFI ROfficer 10,000 Direct Purchase at $4.06 per share. 40,600
Jun 6, 2013 KOVNER BRUCEDirector 738,900 Indirect Purchase at $4.31 per share. 3,184,659
Jun 6, 2013 BAHCALL SAFI ROfficer 10,000 Direct Purchase at $4.04 per share. 40,400
Jun 5, 2013 KOVNER BRUCEDirector 756,000 Indirect Purchase at $4.71 per share. 3,560,760
Jun 5, 2013 VUKOVIC VOJOOfficer 10,000 Direct Purchase at $4.58 per share. 45,800
Jun 4, 2013 KOVNER BRUCEDirector 505,100 Indirect Purchase at $4.99 per share. 2,520,449
Jun 4, 2013 WILSON ROBERT NDirector 10,000 Direct Purchase at $5 per share. 50,000

Massive insider buying before positive news is not unusual, but in this case it caught my attention. In cases where companies release the trial results as scheduled and COMPLETE the trial, insider buying is normal and settling to an investor. But in this case, the Phase I or Enchant-1 breast cancer trial was scheduled to be finished in October with a total of 70 breast cancer patients receiving the therapy. Just a month after buying over 10-15 million in shares, Synta released "positive" results over 3 months early and only 15 of the 70 patients were treated and observed. So to call this Phase I trial half baked is giving it more credit than its due. This pre mature release caused the stock to soar from $5 to just under $8 per share or 60% in two days. In other words, it was payday for insiders who doubled their million dollar investments in less than 2 months. This extremely early decision call the partially completed Phase I a success on a very small number of trial patients and start Phase II tells me one of two things. Either Synta is burning through cash so fast they simply cannot afford to do the complete trial or the insiders perfectly executed their second successful pump. Yes ... they have released "good news" prematurely before. Synta announced the results of their Phase II (ganetespib in lung cancer patients) and decided to move along to Phase III with an uncompleted Phase II.

Secondly, adding on to a point above, moving on without finished trials is a one way ticket to failure. FDA approval is a goal few drugs achieve and cutting your trials short is a death wish. The chance of failure as you go from Phase I to Phase III more than triples. the fact Synta is heading into Stage II trials without a completed stage I cuts their chances of success down even more and causes me to believe the chance of failure will be much greater than the chance for success in the upcoming Phase. I would not be surprised to see the same scenario as last time where SNTA stock decreased over 50% because of their bold decision to move on with their ganetespib for lung cancer trials despite not having completed the entire study.

Lastly, the financials of the company are atrocious. According to Yahoo Finance, the company posted earnings per share of -0.33 per share missing analysts estimates by -0.04. So multiply by the number of outstanding shares (70 million) and your total cash burn for the QTR is 25.6 million. With around 81.5 million in cash and cash equivalents, Synta has limited time before cash becomes an issue. Along with that, I do not see any positive catalysts in the future. This will cause volume and the money flowing into the stock to slow down and the rapidly inflated price per share will not be sustainable. A pop of over 60% on "preliminary" Phase I results is not warranted. In biotech, reaction to news that does not consist of FDA approval is usually an overreaction, and when things begin to return to normal and the volume and attention quiet down, the stock begins to retrace.

Conclusion: The massive insider buying in the two months prior to the pre mature release of the Phase I results was very suspicious and made me very skeptical. in addition, the choice to move on to Phase II with only 15 of the 70 trial patients receiving treatment is a very bold and risky move that did not fare well for Synta in the past. The continued loss per share has increased since 4th Quarter 2011 and at this rate they have enough cash on hand to last them 6-9 months. i do not see any catalysts in the near future and am not optimistic about the future Phase II results.

Disclosure: I am short SNTA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.