If you choose to invest in the risky yet potentially rewarding biopharmaceutical space, then you must know that your investment of choice has the catalysts and data to drive it higher, along with enough cash to give shareholders confidence. With that said, I'm bullish on a very small and new company called Lion Biotechnologies (NASDAQ:LBIO), and there are three reasons in particular.
1. Robust Data
Let's begin with the most basic of requirements to invest in any clinical biotechnology company: It must have robust data.
As we've seen in the biotech IPO market, most recently with Epizyme (NASDAQ:EPZM), there have been a lot of large valuations with not a lot of data. Epizyme held a market cap near $1 billion for the better part of its post-IPO period, but has declined almost 50% in the last month after reporting initial findings from a Phase 1 study.
In retrospect, the data from Epizyme was solid, but when a company has a billion-dollar market cap and no human data, that company must fire on all cylinders to maintain such a valuation. Therefore, the requirement for an additional Phase 1 trial to find a peak dose was not seen as a positive. Another example might be with Sarepta Therapeutics (NASDAQ:SRPT): The company had data on about a dozen patients, and that data had supported a market cap near $2 billion at times. Thus, when the company received news from the FDA that a larger study would be necessary for FDA approval, the stock collapsed.
The point is that valuations in biotechnology are supposed to mean something. Valuations are intended to reflect data, peak sales potential, and a company's likelihood of an eventual FDA approval. The higher the valuation, the higher the expectations, which also means the higher the downside risk.
As this relates to Lion Biotechnologies, we're looking at a company with a market cap of $80 million, trading at $5.20. The company is developing a product called TILs, which are Tumor Infiltrating Lymphocytes. These cells are found within tumors during their growth, and serve to combat the cancer. Naturally, TILs are very low in quantity. Ingeniously, Lion removes these natural cancer fighters, expands them into a few billion T-cells from a few million, and then re-inserts them into the body to fight the disease more effectively.
Now, on paper nearly all biotechnology companies sound good, but as you look closer investors or biotech experts can usually find mishaps or problems with a technology. In the case of TILs, Lion is targeting the most aggressive form of melanoma in those patients who have not responded to other treatments. In this setting, TILs produced a 50% response rate including a 22% complete response. If this data holds, it would be the best data we've ever seen in fighting the disease.
However, biotech investors must admit that many companies produce robust data in early stage testing, which then fizzles out in larger studies. Therefore, I was very skeptical when I first saw the data. But then I saw that TILs have already been tested on 136 patients at four different trials including MD Anderson and NCI. This means that Lion has robust data or a large patient population to draw conclusions from. In fact, 19 of the 20 patients who saw a complete response are still alive after 6 to 9 years. For this reason, I am bullish on the chances of TILs moving forward.
2. Leadership and Uplisting
Like I said, Lion is a small company, one that I would have never noticed if not for news that Manish Singh was the CEO, after essentially taking over the board. Personally, I am a big believer of investing in management, and Singh has a history of creating value for shareholders in the clinical biotechnology setting.
Singh was previously the CEO at ImmunoCellular Therapeutics (NYSEMKT:IMUC), where he took a $6 million OTC company and got it listed on the NASDAQ with a market cap of $200 million. Therefore, his involvement and merger to create Lion is what sparked my interest, but the data itself is what determined my investment. Moreover, with CEOs who are methodical in nature or have a history in financial markets, investors can almost predict future movements.
Lion is very similar to ImmunoCellular Therapeutics in the initial years with Singh, although Lion has more robust data. At ImmunoCellular, one of Singh's goals was to uplist the stock from the OTC markets to the NYSE, which he did in May 2012. As a result, shares of ImmunoCellular soared from $2.80 to $4.00, which then consequently led to its inclusion into the Russell Index Funds.
At Lion, I expect the same. The company already has a market cap of $80 million and has crossed the $100 million threshold several times in its short-lived existence. In company presentations, Singh has discussed upcoming milestones, which include his plans to list on the NASDAQ in Q1 of 2014. If so, this would be a major catalyst, also just before the Russell indexes rebalance. Thus, it could be a repeat of the performance we saw at ImmunoCellular.
Enough Cash for Two Years
One of the key problems for Lion when Singh merged with the company is that it had no money - investors wondered where he would find the financing. Yet, in just a few months Singh has already secured $23.3 million in private financing.
In company presentations, Singh's upcoming milestones estimate a cumulative cash burn. From Q4 2013 till Q4 2014 Lion estimates a burn of $10 million, which takes the company to its FDA meeting to begin Phase 3 testing. Hence, Lion has enough cash to operate for the better part of two years, which is something that not many sub-$100 million biotechs can claim.
Investors must realize that with any biotech of this size, there are risks associated with an investment. However, there are also great rewards. And considering that Lion has robust data, enough cash for two years, and catalysts such as a potential NASDAQ uplisting, I think the short/medium-term outlook is bullish. With that said, all investors must perform their own due diligence, and I highly recommend my previous article regarding Lion's goal to combine TILs with other therapeutics to fully understand this company's goal, and as part of your research. In my opinion, after thoroughly studying this company, I think it has some of the best upside potential in the sub-$100 million biotech market, and that Singh's involvement gives Lion a good chance to trade higher in the year ahead.
Disclosure: I am long LBIO, IMUC. 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.