I have been doing my monthly review of a couple hundred small-cap biotech companies and took a closer look at ADVENTRX Pharmaceuticals (ANX). According to the company’s website:
ADVENTRX Pharmaceuticals is a specialty pharmaceutical company whose product candidates are being developed to improve the performance of existing anti-cancer drugs by addressing limitations associated principally with their safety and use. Its lead product candidates include ANX-530, an emulsion formulation of chemotherapy drug vinorelbine to treat advanced non-small cell lung cancer as a single agent or in combination with cisplatin, as well as to treat advanced or metastatic breast cancer and ANX-514, an emulsion formulation of the chemotherapy drug docetaxel for the treatment of breast, non-small cell lung, prostate, gastric, and head and neck cancers.
I initially took a look at ANX because of its past price performance. The stock spiked above $12 back in January, sold off to around $5 in March and then subsequently dropped to around $2 where it currently stands – more on that later. I read the 2Q’10 press release and discovered that ANX was close to submitting an NDA for ANX-530 (also known as Exelbine).
Why the spike in January? I looked at past press releases and found out that ANX had already submitted the NDA back in January (thus the apparent cause for the price spike). The drop in March was due to ANX receiving a “Refuse to File Letter” from the FDA – i.e. the FDA rejected the application because it had deficiencies. ANX met with the FDA and, according to the 2Q’10 press release is to “submit the Exelbine NDA in the fourth quarter of this year” after apparently addressing the FDA’s concerns. So we have a clear catalyst.
I next checked the company’s financials. ANX has no debt and approximately $31.0mln in cash. As the company has 12.8mln shares, this equates to cash per share of $2.42 – compared to a current price per share of $1.95. Based on this valuation, without further analysis, ANX is essentially going to pay me to own the shares (i.e. I am paying $1.95 for a company with no liabilities and $2.42 in cash). I thought it must be high cash burn – no…about $2.0mln a quarter excluding one-off dividend payments.
Dividends? I thought this was strange for a small-cap biotech. I dug further and discovered that ANX had been quite active over the past years doing convertible preferred financings. Dividends were from the early exercise of the convertible instruments and the debt-like acceleration clauses contained therein (very interesting reading in the 10-Q if you have the time). These cash amounts were basically paid out to the preferred shareholders at the expense of the common.
Also, ANX recently did a whopping 25-to-1 reverse split (thus the high split adjusted share prices; this was formerly a penny stock) – I usually avoid companies that do reverse splits like the plague. But the near term catalyst, past price performance and a high cash per share required further analysis. I checked the ownership profile and discovered that none other than Carl Icahn has the largest stake in the company – this is a very high profile, sophisticated shareholder.
Conclusion: This trade seems to have it all.
However (big understatement), there remain several major issues:
1) The value of ANX-530: Is this product worth the value implied by the price spike in January? Using prior price spikes is usually a good benchmark for valuation purposes. Further research on page 5 of the most recent 10-K, however, revealed the following:
We estimate the current total dollar value of the U.S. vinorelbine market is between $15 million and $20 million.
If the market that Exelbine is targeting is basically only $15 to $20 million large, what possible value can the product have, if any? If anyone has an answer, I would love to hear it. Perhaps it represents the value of the technology itself?
2) ANX management’s desire to undertake “acquisitions” – for such a small company with supposed near-term catalysts, why the emphasis on acquisitions? Does management expect a failure? Also, cash per share is my primary hedge for this trade; a management team with no approved products and acquisitive desires makes me very nervous to say the least.
3) Reverse stock splits are often (if not always) a major red flag for investors: buyer beware.
To be perfectly honest, this company remains an enigma to me. For full disclosure, after my first round of analysis, I bought several thousand shares. I later discovered the 10-K data (as I was going to increase my size) and quickly sold my entire stake the next day. For me, I need an answer to #1 of my major issue list to buy a new stake in ANX.
Disclosure: The author currently holds no positions in this stock