Comparison Shopping For Small-Cap Biotech Deals

Includes: CRMD, ZIOP
by: Faria Capital Management


Many small-cap biotech companies are still overvalued based on the stage of their pipeline and likelihood of successful commercialization.

There are low-profile and mature biotech companies trading at attractive valuations relative to the heavily followed, early-stage small caps.

Comparison shopping is a helpful tool in assessing what category a given company falls into.

Ziopharm Oncology (NASDAQ:ZIOP) currently has a market cap of around $300M-$350M, according to Yahoo Finance. Yahoo rarely gets these numbers exactly right, but let's assume $300M is in the right ballpark. For about $3/share, you can get a piece of Dr. Lewis' "late-stage" oncology company which so far, has produced nothing but failed drugs. The company's original lineup (which consisted of palifosfamide, darinaparsin, and indibulin) has completely vanished from the pipeline page of Ziopharm's website. The shift to R.J. Kirk's synthetic biology platform has produced nothing beyond some mildly positive Phase I data in 16 melanoma patients and a lot of preclinical data. Without a doubt, Ziopharm has cured more mice of cancer than any other small-cap oncology company.

Let's not forget that cancer immunotherapy is an intensely competitive field right now. Little Ziopharm will have to push Merck, BMS, MedImmune, and others out of the way to create space for its gene therapy/small molecule therapy. One thing that distinguishes Ziopharm from its competitors is that Ziopharm has not partnered with anyone but Intrexon, putting all their eggs in the IL-12 basket. If you look at the other players in this space, nearly all have joined forces with at least one other company to carry out combination immunotherapy studies, reflecting the fact that a single agent is unlikely to significantly impact overall survival by itself.

Amgen's T-vec is a prime example. T-vec is an oncolytic virus which not only directly kills tumor cells, but also causes production of a pro-inflammatory cytokine, GM-CSF. In February, before overall survival data for Amgen's Phase III melanoma study was released, Amgen partnered with Merck to investigate T-vec/anti-PD-1 in combination. A few months later, it was revealed that T-vec fell just short of significantly improving overall survival (the secondary endpoint) with a p value of 0.051. Granted, this is a strong trend, but if a therapy that directly kills tumor cells and produces GM-CSF still needs PD-1 blockade to give a p value of less than 0.05, the chances are slim that IL-12 alone will be successful.

In summary, for around $3/share, investors can cross their fingers and hope for positive Phase II IL-12 data and maybe a 10% chance that after three to four years of complex and expensive oncology studies, regulatory submissions, and numerous rounds of dilution, Ziopharm will have a modicum of revenue.

Now let's take a look at another small biotech, CorMedix (NYSEMKT:CRMD). The fully diluted cap is somewhere around $50M, roughly one-sixth of Ziopharm's cap. CorMedix has an antimicrobial catheter lock solution approved in the EU for use in dialysis. Its product, called Neutrolin, contains a patented mix of heparin, citrate, and taurolidine. The product has proven efficacy, and there are conservatively at least a half-dozen well-controlled, peer-reviewed, independent studies showing that this combination of ingredients keeps catheters healthy and significantly reduces infection rates (a few examples can be found in the list at the bottom of this article). This can lead to billions in health care savings in the U.S. alone and reduces the risk of antibiotic resistance, two big wins for governments, health care providers, patients, and CorMedix. Just by negotiating agreements with distributors and completing some paperwork, CorMedix could be selling Neutrolin to most of the world in a year or two, with a pivotal U.S. study slated to begin later this year. The EU label can and will be expanded beyond dialysis just by doing a bit more paperwork.

The current valuation of CorMedix is in part due to disappointing Q4 2013 and Q1 2014 revenue. However, consider that Neutrolin was not launched in earnest until early February 2014, and it's not realistic to expect sales of a non-life saving drug to ramp up in eight weeks. Furthermore, the launch was limited geographically to Germany and Austria which means right now CorMedix is only chasing about 15,000 patients. Consequently, these numbers do not reflect lack of enthusiasm about the product, but rather a launch that is occurring in a limited indication and small geographic area. Within six to 12 months, revenue should increase dramatically as CorMedix expands the label, defends their intellectual property, and completes distribution deals around the world.

Let's recap: $50M cap and a product which reduces infections without resistance, prevents the use of antibiotics, and reduces healthcare costs for anyone using a catheter (oncology, dialysis, parenteral nutrition, ICU patients). All of this with basically zero risk of the product not working, no risk of clinical trial failures (ex-U.S.), and minimal risk of dilution thanks to the cash raised in March at $2.50/share.

Why does the market support a valuation of $300M for a company like ZIOP, which has an unproven technology and will be completely out of cash in 12 months, while CRMD is valued at $50M? Is a 10% chance of $500M in revenue 10 years from now really six times more valuable than a 90% chance of $100M in two years? While CorMedix and Ziopharm are very different companies, comparing them in terms of risk and likelihood of success relative to their market capitalization is a useful exercise. At some point these apparent imbalances will be corrected by data, and the winners going into 2015 will be those who invest now in unsexy, low-risk biotechs with extremely reasonable market caps. CorMedix is one - good luck hunting for the others.

List of studies mentioned above (in the fifth paragraph):

1) Prevention of dialysis catheter-related sepsis with a citrate-taurolidine-containing lock solution.

2) Locked tunneled catheters with Taurolidine-citrate-heparin lock solution significantly improves inflammatory profile in hemodialysis patients.

3) Central venous catheters and catheter locks in children with cancer: a prospective randomized trial of taurolidine vs. heparin.

4) Taurolidine is effective in the treatment of central venous catheter-related bloodstream infections in cancer patients.

5) Taurolidine locks significantly reduce the incidence of catheter-related blood stream infections in high-risk patients on home parenteral nutrition.

Disclosure: I am long CRMD. 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.

Disclaimer: I work for Amgen, but this article is an expression of my opinions as an independent individual and was written using only well-known, public information.

Disclosure: The author is long CRMD.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am an employee of Amgen, but the views and opinions expressed in this article are mine alone and not the views and opinions of Amgen.

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