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YM Biosciences (YMI), a Canadian firm with Cuban connections, has seen its ups and downs, but since 28 June 2010, the company has been on a steady rise from $1.16/share to a recent high of $2.77/share. As I have been evaluating a wide range of biotech firms under $3/share, I encourage any shopping biotech investor to give YMI a close look. For one thing, it is not a one-trick pony oncology firm, but here's the question: Does your investing strategy align with its business strategy?

On 15 March 2011, JMP Securities inititiated coverage: Market Outperform. Months earlier, on 19 October 2010, Rodman & Renshaw also initiated: Market Outperform. Is there a pattern here?

Since the 2 March 2009 bottom of 23 cents, YMI recently peaked at $2.77/share on 28 February 2011 before a modest decline to $2.55/share of 7 March 2011. The stock itself has traded on healthy volume. Here in 2011, its daily average volume (3/M) is 1,171,300 traded shares as of 18 March. That means short-term investors have the option of moving in and out on dips and peaks. On technical analysis alone, unless the recent pull-back is signaling a bearish reversal, the bullish outlook has this stock eventually trending above $3/share. If that holds true, it means YMI is a great buy on any dip ... but if YMI turns bearish, I suggest it has a good base above $2/share. Nevertheless, the long-term investor may weigh the short-term risk versus a long-term horizon and decide to buy at any time -- but read my whole article before you decide to buy.

On 31 December 2010, the company reported 109,956,275 common shares and 7,639,137 outstanding warrants. Not only is the share count more than reasonable, the company ended the year with $78,713,000 in cash and short-term deposits and accrued liabilities of $4,936,000.

Yet despite YMI’s modest common shares and warrants, its cash liquidity, and low debt, the company’s quarterly revenue generation is not going to win points. Primarily relying on licensing revenue, revenue generation plummeted in 2010 from $690,585 (Q1), $494,854 (Q2), and $342,356 (Q3) to $251,417 (Q4).

But revenue generation aside, the company states it has enough funds for 12 months; I found that statement overly conservative, given its last two R&D (licensing and product development) and general/administrative quarters (Q3 and Q4) averaged approximately $8 million per quarter. Yes, clinical development costs enormous sums of money, but I suggest YMI has enough funds for at least two years. Nevertheless, this is something of a moot point.

So without significant revenue generation, what is left? Answer: The pipeline. And that is at the heart of any biotech firm, because it is what most biotech firms hedge their futures on — moving a drug candidate through 10 or more years of clinical trials with odds of failure greater than success.

So what does YMI have? According to the company’s website, it has three primary drug candidates: Nimotuzumab, CYT387 and CYT997, the latter two acquired through the January 2010 merger with Australian firm Cytopia.

Nimotuzumab

Invented in Havana, Cuba, by the Center of Molecular Immunology, Nimotuzumab was in-licensed by what is now YM Biosciences in 1995-96. In 2003, it was out-licensed to Oncosciences AG in Europe; in 2005, to Kuhnil Pharmaceutical Co., Ltd. in Korea and Innogene Kalbiotech Pte., Ltd. in South East Asia; in 2006, to Daiichi-Sankyo Co., Ltd. (OTC:DSKYY) in Japan. These have been YMI’s four cash-generating licenses. YMI’s website claims Nimotuzumab has been used in more than 9,000 patients worldwide via commercialization (where approved) or clinical trials.

In the most simplistic terms, YMI argues that Nimotuzumab binds to the extracellular region of epithelial growth factor receptor (EGFR) to stop cancer cell proliferation. Meaning, it stops cancer from spreading. A cursory presentation of Nimotuzumab’s science can be found on the company’s website.

The drug is already approved for marketing in 25 countries; however, it is not approved in the U.S., Canada, Europe, and Japan. Nevertheless, its potential/applied indications include: Non-small cell lung cancer, pediatric and adult glioma, esophageal cancer, pancreatic cancer, gastric cancer, and head and neck cancer.

Now for an under $3/share biotech stock, I have to state that I have never viewed a drug under more indication trials than Nimotuzumab. But Nimotuzumab is competing in a tough market (e.g. Cetuximab and Panitumumab), though YMI scientists argue that Nimotuzumab has less side effects than its competitors (e.g. rash, skin reactions, pruritis [itching], or hypomagnesemia [electrolyte imbalance {magnesium}]). Yet between 2007-09, Nimotuzumab was cleared for clinical trials in Canada for inoperable brain cancer, adult colorectal cancer, non-small cell lung cancer, and brain metastases. In 2010, the U.S. cleared Nimotuzumab for non-small cell lung cancer and brain metastases from lung cancer. Which leaves me wondering: Have geo-political forces kept this anti-proliferative drug from advancing?

CYT997

From the Cytopia merger, CYT 997 finished phase 1 trials in advanced solid tumors, and ongoing phase 1 for glioblastoma multiforme -- also identified in an ongoing early stage multi-phase phase 2 study. Interested investors can read more here.

CYT387

CYT387 is the trophy of the Cytopia merger. The science can be read on the company's website and needs not repeating here. However, according to the company:

CYT387 is currently being studied in a 140 patient international ... Phase I dose escalation portion of the study is complete and recruitment into the dose confirmatory Phase II portion of the study is ongoing. Initial findings from this study demonstrate that CYT387 has a favorable safety profile in patients with myelofibrosis, and has shown significant activity in reducing spleen size, improving anemia and controlling constitutional symptoms in these patients.

My only point here is: Recognize that CYT387 is an early-stage oncology candidate.

Business Model Philosophy

Despite the intriguing pipeline and boatload of cash, I do have one major objection concerning YMI's business model, noted here:

YM BioSciences’ out-licensing philosophy is to establish collaborations with partners that possess key clinical development and commercialization expertise and capabilities needed to advance YM BioSciences’ products to regulatory approval and commercialization throughout the world.

In my opinion, that out-licensing philosophy is the death-knell to YM Biosciences' ever becoming a double-digit biotech company. While presently tradable for short-term gains, long-term investors need to know what they are investing in: A company that may reach upper-single digits, but which is hardly going to be the next Dendreon (NASDAQ:DNDN) -- at least, not with that business strategy.

Unless, of course, the company is bought out -- but even then, the buy-out should be in the single digits. Why do I state this? Because when a company openly states it is not its intent to go it alone, that means the long-term investor will most likely never see the big payday. CYT997 and CYT387 are in very early stages of development and may never make it. Nimotuzumab is fighting to gain U.S., Canadian, European, and Japanese footholds in the clinical space. The Cuban connection -- to politically-sensitive U.S. investors -- deserves reflective musing.

I like YM Biosciences more for short-term gains, but I don't like its business model. If I were a long-term investor, I'd hesitate. If I were a short-term investor, I'd look for quick gains on technical analysis, assuming the general market doesn't go into the tank.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: YM Biosciences' Business Model May Discourage Long-Term Investors