Cancer Prevention Pharma IPO: Riding The Biopharma Wave

| About: Cancer Prevention (CPP)

Summary

CPP is trying to develop a drug which will unlock a $10 billion market opportunity.

With the company's drug reaching Phase 3 development. The chances of the drug making it to the market has improved by ~40% from phase 2.

With no potential revenue stream in sight for the company, market valuations will be driven by the intense fervor which drives valuations in the Bio Pharma sector.

Cancer Prevention Pharmaceuticals (Pending:CPP) is coming up with their IPO, and is offering ~2 million shares of common stock at $12-14. The focus of this article is to tell you whether or not jumping into the IPO bandwagon will help you turn any profits either short or long term from this stock.

A brief overview

The last time around I went looking for a pharma stock to invest, I landed up with a bunch of these start-up bio-pharma and new drug development companies who were trying to find solutions to some of the most challenging diseases which have plagued the human race for over 200 years.

However, as intriguing and mind boggling I find the possibilities of the development of this sector; truth be told it is a very challenging sector. One that involves numerous levels of government clearances, millions of dollars of R&D spends before the companies see the light of day (profitability or revenue of any kind) and constant scrutiny by the medical, legal and political fraternities of the world.

Before I dwell upon the possibilities of CPPs to make any headway in the industry I'd like to highlight some failures in the industry that I've come across.

Failures

Last quarter of 2015 saw the California based start-up Laguna pharma go bust after seeing unspecified safety issues in the Phase III trials, and this just after 10 months of receiving $30 million venture investment by Versant, Frazier, BioMed and Sante.

CPPs lead product candidate too is in phase 3 development stage (damn coincidences); and if its successful it can lead to treatment of familial adenomatous polyposis (FAP), a rare genetic disorder that can lead to the growth to thousands of colorectal adenomas (adenomatous polyps), a key risk factor for colon cancer.

A bio-tech bubble in the making or great strides in modern medicine

An interesting article published by Max Nisen on Quartz really captures the pulse of what is happening in the sector, and if investors are to be cautioned and well advised when looking into this industry, they would do well to take into account the following points:

1. 97% of drugs in the pre-clinical stage never see the light of day, this number goes down to 95% for drugs under phase 1 trials, and finally 88% for drugs in phase 2 trials.

2. While the number of drugs whose chances of making it to the market greatly improve under phase 3 trials (54% chance of getting approved), there is still a substantial amount of risk involved.

3. It is rare for a head of a monetary policy setting organisation to give their 2 cents on the valuations of any specific sector let alone a company, but with the chairman of the fed, Janet Yellen highlighting certain biotech stocks as gravely mispriced on her social media handle, you ought to take a second look no matter how great a disdain you may have for the creative monetary policies these institutions have adopted in the past.

CPP - A Quick look at the numbers

The company has devoted a substantial portion of its financial resources in the development of CPP-1X/sul and CPP-1X, the drug they are developing to cure colon related cancer cells.

As per company's S-1 filing, the company has accumulated losses of $20.2 million, and recorded net losses of $3.3 and 4.4 million respectively for the 9 month period ending 30 September 2015 and 2014 respectively.

Moreover, the company has forecasted that development of the drug in this phase will continue for the foreseeable period and it will continue to incur substantial losses on this front.

Moreover, the company has forecasted that drug development in this phase will continue and would lead to substantial losses in the foreseeable future.

The company's price band of $12-14 puts an initial valuation of approx.. $320-350 million on a company which is years before it may or may not generate any revenue whatsoever.

From the perspective of pricing it is interesting to note that companies operating in this sector are being valued (priced) at a revenue multiple of 10, as compared to the larger Nasdaq multiple which trades at roughly 2.3 times revenue.

Considering that fact that the company really has no revenue stream, the top line currently is derived primarily through co-development and licensing arrangements with Tillotts, a subsidiary of Zeria, whereby CPP has licensed to Tillotts exclusive European and Japanese rights to co-develop and commercialize the combination of CPP-1X/sulindac.

Under the terms of the Tillotts Agreement, Tillotts is obligated to pay an $8 million upfront payment as well as milestone payments for European and Japanese development programs under a co-development framework.

The potential milestone payments, in excess of $100 million, include drug development milestone payments and one-time sales milestone payments upon attainment of annual net sales levels.

Closing thoughts

The colorectal cancer market is forecasted to touch $10 billion by 2020, and the company if successful will unlock a real value opportunity. However, considering the probability of success in this sphere, I personally believe it's still a long time before this eventuality may occur and if you really have a long term time horizon and patience to wait it out, the probability of success exists.

For a short term horizon though, I believe the market will be optimistic about the stock as it has been about the bio pharma sector in general and the traders would gain to participate in this IPO.

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

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.