Which Has a Better Risk/Reward Ratio - Citigroup or Cell Genesys?

Are biotechs turning around? They are certainly beating the market and, frankly, worrying about FDA decisions is easier now than worrying about how much toxic waste is hidden on a bank's balance sheet.

I have a good feel for the odds of whether Cell Genesys (CEGE) will get an approval in a couple of years for GVAX, its prostate cancer treatment. I don't know the odds of Citigroup (C) writing down another $50 billion, rather than the $12 billion to $20 billion analysts are talking about this quarter.

Think of it this way: If Citigroup is as bad off as I believe it is (and as Meredith Whitney of Oppenheimer thinks it is -- she was the first analyst to say it would blow up and cut its dividend, and for her insightfulness received death threats), then the stock is going from $24 to $11.

If Cell Genesys doesn't get an approval in 2010, the stock is going from $3 to $1. The upside for Citigroup could be $40 in three years -- about a 60% gain. The upside for Cell Genesys is $80, a 25-fold increase.

Both stocks carry the same risk, i.e., we just don't know what is going to happen. So which one has a better risk/reward ratio -- a highly speculative biotech or Citigroup? Maybe for the first time in the history of mankind the winner is the molecules, and not the money-center banks.

This kind of thinking may finally be occurring to speculators and traders. Why?

Many itty bitty biotechs are trading at historic lows, based on their available cash and the proximity of binary events that could catalyze the stock. The market is so down on these guys it is amazing!

A couple of weeks ago Spectrum (SPPI) got its first approval ever for a cancer drug, and the stock went essentially nowhere.

Cell Genesys cut a great deal with Takeda, eliminated the need to raise capital, got funding to finish its Phase III trials for GVAX and the stock popped a little bit, but a small move compared to what would have happened three years ago.

Prana (PRAN) had very-strong Phase II results (my interpretation) for an Alzheimer's drug and the stock moved -- but not as much as it would have three years ago.

This indifference could be ending, and if it is there is huge upside in many smallish biotechs. So, if you have some extra cash from shorting the banks -- and you are thinking about your next speculative play, and I mean speculative -- get some coffee or some other biotech-based brewed liquids, and take a look at some very cheap smallish biotechs.

Comments

[Jose Mcintryre]

Nice corollary but silly to compare Citi with Cell Genesys. The author says he has a "good feel" for the odds of CEGE, but he doesn't say what they are or how he derived his good feel. So how can we judge whether CEGE an all or nothing biotech is a better risk/reward than Citigroup which is most assuredly not all or nothing?

Should Cell Genesys fail its going way below $1 and if it succeeds, does the author really think it goes to a market cap of over $10B?
Get real Shulman. Go to Vegas, you'll have more fun and can catch a show.

[glenncorliss]

Disclaimer First: I bought CEGE, based on reasonable Phase II results and a decent price / cash on balance sheet. The Takeda deal makes me more comfortable with my long position. That being said, I agree with Jose that the author would have been more informative if he put some numbers to his valuation. If GVAX is a success, then what is the realistic value of CEGE? I would love to read a well-informed article answering this question.

[Georealist]

There is nothing "silly" about the comparison..since the "author" is looking at risk/reward..not market caps or size. CEGE..which can easily be found out by any investor able to read...is in late stage clinical trials for a prostate cancer vaccine called GVAX. This vaccine may..MAY..also be applicable to other cancers..it's still early..but Takeda is a HUGE move for CEGE.
How does any investor "know" "most assuredly" that Citi can't or won't go to $2 or $3...but then how could they? That would be like, well, Bear Stearns going from $50 to $2....

[skeptical1]

This article leaves one wondering if the author is truly naive to believe that one can hope to purchase C at $11, or if he is being disingenuous. And comparing it to a biotech hopeful!

As Mr. Cramer says, if C ever does get to $11, too many folks will be backing up the proverbial truck. Or perhaps way before that.

[rahavelich]

I too think CEGE will be a long term winner. It is amazing how the shorts are manipulating many stocks today. The point that I liked about your piece was that we do not know but the "investment" could have much greater returns than past traditional investments.

[chateauwal]

PRAN will explode!!!

Wait and see

[frflyer]

The 10 billion market cap for CEGE is not that out of line if their GVAX drug is succesful. That may be a big if, but it would be proof of principal for GVAX in general, which is in clinical trials for two other types of cancer. If it works in one, it will probably work in others.

[biofest]

Excellent comparison - CITI vs CEGE. Who knows if FDA will approve GVAX but if they do $80 is not impossible. I remember CEGE over $50. Steve Sherwin is a bright guy working for the long haul. SPPI is also very interesting with multiple potential products and reasonable cash.

[Georealist]

As a disclaimer I own a bunch of CEGE...for those interested in learning more about it go to the Yahoo quote on CEGE and hit message board..You will, of course, come across complete morons on occasion. On the other hand you'll find posting by some VERY astute people who have analyzed very deeply.
As for anyone who thinks Citi can't go to $11...in June of 2007..LESS THAN A YEAR AGO..CITI WAS $52.50..HOW ABOUT SOME PEOPLE DOING A LITTLE DUE DILIGENCE???

[Whisper On The Wind]

I'm sticking with the bank(s). Drugs scare me - who knows how far down the road they'll discover some little thing that has very big repercussions? Sorry, but if Citi goes to 11, I'll cash in something else and just buy a bunch of Citi. And not that long ago, JPM was worth a whole lot less. And Bear was a whole lot more. But without the banks, who cares about the drugs?

[Georealist]

Banks don't scare you??! Amazing..I wouldn't think there is a predictable downside. Drug "discoveries"... are really very long, arduous drug development and testing scenarios... not like Financials which can blow billions early in the week.