(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)
Senesco (SNTI.OB) is one of the most undervalued biotech companies I have ever analyzed. The company has developed a new oncology drug that has outperformed the best oncology drug on the market. But what I really like about this investment is that even with excellent clinical trial results, near-term catalysts, insider buying, and a $75 billion total addressable market, Senesco is trading at a 90% discount to its peers. This is market irrationality at its best. Opportunities of this magnitude are rare.
Senesco's mispricing will not last
Senesco's mispricing is so dramatic that the following price targets appear unrealistic. But when conducting peer comparisons, these price targets are justifiable; it's Senesco's ridiculously low $7 million valuation that defies logic. I have consulted with numerous Wall Street veterans as well as biotech opinion leaders, and they agree that the following valuations are more appropriate than Senesco's current valuation:
- Senesco is worth at least $30 to $40 million today given its positive clinical data and total addressable market of over $75 billion.
- When Senesco reports preliminary clinical data in a couple of months, with positive results Senesco should be worth at least $100 million.
- With continued positive clinical data in 2014 or a major pharmaceutical partnership, the company could be valued at well over $1 billion.
When Wall Street becomes aware of the extreme level of mispricing, Senesco's share price should rise to a more appropriate level. Then it's just a matter of waiting for near-term catalysts.
Why is Senesco so undervalued?
Two months ago, Senesco was trading at more than 2 times today's valuation, or $18 million, which was still low. At first glance, one would assume that Senesco had reported disastrous clinical trial results for the share price to fall so precipitously. After weeks of investigation and consultations with industry leaders and oncology experts, I concluded that quite the opposite is true. Clinical data have been excellent.
Another assumption would be that Senesco has reported some other type of negative news. Again, after a complete and thorough investigation, I could turn up nothing: no bankruptcies, lawsuits or scandals with management.
Senesco has been conducting the typical biotech financings that are to be expected with companies in the clinical trial stage. But that's something that biotech investors are familiar with; it just goes with the territory. Past dilution will be of little relevance once the upcoming reverse split takes place, because Senesco's share count will only be about 2 million.
I have determined that two factors have driven down Senesco's shareprice, and these factors have worked in tandem, amplifying the downward spin.
Number one: NASDAQ delisting
Last October Senesco's shareholder equity dropped below the required minimum, and the company was delisted from the NASDAQ exchange. This forced some investors to sell because they could not hold shares that were not listed on a major exchange. This was particularly true for Canadian shareholders who were forced to sell shares held in IRA accounts (the Canadian equivalent), once the delisting was announced. There were also shareholders that sold shares simply because they did not want to own any company on the OTC exchange.
Number two: Penny stock status
Much of the time, a company's penny stock status provides investors with sufficient and justifiable reasons not to own shares. But sometimes, as is the case with Senesco, a company's penny stock status provides phenomenal opportunity.
Many of my best investments have been the result of establishing long positions in extremely undervalued and undiscovered companies that were trading for pennies. It takes a high level of due diligence to make these investments, but when I find a high quality company hiding amongst the sea of penny stocks, the investment usually pays off because the level of undervaluation is often extreme. In many of these cases, it doesn't even take a catalyst to double or triple a company's share price, all that's needed is for Wall Street to become aware of the level of mispricing.
While the market perceives low market cap companies as risky, in reality, some of these quality companies are so undervalued that there is actually very little risk. This is classic Graham/Dodd theory at its best.
Senesco shares are currently trading at around $.03 which many investors see as a red flag signaling problems within the company. Once a company begins trading in this low range, investors just don't take the company seriously, no matter how good the fundamentals are. When shares get below a certain level, a self perpetuating selloff often begins, regardless of a company's fundamentals. This scenario sometimes sets up an ideal investment opportunity, as is currently the case with Senesco.
Management could have solved this problem long ago simply by conducting a reverse split, but management made the mistake of focusing on the science and neglecting capital structure. Senesco will be remedying this tactical error later on this quarter by initiating a reverse split, but the damage has been done. Fortunately for new investors, Senesco's mistake creates a phenomenal opportunity.
I saw the same thing happen with MusclePharm (OTCQB:MSLP) when it was trading for less than a penny. Wall Street completely ignored the company's greatly improved fundamentals and focused only on the share price.
Once MusclePharm conducted a reverse split, investors began to pay attention to the fundamentals because MusclePharm was no longer a penny stock. Within a couple of months, MusclePharm's shareprice went from $4 to $12. I bought shares before and after the reverse split which proved to be one of my best investment decisions this year. To read my last MusclePharm article, please click here.
Senesco's penny stock status does give investors one big advantage. Price swings are often exaggerated with penny stocks in a way that is not seen in stocks trading over one dollar. Psychologically it's easier to go from $.03 to $.30 than it is to go from $3 to $30 even though the magnitude is equivalent in either case. A 10X or 20X return with penny stocks is not uncommon.
Wall Street is completely ignoring Senesco's positive clinical data and level of undervaluation, but that will change. At some point investors will recognize the quality of the clinical data, and these investors will become buyers. At that point I would expect share price appreciation beyond what one would normally expect.
Reverse split and NASDAQ re listing are positive catalysts
Senesco will be conducting a reverse split later on this quarter which should be a positive catalyst for the share price. As I stated in a previous article, 3 months after a reverse split, on average, a company's shareprice appreciates 13% to 16%. This is a little-known catalyst that should boost Senesco shareprice even more. All of my Seeking Alpha investments have delivered double and triple digit short-term returns following a reverse split.
After the reverse split, Senesco will have about 2 million shares outstanding. This tight share count, should also amplify Senesco's upward trajectory. When you have a large number of investors trying to buy a limited number of shares, share price appreciation is often extreme. A perfect example is Spherix (NASDAQ:SPEX), with its very low float. On Monday, the shares went from $9-$27.
Another positive catalyst should be a NASDAQ relisting. This event would bring in a whole new wave of buyers, institutions in particular, who will only come in after the relisting. For example, Organovo (NASDAQ:ONVO) went from $3.90 to $8.50 following the company's recent relisting.
A near-term financing should benefit shareholders
I believe Senesco will conduct a financing sometime before the end of the year. Senesco's cash position as of March 31, 2013 was $1.6 million, and $1.1 million was raised since then, giving Senesco a total of $2.7 million, minus burn.
The company's burn rate fluctuates, but I estimate Senesco will not conduct a financing until after the reverse split and preliminary clinical trial results announcement. The timing is perfect because these two events should allow the company to obtain very favorable terms, (no discount or warrant coverage). With good clinical data Senesco should have investors clamoring to participate in the financing because they will not be able to obtain sufficient blocks on the open market.
Here is how I see events unfolding:
- Mid-September 2013: reverse split completed.
- Early October 2013: preliminary clinical results announced.
- October or November 2013: financing completed.
From my perspective, a 100% equity-based financing would be good for shareholders for the following reasons:
Number 1: The increase in shareholder equity should allow for a NASDAQ relisting.
Number 2: A stronger balance sheet will increase Senesco's leverage when negotiating with potential partners.
Number 3: A stronger balance sheet combined with a NASDAQ relisting should attract institutional investors.
Again, to use MusclePharm as an example, following MusclePharm's most recent financing, the shares surged from $4-$12. The shares were priced at $4 (no discount or warrant coverage) which set a solid foundation for the share price. Once the company's balance sheet was strengthened, Wall Street was more comfortable investing in MusclePharm. I believe a financing will benefit Senesco in the same way.
What is Senesco worth when compared to peers?
This is where the story gets really interesting. When compared to peers, Senesco should be valued above $40 million, not today's $7 million. I will compare Senesco to 3 oncology companies at various stages of development:
- Geron (NASDAQ:GERN): similar stage of development as Senesco but with poor clinical trial results. Valuation: $180 million
- Genmab (OTCPK:GNMSF): similar stage of development as Senesco with positive clinical trial results. Valuation: $1.4 billion
- Pharmacyclics (NASDAQ:PCYC): further advanced than Senesco with positive clinical trial results. Valuation: $8.5 billion
Geron's lead drug is not performing well
Geron is a clinical stage company whose lead cancer drug, Imetelstat has performed poorly in clinical trials. Geron's pipeline has shrunk from 6 candidates last fall down to 2 candidates. The company announced it is winding down the breast cancer, small cell lung cancer, and brain metastases studies. Geron said that it intends to discontinue its discovery research and diagnostic programs, and will shut down its research lab.
What do you think Geron is worth? Certainly less than Senesco's $7 million valuation. After all, Senesco's trial results have been excellent. Well guess again. Geron is currently valued at $180 million. Even if you back out the cash component, Geron still has a valuation of $100 million.
I'm not saying that Geron is overvalued. Geron's valuation demonstrates just how valuable oncology assets are. Oncology drugs represent a $75 billion total addressable market, so even the slightest hope that a drug will succeed, provides a high level of valuation.
When comparing Senesco to Geron, Senesco's undervaluation becomes more obvious. Don't you think that Senesco with its excellent clinical trial results should be given a higher valuation than Geron with its less successful clinical trials?
Genmab: the best comparison to Senesco
Genmab represents the closest comparison to Senesco because both companies are tackling multiple myeloma with drugs that are in phase 1B/2A clinical trials.
Genmab agreed to a deal with Johnson & Johnson that could be worth over $1.1 billion. In this deal Johnson & Johnson is only getting the license rights to Genmab's multiple myeloma drug, Daratumumab.
If Genmab and Senesco are in the same stage of development, and Genmab's multiple myeloma drug is worth $1.1 billion, shouldn't Senesco be worth $1.1 billion also?
No. Genmab's partnership with Johnson & Johnson creates considerable value that Senesco does not yet have. However, once Senesco has a major partner, the company's valuation could go well beyond $1 billion, given the multiple markets Senesco should be addressing.
Senesco may not be worth $1 billion yet, but it is definitely worth more than $7 million. If we value Senesco at a mere 10% of Genmab's Daratumumab valuation, that still gives Senesco a valuation of over $100 million.
Pharmacyclics: an $8.5 billion company in phase III trials
Pharmacyclics shares have risen from $5 to $118 in the last two years. This clinical stage company has developed an effective new cancer drug that could become a blockbuster once it is brought to market. Pharmacyclics is currently conducting phase III trials, and even though the company has never sold any products, it has a valuation of over $8.5 billion
Pharmacyclics should be trading at a higher valuation than Senesco, primarily because it has advanced to phase III clinical trials, versus Senesco's phase 1B/2A trials. Also, Johnson & Johnson's partnership adds considerable value.
But one thing to keep in mind is that Senesco could be addressing a larger market than Pharmacyclic because of the programmable capabilities of Senesco's gene technology. This will allow Senesco to target most types of cancer. If Senesco is able to successfully advance to phase III clinical trials, Senesco should ultimately receive a valuation larger than Pharmacyclics.
What is Senesco worth today?
Most experienced biotech investors would agree that a $7 million valuation for Senesco is way too low. One could argue that Senesco should be valued somewhere between Geron's $100 million valuation, and Genmab's $1.1 billion valuation.
From my perspective, in a worst-case scenario, Senesco should be worth at least as much as Geron given that Senesco's clinical results have been stellar, and Geron's have been disappointing.
Still not convinced? Okay, let's say that Senesco is only worth 50% of Geron's $100 million valuation, or $50 million. At $50 million, Senesco looks like a real bargain compared to Geron. That is still a 7X return on today's shareprice.
What is Senesco worth with more positive clinical data?
If Senesco reports more positive clinical data in the next couple of months, the company's valuation should go up considerably. At that point Senesco should have a valuation considerably greater than Geron's.
In my opinion, with robust data, Senesco should be conservatively valued between $100 million and $150 million. With a solid partnership, a $1 billion valuation would not be surprising.
Senesco's lead drug kills cancer cells without affecting normal cells
Senesco's lead drug, SNS01-T has outperformed the best cancer drug on the market. I recommend all investors study this presentation that was given at the American Society of Hematology late last year. The results are stunning.
Senesco's methodology revolves around a gene therapy and small inhibitory RNA approach. The gene is delivered with a specific set of instructions that allow it to only kill the cancer cells without affecting the normal cells.
This is a significant breakthrough because Senesco has found a way to kill the cancer cells without creating collateral damage. In other words, healing without side effects. Given the horrendous side effects of most oncology drugs, Senesco's stellar safety profile could help the company capture a large share of the oncology market.
Senesco's gene technology could treat most types of cancer
If Senesco's first drug continues to achieve clinical success in treating multiple myeloma, the company will be able to program its gene for different types of cancer treatment simply by changing the promoter. For example, if the company wanted to target liver cancer, it would use a liver cancer specific promoter. For lung cancer, Senesco would use a lung cancer promoter.
With this approach, Senesco should be able to treat most types of cancer, thus creating a practically endless pipeline. Each new cancer drug that is added to the pipeline could add at least $500 million to Senesco's top line.
How big is the cancer drug market?
When you look at the total addressable market for all cancer drugs, Geron's seemingly high valuation looks justifiable. Worldwide cancer drug sales was estimated to be $75 billion for 2012. Here is a breakdown of the top cancer drugs in the United States:
With numbers like this, it becomes clear why oncology companies are given such high valuations, and why Senesco should be given a higher valuation.
Any new cancer drug that can demonstrate efficacy while limiting side effects should be able to capture a large market share. Senesco could become a major force in the cancer drug market because of Senesco's potential to address all types of cancer.
Senesco's total addressable market could reach $75 billion
Could Senesco ultimately capture a large portion of the $75 billion market? Yes, if it continues to generate positive clinical results, Senesco's drug pipeline could eventually treat most of the 200 different types of cancer.
That's why the current clinical trial results are so important; if Senesco is able to successfully treat multiple myeloma, that success could be multiplied up to 200 times over. Remember, all Senesco needs to do is change the promoter in order to address each type of cancer, a relatively simple and inexpensive process.
Senesco's multiple myeloma drug offers the company an incredible degree of leverage, given that success with this drug suggests success with a large number of other drugs. Wall Street doesn't understand this relationship yet, but once it becomes clear, Senesco's valuation should be considerably greater than $7 million.
Future drugs will be less expensive to develop, and quicker to market
Once Senesco completes clinical trials for its first drug, it will be able to use all the data from those trials to develop the new drugs. The company will be able to immediately go into late stage phase II or phase III trials, which will allow the new drugs to be brought to market rapidly, and at a relatively low cost. This is important because Senesco will be able to increase shareholder value at an accelerated rate.
Why I believe the current clinical trials will produce positive data
Senesco's current 3rd cohort clinical trial is important because all patients are receiving dose levels many times greater than levels received in the first 2 cohorts. Most importantly, in animal studies, this is the dose level that began to demonstrate a high level of efficacy.
So far, in the first two cohorts of the current human studies, the clinical results have been excellent. Not only has the safety data been strong, but there have been surprising positive indications of efficacy as well. (Efficacy wasn't expected at the lower dose levels).
Given the positive data we have seen with the higher dose level in animal studies, in my opinion, we should see positive human data in this current cohort also, especially when you consider that efficacy was seen in the lower dose levels. If Senesco reports positive data for the 3rd cohort, share price appreciation could be extreme.
Senesco's business plan offers tremendous leverage
Senesco's initial strategy involves partnering with larger pharmaceutical companies and receiving milestone and royalty payments as opposed to taking on the expense of commercializing the products. I like this model because it gives Senesco potentially huge revenue streams, while keeping expenses to a minimum. Senesco's decision to partner each drug also keeps shareholder dilution to a minimum.
Once Senesco partners its multiple myeloma drug, the company should be in a very strong financial position. Senesco will then be able to begin phase II or phase III trials for the next drugs which will be partnered individually.
In other words, if Johnson & Johnson (NYSE:JNJ) were to partner the multiple myeloma drug, that agreement would not give Johnson & Johnson any rights to Senesco's other cancer drugs, unless Johnson & Johnson paid for the right to future drugs. In my opinion, Senesco will never sell or license its core gene technology (unless it sold the whole company), but it will sell and license each individual drug. This would produce revenue streams that could be mind-boggling.
It's difficult to anticipate what percentage of the 200 different types of cancer Senesco could ultimately treat, but even if Senesco could only capture 25% of the market, the company would be a powerhouse in the pharmaceutical industry.
When could Senesco bring in a major partner?
With Senesco's excellent preclinical and phase 1B/2A clinical data, it's inevitable that Senesco has already been approached by potential pharmaceutical partners. We could see a partnership announcement anytime now. That would bring in near-term revenue which would benefit shareholders.
But realistically I don't expect any partnership announcements before the current clinical trials are completed. The longer Senesco is able to wait before committing to a partner, the better the terms will be for Senesco.
As an investor, even an early partnership with a relatively low $250 million milestone and royalty deal, would still give me a huge return on my investment.
Senesco's agricultural gene technology is worth more than Senesco's market capitalization
Senesco scientists are not limiting the company's technology to cancer treatment. Senesco's agricultural lab has developed a gene technology which allows plants to thrive in spite of disease, drought, poor soil and other negative conditions. This technology also helps plants to produce larger crops.
Thus far, in the greenhouse, Senesco's gene technology has performed exceedingly well. Currently, Senesco's agricultural partners, which include Monsanto (NYSE:MON), Bayer (OTCPK:BAYRY), and Scotts (NYSE:SMG), are conducting field studies. I expect field data to be reported in 6 to 12 months, and if most of the partners report positive data, this could be worth over $20 million in milestone and royalty payments.
Most investors aren't even aware of this hidden asset. In my opinion, Senesco's agricultural division is currently worth more than Senesco's $7 market capitalization. With positive field data, Senesco's agricultural division should be worth at least $50 million.
ImClone's cofounder is behind Senesco
As is always the case, great management is as important as a great product. One reason I invested in Senesco was Dr. Harlan Waksal's involvement with the company. He is currently chairman of the board, and in my opinion, he is one of the company's best assets.
Dr. Waksal cofounded the biotech company, ImClone systems which sold for $6.5 billion, to Eli Lilly after a bidding war with Bristol-Myers Squibb. In my opinion, Dr. Waksal would not be investing his time in Senesco unless he believed a similar payoff was probable.
Christopher Forbes has a large position in Senesco
Christopher Forbes, the vice-chairman of Forbes publishing company, has a large stake in Senesco. In 2010, he increased his ownership to 44.7% by purchasing shares from Stanford Venture Capital. Mr. Forbes has been on the Senesco Board of Directors since 1999, so he knows more about Senesco's prospects than most.
Management has been aggressively buying Senesco shares
Late last year, there was considerable insider buying. Harlan Waksal purchased almost 2 million shares at $.26, and Christopher Forbes purchased over 4 million shares, also at $.26.
We are now presented with a rare opportunity because we can buy shares substantially below where the insiders increased their positions. Remember, insiders generally do not buy unless they have substantial reasons to believe that the company will succeed.
Celgene should be looking at Senesco as a buyout candidate
Johnson & Johnson or Pfizer (NYSE:PFE) could buy Senesco, but Celgene (NASDAQ:CELG) should be especially interested in Senesco based on last year's exceptional clinical trial results where Senesco combined its drug with Celgene's Lenalidomide. This combination completely eliminated tumors in over 80% of the animals treated with the optimal dose. Even more impressive is the fact that the tumors did not come back. With more positive clinical data, I would be surprised if Celgene didn't make an offer.
What's the risk?
Senesco's primary risk revolves around the upcoming clinical trial results. The current trial is using significantly increased dose levels, so safety will be a concern, even though dose escalation was not a problem in earlier trials.
But in my opinion, risk is diminished given Senesco's severe undervaluation. Even if the clinical trials were to produce negative results, the agricultural division should still be worth more than today's valuation. This added value drastically reduces downside risk.
What's the trade?
Senesco presents an ideal asymmetrical trade: huge upside potential, with limited downside risk. Senesco is completely ignored by Wall Street, and an $7 million valuation is way too low. Buying shares today is like buying cheap call options with no expiration date.
Once Wall Street becomes aware of the extreme mispricing, Senesco shares should more than double. As we get closer to clinical trial results, shares should rise again in anticipation of positive data. If positive data is reported, Senesco's valuation could exceed $100 million. With a major partnership, a $1 billion valuation would not be surprising.
I have spent the last two months researching and analyzing all aspects of Senesco's business, including dozens of hours on conference calls with management, physicians, opinion leaders, oncology experts, and Wall Street biotech veterans.
My final determination is this: Senesco is one of the most undervalued biotech's I have ever analyzed. The company has potential blockbuster drugs that could address a large portion of the $75 billion oncology market. I have invested heavily in Senesco, because if this company continues to execute, Senesco could ultimately have a valuation even greater than Pharmacyclics current $8.5 billion figure.
For complete disclaimer and disclosure information please click here
Disclosure: I am long SNTI.OB. 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.