Author's note: This article was presented early to subscribers of the Total Pharma Tracker, and they also got further insight into how best to use these tools in making investment decisions.
Biotech holds a special place in my heart, both for the way it captures the imagination and for its explosive growth potential. This makes it a field full of interesting happenings, where every day you can find a company blowing up or cratering. In many cases, these are the penny stocks that you should avoid in the first place.
But if you're reading this, then you're probably like me: tempted by the allure of explosive growth potential. And you're also probably confused as anything when it comes to identifying promising players. With everyone who asks me for my opinion on company X, I am reminded of the golden question for biotech in general:
How can I consistently pick winners through analysis?
If you follow the tenets of fundamental analysis, the way forward is simple, if not laborious. Gather information on the prevailing headwinds facing a company. Gather information on the company's products. Gather information on the company's cash flows. Use this information to gauge where there is a gap in the market's current valuation and where the company should be.
But in biotech, you are missing so many pieces of that puzzle. First, a clinical-stage biotech, by definition, has no products. They have few, if any, sources of revenue, and they are almost always cash flow negative for the entire time you would be drawn to them. Furthermore, if a company scores a big breakthrough in a medical unmet need, it doesn't matter what the Fed is doing to interest rates. It doesn't matter if the economy is undergoing a recession, even.
Of course, market conditions can and do affect aspects of a speculative biotech's business. It can affect what kinds of loans and other sources of funding, in particular. I'm only pointing out that biotech is associated with these unique binary events, where suddenly a product exists on the market where there was none before, with a night and day difference made for the company in question.
So fundamental analysis is possible, but very challenging.
What I look for in a cancer stock
My realm of choice is oncology, given my scientific training. It's where I'm comfortable and most familiar with the processes in drug development. And it's where I feel most comfortable offering some kind of advice.
On one hand, people find that they need help with scientific material, as concepts like clinical trials, endpoints, and statistical analysis are lost on a lot of people. They are very complicated, even if you're just trying to ask a simple question like "does my drug prolong life?"
Scientific analysis is beyond the scope of this article. No, what I'm interested in conveying to you today is a method for quickly gauging a company's likelihood that they have enough cash in the till to get them through major milestones without hitting up the shareholders via some dilutive funding arrangement.
You might find a company with hundreds of millions of dollars in the bank, get excited, and invest. Only to find out years later that their increasing costs got the better of them.
By buying in too early, you risk eroding your investment in three different ways. First, if you bought during a period of hype, you risk capital losses. These are your general bag holders, who we are all loathe to become. So now you're sitting ugly, waiting for the stock to go up just so you can break even.
Second, your investment will be eroded by public offerings of shares. This is all but a guarantee, and you need to work it into your expected return when assessing the risk.
Third, the time it takes to realize the gain in your investment incurs an opportunity cost. You lose purchasing power via inflation. You lose out on other potential investments you could have made, if only your money wasn't tied up in a phase 1 flyer.
All of this isn't me telling you "never buy a phase 1 stock." I'm only saying you need to get a handle on the realistic outlays that will be necessary for getting a drug to market.
Timelines in drug development
Clinical development takes a long time. No surprise there. But a lot of shareholders find themselves squarely ignorant as to just how much time that means. The length of time from phase 1 to approval has continually stretched out over the years, as treatments have tended to get better.
In part, this is reflective of a good thing. Improvement in treatment options means that you need longer follow-up times to see a benefit for a new drug. Good for patients, bad for new drugs.
Overall, as of 2014, the following average timelines can be expected for oncology clinical trials:
- Phase 1 - ~32 months
- Phase 2 - ~40 months
- Phase 3 - ~50 months
- Filing of an NDA to acceptance, review, and approval, ~12 months
At its worst, then, this process can take upwards of 130 months from inception of clinical studies to approval. Of course, in many cases you will see companies initiate later-stage clinical studies before the official termination of a prior study, particularly in the case of drugs that show early promise. So we might be able to cut these times by as much as half, depending on a number of factors.
This is how I think about companies when gauging their potential. How many quarters will it take this drug to make it to market, if things generally go well?
Does the company have enough money to make it there? As a rough guide, we can generally expect the following time needs for companies currently in phase 1, phase 2, etc:
Quarters of cash needed
These ranges allow for some wiggle room in the timelines, and I add a few quarters to give the company extra time to get a drug launched once it is approved.
Initial assessment of a company's financial state needs to take these timelines into account. And then we need to square this against the burn rate as best as we can. We can get an early sense of where the companies with relatively strong cash positions are if we square away a company's burn rate with their short-term holdings and cash/cash equivalents.
So that's what I'm going to do for you today. I went through a list of cancer biotechs trading on the Nasdaq (at least for now) and pulled this relevant financial information into a spreadsheet. For the most part, this list is limited to companies that currently have no drug approved, and thus rely on their existing partnerships and cash positions to fund operations. Here is an example entry:
|Company name||Ticker||Phase||Market cap (M)||Short-term investments||Cash/equivalents|| |
Net quarterly loss
|Quarters of funding left||Cash needed, lower bound||Cash needed, upper bound|
What we have here is the company's name and ticker, as well as the phase of its most advanced product. Market capitalization gives you a sense of the size of the company, and generally how the market values it at this time. Next are the pertinent pieces of financial information. Companies can usually tap their short-term investments within a few months, so I count them as long-term cash here. Net quarterly loss reflects the losses after taxes.
Then, I express the amount of cash the company will need in two terms, an upper and a lower bound. This reflects the company's current cash burn rate and the expected range of time it will take to see the drug to market, given what stage it is in. There are a few assumptions baked into this calculation, for the sake of simplicity:
- Burn rate will not increase. This is not a safe assumption, as drugs get more expensive to develop as you advance to later stages. But if your company doesn't have enough money to meet this timeline, then it won't have enough cash as burn rates grow, either.
- That the company is just embarking on the trial in question. "Phase 3" could mean the beginning of phase 3, somewhere in the middle, or one day before the top-line data are announced.
I accept these errors, though, for the sake of developing a screening tool that can help identify companies with stronger-than-average cash positions. If you have enough cash on hand to get you through the entirety of phase 3 at current burn rates, then you deserve a deeper look, in my mind.
|Company Name||Phase||Market Cap (NYSE:M)||Short-Term Securities||Cash @ End of Quarter||Quarterly Cash Loss||Quarters of Money Left||Money needed (lower bound)||Money needed (upper bound)|
|Aduro Biotech, Inc. (ADRO)||1||551.111||$207M||$100M||$21M||14.92||$311M||$697M|
|Advaxis, Inc. (ADXS)||3||96.4||$9M||$49M||$13M||4.32||$36M||$170M|
|Aeglea Bio-therapeutics, Inc. (AGLE)||1||221.3869392||$33M||$11M||$8M||5.35||$200M||$352M|
|Affimed N.V. (AFMD)||2||140.4005252||$M||$47M||$9M||5.14||$99M||$236M|
|Aileron Therapeutics, Inc. (ALRN)||2||76.7945472||$37M||$7M||$8M||5.71||$78M||$192M|
|Alpine Immune Sciences, Inc. (ALPN)||Pre||125.8904916||$69M||$7M||$5M||14.32||$191M||$191M|
|Altimmune, Inc. (ALT)||2||12.4070496||$M||$8M||$3M||2.55||$43M||$90M|
|Aptevo Therapeutics Inc. (APVO)||2||121.1557082||$50M||$12M||$14M||4.45||$160M||$368M|
|Arcus Biosciences Inc (RCUS)||1||731.0763003||$82M||$198M||$13M||21.63||$108M||$351M|
|ArQule, Inc. (ARQL)||1||513.9463495||$32M||$11M||$7M||6.57||$153M||$276M|
|ASLAN Pharmaceuticals (ASLN)||3||261.132432||$39M||$29M||$9M||7.48||-$4M||$86M|
|Athenex, Inc. (ATNX)||3||1101||$67M||$39M||$7M||14.51||-$55M||$18M|
|Atossa Genetics Inc. (ATOS)||2||7.375||$M||$5M||$2M||2.55||$25M||$53M|
|AVEO Pharmaceuticals, Inc. (AVEO)||3||342.988||$11M||$16M||$9M||3.00||$36M||$126M|
|Bellicum Pharmaceuticals, Inc. (BLCM)||1||407.294||$50M||$32M||$23M||3.59||$603M||$1031M|
|Benitec Biopharma Limited (BNTC)||2||31.552||$M||$11M||$3M||3.38||$39M||$86M|
|BeyondSpring, Inc. (BYSI)||3||632.209||$31M||$8M||3.79||$26M||$106M|
|BioLineRx Ltd. (BLRX)||2||106.366||$44M||$5M||$5M||10.19||$28M||$101M|
|Bio-Path Holdings, Inc. (BPTH)||2||19.511||$M||$4M||$2M||2.24||$26M||$55M|
|Blueprint Medicines Corporation (BPMC)||3||3237||$472M||$135M||$57M||10.74||-$211M||$354M|
|Calithera Biosciences, Inc. (CALA)||2||184.6||$96M||$55M||$13M||11.43||$60M||$258M|
|Cellectar Biosciences, Inc. (CLRB)||2||17.099||$M||$7M||$3M||1.96||$49M||$101M|
|Celsion Corporation (CLSN)||3||46.779||$18M||$2M||$4M||4.62||$11M||$55M|
|Celyad SA (CYAD)||1||380.161||$13M||$27M||$17M||2.40||$459M||$770M|
|Checkpoint Therapeutics, Inc. (CKPT)||1||99.567||$M||$35M||$9M||3.98||$228M||$392M|
|ChemoCentryx, Inc. (CCXI)||3||591.767||$116M||$31M||$9M||15.56||-$81M||$14M|
|Corvus Pharmaceuticals, Inc. (CRVS)||1||366.088||$41M||$103M||$14M||10.06||$285M||$553M|
|CTI BioPharma Corp. (CTIC)||3||284.107||$M||$105M||$14M||7.46||-$6M||$134M|
|Cyclacel Pharmaceuticals, Inc. (CYCC)||1||17.516||$M||$24M||$2M||15.38||$23M||$52M|
|CytomX Therapeutics, Inc. (CTMX)||1||971.99||$219M||$142M||$15M||23.33||$103M||$394M|
|Deciphera Pharmaceuticals, Inc. (DCPH)||3||1220||$M||$180M||$21M||8.39||-$30M||$184M|
|DelMar Pharmaceuticals, Inc. (DMPI)||3||18.71||$M||$9M||$3M||2.90||$12M||$41M|
|Diffusion Pharmaceuticals Inc. (DFFN)||3||28.8||$M||$16M||$3M||4.89||$7M||$40M|
|Dynavax Technologies Corporation (DVAX)||2||1021||$215M||$36M||$39M||6.44||$373M||$957M|
|Eleven Biotherapeutics, Inc. (EBIO)||3||157.227||$M||$20M||$4M||4.97||$8M||$48M|
|Endocyte, Inc. (ECYT)||3||986.228||$79M||$19M||$12M||8.47||-$17M||$98M|
|Epizyme, Inc. (EPZM)||2||1100||$118M||$130M||$34M||7.28||$297M||$808M|
|ESSA Pharma Inc. (EPIX)||1||20.892||$M||$2M||$2M||0.88||$62M||$102M|
|Evelo Biosciences (EVLO)||Pre||412.677||$85M||$114M||$11M||18.98||$326M||$326M|
|FibroGen, Inc (FGEN)||3||4941||$45M||$659M||$41M||17.00||-$414M||$M|
|Five Prime Therapeutics, Inc. (FPRX)||2||611.586||$323M||$66M||$20M||19.10||-$63M||$243M|
|Fortress Biotech, Inc. (FBIO)||1||174.048||$37M||$124M||$38M||4.21||$986M||$1702M|
|G1 Therapeutics, Inc. (GTHX)||2||1372||$M||$194M||$20M||9.52||$132M||$438M|
|Geron Corporation (GERN)||2||655.112||$82M||$8M||$7M||12.49||$25M||$133M|
|GlycoMimetics, Inc. (GLYC)||3||755.074||$M||$243M||$12M||21.08||-$162M||-$47M|
|GTx, Inc. (GTXI)||2||451.546||$17M||$15M||$14M||2.37||$185M||$388M|
|Heat Biologics, Inc. (HTBX)||2||44.531||$M||$9M||$4M||2.40||$51M||$107M|
|Immune Design Corp. (IMDZ)||2||218.969||$59M||$72M||$13M||9.84||$82M||$281M|
|ImmunoGen, Inc. (IMGN)||3||1508||$M||$218M||$39M||5.66||$52M||$438M|
|Immutep Limited (IMMP)||2||85.401||$M||$14M||$4M||3.59||$47M||$105M|
|Infinity Pharmaceuticals, Inc. (INFI)||3||103.729||$17M||$31M||$9M||5.06||$18M||$113M|
|Karyopharm Therapeutics Inc. (KPTI)||3||1047||$93M||$37M||$38M||3.40||$138M||$523M|
|Kura Oncology, Inc. (KURA)||2||595.049||$112M||$27M||$15M||9.46||$95M||$315M|
|Loxo Oncology, Inc. (LOXO)||NDA||5426||$606M||$10M||$4M||173.36||-$603M||-$588M|
|MacroGenics, Inc. (MGNX)||3||911.565||$60M||$200M||$49M||5.25||$86M||$581M|
|MEI Pharma, Inc. (MEIP)||3||310.844||$30M||$6M||$21M||1.74||$110M||$318M|
|Merrimack Pharmaceuticals, Inc. (MACK)||2||127.424||$42M||$34M||$18M||4.29||$208M||$475M|
|Mersana Therapeutics, Inc. (MRSN)||1||380.057||$76M||$32M||$12M||8.70||$264M||$497M|
|Merus N.V. (MRUS)||2||441.521||$M||$177M||$22M||8.20||$168M||$491M|
|Mirati Therapeutics, Inc. (MRTX)||2||1530||$128M||$21M||$15M||9.91||$91M||$316M|
|Molecular Templates, Inc. (MTEM)||2||151.539||$M||$49M||$9M||5.65||$90M||$221M|
|Moleculin Biotech, Inc. (MBRX)||1||50.267||$M||$13M||$2M||6.81||$45M||$81M|
|Mustang Bio, Inc. (MBIO)||1||192.513||$37M||$18M||$6M||8.72||$134M||$251M|
|Nektar Therapeutics (NKTR)||1||9213||$262M||$35M||$96M||3.10||$2577M||$4373M|
|NewLink Genetics Corporation (NLNK)||2||197.533||$M||$144M||$18M||7.86||$149M||$424M|
|NuCana plc (NCNA)||3||877.337||$M||$14M||$1M||10.59||-$5M||$9M|
|Oasmia Pharmaceutical AB (OASM)||3||75.755||$M||$28M||$5M||5.67||$7M||$56M|
|Odonate Therapeutics, Inc. (ODT)||3||714.815||$M||$195M||$17M||11.57||-$77M||$92M|
|OncoMed Pharmaceuticals, Inc. (OMED)||1||106.454||$74M||$14M||$6M||15.86||$79M||$183M|
|Onconova Therapeutics, Inc. (ONTX)||3||40.353||$M||$7M||$5M||1.43||$28M||$79M|
|OncoSec Medical Incorporated (ONCS)||2||76.137||$M||$18M||$11M||1.67||$154M||$315M|
|Progenics Pharmaceuticals Inc. (PGNX)||NDA||654.622||$M||$83M||$13M||6.21||-$30M||$24M|
|SELLAS Life Sciences Group, Inc. (SLS)||2||33.409||$M||$3M||$8M||0.43||$124M||$244M|
|Sierra Oncology, Inc. (NASDAQ:SRRA)||2||257.118||$M||$134M||$12M||11.61||$51M||$223M|
|Stemline Therapeutics, Inc. (STML)||2||510.259||$84M||$15M||$18M||5.40||$195M||$471M|
|Surface Oncology (SURF)||1||386.914||$132M||$59M||$31M||6.12||$745M||$1331M|
|Sunesis Pharmaceuticals, Inc. (NASDAQ:SNSS)||1||78.71||$4M||$21M||$7M||3.49||$193M||$329M|
|Syndax Pharmaceuticals, Inc. (SNDX)||3||205.799||$85M||$28M||$19M||5.84||$23M||$217M|
|Syros Pharmaceuticals, Inc. (SYRS)||2||424.169||$27M||$94M||$14M||8.42||$110M||$327M|
|TapImmune Inc. (TPIV)||2||102.883||$M||$3M||$3M||0.88||$48M||$96M|
|TG Therapeutics, Inc. (TGTX)||3||1050||$26M||$83M||$42M||2.63||$182M||$597M|
|Tocagen Inc. (TOCA)||3||196.143||$56M||$18M||$13M||5.75||$16M||$145M|
|Trillium Therapeutics Inc. (TRIL)||1||80.573||$45M||$29M||$9M||8.63||$183M||$344M|
|Tyme Technologies, Inc. (TYME)||1||336.328||$M||$11M||$6M||1.94||$156M||$260M|
|Unum Therapeutics Inc (UMRX)||1||354.489||$7M||$26M||$7M||4.81||$170M||$296M|
|UroGen Pharma Ltd. (URGN)||1||846.118||$M||$73M||$5M||14.60||$77M||$171M|
|Vascular Biogenics Ltd. (VBLT)||3||79.228||$M||$55M||$3M||21.54||-$37M||-$12M|
|Verastem, Inc. (VSTM)||3||363.826||$M||$64M||$21M||3.05||$83M||$294M|
|XBiotech Inc. (XBIT)||3||150.017||$M||$28M||$4M||6.98||$M||$41M|
|Xencor, Inc. (XNCR)||3||2326||$211M||$252M||$30M||15.47||-$253M||$46M|
|Xenetic Biosciences, Inc. (XBIO)||2||13.533||$M||$4M||$2M||2.12||$25M||$53M|
|Zai Lab Limited (ZLAB)||3||1207||$M||$84M||$38M||2.24||$179M||$554M|
|ZIOPHARM Oncology Inc (ZIOP)||1||598.685||$M||$51M||$16M||3.19||$429M||$730M|
If you're interested, I have a more comprehensive version of this chart available for download on my website. Feel free to check it out if you want to see this in the context of other information like PPS and average volume. Also, the spreadsheet is sortable.
We can learn some interesting information from this screening tool. For example, if we sort in ascending order by companies' needs for cash, these are the ten companies that need the least:
- Loxo Oncology
- Vascular Biogenics
- Fibrogen, Inc.
- NuCana plc
- Chemocentryx, Inc.
- Athenex, Inc.
- Progenics Pharmaceuticals
- Diffusion Pharmaceuticals
- XBiotech, Inc.
In several cases, the companies score well here because of a clear advantage: huge cash partnerships. LOXO is a standout here, as they have more than half a billion in cash on hand and short-term investments than they need to launch their first drug.
But the analysis turns up a few other interesting players, like Vascular Biogenics (market cap ~80 million) and NuCana (market cap 877 million). These are companies that don't get a lot of hype, but they have phase 3 trials ongoing and almost all the money they need, according to their current burn rates.
It is clear, then, that this kind of analysis is interesting for identifying potential new leads for your research. If you find a company with enough money on hand, then they are all the more likely to bring their research to fruition.
So here we were able to, in a simple way, take a huge list of stocks in the oncology sector and find the companies with the strongest cash positions as of their latest quarterly filings.
Hopefully, you will find this useful in quickly identifying companies that are more or less risky than others, to inform your need to do a deeper due diligence dive! Of course, screening stocks won't get you where you need to be. For that, you'll need to take a closer look at the company's management structure, as well as their science. Even then, I don't think you should go in blind. Rather, you should have a framework for trading and taking gains where you can. If you're interested, I just published a short book on Stock Trading based on a recent series I ran for Seeking Alpha. Here is the link!
Disclosure: I am/we are long ADXS. 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.
Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.