My hedge fund is short BioTime (BTX), a speculative "regenerative medicine" company. BioTime trades for a value of $221 million, but I think the company's enterprise is worth something closer to $20 million. With only $22 million in cash, and limited operations that seem to be ramping up, BioTime has a need for raising cash in the future. Without any great assets to attract investors, I predict BioTime shares will drop at least 50% in the next 12 months.
BioTime is a collection of stem cell assets. None are particularly exciting. Start with the pedestrian stem cell research tools the company offers. While BioTime tries to do their best "Life Technologies impression", sales of these products were a paltry $500,000 last year, hardly material. Their revenue from their Hextend products is around $1 million a year, and is probably worth $5 million in value. These are reasonable and real assets that are easy to value. There is about $6 million of value here, give or take. Let's now examine the rest of the company's assets, which putatively make up the rest of the value.
The company is going to develop a device called HyStem-Rx , which is a hyaluronan/collagen matrix. A lot of companies develop these gels and matrices, and it will be a hard market to break into without salespeople, promotion, etc. The company BioTime acquired to get this asset, Glycosan, was basically bankrupt and BioTime paid no cash to acquire the company, instead issuing what I believe is their overvalued stock.
PanC-Dx is BioTime's diagnostic that "could be the future alternative to the mammogram", according to the company. That shameless promotion should be censured by the SEC. With no clinical data or explanation of which biomarkers this test uses, and the quite early stage of development, BioTime should be embarrassed to be this promotional. Meanwhile, other companies have cancer diagnostics, and while that can be a great business, BioTime does not seem to have any proprietary technology. Their "antibody-based ELISA" (redundant) technology has been around for a long time, and the idea of scouring cancer patient blood for a reliable diagnostic is nothing new. I am skeptical the company has a "special sauce" here.
OncoCyte, OrthoCyte, ReCyte and CellCure are BioTime's drug companies. I'm sure the Company prefers to call them "regenerative medicine" companies or "insert revolutionary, awe-inspiring synonym here companies", but they're just plain old drug companies trying to develop stem cell drugs. These drug companies have never advanced a clinical candidate to a Phase 1 study.
This is a good time to step back and explain why stem cell therapeutics are not here yet and probably won't be here for a long time. I divide the stem cell pharmaceutical market into two categories, the real science and the pseudo-science. I'll not name too many private companies here, but I see a lot of different public, private and academic stem cell efforts. The less-serious companies, like Cytori, Baxter, Neostem and Mesoblast which attempt to harness adipose stem cells for some kind of paracrine effect, are having a hard time. These products don't work, show no signs of working, and are very low-tech.
The more advanced stem cell players, like Geron (NASDAQ:GERN), Advanced Cell Technology and Osiris (NASDAQ:OSIR) are very interesting and high-tech. These companies have tried human experiments with cells that actually might differentiate into various cell types. I generally view this approach as unwieldy and perhaps even dangerous. It's very difficult to tell what is going on inside the patient when administering one of these drugs. Geron gave up on this field after their Phase 1 study of human embryonic cells for a reason. The FDA was so afraid that their powerful embryonic stem cells might do harm, they required patient-by-patient dosing confirmation. Of course, the company so no effect in the trial. It's simply too hard to predict or expect how or why these cells will differentiate into new cell types, know how to stop etc. Without getting into too much biology, I will utter the word that strike fear into every stem cell advocates' heart because it is an important part of the point I'm trying to make: teratoma.
Teratomas, straight out of science fiction, are tumors with three germ layers expressed. Stem cells form teratomas (Tang et al 2012, Wesselschmidt 2011), and this is one of the many reasons the FDA fears (and should fear) stem cell therapeutics. The other obvious pharmacodynamics issues are important. Without an obvious mechanism of action, it is difficult to form boundaries on dosage (no Ki or IC50 here). Finally, I have always found the immunogenicity aspects of cell therapy questionable. If we're giving fully functional cells to patients, and not purified proteins, how can we be sure to not induce GvHD and other immune issues?
The field has a lot of challenges ahead of it and I would not race to invest in anything that moves. There are dozens, if not hundreds of stem cell companies. It doesn't always pay to "be first" in revolutionary technologies and fields. Ask Geron shareholders and the few dozen other stem cell failures. Also remember you could have owned one of the first antibody companies, Idec (IDPH), at their IPO when they had miracle phase 3 data and a filing for FDA approval for only $400 million market cap. The same exact math holds true for Centocor. Watch and wait and pounce on bargains. BioTime is not one of them.
I am updating the investment ideas I give you all once again. I am covering the Cytori (NASDAQ:CYTX) short that was recently recommended. I am not doing this because I think Cytori is now a great investment opportunity, or I am going long, or anything like this. I am doing this to illustrate the beauty of time-adjusted returns. If you do not think extremely carefully about how time impacts your investing performance, you are not investing properly. To put it more attractively and simply: if you optimize the duration of your investments, you can become very wealthy, very quickly.
Recognizing the power of a smaller gain in a shorter period of time, versus a large gain in a long period of time is important. Time is your main asset and liability. Shorter-term investments require smaller returns because the compounding you are allowed to engage in frees the requirement for a big return. Thus, capturing a 1% return every week in a large-cap security (or a portfolio of them) is preferred to capturing a 50% move in a stock over a 1 year period (1.01^52-1) = 68%. Depending on your investing style, it is often easier to predict several, smaller 1 to 5% moves than 50-150% moves. I don't mean to say that you shouldn't attempt to find large performance outliers - I have a long set of theory I've developed on that - but you shouldn't ignore the opportunity to make great time-adjusted trades. Eventually, you may "crowd out" the market for these opportunities, but there are plenty of great funds that haven't quite reached their capacity to do so, even though they are managing more than $10 billion dollars. Sometimes people ask me why it makes sense to short a $3 stock like Cytori. Of course, this question illuminates the questioner's failure to grasp the principles in this entire paragraph. A $3 to $2 stock move in a short period of time is one of the most desirable returns one can see, similar to a $2.00 to $2.66 if one is long. If you can consistently find returns like this, it won't be long before you have reached a level of success few have.
With 11 out of 12 stock picks "working", with a median return of +36% and IRR of +119%, I am pleased to continue to provide you with high-quality, albeit infrequent, investment ideas.
|Mesoblast||8/18/11||7.95||Ongoing||7.66||236||4%||6%||Will eventually crack|
|Biomarin||6/8/11||27.12||Ongoing||32.13||307||18%||22%||Great company, should be great long-term investment.|
|Chelsea||7/29/11||5.08||Ongoing||1.93||256||-62%||-75%||Hanging in there.|
|Star Scientific||6/5/11||5.26||Ongoing||2.78||310||47%||58%||Will go to zero, cover at 2?|
|Ampio||1/6/12||4.51||Ongoing||2.96||95||34%||211%||Will go to zero, cover at 1-2?|
Disclosure: I am short BTX.