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Heat Biologics: Time To Buy?

|Includes: Heat Biologics, Inc. (HTBX)

Heat Biologics Inc. (NASDAQ: HTBX) is a Durham, North Carolina based clinical bio-pharmaceutical company focused on developing ImPACT therapeutic vaccines which use live, irradiated genetically modified cells to activate the immune system and fight antigens causing cancer and infectious diseases. The company is currently involved in clinical trials of its two vaccines; HS-110 for lung cancer and HS-410 for bladder cancer. Heat Biologics was founded in 2008 and raised $25 million from its IPO in July 2013.

Heat Biologics released its Q1 2014 results on May 13, 2014. The company is currently involved only in conducting clinical trials and performing R&D in immunotherapy. No revenue was booked and the operating loss increased to $2.39 million in Q1 2014 from $0.77 million in Q1 2013.

The net loss in the first quarter was $2.42 million from $0.78 million last year due to higher R&D expenses, clinical development and personnel expenses. In the last quarter, the company started enrollment and dosing for phase 1/2 trial of HS-410, the bladder cancer vaccine and submitted revised protocol to the FDA after phase-2 clinical trial for HS-110.

Cash balance as of March 31, 2014 was $19.4 million, which according to the company is estimated to be sufficient to meet operational expenses for current year.

The key milestones for the second half of 2014 are to initiate Phase 2 enrollment for HS-110 and commence cohort 1 enrollment for HS-410. In terms of revenue visibility, the five member sales team of the company will scope the market for development and commercialization partners in 2014.

Immunotherapy as an alternative treatment mechanism for cancer has gained traction in the last 10 years with players like Bristol-Myers Squibb Co (NYSE: BMY), Roche (OTCMKTS: RHHBY) and AstraZeneca (NYSE: AZN) developing their own immunotherapy based drugs.

Various techniques exist within immunotherapy, and Heat Biologic's genetically modified cell based technique is the first of its kind and has significant commercialization opportunity. According to a report by Goldman Sachs (NYSE: GS), each immunotherapy drug has potential to generate $1 billion in revenue and immunotherapy can capture up to 50 percent of the entire oncology market by 2020 with a market size of $25 billion.

Heat Biologics was issued at an offer price of $10 per share in July 2013. Since then the stock has hit a high of $15.29 and has declined consistently since January 2014 to close at $4.56 on May 29, 2014. The book value of the company has reduced to $19.6 million in March 2014 from $21.7 million in March 2013 due to widening losses

Heat Biologics' business strategy is to collaborate with big pharma players for platform development, retain U.S. commercialization and sell global distribution rights to partners. Similar deals have happened in the past such as AstraZeneca's deal with Immunocore for $20 million.

This should boost investor confidence in the company's monetization prospects and long-term value to shareholders. At an enterprise value of $10 million and current cheap price, the stock is a buy for long-term value. Key milestones in terms of timely progress of clinical trials and the company's ability to raise capital when required will have to be tracked closely.