Source: Flickr user Mike Poresky
Few sectors offer a greater potential for risk and reward than biotechnology. It's a sector where many companies are still in the early stages of their drug development process, but if you happen to catch a winner the returns can compound many times over.
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Unfortunately, the odds are stacked against biotech investors with far more drugs failing in clinical trials than succeeding. It also means that biotech companies typically have to endure potentially hefty losses during the development process, which can take years (or longer). The threat of running out cash prior to developing a sustainable product portfolio is a very real threat for some biotech stocks.
With that in mind, we asked three of our top healthcare analysts to name a biotech stock they believed could be in danger of running out of money. Here's what they had to say.
Sean Williams: To be clear, the chances of any biotech company running out of cash are pretty slim as there are multiple financing options available, including common stock offerings, debt issuance, and even collaborations/licensing deals, which can result in expense shares and even upfront payments.
However, if my arm were twisted, the biotech whose cash situation would concern me the most isGalena Biopharma.
Galena Biopharma is actually a pretty exciting small-cap biotech stock with a potentially revolutionary cancer vaccine in development. NeuVax, as its lead drug is known, is a therapy currently being studied in the phase 3 SUNRISE trial as an adjuvant therapy in breast cancer patients with mild-to-moderate HER2 expression. Its goal is to reduce the recurrence of cancer relative to the control group.
Trial patient receiving a NeuVax injection. Source: Galena Biopharma
In phase 2 clinical studies only 5.6% of NeuVax-treated patients had their cancer recur compared to 25.9% of breast cancer patients in the control group, which amounted to a 78% clinical benefit. Unfortunately for investors, NeuVax's studies are conducted over the course of five years, so the SUNRISE trial isn't expected to yield data until 2018.
Galena's answer to this was to purchase two commercial-ready therapies: Abstral, a breakthrough cancer pain medication, and Zuplenz, a drug designed to reduce the effect of chemotherapy-induced nausea and vomiting which is set to launch this year. Abstral delivered just $9.3 million in revenue in 2014 after early year estimates had called for $11 million to $15 million in revenue, leaving me skeptical as to whether both drugs will really help lessen Galena's cash burn in any meaningful way.
Galena ended its latest quarter with just $23.7 million in cash and cash equivalents, down from $47.8 million in the year-ago quarter. Galena did supplement its cash with a common stock offering earlier this month consisting of nearly 24.4 million shares as well as nearly 12.2 million warrants with an exercise price of $2.08. The net proceeds from the deal were expected to be $35.4 million and would boost Galena's cash balance to $59 million. But Galena burned through $12 million in just the fourth quarter alone. Even with improved Abstral and Zuplenz sales and reduced administrative expenses, I don't see any way that Galena's current cash runway extends beyond the end of 2016.
In other words, expect more potential common stock offerings and dilution in the future.
George Budwell: Sean's certainly right in that biopharmas have several ways to raise money, and going totally broke is a rare feat. That said, some companies, likeAmarin, have alarmingly high cash burn rates and operate at such steep losses that investors should always keep an eye on their cash reserves.
Source: Food and Drug Administration, Facebook
Amarin, for instance, is hoping to expand the label of its FDA-approved fish oil pill Vascepa by finishing up a huge -- and extremely expensive -- cardiovascular outcomes study known as REDUCE-IT. At present, Vascepa is only approved for use in patients with severely high triglycerides, limiting its market potential.
The problem is that REDUCE-IT is costing the tiny biopharma over $4 million a month. Combined with the commercialization expenses of Vascepa for its present indication, Amarin has been losing about $4.5 million a month in recent quarters. Although increasing Vascepa sales should help offset these losses moving forward, the company was dangerously close to burning about half of its $119 million in cash reserves within the next 14 months.
Fortunately, Amarin was able to execute a private placement recently that raised $52 million in proceeds. Given that REDUCE-IT may not wrap up until 2017, though, the company may have to perform another private placement to help stave off a major secondary offering down the road. So, stay tuned!
Brian Orelli:Exelixis ended 2014 with $243 million in the bank, which management said will last the company through the end of this year assuming the expected extension of notes that are supposed to be paid July 1.
Source: Food and Drug Administration, Facebook
While the biotech is technically in danger of running out of cash, that's unlikely to actually happen. One of two things will likely occur first:
1. Cometriq beatsNovartis'Afinitor in patients with kidney cancer. The Meteor clinical trial is due to read out in the second quarter. If it's positive, shares will skyrocket and Exelixis can raise more money through a secondary offering. It'll be able to go through with plans to license rights to the drug in Europe, gaining an upfront payment in the process.
2. If the Meteor trial fails, Exelixis shares will fall further, but the company isn't completely worthless; it still has rights to cobimetinib, which it developed and licensed toRoche's Genentech group. The drug is currently under FDA review with an action date of Aug. 11. If shares fall far enough -- because Exelixis is in danger of running out of cash -- it would be in Roche's best interest to just buy the company so it doesn't have to share revenue with Exelixis.
In the nightmare scenario where Meteor fails and cobimetinib isn't approved by the FDA, it's possible for Exelixis to raise cash to continue the ongoing trial of Cometriq in liver cancer and develop its pipeline candidate XL888, but it would substantially dilute shareholders.
The article 3 Biotech Stocks in Danger of Running Out of Cash originally appeared on Fool.com.
Sean Williamsowns shares of Exelixis, whileBrian OrelliandGeorge Budwell have no position in any stocks mentioned in this article. The Motley Fool recommends Exelixis. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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