| Price | 3.97 | TTM EPS | -1.17 |
| P/E | NA | Mkt Cap (mm) | 274.8 |
| TTM P/S | NA | Avg Vol (mm) | 1.276 |
| % Short | 59.8 | Shares Outstanding (mm) | 69.05 |
Price Action:
Writeup:
I typically don't like unprofitable companies, let alone companies that don't have any revenues at all. Thus, when I came across the following words in the most recent 10-Q, I almost put the report down and wrote it off as something that's not of interest: "We have not generated any product revenue and do not expect to generate any product revenue in the foreseeable future, if at all." As someone that believes a stock price's value comes from the discounted future earnings of the company, seeing a line like that is a huge deterrent - but I decided to read on.
Like most small-cap biopharma companies, SNTA burns through cash hoping that their flagship drug in development will make it big-time, in which they'll get bought out by a larger company or use the income stream to expand their product offering and become more stable. Their champion is ganetespib, a Hsp90 inhibitor - meaning that it prevents Hsp90 from doing what its meant to do, which is to facilitate the proper construction and activation of many cancer-promoting proteins. There are many things that make this drug novel: small size so that it can readily pass through membranes larger molecules can't; generality - instead of targeting specific down-the-line targets, ganetespib decreases expression of many of the same targets through targeting Hsp90; low toxicity - though other companies have abandoned similar undertakings due to toxicity and liver damage, ganetespib has proven to be lower toxicity that all the other options, usually resulting in mild diarrhea as its worst side-effect.
SNTA's main trial is the Galaxy-2 Phase III trial for lung cancer treatment as a second line therapy with chemo, which should finish in the 2nd half of 2014 with final results published early 2015. The results from the first trial (Galaxy-1) were recently published and showed that results had worsened over time (moved Hazard Ratio closer to 1.0 - see Appendix). This was due to a disproportionate inclusion of trial patients from Eastern Europe (Russia and Ukraine) late in the trial period, and so the results come on the tail end of the study. These patients contributed to much larger, longer medial survival times, which affected the results negatively. SNTA announced that they're increasing the sample size of Galaxy-2 from 500 to 700, pushing the trial results later into the future, and will not be taking any new patients from the Eastern European countries but will ramp up patient enrollment in the Western countries, where the hazard ratio is much more attractive and the efficacy of the drug is more apparent. If nothing else, this shift in patient demographics should help results going forward.
Another trial started in 2012, ENCHANT-1, is designed to evaluate ganetespib as a first-line treatment for two kinds of HER2+ breast cancer and triple-negative breast cancer (TNBC) (see Appendix). Initial results are expected to be published in December 2013.
In terms of going concern, SNTA burns through roughly $22 million each quarter to fund its operations. That number is expected to go up by roughly $6 million as each new patient in the trial costs around $30,000. SNTA currently has around $54 million to fund operations and has raised another $50 million through a recent share offering (14 million shares @ $3.75/share). This should amount should get them through 2014, where they'll at least have enough to publish interim results from the Galaxy-2 trial and raise more money if there are positive results.
Trade
SNTA is sitting at its 52-week low due to increased trial period of Galaxy-2 and lower efficacy results of Galaxy-1. With initial data from another trial (ENCHANT-1) being presented in December, and management's comments along with industry expert's praise of ganetespib - I believe that the downside is limited. In the case of bad ENCHANT-1 data, I can envision another 5-10% drop - but positive results should push the price up significantly more. Further to that, high short interest and days-to-cover prime the stock for pop-ability. Looking at the technicals, the stock is also oversold and presents a good entry point.
For fundamental/value folks, I would wait until after December results and enter into the stock closer to the initial results of the Galaxy-2 Phase III trial, which should be improved from the Galaxy-1 trial results due to regional sampling. Or - don't get into this name at all. It doesn't create any value due to no revenues and future earnings are too difficult to guess at this point, so from an earnings perspective it should be trading at 0.
If you're in for some quick gains, I would be comfortable entering at this price while price increases due to the stock being oversold and shorts locking profits. I also like the risk/return prospects of the December data for the ENCHANT-1 trials, though I must admit that I have not looked into those results as deeply as I have for the Galaxy trials.
The way I'm going to play it is to write some puts for December 4.0 expiry. The 4.0 puts for December expiry are currently trading at 0.45 - 0.55. I would be comfortable entering into this position in December at $4.00 for a $0.45 premium if I get called, or just pocket the $0.45. The Jan 15 5.0 calls look like a good way to get some exposure to the Galaxy-2 trial results without too much premium. The liquidity is quite low, so I'll be patient and only get in a small size.
Appendix
Hazard ratio (HR) represents the odds that a patient in the experimental treatment arm will experience the event of interest (such as death or disease progression) before a patient in the control arm. A hazard ratio of 1.0 corresponds to no treatment effect, while a hazard ratio of less than 1.0 signifies that the treatment is working better than the control.
HER2+ and TNBC are two major subtypes of breast cancer, accounting for 15% and 20% of new breast cancer cases.
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