Synta Pharmaceuticals (NASDAQ: SNTA) is a development-stage bio-pharmaceutical company. Currently the company has 3 candidates past pre-clinical studies. STA-9090 is what is known as an Hsp90 inhibitor, which for those of us without medical degrees means that the drug is targeted to prevent and possibly reduce the spread of cancerous tumors.

This drug is just now entering Phase 2 clinical trials. The second drug is Apilimod, a treatment targeting rheumatoid arthritis, also just entering Phase 2. Finally there is elesclomol, an “oxidative stress inducter” for cancer treatment, specifically metastatic melanoma, a form of skin cancer. Synta has other compounds under development, but as most are in pre-clinical stages, there is no reason to discuss them at this point.

Elesclomol is a sad story for Synta, despite it being the reason why the stock perked up on my Magic Formula radar. The company entered a joint development agreement with GlaxoSmithKline (NYSE: GSK) in 2007, and the drug progressed well through Phase 1 and 2 clinical trials, and Phase 3 (the final stage before submission) was scheduled to complete in 2009. In February, Synta received results that showed elesclomol was producing lower overall survival rates than no treatment, causing the FDA to put the drug on clinical hold. Glaxo saw this result as a death sentence for the compound, and terminated the joint venture in September.

With the termination, Synta recognized nearly $115 million of previously deferred revenue on the income statement in the just-completed Q3 (deferred revenue is cash already received but not yet recorded on the income statement). This has pushed the company’s trailing 12-month operating profits way, way past anything sustainable and has led to an earnings yield over 60%, and return on capital over 1,300%!

Clearly, this is a one-time event and not something we can rely on.

Looking at Synta’s results absent this windfall, they are grim. The company started operations in 2001 and has never produced any marketable drugs. The only way they continue to operate is through financing such as the 2007 IPO and preferred stock offerings, as well as a few minor licensing milestone payments and government grants. In 2005 and 2006, there was no revenue at all!

As a result, Synta has been unprofitable for its entire existence, accumulating a deficit of over $400 million dollars. With elesclomol a failure, the future is even darker. Speculating on anything before Phase 3 is risky business.

The disappointing thing is that until this one-time payment falls 4 quarters behind, it’s likely that Synta will continue to occupy a space in stock screens as a stock worth looking at. Avoid this one at all costs – it might even make an interesting short candidate right now: typical annual cash burn is near $50 million and that’s about all the company has left in its coffers.

Don’t get burned by this unattractive pharma stock…

Sincerely,
Steve Alexander
MagicDiligence.com

December 11, 2009

Synta Pharmaceuticals: Stay Away from This Hopeless Pharma Stock was originally featured in the Penny Sleuth.

The health care sector’s dismal performance has been Wall Street’s worst-kept secret this year. And with uncertainly swirling around the health care debate right now, many investors are shying away from health care stocks for good reason — governmental reforms could affect medical businesses enormously.

But we’ve just uncovered one health care small cap that’s facing a 42% upside regardless of which direction Capitol Hill takes taxpayers.

While other industries — like financials — rebounded more than 40% on average from March lows, health care has remained slow to come back as rightfully nervous investors ponder what additional health care regulation might mean for their investments.

But our latest play doesn’t rely on price gouging or government subsidies to survive. Instead, this under-the-radar company develops life-changing therapies for some of the worst diseases in the world — and it does it at a profit. And unlike the major pharma companies, this tiny drug developer doesn’t have to worry about marketing and advertising its products. Instead, it lets firms like Novartis and Sanofi-aventis take care of the dirty work.

Here’s everything you need to know to profit from this small-cap health play…

The company is QLT Inc. (NASDAQ: QLTI), a Vancouver-based biopharma that creates and produces drugs designed to treat macular degeneration — the leading cause of blindness in people 55 and older in North America and Europe — and prostate cancer.

Visudyne, the company’s macular degeneration therapy, is marketed and distributed by Novartis, while its prostate cancer drug Eligard is licensed to Sanofi-aventis, Astellas Pharma and Medigene.

This arrangement with some of the biggest players in the pharmaceutical industry means that QLT avoids dealing with expensive advertising campaigns and distribution networks. The company instead focuses its resources on developing new, profitable therapies. At the same time, licensing its patents to consumer-facing pharmaceuticals mitigates the effect that new drug legislation is sure to have on the rest of the industry.

But it gets better… You see, this amazing drug developer is essentially free.

While that may sound unbelievable at first, shares of QLT currently trade for approximately the company’s net quick assets per share. In other words, if QLT had to liquidate tomorrow, shareholders would be left with potentially more than they paid for shares. That ample asset base is a huge hedge against nearly any risk this company faces.

Right now, the company has no debt, and with $5.53 in net assets per share, every dollar invested in this company buys $1.42 in assets. That’s a staggering value — and it represents a 42% upside potential.

On top of that, QLT’s mature product lineup is making money every quarter, thanks in part to nearly 12% net margins that delivered $14.5 million in profits last year. That equates to a price-to-earnings ratio of only 7.18 — five times lower than the average stock on the S&P 500. Improving margins and solid licensing contracts ensure that cash-machine trend should continue for a while.

Dollar for dollar, QLT is one of the most fundamentally fit companies in the health sector today. Its small $211 million market cap will ensure that the company stays that way until corporate news garners attention from the investing public. A third-quarter earnings release scheduled for Oct. 27 could be just that catalyst. More on that in a bit…

Like any company, QLT isn’t without its blemishes. For this company, those scuffs come in the form of falling demand and litigation. In the last several years, QLT’s Visudyne sales have tumbled somewhat as new therapies designed to treat wet age-related macular degeneration, known as anti-VEGFs, have come onto the market. But with Phase II clinical studies currently taking place to show that Visudyne may, in fact, work well alongside anti-VEGF drugs, QLT’s sales could see a significant increase as more and more patients add Visudyne to their treatment regimens.

The company also has two main legal actions regarding patent infringement and royalties. The first, which resulted in a relatively modest judgment against QLT, is under appeal, and the second recently saw all but one of the plaintiffs’ charges against QLT dropped by the presiding judge.

While the outcomes of these cases are far from certain, we don’t believe that either would significantly impact QLT’s business.

Reinventing QLT as the Ocular Therapy Leader

That business has changed dramatically in the last couple of weeks. On Oct. 1, QLT announced the sale of its U.S. subsidiary to one of its suppliers for up to $230 million. The sale of that subsidiary, which owns the company’s Eligard patent, clears the path for a move to QLT’s specialization in ocular therapies only.

The deal also makes sense from a financial perspective. By selling the U.S. division, QLT gets lump cash payments of $20 million and $10 million followed by an 80% cut of Eligard’s all-but-guaranteed royalty revenues until 2024 — or until the company is paid a combined total of $230 million, whichever comes first.

In other words, QLT keeps the majority of Eligard’s profits for the next 15 years while avoiding any legal complications or licensing issues and collecting $30 million in guaranteed cash in the process.

The deal also lines QLT’s corporate coffers with cash at a very opportune time. With three new therapies in the development pipeline — two of which are in Phase II — the company avoids hitting up its cash to pay for research and development costs that have already increased 43% since 2006.

We fully expect QLT to garner a new degree of investor attention in the third quarter with sale-bolstered financials and new developments on the ocular therapy front. The company’s timing of the financial release on Oct. 27 makes moving on this stock even more significant. Good news next quarter could be the catalyst this stock needs to head to the next level.

Sincerely,
Jonas Elmerraji

December 10, 2009

This “Free” Therapeutic Developer Could Give You 42% Gains was originally featured in the Penny Sleuth.

Currently, medicine is, to a large degree, a “one size fits all” proposition. Doctors watch for adverse effects and check personal and family histories. Medical technologies, however, are designed for the general population, not individuals.

That’s going to change…

The Problem With the “Normal Curve”

We know that many current treatments work on some people, yet not others. Some drugs are safe for many people, but have dangerous side effects for others. This is because all of us have individual differences in our genetic code based on heredity and environment. Even slight differences can lead to very different reactions to medications.

This has created serious regulatory problems. Drugs are denied regulatory approval not because they do not work, but because some fraction of the population suffers adverse effects. As a result, we are often denied incredibly effective therapies simply because they are not universally effective.

This shockingly primitive state of affairs exists because, until very lately, we simply have not had the tools to get to the genetic roots of disease. Scientists and pharmaceutical companies haven’t precisely known how a particular drug’s chemical profile interacts with a genetic one. Medical science, in turn, has been unable to tailor drugs to work with a specific genetic makeup.

The Impact of the Genome

This is rapidly changing. Just a few short years ago, the human genome was first mapped. The genome, as you know, is the entire collection of genetic code that defines us at a biological level. Now scientists are studying single genes and their individual expressions.

It is meaningful, from the investor’s perspective, that Dr. Francis Collins, the head of the Human Genome Project, has just been selected by the Obama administration to head up the National Institutes of Health. Collins has long been a prominent champion for using the knowledge gained from human genome to accelerate personalized medicine. 

This is important because institutional forces, with lobbying clout, always resist change. Much of Big Pharm, and its regulators, are vested in the “one size fits all” model. Many of the old players fear personalized medicine because it threatens the existing hierarchy. Collins’ presence at the top of the NIH will help counter this institutional resistance.

Incidentally, Collins has stated that genomics is currently where the computer industry was back in the 1970s – at the beginning of a technological revolution. While he was speaking in scientific terms, we should remember that the ’70s was also the right time to begin investing in a diversified portfolio of breakthrough computer technologies. Those who did so, despite claims that it was too risky or early, were made rich.

Dr. Collins is not alone in his views about personalized medicine. Former FDA director under G.W. Bush Dr. Andrew Von Eschenbach urges that the FDA approval process be overhauled and streamlined to help accelerate the adoption of personalized medicine. He is on record predicting that the medical industry will, in fact, undergo this profound metamorphosis.

For transformational profits,
Patrick Cox

How to Make a Fortune From the Personalized Medicine Revolution was originally featured in the Penny Sleuth.