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NewLink Genetics Corporation Offers a Risky Way to Generate Income
Posted by: P.I.A. (IP Logged)
Date: September 11, 2013 05:21PM
NewLink Genetics Corporation (NLNK) is a biopharmaceutical company based in Ames, Ia., that currently has a market cap of approximately $425 million. It is in analyst favor and has multiple potential catalysts before it. An investment thesis may be based upon capital appreciation stemming from potential success of its pipeline of drug products. My own reasoning involves a corollary: generating substantial income while owning the equity of a company that is pursuing worthwhile causes.
As with virtually all early stage drug companies, finances are a concern; and part of the implicit risk has just been mitigated. After closing trading at $17, the stock has plummeted to as low as $15.73 pursuant to entering an Agreement with Cantor Fitzgerald & Co. that allows it to sell up to $60 million worth of equity. The text included in SEC filing says it is "…Assumed that no more than 3,422,703 Shares will be sold, based on a sale price of $17.53 per share (determined by reference to the last reported sale price on September 4, 2013)." The company's cash position should be relatively strong and the selloff appears to be unfounded. Micro caps that do not make any money are susceptible to this sort of thing, however.
For some background, founder, CEO and Chairman Charles Link, MD has been with the company since inception in 1999. NewLink’s IPO is recorded as occurring on November 16th, 2011 and netting $37.6 million in proceeds. As of June 30th, 2013 approximately $31.8 million of it has been used on Phase 3 trials. A table summarizing financial metrics over the span of one year follows, perhaps the most obvious change is the increased share count:
Probably the most exciting aspect of the company's operations involves Phase 2B/3 trials for a pancreatic cancer treatment, Algenpantucel-L, or HyperAcute Pancreatic cancer immunotherapy. The drug candidate still has a way to go before potentially being approved for use. However, it has FDA Fast Track and Orphan Drug status; which allow for expedited review and favorable treatment, respectively. Remarkably favorable news has been known since June 3rd. Pursuant to them, NLNK has recorded its 52 week high of $23.67 on July 23rd. Interim results should be known by year end.
Thompson First Call shows a mean recommendation of 1.3. The median price target is $24.50. As of August 8, Stifel Nicolas has raised its target from $25 to $28. Jefferies has a Buy NLNK)+at+Buy/8415740.html" target="_blank">rating on the stock, believing Algenpantucel-L's IMPRESS trial has 70% chance of success in 2H 2014, and says it should be worth $29. Also, on August 6th, when trading at just under $18, a $1.1 million bet was placed in the form of 5,000 January 25/40 call spreads.
Jean-Marie Eveillard has been building a notable position in NLNK. Owning 641,554 shares as of June 30, he possesses roughly 4.2% of the publicly traded float. While he continues to like the investment it is helpful; however, if he liquidates his position the stock may struggle.
Returning to the company’s own value, after Algenpantucel-L, the next most advanced pipeline product is Tergenpumatucel-L, intended for treatment of non-small cell lung cancer. It is in Phase 2. A June 1st Press Release describes results. Beyond that, drug products need to defy the odds to be successful. Here is a graphic:
Though Tergenpumatucel-L and the rest of the pipeline may be viewed as promising, and hopefully result in success, my view on this company is that an investment in it is, for the most part, a call on Algenpantucel-L. Nearly all the funds retained from NewLink's IPO have been used on the HyperAcute Pancreatic treatment. It is the only Phase 3 product. Several eggs are in one basket, and the stock could drop to under $10 with its failure.
My preference would be to own 100 shares of stock and write a call(s) option: selling the implied volatility (“IV”) that is built into the price of options. It is feasible here, as a $17.50 call that expires in October can generate approximately $230 in income. On a $1,662 investment the gain in six weeks would be 13.85%, and losses would only be incurred below a lowered cost basis of $14.32 per share. The stock's price is near $16 and it is not clear if a better bargain is to be had. In the event that the stock price rises above $17.50, there is a limit on profits.
The following chart shows the rising elevation of IV, colored orange, which is currently quite high. The blue line denotes historical volatility and measures the changing share price.
In summary, NLNK is a stake in a risky company that is unlikely to be profitable anytime soon. The corporation is working on worthwhile things, however. Its most important data is projected to be available next year. In the meantime, for those who like it, and can stomach instability, short term gains of nearly 14% within two months is a possibility.
Stocks Discussed: NLNK,