Cempra's Platform Potentially Worth Billions In Battling Superbugs
Scott Matusow | Jun 25, 2013 08:49AM ET
During volatile market conditions, many investors decide to sell to protect profit. Investors have seen extraordinary gains so far in 2013 and stocks that have done really well are seeing a small correction. This is healthy for the market and sets up another period for new buyers to come in. This week, we are detailing a company that we feel can still appreciate under these conditions because it is under speculation valued and under-the-radar.
Cempra (CEMP) is a biopharmaceutical company that is focused on developing antibiotics for the treatment of bacterial infectious diseases. Cempra's two main products in its pipeline are solithromycin (CEM-101) and Taksta. Solitromycin is in clinical studies for Community Acquired Bacterial Pneumonia (CABP) and urethritis. Taksta is in clinical studies for acute and chronic treatment of Methicillin-resistant Staphylococcus auereus (MRSA).
Solitromycin and Taksta are two products that have a large market potential. Both solitromycin and Taksta have oral and oral-suspension formulations. Cempra is the only company developing an oral formulation antibiotic for these indications. The company is also developing an oral suspension formulation that could have a broad use in pediatric care. With several catalysts later this year and a current market cap of about $215M, Cempra has lots of room for a run.
- Methicillin-resistant Staphylococcus aureus
Over time, bacteria have become more resistant to the current antibiotics on the market. Through natural selection, the genetically resistant bacteria survive and eventually become the most common strain. MRSA is one strain of bacteria that is becoming more difficult to treat. Companies are constantly developing newer drugs to combat the new strain of bacteria. For more details about MRSA, please refer to our previous article. NBC also ran an public offering of common stock priced at a market discount of $7.00 per share. The company generated about $50.8M to fund its ongoing Phase II and Phase III trials. The offering closed on June 19 and was received well by investors. Since the offering was priced at a substantial discount, we strongly feel there is a good opportunity here for new investors to establish a position at a discounted price.
Since Cempra's initial public offering (IPO) in 2012, the company has been quietly leveraging several governmental policies to its advantage. The Generating Antibiotic Incentives Now (GAIN) Act was just enacted by Congress in October 2012 to encourage and incentivize companies to create new and effective antibiotics. One very important benefit from this act includes an additional 5 years of market exclusivity for companies who develop treatments that qualify under the act. Also, Cempra just signed a 5-year contract with the Biomedical Advanced Research Development Authority (BARDA) for $58M. With the money generated from the public offering and $17M this year from the BARDA contract, Cempra has enough cash to run on for the next 3 years.
Get The News You Want
Many investors and traders tend to "knee-jerk" react negatively when offerings are announced by developmental biotechs. However, many of these offerings are very positive for both long and short term stock price appreciation. For example:
Trius Therapeutics (TSRX) did a public offering earlier this year that was received well by investors. The company is developing Tedizolid for the treatment of gram-positive infections, including MRSA. After the public offering, the stock ran from under $5 to over $9. We have written 2 articles on Trius, with our sentiment being that Trius provides an excellent speculation investment opportunity, and is an acquisition target moving forward.
On February 5, 2013, Celldex Therapeutics (CLDX) entered into an underwriting agreement Jefferies & Company, Inc. and Leerink Swann LLC, to sell 12,000,000 shares of its common stock at a price of $7.50 per share, subject to customary closing conditions. The offering closed on February 11, 2013. The offering went very well, with the company's stock price steadily appreciating since then, likely because Celldex is currently developing two very important unmet need drugs.
Rindopepimut, an immunotherapy that targets the tumor specific oncogene called EGFRvIII, and CDX-011, a fully-human monoclonal antibody-drug conjugate (ADC) that targets glycoprotein NMB (GPNMB). CDX-011 might have the most potential for Celldex, as it targets GPNMB. GPNMD is a protein overexpressed by multiple tumor types, including melanoma, breast cancer and gliomas, which have huge market potential -- Celldex currently sells for $14.06 a share.
On January 24, 2013, Ariad Pharmaceuticals (ARIA) entered into an underwriting agreement with J.P. Morgan Securities LLC, Cowen and Company, LLC and Jefferies & Company, Inc. to sell 15,307,000 shares of the Company's common stock at a public offering price of $19.60 per share. The offering closed on January 29, 2013, with Ariad receiving net proceeds to the Company of approximately $287.5 million. Since this most recent offering, the company's stock reached a high of $22.49 on March 14, 2013.
Ariad is currently focusing on commercializing Iclusig (formely known as ponatinib), which is a cancer medicine; and is also developing AP26113, a small molecule that in preclinical studies has exhibited activity as a potent tyrosine-kinase inhibitor of anaplastic lymphoma kinase (ALK), epidermal growth factor receptor (EGFR), and c-ros oncogene 1 (ROS1).
Ariad also engaged in am successful offering in December of 2011, raising over $200M at the time at $12.50, which within a year, the stock doubled to over $25.
As we can clearly see with the 2 examples we have given, when a developmental biotech is working on important drugs, investors will in fact support offerings, and not necessarily sell into it. Cempra is very much "under the radar," and we feel that the company presents a very good opportunity for both traders and biotech speculation investors.
- Management and Insider Ownership
Insiders hold a nice position in Cempera, which is always a bullish sign to see. Dr. Goldstein in particular holds a massive 3 million + share position.
When engaging in secondary offerings to raise cash, companies with higher insider ownership tend to work harder and smarter to secure financing that is beneficial to themselves as shareholders, which is a positive for both retail and institutional shareholders. Far too many developmental biotechs do not have strong insider ownership, and often times these companies tend to needlessly over dilute, which is not beneficial for shareholders.
Conclusion
Cempra's secondary offering has gone well so far, receiving solid support. The company now has enough cash on hand to fund operations for the next 3 years. It's our opinion that Cubist (CBST) is likely to come knocking on Cempra's door soon to inquire about a partnership and/or to acquire the company. Cubist made an unsolicited offer earlier this year for another company in the same segment. Trius, as we mentioned in a prior article, should also peak Cubist's interest for partnership and/or acquisition. Cubist certainly seems more than willing to acquire a smaller company within its segment, and Cempra and Trius are the likely targets in our mind.
Since Cempra has high insider ownership, with such insiders as Dr. Goldstein holding huge positions, we feel the company will work hard to either get a solid partnership, or shop the company around for acquisition.
Our 1 year target price for Cempra based on its current $215M market cap is over $500M, or basically around $15 a share. Based on longer term potential, we feel an acquisition price around $1B is warranted, which would roughly equate to $30 a share. All of this is dependent on good Phase II and Phase III results, which will be announced in the fourth quarter of 2013 and early 2014, respectively.
Disclosure: I am long CEMP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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