According to the CFA Institute, there were more than 154,000 Chartered Financial Analyst (CFA) charter holders in 2018. And while these CFAs work for firms like JP Morgan Chase, UBS, RBC, Bank of America ML, and Morgan Stanley, not all CFAs work on Wall Street.
CFA charter holders do, however, make a median salary of approximately $86,000 – Which is a pretty tidy sum for a band of folks that, in my view, spend too much time thinking between the lines and not enough time thinking outside the box and learning how to value small, more speculative, but potentially fast-growing businesses.
So, have you ever wondered how an overpaid Wall Street analyst arrives at his conclusion for what a company is worth?
Having blown a small fortune and several years of their life earning the Chartered Financial Analyst (CFA) designation, many analysts lean on their ability to generate a common, one size fits all financial statement.
And let’s not forget about financial ratios. If it’s one thing these Wall Street analysts’ treasure, it’s their ability to recall a dozen different ratios at the drop of a hat!
Activity ratios to gauge the efficiency of a company’s operations, liquidity ratios to measure a company’s ability to meet short-term obligations, profitability ratios to estimate a company’s ability to generate profits from revenue and assets, and a dozen more ratios like these. CFAs love ratios!
And you know what?
There’s a time and a place for this type of analysis, especially when analyzing your run-of-the-mill, slow-growing, multi-billion-dollar industrial, consumer package goods, or energy company.
But when it comes to analyzing clinical-stage biotechnology companies, one size fits all financial statements and ratio analysis isn’t going to cut it.
Look, there’s no secret to investing in biotech stocks. And you certainly don’t need to sell your soul on Wall Street or give up years of your life earning a CFA designation to understand the difference between a promising clinical-stage biotech company and a company destined to fail.
There are, however, a few simple guidelines you need to follow. And by adhering to these rules, your chances of racking up profits in the biotech sector are greatly improved.
De-risking a Small-Cap Biotech Investment
Before we get to the rules, let’s remember we are talking about investing in small-cap, clinical-stage biotech companies.
Large-cap biotech companies like Amgen, Regeneron, and Gilead are mature companies with market caps in the tens of billions. They have marketable drugs, extensive drug pipelines, and billions in revenue.
Unfortunately, large-cap biotech companies rarely generate market-beating, triple-digit returns.
Now, for investors looking for stable companies with low-to-moderate revenue growth and, in some cases, a dividend payment, a multibillion-dollar biopharma drug company is ideal.
But for growth investors with a tolerance for volatility and a penchant for asymmetric investing, an $80 billion biopharma company with a sustainable dividend isn’t going to cut it. Aggressive investors willing to accept more risk for the chance at a market-beating return are more inclined to invest in a clinical-stage biotech company with the potential for massive growth in a short period.
OK, let’s talk about de-risking a clinical-stage biotech investment.
Rule #1 – Cash is king!
Small-cap biotechs are often cash-strapped, meaning they frequently need to tap equity or debt markets for funding. Being cash hungry may not sound like a big deal, but frequent financing leads to shareholder dilution and, at least in the short-term, a lower stock price.
Researching molecules, hiring clinical physicians, and conducting FDA trials are enormously expensive. So, when possible, I prefer to invest in companies that are well funded without any short-term capital worries.
Rule #2 – Invest in People
If a speculative biotech company has plenty of money — but terrible management — odds are the money will be poorly allocated, and the company’s stock will die on the vine.
While it isn’t always possible, I love to find well-funded biotech companies with a seasoned Chief Executive Officer (CEO) and Chief Medical Officer (CMO) or scientific advisory board.
If push comes to shove, I want to invest alongside an accomplished CMO. Because while a good CEO can control a company’s narrative and the flow of funds, without top-notch science and a respected CMO, a biotech company is unlikely to ever get off the ground.
Rule #3 – Follow the Science
Clinical-stage biopharma companies live, and die based on their clinical and preclinical research. Frankly, while my first rule revolves around a company’s cash balance, the reality is a company is highly unlikely to succeed without the necessary science and data to back up its preclinical and clinical claims.
So, when I’m analyzing a small-cap biopharma company, I want to know as much as possible about ongoing trials. And when possible, I prefer to only invest in companies that have already reported interim phase 1 clinical data that is positive and exceeding expectations.
Look, investing in biotechnology is risky – There are no two ways about it.
However, when I find a small-cap biotech company with excellent leadership, boatloads of cash, and an ongoing clinical trial with robust data, that’s the company I want to invest in!
Our Path Forward
My goal with this report is simple.
I want to share my rules for identifying potential winners in the small-cap biotech field. And while all the rules in the world will never eliminate risk from the equation, I believe your chances of generating market-beating returns in an otherwise tricky sector are significantly improved by following the three simple guidelines I’ve already outlined.
Now, I want you to stick with me a bit longer. Because after I introduce you to a recently up-listed $223 million clinical-stage biotech that checks off all the boxes on my three rules list, I’m going to outline a brief investment thesis for you to review with your financial advisor.
Identifying Opportunity in Small-Cap Biotech
Now that you know what I look for when I’m trying to uncover a tremendous, small-cap biotech investment, I want to introduce you to a company that checks off all my boxes: GT Biopharma (GTBP).
GT Biopharma is a $223 million clinical-stage biopharmaceutical company focused on developing and commercializing novel immuno-therapeutic products based on its proprietary Tri-specific Killer Engager (TriKE™) and Tetra-specific Killer Engager (TetraKE™) platform technologies.
In simpler terms, GTBP is developing a drug platform that allows it to both harness and enhance the immune response of a patient’s own (endogenous) natural killer cells (NK cells).
The idea behind GTBP’s drug platform is that once its molecule is bound to a patient’s NK cell, the molecule turbocharges the patient’s endogenous NK cell. The NK cell can then search out the proteins expressed on a specific type of cancer cell (or virus-infected cell) and destroy that cell.
And the beauty of GTBP’s TriKE and TetraKE platforms is the company believes it can be applied to a range of liquid and solid tumors. And they’ve got the data to support this claim!
Now, before we dive any deeper into GTBP’s science and what the company has already accomplished in the clinic, I want to tell you its management team and cash war chest.
Biotech is a harsh industry to succeed in between the non-stop cash burn from research and clinical trials and the pressure to deliver data and reach primary endpoints. That’s why I like to make sure that any company I am investing in has a battle-tested management team.
And that’s exactly what we have here…
Before working with GT Biopharma as its Chairman, Chief Executive Officer, and President, Anthony Cataldo was Founder, Chairman, and CEO of Genesis Biopharma — which would later merge with Lion Biotechnologies and eventually rebrand itself as Iovance Biotherapeutics, Inc.
Tony has also served as Chairman and CEO of several other biotech companies, including Calypte Biomedical Corporation and Senetek, PLC.
While it’s nice to have someone like Tony leading GTBP, I am excited by its exceptionally humble, yet wildly accomplished Chief Medical Officer (CMO), Jeffery Miller, M.D.
Doctor Miller joined the company in late August 2019. To this day, he remains a Professor of Medicine at the University of Minnesota and the Deputy Director of the University of Minnesota Masonic Comprehensive Cancer Center.
In joining GT Biopharma as the company’s CMO, Dr. Miller brings his 20 years of experience studying NK cells’ biology and other immune effector cells — and their use in clinical immunotherapy (with over 170 peer-reviewed publications).
If you visit Dr. Miller’s faculty page on the University of Minnesota Medical School website, you’ll find this under the summary of his work:
“Dr. Miller has been interested in NK cell biology, NK cell development, the acquisition of NK cell receptors and seamless translation into clinical trials throughout his entire academic career. Currently, the lab is focused on mechanisms that determine the enhanced function seen with CMV induced adaptive NK cells, facilitating immune synapses with IL-15 containing Trispecific Killer Engagers (TriKEs), IL-15 biology, NK cell killer immunoglobulin receptor (KIR) acquisition and function (NK cell education), and developing NK cell therapeutics. Throughout his career at the University of Minnesota, he has mentored faculty and delivered hundreds of NK cells products to patients with cancer.” [emphasis is my own]
Look, Dr. Miller isn’t GT Biopharma’s Chief Medical Officer for optics. And he certainly isn’t at the company for the fancy c-suite title.
Dr. Miller has spent virtually every day of his professional academic career studying and improving his understanding and application of NK cell biology.
Simply put, Dr. Miller is GT Biopharma’s CMO because he is the best qualified, and in Tony and others’ opinion, the foremost authority on all things NK related.
A Multimillion-Dollar Warchest
Back in mid-February, GTBP announced the closing of an underwritten public offering of 4,300,000 units. Each unit consisted of one share of GTBP and one warrant to purchase one share of common stock at $5.50.
The offering’s gross proceeds came to $23.6 million and combined with the company’s existing cash, GTBP was sitting on approximately $30 million four weeks ago. According to GTBP’s Chief Executive Officer, Anthony Cataldo, its cash balance provides a runway through 2022.
While a cash runway through 2022 is fantastic, that doesn’t mean the company won’t raise money before that date. It does, however, suggest that the company shouldn’t find itself in a cash crunch anytime soon.
Speaking of cash, I’ve talked to Anthony twice over the past few weeks. Both times he told me that, while he believes the company will raise additional money over the next year, that raise will be done at a significantly higher valuation.
Well, Tony believes the pre-clinical and clinical data the company will generate over the next 12 months will drive the company’s market cap significantly higher — potentially toward $1 billion!
GT Biopharma’s market cap is sitting around $223 million. Even if the company were to raise money at half of Tony’s target valuation, that’s still an enormous amount of upside potential.
The bottom line is I want to invest in small-cap biotech companies that aren’t in a cash crunch. And as you can see, the last thing GTBP needs to worry about in the near term is paying its bills and funding its research.
Harnessing Natural Killer Cells
I want to tell you that product pipeline overviews and clinical trials are easy to understand, but that’s not the case. The truth is, a biotech’s pipeline overview is riddled with medical jargon.
So, let’s begin with a simple overview of what GTBP’s focus is.
Simplified, Dr. Miller and colleagues use a patient’s Natural Killer (NK) cells to kill cancer.
Here’s how Roth Capital Partners explained GTBP’s TriKE therapy to clients in their March 17, 2021 research note:
“These Tri- and Tetra-specific killer engagers (TriKEs, TetraKEs) simultaneously react with natural killer (NK) cells and cancer cells to selectively facilitate tumor killing.”
The analyst for Roth goes on to break down the TriKE components like this:
“1) A tumor-targeted binder; 2) An IL-15 linker, and 3) A human anti-CD16 single-chain variable fragment (scFv derived from a human phage display library). NK cells have CD16 on their cell surface. NK cells mediate antibody-dependent cellular cytotoxicity (ADCC) through the highly potent CD16 (FcγRIII) activating receptor. IL-15 plays a key role in NK cell development, homeostasis, proliferation, survival, and activation. IL-15 and IL-2 share several signaling components, including the IL-2/IL-15Rβ (CD122) and the common gamma chain (CD132). However, unlike IL-2, IL-15 does not stimulate CD25+ T regulatory cells (Tregs), allowing for NK cell activation without inducing simultaneous Treg-mediated immune inhibition.”
As I said, understanding the science behind these medical breakthroughs is a challenge for those who opted out of pre-med. Just know that Dr. Miller has dedicated his career to understanding and harnessing one’s endogenous NK cells’ tumour killing ability. Best of all – as I am about to explain, Dr. Miller’s TriKE, which utilizes (high levels) of IL-15 and a patient’s NK cells, have shown to be both effective and astonishingly free from side effects.
The Stages of Clinical Success
Before we dive into GTBP’s success in the clinic, let’s talk about the steps a new drug therapeutic goes through.
At first glance, clinical trials appear confusing, disjointed, and, frankly, nearly impossible to understand. But there’s a reason the FDA requires companies to put their therapeutics through such a rigorous process, and it has everything to do with determining safety and necessity!
In preclinical laboratory studies (cell and animal), scientists determine if a compound, molecule, or therapeutic might work. Researchers are looking for how a drug/treatment reacts with cancer cells.
Next up is the investigational new drug (IND) application.
When a company files an IND, they provide the FDA with their preclinical results. Researchers will also lay out how the drug is made, who makes it, what’s in it, its stability, and any additional information they deem relevant. The IND application will also include outlines for the planned clinical studies and detailed information regarding the study’s clinical team.
Now, while some clinical trials begin with a phase 0 trial to explore if and how a new drug may work, I find that most companies jump in with the traditional phase 1, 2, and 3.
At a basic level, phase 1 trials are conducted to determine a maximum tolerated dose. Put another way, researchers want to know how high they can push treatment dose before severe side effects become a problem.
Once the maximum tolerated dose is determined, researchers progress to a phase 2 trial to determine how effective the treatment or drug is.
For example, does a drug work in certain types of cancer.
In phase 3 studies, the FDA wants to see how the new treatment’s safety and effectiveness compare to the current standard treatment. And if the investigational drug or therapy displays improved safety of efficacy relative to the current treatment, a new drug application (NDA) is submitted to the FDA for approval.
As you can probably guess, taking a therapeutic from preclinical studies to FDA approval takes a long time – A decade or longer generally! And the odds of success aren’t high.
Take a look at this graphic from biotech primer —
One look at that the success rates above, and you’ll immediately understand why I am only interested in clinical-stage biotech companies that demonstrate some level of success in phase 1 trials. Given the challenges associated with progressing a therapeutic through the trial process, we want to marginally de-risk our investment as much as possible. Early trial success is one small way to accomplish that.
Rule #3 in analyzing clinical-stage biotech companies is Follow the Science. And that’s what we’re going to do – Right now!
Again, because the company’s work in the clinic is riddled with medical jargon, don’t fret if you feel lost. I’ll break the concepts down into easy-to-understand tidbits.
We’ll begin with a quick look at the GT Biopharma’s pipeline but then shift to a singular focus on GTB-3550 TriKE since that’s the company’s most advanced therapeutic.
One thing worth noting about GTBP’s pipeline is this – While GTB-3550 is focused on a liquid tumor, the TriKE platform therapeutic has been evaluated in ovarian, breast, prostate, pancreatic ductal adenocarcinoma, and lung cancer models. And these are all SOLID tumors.
GTBP’s TriKE™ demonstrated a significant reduction in tumor burden and an increased overall survival rate in the animal modelling.
And with ThermoFisher Scientific reporting that “solid tumors represent approximately 90% of adult human cancers,” the fact that GTBP’s TriKE™ platform therapeutic shows promise in treating solid tumors is potential HUGE for the company.
Now, since GTBP’s primary focus is on GTB-3550, let’s dive into that clinical trial.
Without getting too deep into the weeds, GTB-3550 is in a phase 1/2 clinical trial to treat CD33 positive leukaemias, a marker expressed on tumor cells in acute myelogenous leukaemia or AML. And as the slide above states, GTB-3550 incorporates IL-15 within the therapeutic for enhanced Natural Killer cell proliferation and persistence.
We’re talking about a patient’s ability to sustain intense and ongoing NK cell activation by proliferation and persistence. Remember, the whole objective of the TriKE therapeutic is to utilize a patient’s NK cells … but in a turbocharged manner.
Moving on to the GTB-3550 TriKE™ clinical trial design, take a look at the slide below. The company lays out the process and objective of their phase1/2 trials.
The most important thing to know above the design slide above is that the goal of phase 1 is to determine the maximum tolerated dose (MTD) of the GTB-3550 TriKE™. Patients have already been dosed as high as 100mcg/kg/day with no toxicity signs and without any grade of Cytokine Release Syndrome (CRS). Best of all, this lack of adverse events has been accompanied by significant reductions in bone marrow blast levels in several patients.
For reference purposes, 100mcg/kg/day means that a patient was dosed with 100 micrograms of therapeutic per kilogram of body weight per day.
As far as bone marrow blasts are concerned, people with acute myeloid leukemia (AML) have “blasts” that quickly replicate themselves. And the proliferation of blasts slows the production of red blood cells and platelets, which causes tiredness from anemia and a risk of bleeding from a reduced platelet count.
Doctors and clinicians will check bone marrow blasts during and following AML therapeutics to determine the level of blast reduction in a patient’s bone marrow.
According to the folks at NYULangone.org, “People with a blast level of less than 5 percent are considered to be in a low-risk category for experiencing symptoms and for having their condition progress to AML. Elevated levels of blasts – defined as the bone marrow containing at least 20 percent blasts –are associated with a higher risk of a myelodysplastic disorder progressing to AML.”
A Clinical Milestone
As you now know, phase 1 trials are primarily in place to determine safety. This stage of the process rarely involves a large patient pool, and the odds of meaningful efficacy are pretty low.
But GTBP’s GTB-3550 TriKE™ monotherapy appears to have broken the mold on this line of thought. While the number of patients is small, Dr. Miller and his colleagues have reported some incredible results. And frankly, it’s the results I am about to share with you that I believe are responsible for driving the stock higher in recent weeks!
I want to share with you the highlights from the first nine patients treated with GTB-3550 TriKE™ that GT Biopharma released on April 12, 2012 –
- Up to 63.7% Reduction in Bone Marrow Blast Levels Resulting in Clinical Benefit
- Restores Patient’s Endogenous NK Cell Function, Proliferation, and Immune Surveillance
- No Progenitor-derived or Autologous/Allogenic Cell Therapy Required
- No Cytokine Release Syndrome Observed
- 3 out of the last 5 Patients Treated Respond (25mcg/kg/day to 100mcg/kg/day therapeutic dose range)
Here’s what GTBP’s Chairman and CEO, Tony Cataldo, had to say about these results:
“We believe GTB-3550 TriKE™ sets a new standard for NK cell engager therapies due to the incorporation of Interleukin 15 (IL-15) directly in the protein backbone. The flexibility and versatility of our TriKE™ platform allows us to change the cancer cell targeting moiety of TriKE™ to attack different cancers while maintaining the core NK cell activation, proliferation, and persistence attributes of the molecule.
The TriKE™ is a true monotherapy, unlike all other NK cell technologies in development. The novel TriKE™ uniquely does not need any outside NK cell manufacturing or combination drugs, to supplement or assist. Further, the TriKE™ does not require pre-conditioning of the patient’s immune system. These supplemental requirements of competitive technologies add tremendous cost to an already costly therapeutic approach. Everything the TriKE™ does happens with no outside assistance whatsoever. We believe the TriKE’s clinical data is demonstrating exactly that, opening the door to a significantly more cost-effective off-the-shelf therapeutic.”
Look, while Dr. Miller and his team still have a lot of ground to cover with the remainder of the phase 1 trial and the transition into phase 2 – with the hope of progressing into a phase 3 trial, the early data is undeniably positive. And while I’m not a clinician or cancer researcher, the fact that GTB-3550 is showing efficacy and no -current- toxicity in phase 1 trials is a hands-down success.
The bottom line is it’s early-stage clinical successes like what GTBP has reported that pique investors’ interest.
Risks & An Investment Thesis
An investment thesis on GT Biopharma is framed around the idea that NK cells and the TriKE™ therapy will prove to be beneficial to cancer patients. And for this to pan out, GTB-3550 will need to progress from Phase 1 into Phase 2 and 3 trials and ultimately be submitted to the FDA for approval.
This thesis’s obvious risk is it takes years and many millions of dollars for a drug to progress from the lab to FDA approval.
Trial delays and setbacks are always possible, and we should expect the company to raise money from time to time to fund ongoing and future research and clinical work.
Now, as long any fundraising occurs at a subsequently higher valuation from the last raise, I wouldn’t expect traders to be overly bothered by the additional dilution on the back of positive data.
However, if the fundraising occurs at a reduced valuation or on the heels of negative data, the stock will likely suffer.
Investors also need to understand that clinical-stage biotech stocks can be highly volatile – Significant more so than a simple biotech ETF or S&P 500 index fund.
Suppose you’re going to invest in a small-cap biopharma company for the possibility of market-beating returns. In that case, you also need to be comfortable sitting through significant price corrections and day-to-day price volatility. So, be sure to give special consideration to your position sizing and tolerance for near-term volatility.
Data is Key!
GT Biopharma shared incremental patient data for patients 5 through 9 on March 17, 2021, after announcing that patient #8 began treatment on January 12, 2021.
The company announced the enrollment of patient #10 on April 8, 2021. While I am purely speculating on this, my guess is we will see additional, incremental patient data in or around late May to June. And suffice it to say, the next batch of patient data is likely to be impactful to GTBP’s stock price one way or another.
Again, as with any clinical-stage biotech stock, interim data on GTB-3550 (and any subsequent trials or provisional data on solid tumors) will be the primary driver of GTBP’s stock price.
From a stock perspective, as long as trial data continues to show little to no toxicity (no Cytokine Release Syndrome), significant reductions in Bone Marrow Blast Levels, and sustained restoration of patient endogenous NK cell Function and proliferation, investors are likely to remain optimistic and engaged in the story.
Look, I will not tell you that GTBP’s stock is going to quadruple based on the TriKE platform. But the company’s result to date has been impressive, and I believe it’s worth considering the following excerpt from the research note Roth Capital Partners sent to clients in mid-March 2021:
“Our $25 price target is derived from a risk-adjusted net present value analysis of the utility of lead asset GTB-3550 in acute myeloid leukemia and myelodysplastic syndrome in the U.S. and Europe (2024/26 launch, $1.5-8 bn peak sales, 40-55% POS). We assign a lower probability of success for ex U.S. sales as GT Biopharma isn’t currently developing outside of the U.S.”
While analyst price target should always be taken with a grain of salt, the folks at Roth issued this $25 price target with the stock around $6.30, suggesting the stock has considerable potential upside.
And while investors may continue to bid the stock higher ahead of the next batch of patient results, one thing is clear. If the FDA eventually approves GT Biopharma’s GTB-3550 TriKE™ therapy (potentially validating the company’s opinion that the TriKE™ is a platform technology), early investors are poised to benefit handsomely.