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Value investing in the field of biotechnology is a difficult task indeed. Often, investors cannot rely on typical valuation metrics such as asset values and earnings. This is because biotech companies are about finding new products to treat unmet medical needs such as cancer, diabetes etc. As such, before investing in a biotech company, investors require an understanding of how well a company is progressing on its way to reaching its profitability goals.
The model for many biotech companies is to take a product through Phase I and Phase II testing, and then sell it to a company better equipped to take it to the next level. Sales prices for products with ready markets are often in the hundreds of millions of dollars. ImmunoCellular Therapeutics (IMUC) trades for just $25 million, but has made significant progress towards this goal.
The company is beginning Phase II trials for a product that fights aggressive brain tumours (like that of the late Senator Ted Kennedy) after a very successful Phase I trial. Only 10% of those afflicted with this form of cancer are disease-free after two years, whereas half of the patients under this trial are disease-free after two years.
Of course, the problem with this kind of company is that it needs to burn through cash for several quarters or sometimes years before completing its trials. The good news for ImmunoCellular is that it typically burns through less than $1 million per quarter, and has $7 million in the bank. Furthermore, management expects to raise another $10 million before the completion of Phase II trials.
For investors willing to take downside risk in return for very strong potential upside returns, ImmunoCellular may offer an enticing risk/reward scenario. Below are comments from the company's CEO:
Disclosure: The site's author does not own shares of IMUC