Money Morning Article of the Week
by Ernie Tremblay, Money Morning
To be worth an investor’s money, any promising pre-profit biotech needs to offer high scores on three fundamental benchmarks: pipeline depth, lead product quality, and cash-reserve to burn ratio.
Very few young pharma firms meet these qualifications, of course.
That’s what makes a company like this so exciting…
How to Profit from Each of the “Sacred Catalysts”
A pharmaceutical pipeline consists of all the drugs a company currently has under development. Having a deep pipeline is like having depth on a football team – if your first-string player doesn’t work out, you’ve always got a few backups to take his place. Likewise, if one drug doesn’t make it to market, it’s great to have another one right behind it to pick up the slack.
But unlike a lineup of bench players, every drug in a pipeline has five predictable chances to score in the game. Those opportunities are the five sacred catalysts the FDA stipulates every drug must go through to reach its ultimate goal: approval for marketing. They are:
- Phase 2 clinical trials;
- Phase 3 clinical trials;
- New Drug Application (NDA);
- FDA Advisory Committee review (AdCom);
- FDA final review (Prescription Drug User Fee Act review, aka PDUFA).
There are other incidental events that can happen along the way and kick up share value – fast-track approval designation, for example – and not every drug goes through an AdCom, but the point is, every experimental drug in a company’s pipeline will likely give you at least five opportunities to make money for each disease it treats.
That’s why the pipeline at Omeros Corporation (Nasdaq: OMER) is so critical.
This Company’s Deep Pipeline Is the Key
Omeros is on a mission.
Actually, it’s on a number of missions…
The company has no fewer than six drugs in clinical development to treat seven diseases. Some have already moved up the regulatory gauntlet – the ladder of the sacred catalysts – but I’m still seeing 18 opportunities, at the very minimum, for an investor to watch his money soar.
The pipeline includes drugs to treat schizophrenia and Huntington’s disease (the disease that killed folksinger Woody Guthrie), as well as opioid and nicotine addiction, and drugs that can actually limit the damage of various types of surgery before it ever happens!
And of course the pipeline will expand as the many pre-clinical (animal-tested) drugs this biotech is developing move into clinical (human tested) studies – meaning even more opportunities to make quick profits.
The pipeline, of course, is just the first reason this is one of the companies I’m watching so closely.
Quality Leads You Can Bank On
By far, the most important variable to consider when you’re looking at a young biotech is the quality of its lead drug candidates. And you need ask only two questions in making that consideration: is the drug safe, and is it effective?
Omeros has an interesting and efficient way of approaching both questions: It leverages FDA-approved generic drugs into proprietary (patentable) formulations. This takes a lot of the guesswork out of drug development, especially where safety is concerned. If two ingredients have already been approved individually as safe, the only thing you have to prove is that using them together doesn’t raise your risk for some unexpected side effect.
Proving effectiveness, of course, depends on the clinical endpoint you’re trying to achieve, but if both are effective separately for a given indication, they’ll probably be as effective or more so when used together.
This company’s lead product, now awaiting assignment of a PDUFA from the FDA, is a novel medication, called Omidria, which reduces trauma from lens-replacement eye surgery by preventing damage before it happens. Surgical trauma can include pupil constriction, inflammation, pain, spasm, loss of function, and other problems. Omidria significantly reduces these problems. The surgeon delivers the drug throughout the duration of the operation.
Study results have been terrific, and approval by the FDA and EMA (European Medical Agency) should be a slam dunk. I expect those approvals to happen sometime in mid Q3 to early Q4 of this year, unless the FDA gets lazy and prolongs the wait.
There were also recent positive data releases for the firm’s schizophrenia drug, and releases for its Huntington’s disease drug are soon to come (this could be huge).
All in all, it’s a great product profile.
Deep Pockets Will Smooth the Path to Great Earnings
Young biotechs have no sales to bring in profits, but they have plenty of operating costs to usher money out the door. They depend on investors, both public and private, as well as loans to keep them going. Because of this, most standard financial indicators don’t apply.
One indicator that is vitally important, however, is burn rate, aka negative cash flow. This number can help you determine how long the company can operate with current cash on hand. When its coffers get low, a biotech can run into trouble. Its best option at that point is often to float a public stock offering, which can sting early investors by diluting the value of their stock.
To calculate burn rate, first go to the company’s stock page on Yahoo Finance, and click on “Cash Flow” at the bottom of the left-hand column. Then click on “Quarterly Data” and find two numbers: Total Cash Flow from Operating Activities and Capital Expenditures. Add them together, and then divide by 3 to get a number that represents monthly outflow.
Now go to the left-hand column again and click on “Balance Sheet.” Again, click on “Quarterly Data,” and add “Cash and Cash Equivalents” to “Short Term Investments.”
Divide that number by the monthly outflow number. The answer will tell you how many months the company can continue to operate out of current cash reserves, as of the last date reported.
Omeros, the biotech I’m describing, had about 26 months’ worth of cash in its coffers as of the end of the Q3 2013 and a burn rate of about $395,000 per month. As of March 4, 2104, it added $12.6 million to its operating funds by way of a $32 million term loan from Oxford Finance and MidCap Financial. The loan requires interest-only payments until March 2015.
So financially, the company is strong, with plenty of cash on hand to get its lead drug to market and its other pipeline drugs further up the ladder.
Omeras currently has a market cap of $389.6 million, so it has lots of room to grow. Over the past 12 months, its stock value has increased by 126.4%, and I expect that trend to continue through the next year…
