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Investors still waiting for Heat Biologics (NASDAQ: HTBX ) to trade at a market cap of $100 million will have to wait longer. The stock surged to above $4 a share in May, but that proved temporary.
The biotechnology company, whose market capitalization is just $43 million, which puts it in the nano-cap territory, does not have much to offer except for hope. That started when HTBX issued a share issuance in May.
On May 3, HTBX stock slumped by around 50% when the company filed a preliminary prospectus for the public sale of nearly 4.3 million shares.
The company estimated net proceeds of $16.2 million from the deal and will use it to fund preclinical and clinical programs. On the balance sheet, this will show up as working capital and general corporate purposes. In the filing, the company wrote:
"To acquire, license or invest in complementary businesses, technologies, product candidates or other intellectual property. We have broad discretion in determining how the proceeds of this offering will be used, and our discretion is not limited by the aforementioned possible uses. Our board of directors believes the flexibility in [the] application of the net proceeds is prudent."
The generality around the use of the cash infusion is typical for a biotech firm that spends much of its resources developing drugs.
Drug Development With HS-110
Heat Biologics is currently enrolling patients in a Phase 2 clinical trial for advanced non-small cell lung cancer (NSCLC), in combination with Bristol-Myers Squibb 's (NYSE: BMY ) nivolumab (Opdivo).
The Phase 2 study enrolled 35 patients. Six of the patients treated with Opdivo and HS-110 achieved a partial response, while 40%, or 14 patients, stabilized their cancer. With the total disease control rate at 57%, speculative investors are willing to continue holding the stock.
The combined efficacy of the two drugs benefits both companies. BMY's Opdivo faces generic competition, due to a loss in patent exclusivity. In 2015, Opdivo sales totaled less than $1 billion, but by 2017, they reached nearly $5 billion . If sales of the drug reach $12 billion, then HTBX stock could join the ride in light of the higher efficacy of the dual drug treatment.
Risks for Heat Biologics
Phase 2 clinical trials are still early in the grand scheme of things. After completion, these Phase 2 numbers may not hold up. Any negative results would send HTBX stock significantly lower. Speculative investors betting that an HS-110/Opdivo combo is going to get approved would sell the stock instead. This would bring Heat Biologics back to $1.00 a share or lower.
Takeaway on HTBX Stock
The company will likely report Phase 2 HS-110 results that affirm the drug efficacy. That could send the stock's valuation back to the $100-million mark (or $4 a share).
Needless to say, the biotech sector is going through a rough patch. Generic drug giants like Teva (NYSE: TEVA ) and Mylan (NASDAQ: MYL ) both fell after reporting quarterly earnings. These firms offer superior cash flow growth and stock market gains in the years ahead. And both trade at single-digit forward P/E multiples.
Investors could look at other biotech startups that have less risk. Still, HTBX is trading at multiyear lows, with little premium assigned to the stock. If the company succeeds in its clinical trials, it has a strong partner (Bristol-Myers) that it may rely on. And in an age where nano-cap companies partner with giants, HTBX is a worthwhile bet.
Disclosure: The author does not own shares in any of the companies mentioned.
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