Cleveland BioLabs, Inc. Increases 63% on Efficacy Study Results
Cleveland BioLabs, Inc. (NASDAQ: CBLI) increased 63% on today's announcement of strong survival results for its randomized, placebo-controlled efficacy study of CBLB502 in animal primates required by the U.S. Food and Drug Administration's (FDA) Animal Rule. Over the past few years, CBLI's share prices have decreased significantly. In the first quarter of 2011, CBLI traded at $9.60 per share. Currently, CBLI is trading at $2.07 per share. Now, CBLI may be a good speculative buy.
CBLB502 has the potential to serve two end markets. CBLB502 could potentially act as a radiation countermeasure and be used in radiotherapy as well as a treatment for nuclear poisoning. The Company also has two operating subsidiaries. CBLI owns 75.8% of Incuron, LLC, and 54.6% of Panacela Labs, Inc. CBLI along with its operating subsidiaries has 8 proprietary oncology products. CBLI has a strong patent portfolio with over 20 patent applications worldwide (granted patents in USA, Europe, Asia).
CBLI is still early in its development. On a trailing twelve month basis, R&D is 3.2 times sales. CBLI has cash of 23 million and no debt. CBLI will be able to fund short-term R&D expenses as it spends around $6 million a quarter. Eventually, CBLI will need to seek external financing. In the recent earnings call, CFO Neil Lyons stated the company is placing emphasis in non-dilutive sources of capital and are pursuing support from federal partners.
One potential source of funding is from Biomedical Advanced Research and Development Authority (BARDA). BARDA manages Project BioShield which includes the advanced development of biological countermeasures for radiological and nuclear agents.
CBLI's viability as a company hinges on the success of CBLB502, the company's lead candidate for FDA approval. Today, CBLB502 demonstrated statistical significance with the survival of animals exposed to lethal levels of radiation. This allows CBLB502 to pass the pivotal stage of approval. This is a very important step and caused the stock to increase 63%. The company's plan, once CBLB502 is approved as a radiation countermeasure, is to eventually sell it to the U.S government and other allied governments. As well, if CBLB502 is also approved as a cancer drug, the company would sell it through traditional distribution channels. CBLB502 as a potential cancer drug is currently in the phase I approval process.
Since very high R&D costs and little to no revenue in the early years of development characterizes early biotech companies, working with a large strategic partner is important to complete product development. CBLI has strategic partnerships with the Cleveland Clinic, the Roswell Park Cancer Institute, and the Children's Cancer Institute of Australia.
The stock has several potential upside catalysts such as FDA approval to commercialize CBLB502, the ability to bring other proprietary drugs through the development process, and ability to attract non-dilutive capital such as from federal sources.
Using financial options to invest will provide downside protection by limiting losses while also providing a source of leverage. When considering a longer-term investment horizon, purchasing Jan 2013 calls with a strike price of $2.5 for a debit of 0.6 per share can be profitable. The stock has to increase in value to $3.10 a share to break even. The max loss is the total debit paid for the option.
The risks in the investment should be considered. The company has a history of operating losses and will probably continue to incur losses in the short to intermediate term. The company needs financing in order to be viable in the intermediate to long term which may include an additional equity issuance. Moreover, there is the risk that none of CBLI's drugs are approved for domestic or foreign markets. Lastly, the Jan 2013 calls have very low open interest so liquidating the position would be difficult.
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