My most recent post was about story stocks and "The Emperor's New Clothes". Basically I wrote that any company with negative earnings and little to no revenues....that they're clothed in rags, and that Investor Relations types endeavour to create the impression that these rags are in fact a gorgeous outfit worthy of attention and investment.
The "story" is what these companies wear in the absence of solid financials, and if the promotion works a company's PPS can soar if investors see a spectacular outfit instead of dirty cheap threads. But ultimately and long term, a story can only do so much. Eventually the chickens come home to roost and to deliver long term shareholder value the story has to come true.
Resverlogix has a story, but its not being promoted far and wide. You won't see cheesy podcasts with the CEO being interviewed by someone with scripted questions. Of course current shareholders, especially retail investors, they want news and information, and the company has been very forthcoming in keeping those who've risked capital in the loop.
Here's a video the company put out itself and uploaded to their own YouTube channel:
Currently Resverlogix has a market cap of about $130 million CDN or about $100 million USD. Is that a fair value? In my view its a mug's game trying to assign a valuation to a company that is highly speculative, $100 million, $25 million....$250 million, $2 billion....pick a number.
Resverlogix is attempting to prove that its drug Apabetalone can reduce the occurrence of Major Adverse Cardiac Events, or MACE, in patients with a form of Diabetes called Dibates Mellitus. The company is currently engaged in a phase III trial the goal of which is to prove just that. Beyond Diabetes there are also other diseases which Apabetalone may be able to address such as Alzheimers, Cardio Vascular disease and Thrombosis. With our aging population the number of people suffering from diseases such as these is only going to increase.
Why do I think trying to assign a market valuation is a "mug's game"?
As a point of comparison I would suggest looking at Esperion Therapeutics, (ESPR on Nasdaq). Esperion is engaged in the development of, among other things, the treatment of patients suffering from Cardio Vascular Disease and with elevated levels of bad cholesterol or LDL. Its not a perfect comparison but I think its close, especially considering both companies are development stage.
Shares of ESPR went on a wild ride in 2015, going from less than $20 for most of 2014 to over $100 by the summer of 2015. With about 22.5 million shares outstanding at the time, at $100 per share ESPR's market capitalization climbed to over $2.2 billion. Currently shares have been trading in the range of $10 to $11 over the past couple of months with the MC falling all the way down to about $250 million USD.
How did a development stage company go on such a wild ride and attain such an incredible market cap? I would argue they had a really good story about lowering bad cholesterol and told it well at events like conferences sponsored by investment firms. They had good top line results in phase II studies and investors got excited over the potential market and the share price was pushed higher and higher accordingly.
Why did it all fall apart and come crashing down so hard? To be perfectly candid I don't know, I suspect that the excitement wore off, ESPR is advancing in its efforts to combat Cardio Vascular Disease (CVD) by trying to reduce LDL. But CVD trials take a long time and are probably among the most expensive treatments to pursue. It may be that investors simply lost patience.
I do think that if Esperion succeeds that a MC in the billions is not unreasonable, I feel the same with with Resverlogix. In terms of Resverlogix I'm glad to see them targeting a disease like Diabetes Mellitus instead of CVD given the time and cost associated with conducting trials for Cardio Vascular indications.
Success or failure though is the ultimate litmus test. Investor roadshows and conferences can do a lot to raise a company's profile and also its share price, but as the ESPR roller coaster ride shows, share appreciation can be fleeting.
Here's hoping both companies achieve ultimate success, that neither will need IR tailors to convince the great unwashed that the clothes these companies are wearing are in fact worthy of attention
Nice blog. A couple comments. First, apabetalone does indeed target cardiovascular disease. In fact, patients in BETonMACE are required to have had an acute coronary syndrome event within 90 days to be eligible for enrollment. They also must have low HDL. Furthermore, the primary outcome of BETonMACE is MACE (major adverse cardiac events). Although apabetalone may have some beneficial effects on lowering blood glucose, and BETonMACE is targeting diabetic, low HDL patients at high risk for cardiovascular disease, this is not a diabetes trial.
ReplyDeleteAs for the ESPR comparison, yes that wild ride up to the 2.2 billion MC was crazy, fueled by investor expectations that ETC-1002 had a clear path to FDA approval. ETC-1002 is for LDL lowering and is especially promising for statin intolerant patients. The first big hit to that 2.2 billion MC came with the approval of the PCSK9 antibody therapies to lower LDL. Despite the prohibitively exoensive cost of these antibody therapies, which will prevent them from ever having widespread use in my opinion, the market viewed this competitor as taking out a significant portion of ESPRs market. However, the more recent and significant hit came from the FDA decision (or lack thereof) to provide a clear path to approval based on LDL lowering alone, as it had done for the PCSK9 antibody therapies. Instead, the FDA may require a longer cardiovascular outcomes trial prior to approval. The European EMA is a different story and is on board with an approval path for LDL lowering, without needing cardiovascular outcomes trial for approval, after the Phase 3 long term safety trial concludes around early 2018. I suggest folks cruise over to Esperion website and view the most recent company presentation/transcript for the full story.
I'm long RVX and long ESPR, and I continue to have confidence in both as they each proceed with Phase 3 despite the FDA, but not EMA, dragging their feet with both companies. None of what I comment on here should be taken as investment advice. Do your own due diligence. Best of luck to all.
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