2022 has been a year characterized by tightening financial conditions and the rising cost of capital. This dearth of “cheap” money combined with hawkish central bank policy has limited the financing capabilities of small and micro cap publicly listed companies and decimated share prices across the biotech sector (we have witnessed outsized share declines of 80%, 90%, and in some cases 95% year to date). This has resulted in an unusual and particularly pronounced opportunity in the micro cap biotech space to invest in companies at valuations that are less than the total value of the cash in the company's treasury. Put simply, the breakup value (i.e., cash distributions made to shareholders should the company dissolve) of the company is higher than the company’s current market valuation.
This is a unique situation because public companies are normally priced at a premium to their current assets, their net assets, and in some cases (like at the end of 2020 and early 2021) we saw astronomical valuations ($200M-$300M) for companies that didn't have much aside from a public listing and a story to tell. The fact that shares of companies trading below cash value are being sold off in droves is a testament to two things:
Thankfully, there are CEO’s unwilling to return capital to shareholders and close up shop because many of these biotechs trading between $3M-20M are sitting on intellectual property that (if properly monetized) could be worth 50-100x the current valuation.
There are signs of capitulation across the micro/small cap biotech sector and it appears to have entered the despair/despondency stage:
The despondency stage is the time when it is the most difficult to step in and buy because sentiment is horrendous and the price trend has been straight down for many months. This is also the stage of the long term market cycle that offers investors the maximum financial opportunity.
So, we've gone from one end of the pendulum two years ago to the complete opposite end of the pendulum today. This doesn't mean the sector has to bottom and share prices will go up January 1st, but it does mean the risk of further losses relative to the potential upside is the most attractive it has been in more than a decade.
I believe that if an investor has a 12+ month investment timeframe, the return potential is quite significant; share prices could be up 200%, 300%, 400% by the end of 2023. Obviously, there will be some companies that continue to shed share price and shed market cap as they deal with challenging financing conditions and poor investor sentiment. Dilution is absolutely a clear and present danger for investors in pre-revenue companies that are still burning through shareholder capital. However, as I mentioned, the pessimism is so high, and share prices and valuations are so low that this is the time to seriously start sifting through the wreckage and finding gems that have been tossed out in the drain along with everything else.
MedicalGold has identified microcap biotechs that qualify as de-risked opportunities with substantial upside potential by applying these two criteria:
Medicenna is a clinical stage immunotherapy company focused on the development of novel, highly selective versions of IL-2, IL-4 and IL-13 Superkines and first in class Empowered Superkines. Medicenna’s long-acting IL-2 Superkine, MDNA11, is a next-generation IL-2 with superior CD122 (IL-2 receptor beta) binding without CD25 (IL-2 receptor alpha) affinity thereby preferentially stimulating cancer killing effector T cells and NK cells. Medicenna’s early-stage BiSKITs™ program (Bifunctional SuperKine ImmunoTherapies) is designed to enhance the ability of Superkines to treat immunologically “cold” tumors. Medicenna’s IL-4 Empowered Superkine, MDNA55, has been studied in five clinical trials including a Phase 2b trial for recurrent GBM, which is the most common and uniformly fatal form of brain cancer. MDNA55 has obtained Fast-Track and Orphan Drug status from the FDA and FDA/EMA, respectively.
Read our coverage of Medicenna here.
MDNA is currently trading at a $42 million market cap with C$40 million in cash as of the company's latest 9/30/2022 quarterly financials. The share price is exhibiting support near the $.40 level on Nasdaq as selling pressure wanes. Risk/reward is highly favorable for a short term (1-3 months) trade taking advantage of the end of tax loss selling season and turning the page on a dreadful -75% year-to-date performance in MDNA shares.
Numinus Wellness helps people to heal and be well through the development and delivery of innovative mental health care and access to safe, evidence-based psychedelic-assisted therapies. The Numinus model - including psychedelic production, research and clinic care - is at the forefront of a transformation aimed at healing rather than managing symptoms for depression, anxiety, trauma, pain and substance use. Numinus is leading the integration of psychedelic-assisted therapies into mainstream clinical practice and building the foundation for a healthier society.
Numinus has been whittled down to a C$50 million market cap. Meanwhile, the company has roughly C$30 million in cash and stands as one of the leading companies in the integration of psychedelic-assisted therapies into mainstream clinical practice, and building the foundation for a healthier society.
Enveric Biosciences (NASDAQ: ENVB) is a biotechnology company dedicated to the development of novel small-molecule therapeutics for the treatment of anxiety, depression and addiction disorders. Leveraging its unique discovery and development platform, The Psybrary™, Enveric has created a robust Intellectual Property (IP) portfolio of New Chemical Entities (NCEs) for specific mental health indications or physical ailments. Enveric’s lead program, the EVM201 Series, comprises next-generation synthetic psilocybin analogues that are considered prodrugs of the active metabolite, psilocin. Enveric is initially developing EVM201 for the treatment of anxiety disorder. Enveric is also advancing its third generation of therapeutics, the EVM301 Series, to offer a holistic approach for treating central nervous system disorders. Enveric is headquartered in Naples, FL with offices in Cambridge, MA and Calgary, AB Canada. For more information, please visit www.enveric.com.
Enveric is a puzzling stock due to its relatively large cash position that dwarfs the current market cap. The chart shows evidence of a capitulation decline in recent weeks.
The biotech investor despair of 2022 has planted the seeds for a bull market rebound in 2023. While many beaten down biotech stocks offer the best risk/reward opportunity in years, the biggest risk in 2023 is that the Fed will continue to tighten financial conditions and liquidity will become increasingly scarce. This is why we believe that companies with strong cash positions that will not have to finance in 2023 (if conditions remain unfavorable) will be able to weather the storm and continue to create value by aggressively pursuing their drug development programs, while cash-poor companies will be forced to stall until more favorable market conditions arise or dilute their shareholders into oblivion.
Here is a list of Canadian biotechs that have a tremendous amount of cash relative to their market cap.
It is usually the darkest before dawn. Investing in high risk, early stage companies is no different. Please do your own due diligence, it’s your money and your responsibility.
Author owns shares of Enveric Biosciences and Medicenna Therapeutics at the time of publishing and may choose to buy or sell at any time without notice.
The work included in this article is based on current events, technical charts, company news releases, and the author’s opinions. It may contain errors, and you shouldn’t make any investment decision based solely on what you read here. This publication contains forward-looking statements, including but not limited to comments regarding predictions and projections. Forward-looking statements address future events and conditions and therefore involve inherent risks and uncertainties. Actual results may differ materially from those currently anticipated in such statements. This publication is provided for informational and entertainment purposes only and is not a recommendation to buy or sell any security. Always thoroughly do your own due diligence and talk to a licensed investment adviser prior to making any investment decisions. Junior resource and biotechnology companies can easily lose 100% of their value so read company profiles on www.SEDARplus.ca for important risk disclosures. It’s your money and your responsibility.