Stocks That Almost Made The Cut: Sep 2007 – Part 2

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September 14, 2007 | S.T.A.M.T.C | | Author Asif

This is the second of three blog posts covering the three stocks that almost made the cut for the September 2007 newsletter.

About six months ago a subscriber suggested a micro cap biotech company called Lipid Sciences (LIPD) that he felt had a great story and was trading for less than $1.50 per share. In his words this company should have been pre IPO but they became public through a reverse merger with an Arizona public shell company called NZ Corporation. From what I could read on the Lipid Sciences website, the story indeed seemed very interesting with the company attempting to remove “select lipids– such as cholesterol and triglycerides–from lipoproteins and lipid-coated infectious agents”. In laymen’s terms this translates into treating heart disease and highly infectious diseases like HIV or SARS by selectively removing fat soluble molecules called ”lipids“. Since my background is in technology, I could not really asses if their research had commercial potential and if the story was indeed as good as it sounded.

I convinced my friend Hatim Zariwala, who recently completed his Ph.D in Neurosciences from one of the top neuroscience institutes in this country, to take some time off from inserting electrodes into rat brains and look at Lipid Sciences. Given below are some of his thoughts about the company.

Technology:

  1. They have used a rather believable concept from lipid chemical biology, developed a patented technology for delipidation, have shown promise at the preclinical level but no clinical results yet on its utility in HDL therapy as well as antiviral vaccine.
  2. The preclinical results with delipidated viruses have been successful in developing cell-mediated immunity against the virus.
  3. LIPD proposes encouraging preclinical results for HDL therapy.

Market Potential:

The estimated overall antiviral market in the world is roughly $16 billion (conservative projection) and that of cardiovascular care $22 billion (US only) and ever growing in the developing countries like China, India and Russia. The cardiovascular care is complementary to therapy for obesity, stroke and diabetic care.

Company fundamentals:

  1. The company has not yet disclosed its potential competitors. We couldn’t find anyone else advertising the development of this technology for human clinical application. We have not been able to assess any competitors so far.
  2. The company R&D expenses have grown in the last two quarters and we couldn’t find any forward looking statement defining deadlines for announcing their results.
  3. LIPD has no net income and its income per share is negative. But this is the case with majority (and an overwhelming majority) of early stage biopharmaceuticals.

Future:

  1. Even at (a stock price of) $1.24 most analysts have put a “Strong Sell” rating on this stock. Though I was initially very excited about the prospect of this technology, I would definitely put a cautious rating till the results from the clinical trials are out.
  2. FDA approval to increase the number of hospital and patient recruitment of LIPD is encouraging.
  3. We do not know what the delivery route for their antiviral or HDL therapy would be. We believe the HDL therapy will be restricted to the in-patient population. The antiviral therapy is not a traditional viral therapy, it is a vaccine (what is the market for anti-viral vaccines).

After getting Hatim’s thoughts, I also checked with another senior scientist who has years of experience advising senior management at biotech companies and is well on his way towards developing a new drug through his own pharmaceutical company. His thoughts on Lipid Sciences were that the company is targeting an area of research that is so vast and with so much potential that it is usually done by either government funded agencies or universities. He also told me that in more than five years the company has not even reached phase 1 clinical trials and that is not very encouraging.

Management has been done a great job of keeping a lid on operating expenses and based on its current rate of cash burn of approximately $11 million per year, the company has enough cash on hand to last through the middle of 2008. I was looking at Lipid Sciences as nothing more than a call option that expires in mid 2008 but based on the feedback of the two scientists I consulted, even this call option appears to be expensive. The stock had dipped to as low as $1.03 just a couple of days ago and is dangerously close to getting a deficiency notice from the Nasdaq, which is triggered if a stock trades below $1 for 30 consecutive days.

I hope that Lipid Sciences eventually goes on to become successful and I will continue watching this company like I have done for the last six months but I would prefer to do so from the sidelines rather than have my money on the line.




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