My Stock Winners

It’s quite an oddity when the words “Value” and “Biotech” are ever used or seen in the same sentence. Why? Well…biotech is in the business of hopes and dreams and the last time we checked those items were of little tangible value. Investors as well as patients are looking for new blockbuster medications that can save lives and create riches. However, it takes a mountain of money to take a drug from preclinical studies into Phase III clinical trials and if things work out…ultimately into the market place.

Globally the pharmaceutical sector spends an estimated $53 billion a year on research and development. Despite this massive amount of capital an average of less than 26 drugs per year have been brought to market in the last eight years.

If $32 billion out of $53 billion results in failed drugs that means the chances of success are roughly 1 out of 3. That is pretty risky when the gamble is $800 million dollars. It is for this very reason the SmallCap MarketWatch has stayed away from biotech in most situations. In the very few circumstances where feel the inclination to be bullish, the underlying reason is almost always hard cold cash. The subject of today’s edition, Inhibitex Inc. (INHX), is a company that had $59.5 million in cash at the end of Q1 2007 and a current market capitalization of $37.06 million. On March 8, 2007, the Company provided financial guidance for 2007, indicating its anticipated net cash burn for 2007 would be less than $11 million (press release). Assuming this is the case, Inhibitex should have almost $55 million in cash when the company reports earnings next week on August 9th. In case we forgot to mention, the stock closed yesterday at $1.20 per share while cash per share is in the neighborhood of $1.75 per share. We often hear people say that this company or that is “worthless” but here we actually have a case of being worth less than cash.

Things at Inhibitex weren’t always so dire. The company was actually founded in 1994 and went public in 2004 raising $35 million dollars at $7 per share. Based on the current 30.6 million shares outstanding the company was sporting a valuation of $214 million or over six times today’s market value. The beginning of the end occurred in Q1 2006 when the company had disappointing news regarding their leading drug Veronate. This drug was being developed for the prevention of hospital associated infections in very low birth weight infants. As we mentioned earlier in this edition, biotech is a risky venture and Inhibitex’s Veronate failed phase III clinical trials. Not surprisingly, this sent the stock into a tail spin from a high of $10.82 to a low of $1.42 down to yesterday’s all time low of $1.20 per share.

This is where we have to give the management team at Inhibitex some serious credit. Instead of just sitting there shell shocked the company is actually trying to survive although things for shareholders have not prospered. In the past 52 weeks share of INHX are down 20% BUT it has been quite an improvement from 2006 as readers can see from the chart above.

Inhibitex has completely divested its interest in Veronate and has refocused resources on its MSCRAMM platform. The company has successfully restructured its operations reducing its burn rate from $9 million in Q1 ?06 to $11 million for all of 2007. It’s never easy to make the hard decisions that enable a company to survive. In this instance, we think management has done a good job of trying to salvage what must have been a tremendous heart ache.

Inhibitex is now focused in the novel antibody space. Novel antibodies are geared towards the prevention and treatment of serious bacterial and fungal infections. All of the company’s current projects and licensing agreements are based on their proprietary technology MSCRAMM protein platform. One of the main functions of the immune system in the human body is to produce antibodies. Antibodies are proteins that attach themselves to infectious agents (pathogens) within the body. MSCRAMM is a protein that has been found successful to bind with different antibodies.

Going forward, the company has a couple strong drug candidates in its pipeline. First, Inhibitex’s leading drug candidate is Aurexis, which has completed phase II clinical trials and has also been granted fast track designation by the FDA. Aurexis is an antibody that targets S. aureus or commonly known as staph infections. If the drug enters phase III or the company announces a pharma partnership there could be a tremendous upshot for the stock.