by Travis Johnson, Stock Gumshoe | January 22, 2010 4:31 pm
Chuck de Castro gets most of the attention that comes his way by virtue of some mining and resource newsletters — I’ve written about some of his microcap gold and oil picks, including Hill End Gold, Eromanga Hydrocarbons, Keegan Resources, Painted Pony and Vista Gold over the years. And I actually owned Hill End Gold for quite a while, and would like to buy it again (he’s also pushing that one again today, as far as I can tell — that’s the company that found gold in an “abandoned” mine in Australia, now that modern mining can deal with the water table problems that the original mine hit).
But while some of those picks still look interesting, and performance has certainly varied, he’s now pushing a completely different kind of company. He’s got his eye on a small pharmaceutical stock with an anti-scarring product in clinical trials, and since it doesn’t obviously fit in with his Penny Oil Speculator or Penny Mining Speculator newsletters he’s selling this recommendation on its own for a cool $500.
Can we figure it out without shelling out that cash? Well, your friendly neighborhood Gumshoe loves a challenge — and this Friday File is a nice spot to mention the stock, since it appears that it’ll be a really teensy hard-to-trade stock again, no need to get the dramatically larger free Stock Gumshoe audience revved up just yet.
We start, as always, with the clues. Here’s how de Castro pitches the basics of this stock:
“When JP Morgan, Goldman Sachs, Fidelity, and Union Bank of Switzerland, invest big dollars into a little-known biotech company, you have a situation that screams money.
“This is a tiny pharmaceutical company that developed a drug that can almost completely erase stretch marks and scars from burns, tummy tucks, stitches, and Caesarean sections.
“The company’s scar-erasing drug is based on a very simple and interesting observation. When a very young child gets a cut it heals very quickly, and often without scarring. But the same cut for an adult heals slowly, and often leaves disfiguring scars.
“So the two scientists at the head of this company started exploring why. They examined the blizzard of hormones, proteins, and enzymes that are released by the very young when they get a cut. They compared it with the blizzard of hormones, proteins and enzymes that are released when an old fartski like me gets a cut.”
As an aspiring old fartski myself, I can’t help but wonder whether he’s just showing his age by referring to the “Union Bank of Switzerland” … or if he’s trying to throw the Gumshoe off the scent by searching for a bank that virtually everyone knows as UBS. But that’s neither here nor there. How about some more specifics about the drug or the company?
“The drug has already passed two rounds of clinical tests in 10 different European countries. It’s coming down the homestretch on the third and last clinical test….Are you getting our free Daily Update
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“The shares are currently selling for about 45 cents each. After the drug is approved, I think shares will quickly go to $1.50, and longer term, to $4.50.”
Hmmm … pretty thin, right? Well, let’s fire up the Thinkolator anyway … I think this stock must be …
Renovo Group (trades primarily in London at RNVO, also on the pink sheets at ROVOF)
If you do decide to research this further and buy shares, use the London price as your benchmark — it closed this morning in London at 29p (pence), which at the current exchange rate rounds off to 47 cents. The shares last traded on the pink sheets at 50 cents, it’s not unusual to see investors bid up a little bit for foreign pink sheets shares, but if you’re a trader also keep in mind that it’s not unusual to have to accept a lower price if you want to sell these kinds of shares — there just isn’t that much volume. To get the fairest price, always try to place orders when both London and NY markets are open at the same time, first thing in the morning.
So who is Renovo? This is indeed a young company that was founded by two scientists, Mark Ferguson and Dr. Sharon O’Kane. Ferguson remains the CEO and O’Kane was the Chief Science Officer, but it appears that she’s resigning from the company next month — several other board members and executives have also resigned over the last year, and the board has shrunk considerably in sympathy with the company itself, which has spent the last year doing some significant cost-cutting to make sure the cash burn rate of the firm allows them to remain in good shape until at least the middle of 2011, when results from the phase III trial of their lead compound are expected.
And that compound, Juvista, seems pretty clearly to be what de Castro is teasing. Here’s how the company describes it:
“Renovo’s lead drug candidate for the reduction of scarring, Juvista, is a therapeutic application of human recombinant Transforming Growth Factor β3 (TGFβ3). TGFβ3 is present at high levels in developing embryonic skin and in embryonic wounds that heal with no scar, but by contrast, is present at low levels in adult wounds that scar.”
Which, as I read it, is a more complicated way of saying, “heal wounds like a young child instead of like an old fartski.”
And this compound has been through two rounds of clinical trials and is in Phase III — though whether you call that the “homestretch” or not is a matter for some interpretation, they expect to get the first results from the current trial sometime in the first half of 2011. And yes, at the current burn rate they have plenty of funding to make it there — in fact, the stock is feared enough that as of last Fall they had a bit more cash on hand (65 million Pounds) than the market capitalization of the company (55 million Pounds — about $88 million), with a current burn rate that they say will leave them with 25-30 million Pounds in cash when the Phase III trials for Juvista are released in mid-2011.
The institutional investors measure up to the tease, too — JP Morgan and Goldman Sachs both have significant holdings in a variety of funds that they manage, though both have seen their holdings drop a bit recently (Goldman at one point owned more than 10% and it’s a hair below that now, JP Morgan’s position is about half that size), and both UBS and the Fidelity Small Cap Stock fund own (or have recently owned, at least) more than 5% of the shares.
The big deal for Renovo so far is clearly Juvista, though they have some other compounds coming up behind, and a possible cosmetic product that they’d like to license this year. But most of their money has come in because of Juvista, including most critically their deal with Shire plc to develop and commercialize Juvista worldwide except for in the European Union, where Renovo continues to hold commercialization rights. In exchange for that deal they got a huge $50 million equity investment from Shire and an upfront payment of $75 million, both at a time when the shares were trading at close to 200 pence back in mid-2007.
After that, the shares collapsed on the initial response to some “failed” trials — making this definitely a “fallen darling” of a stock. Extraordinary things were expected from Renovo three years ago, and while there seems to still be some potential for those great results the enthusiastic shareholders have left. Here’s a good article about the company’s phase II failures (in mole scarring and breast reduction scarring) … and, lest we put too much weight on those shareholdings by Goldman Sachs and JP Morgan, here are the extraordinarily optimistic target prices from their and other analysts at the time:
“Goldman Sachs added Renovo to its ‘conviction buy’ list and reiterated its 18-month price target of 389p, predicting a return potential of 190 percent. Panmure Gordon reiterated its ‘buy’ note, with a target of 120p. JPMorgan gave it an ‘overweight’ rating and a target of 134p.”
The optimism is due to the potentially massive market, those 42 million US surgeries per year that de Castro mentioned in his article (and roughly the same number in the EU). During headier days, biotech analysts were saying that the potential market for Renovo’s anti-scarring treatment ranged from $4 billion to $12 billion, with even the low end of that meaning that Renovo, just from Shire milestones and royalties in the US alone, should have seen its share price explode. The company and the analysts consistently mention the “botox model” in saying that they see a “real” medical, insurance-covered business for anti-scarring treatments following major surgeries, as well as a cosmetic and consumer-paid business for plastic surgery, varicose vein surgery and the like. The company claims that Juvista has “no near-term competition” and that this is the “First in class pharmaceutical for prophylactic improvement of scar appearance in the skin.” It is relatively inexpensive to make, and they have the ability to scale up manufacturing.
I’ve never heard of the company before today, but the stock is starting to look like an appealing speculation — albeit one that might not have a catalyst for a while. Unless any deals they make to advance development of Juvidex catch attention this year (that’s a cosmetic ingredient that promotes skin healing, apparently), there shouldn’t be much news out of the company in 2010. Juvista is clearly where the company’s future lies (or dies), and we probably won’t hear any more about that for at least a year. If (and that could certainly be a big “if”) the Phase III trial goes very well, perhaps they’ll apply to the FDA, which would bring the next payday for Renovo, they get another $25 million if an application goes through for Juvista, and up to $150 million if it gets approved. The larger amounts would come after that if Juvista actually becomes a big drug, with potential milestone payments on sales of up to $525 million and royalties — as well as whatever they can bring in from the EU market, either by partnering with someone else or getting it approved and selling it there themselves.
If you’d like to start digging into this stock, they had a good investor presentation on Wednesday that you can view here [pdf file], and their latest earnings release is here [pdf file]
So where does that leave us? With a relatively cheap company that addresses a large market and has a pretty lucrative deal in place for their lead product … assuming, of course, that the product pans out. That gets me intrigued, I’ll be looking into this one a bit more and may be adding it as a little speculative flier in my portfolio, one that I might be able to ignore, not set a stop loss on (not that I often use those anyway), and wait to see how it does when their clinical trial results come out in 2011.
Renovo may again be a bust, of course, and it’s also possible, given the limited clues provided, that I’m wrong about de Castro picking this stock. And we’ve already seen how this stock performs when the clinical trials disappoint, just look at the stock chart for early 2008, and know that the stock’s crash back then could be magnified if it occurs after a pivotal phase 3 trial like the one now underway. Still, the size of the market, the potential of the product even if the end market ends up being much smaller than “all surgeries”, and the financial condition of the company (ie, they shouldn’t go broke before the clinical results are announced) make me think it might be worth a tumble. If you’ve got an opinion on the stock or product, as always, feel free to let us know.
I do not own these shares now, and per my trading rules I will not trade in any stock mentioned for at least three days — and for personal portfolio reasons, if I do buy into Renovo it will probably be farther down the road than that.
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