Insider Buying and a teased “295% pop” to come?

Sleuthing out the teaser for Money Map's Private Briefing biotech stock

By Travis Johnson, Stock Gumshoe, October 3, 2012

“I Have Access to Financial Strategies That You Don’t Have…

“And They Could Be Worth a Fortune

“Starting with the Next 295% Extravaganza…

“I just discovered a large, sudden and concentrated block of insider buying.

“Please… pay attention to this…

“I’m talking about 7 insiders, including the CEO and CFO. They just spent $353,000 on the purchase of nearly 215,000 shares of their company’s stock.

“And when they buy en masse like this, they aren’t doing it to pick off a point or two of gains – they see big upside ahead.

“I’m talking about an estimated 295% pop in the quick action – with the potential to rise as high as 895% if you’re patient and willing to ride the upside. It’s up to you.”

That’s the opening spiel from Bill Patalon from Money Map Press, and he’s trying to sell subscriptions to their Private Briefing monthly letter, which is one of those “not all that expensive” monthly fee letters that most of the big publishers are experimenting with, seeing how many folks will pay between $5-10 a month on a month-to-month basis for their stock picking ideas and analysis (these are tests to see if this works better than charging $50-100/year, which is the typical “entry level” newsletter that they use to bring in new customers, folks who will hopefully eventually buy their more expensive letters, they’ve been around for a year or so so I guess they must be working on some level).

Most of these types of services offer a “best of the best” approach — with the editor picking out a favorite pick from one of the publisher’s other newsletters each month for these monthly payers — this one has been around for at least a little while and I’ve seen it pitched as a $5 a month service, but apparently in this ad they’re asking for $7.99/month. It’s hard to keep track of the “real” price of any of these services, frankly.

But you don’t want to know the marketing strategy of the publisher — you want to know the name of the stock they’re teasing, right? Well, don’t worry — we can help you there, too. All we need to do is sniff out a few of the clues from the ad so we can toss ’em into the ol’ Thinkolator …

So what does this company do? Why are they excited? More from the ad:

“You might be excited too if you just brought in one of the country’s top liver specialists from the Mayo Clinic. His assignment: To use his contracts, knowledge and reputation to grease the wheels for a potentially lifesaving new medical device that treats liver cancer.

“Did I mention that this little company is selling for around $1.70 a share right now?

“This company’s breakthrough is amazing…

“It’s developed a proprietary system for something called “chemosaturation.” More than a drug, it’s a device. It’s a means of administering a high dose of chemotherapy directly into a diseased organ.”

And a few more clues:

“For millions of suffering people, this system stands to be a miracle – sheltering them from highly invasive surgery and debilitating and painful side effects… while giving them a better chance to survive.

“Now here’s the thing: This company’s device is already a big hit in Europe, and the company is making good money there.

“Right now it’s well on its way, moving through approval here in the U.S. Remember, this is more of a device than a drug.

“Moreover, as the CEO of this amazing company says: ‘We believe we qualify hands down, because there really isn’t anything available for these patients today and that is the main criteria.'”

Medical devices are generally easier to get approved by the FDA than are drugs, so that’s appealing. So what is this particular device?

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The product is the Hepatic CHEMOSAT Delivery System, and it’s owned by Delcath Systems (DCTH).

Which is indeed a small company, with recent insider buying, and a product that is approved in Europe and under review by the FDA — they submitted it for FDA approval on August 15, and they asked for “fast track” review to get an answer in six months. They should find out in mid-October whether or not they get the “fast track.”

Their system is basically designed to deliver chemotherapy drugs directly into the liver and then filter them out of the blood before much of the toxins get into the rest of the body, and their approval for a single drug delivery system/procedure in Europe earlier this year had them generating their first operating revenue in the second quarter — it will be a while before it becomes profitable, partly because it’s a new system that has to be introduced, taught, and sold to cancer treatment facilities and doctors, and partly because it is targeted at a fairly precise form of otherwise-hard-to-treat liver cancer.

That’s about all I understand of the technicals — there’s a limit to how much of an expert on the business you get to be when you look at several companies a day, and my last biology class was almost three decades ago — but the company believes their current addressable market is about $500 million with FDA approval. They are losing money, of course, and will be quite a while in ramping up to profitability — this isn’t a drug they can just start selling to an unmet need, it’s a device and a system that they have to publicize, train, educate, market and distribute, so the ramp-up should, I presume, be quite slow even if they can address most of that $500 million market or expand beyond it, as they hope to, with targeting other challenging cancers.

The financials are not horrible, they don’t have a lot of debt or anything like that, but I’d give you good odds if you’d take my bet that they’ll be raising money by the time the FDA response is due next year. They raised $21 million last quarter, and apparently have a $20 million line of credit they can tap, and that gets them to roughly $50 million in available cash and liquidity the way I read it. That’s of the end of the quarter (June 30), and they said that after the FDA submission they expect their cash burn rate (they don’t call it that) to be between $3-4 million/month. So if we assume the high end — and biotech companies don’t often spend less than they say they will — that’s roughly 10 months of available money, which gets them to … February. So if they do get the fast track, then they’ve got enough liquidity, probably, to get through to an FDA answer — since a bad answer or a request for more data would clobber the share price, I presume they’d be conservative and want to raise some more cash before they hear back on their application.

I don’t know of any reason why the FDA might reject their system — it is approved in Europe, which isn’t a guarantee of FDA approval but it can’t hurt, and it doesn’t use a new drug, so it seems unlikely that there would be catastrophic side effects, and it does target a group of people who are not well-served by existing therapies (in this case, I gather that if you need chemo targeted more specifically at your liver right now in the US, the procedure is more invasive and surgical).

And the insider buying is real and fairly widespread, with no recent insider selling to offset it, so that’s promising but also opportunistic — that buying was all done at the end of May by a variety of officers and directors, after the announcement of that last $20 million(ish) fundraising crushed the shares from $2.38 to $1.50 overnight. So that’s also a note that watching Delcath’s fundraising has been an important thing for investors to do in recent years, as the extremely long development time of their product has brought several near-crises of liquidity along the way — though certainly if they can generate good news from the FDA early next year, the fundraising would be unlikely to hamper the shares as much. Things seem to look pretty good now, but I don’t have a crystal ball that tells me what the FDA will do or, if approved, how long it will take to ramp up to meaningful sales in addressing that potential $500 million market. Analysts think they’ll hit $10 million in sales next year, though the range of guesses is very wide, and they expect meaningful losses next year, too (the company last about $50 million last year).

Oh, and there are tons of outstanding stock options — but they’re well underwater, on average, so the cynic in me expects that they might get re-set or have lots of new options granted at the end of this year, before the expected approval. We’ll see.

There is a positive note here from the Motley Fool that goes into some of the product details, and a Seeking Alpha contributor interviewed the CEO recently here. Will it go up 200-300% in the months to come? Well, that I dunno — it’s hard to guess what the ramp-up of sales might be either in Europe or the US, or even what level of sales they might need to achieve profitability. On the positive side, they’ve booked losses (sorry, “investments”) approaching $200 million now over the life of the company, so I doubt they’ll have to pay much in taxes anytime soon.

Sound like the kind of thing that interests you? A potential FDA approval within six months and a somewhat beaten-down stock? Or do you have qualms? I’m not buying this one because I’ve largely lost my stomach for one-product biotech bets, but I may be too much of a baby and it’s your money — let us know what you think with a comment below.


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