Description

Cell Theraputics is a biopharmaceutical company committed to the development and commercialization of an integrated portfolio of oncology products aimed at making cancer more treatable.  With such a vague and admirable goal, surely this company must be successful?

In fact, CTIC is possibly the most incredible dilution machine the US stock market has ever seen. On a pre-split basis their stock, which currently trades for $1.59, used to be over $80,000 in 2001 and over $50 just several years ago. Though they have theoretically been working on drugs to cure cancer, their stock is where capital goes to die.  They have done 4 reverse splits:

4-1 reverse split on April 15, 2007
10-1 reverse split on September 2, 2008
6-1 reverse split on May 15, 2011
5-1 reverse split on September 4, 2012

Let’s look deeper into their key products – PIXUVRI which is commercially available in certain EU countries, Opaxio, and the recently acquired Pacritinib.

CTIC fast tracked their PIXUVRI drug to the FDA in 2010 but they rejected it, claiming it was not statistically significantly better and at the same time unsafe.  The company has unsuccessfully appealed so far and went to Europe.

http://www.genengnews.com/gen-news-highlights/cell-therapeutics-formally-appeals-fda-s-nonapprovable-ruling-for-pixantrone/81244332/

In May 2012, the European Commission granted conditional marketing authorization* for PIXUVRI as the first pharmaceutical product for the treatment of adult patients with aggressive non-Hodgkin B-cell lymphomas (NHL) who have failed two or three prior lines of therapy. This approval was based on the results from our pivotal Phase 3 clinical trial known as EXTEND or PIX-301 (NCT00088530 on clinicaltrials.gov)

As of the most recent Q, PIXUVRI was available in Austria, Denmark, Finland, Germany, Netherlands, Norway, Sweden and the United Kingdom and had been granted market access in Italy. They plan to extend the availability of PIXUVRI to France in the second half of 2013.

So CTIC finally actually got their product approved in the EU. Normally when there is such a long development cycle with some new drug like this for example DNDN is a huge revenue boost with all the pent up demand once the drug is available. Not so here...  In fact, despite 5 quarters now that the drug has been available, their total revenue has been negligible.  They reported $1.1mm revenue in Q1 DROPPING to only $300k in Q2 2013.  Somehow they have claim to have $1.4mm WIP inventory as of the end of 2012 before reporting this revenue, which given the 90%+ margins for drugs seems to indicate that any high expectations they might have had for a revenue boom have not come to fruition.

What about Opaxio – maybe it will be a huge hit – they are working on it for lung cancer?

In fact, Opaxio was the company’s original target drug which they purchased with their IPO proceeds in 1998.  In 2005 the company announced that Opaxio had missed its primary endpoints for superior overall survival and began a new trial seeking a different outcome.  However shortly after, in 2006 the Data Safety Monitoring Board shut down their trial.  So it doesn’t seem that there is much potential there either…

Pacrinitib was recently purchased and in early stages of phase 3 trials so it is a bit harder to calibrate but let’s look into the track record of this company.

Management reiterated that they expect to lose $60 to $65 million for 2013 which is consistent, though a slight improvement over their history, having burned nearly $1.5 BILLION dollars in the last 10 years with basically nothing to show for it.  Based on their most recent convertible preferred raise which seems to have made the stock run up 50%, making this a timely short idea, they should have about $15mm or less cash left at year end giving them at most another 6 months until the next dilutive equity raise.

Their expenses on SG&A for a pre-revenue company have been nothing short of incredible.  

What about the little revenue they did generate nearly a decade ago (shown in the chart above)? Well they generated revenue and then CTIC has had to pay significant cash fines to the Justice Department and CMS for illegally marketing their drugs!

http://www.justice.gov/opa/pr/2007/April/07_civ_258.html

“The government’s suit alleged that because of the company’s actions, physicians who prescribed Trisenox “off-label” unwittingly submitted false claims for reimbursement to the Medicare program from 2001 until 2005. In 2005, CTI sold Trisenox to another company and the drug’s new owner halted CTI’s misleading off-label promotion campaign.”

Here is the legal settlement document that spells out additional details of the violation: http://seattletimes.nwsource.com/ABPub/2007/04/17/2003670130.pdf

Compensation has additionally been astronomical.  The board is classified and has highly entrenched bylaws.  At the same time, for a company with zero revenue and a market capitalization under $200mm, the 7 non-employees board members were compensated over $350,000 each last year!  

Executive compensation is similarly astronomical with the CEO pay at $1.36, $4.60, and $2.81 Million dollars over the last 3 years respectively.  The next top 2 executives also receive in excess of $1mm of compensation per year.  This incredible compensation happens at the same time that the insiders have been aggressively selling their stock which has increased recently with insiders selling over 500k shares just in the last 6 months alone!

Financial red flags: Audit fees were nearly $600,000 for a company with no revenue, which is extremely suspicious, not to mention their auditor is Marcum LLP, a frequent auditor for fraudulent Chinese companies that turned out to have illegitimate books.  The company has no CFO but it’s probably fine because the CEO, James Bianco, has his brother, Louis Bianco, as Exec VP of Finance to make sure the books are correctly kept and the audit bill is paid.

In summary CTIC has never produced any legitimate revenue despite burning through well over $1 Billion dollars since their IPO 15 years ago.  Now is a timely short as it has run up 50% post their recent convertible preferred offering and their start product PIXUVRI has now been out in the market for 5 quarters and appears to have virtually zero traction, eliminating any upside risk that a short position may have had prior to this.  They will require more cash through another dilutive financing within the next 6-9 months which should keep the downward pressure on.

Catalyst

-Next equity raise or ch11 needed in 6-9 months continues to put downward pressure on stock

-Key product PIXURVI released 5 quarters ago and has reduced any upside risk as there is no traction in the market

-Insider sales accelerating recently

Catalyst

-Next equity raise or ch11 needed in 6-9 months continues to put downward pressure on stock

-Key product PIXURVI released 5 quarters ago and has reduced any upside risk as there is no traction in the market

-Insider sales accelerating recently