Nevertheless, as closely as I follow the biotech sector, I'm having a hard time coming to terms with not having pulled the trigger on Celldex Therapeutics earlier this year. This is despite my having proclaimed about how cheap I thought it. Since then, not only have shares of Celldex soared 235% year-to-date, but since January 2012 the biotech company has rewarded shareholders with gains of more than 700%.
Although it's certainly possible that new developments regarding the company's brain cancer treatment Rindopepimut and its orphan product CDX-1135, which is use to treat dense deposit disease can propel the shares higher, I believe this is one of those situations where those who are on the sidelines have to raise the white flag and/or say goodbye. This ship has sailed -- at least for now.
But understand, this has nothing to do with my lack of confidence in Celldex's management to continue steering this ship in the right direction. As an investor with a strong bias towards value and a low-risk threshold, Celldex's stock price just never seemed right to me -- at least not relative to Roche and Bristol-Myers Squibb . Not to mention, Celldex has had a very unattractive cash-burn rate, which led to almost $70 million in negative cash flow over the past year.
Now, this is not unusual for a young biotech company, especially one that is managing various drug trials that are in all three study phases. Nor am I bringing up its cash situation to justify my lack of conviction for not having pulled the trigger on this trade. But I do have to question the Street's overzealousness towards Rindopepimut.
It's true the recent efficacy data have been encouraging, yes. I will also grant Rindopepimut does produce impressive patient results when compared to, say, Avastin, which is the Roche alternative. But Rindopepimut, while advancing well in clinical developments, has yet to be granted approval. I believe it's premature -- as evident by the stock price -- to assume that it will be.
This is the part where Celldex investors will scream "sour grapes." But I've seen the market hype up companies in anticipation of a blockbuster approval, only to punish them later mercilessly. Now, if you know anything about the biotech industry, it's extremely volatile. But this is a sector that moves quickly in either direction on the prospects on new drug production and the approval of regulators such as the U.S. Food and Drug Administration.
Take, Achillion Pharmaceuticals , a company that has now become a shell of itself, if not a complete disaster. After Achillion traded as high as $10.17 in February, the stock tanked to $2.26 in October, losing close to 80% in seven months on news that the FDA opted to not remove sovaprevir, the company's lead protease inhibitor for hepatitis C, off clinical hold due to safety concerns.
I'm not suggesting that Celldex will suffer the same fate. But the market was as equally optimistic about sovaprevir. The other thing is, while I'm cautioning against chasing this stock for investors who are still on the sidelines, there's also a lesson here for those who are still holding this stock after such monumentous gains solely on the promise of Rindopepimut.
Celldex management just announced a new seven-million share offering in an effort to raise more than $162 million in working capital. Again, this is one of the pitfalls of investing in a company that is known to deplete its cash reserves through aggressive growth strategies. As an investor with 235% gains, I wouldn't feel very comfortable seeing an additional seven million shares flooding the market.
Having said all that, I have to credit the company's management for having made all of the right moves. It's not their fault the Street has fallen in love with this stock. But strictly from an investment standpoint, there are still risks that need to be considered. Until Rindopepimut is officially approved by the FDA, investors that buy at this level will be on the wrong side of the trade.
At the time of publication, the author held no position in any of the stocks mentioned.
This article was written by an independent contributor, separate from TheStreet's regular news coverage.