Do you remember the movie The Boy in the Plastic Bubble starring John Travolta? How about Bubble Boy starring Jake Gyllenhaal? Both were about a child born without an immune system, forced to live in a bubble to avoid contamination from the outside world.
Well, now, Mustang Bio (NASDAQ:MBIO) has cured eight infants suffering from the “Bubble Boy” immune disorder, sending MBIO stock up as high as $10.20 in pre-Good Friday trading.
The question investors are asking themselves today is whether they should get in on the action before it’s too late. FOMO is alive and well and living in this micro-cap biotechnology stock.
Why MBIO Stock Is a Good Speculative Bet
Any time a biotech company comes up with a gene therapy that works, there’s bound to be excitement surrounding it. Even better if the infants suffered few, if any, side effects from the experimental gene therapy.
Mustang Bio is a 2015 spinoff of Fortress Biotech (NASDAQ:FBIO), a company that is run by Lindsay Rosenwald and Michael Weiss, two serial healthcare entrepreneurs, who’ve spread lots of bets on small companies like Mustang Bio, of which Fortress owns approximately 38%.
“While I am a biotech entrepreneur, I am also a ‘risk manager,’ as we have many shots on goal for such small companies,” Rosenwald said in an email. “The more shots on goal, theoretically the less risk there is.”
However, despite the success of the gene therapy to date, it likely won’t file for FDA approval until late 2021 or beyond. In the meantime, it’s little to no money in — 2018 income of $561,000 from interest on its cash on hand — and $31.2 million in operating expenses, such as research and development, out.
So, it’s likely to burn through $100 million in operating losses before it even files with the FDA.
While this might seem like an argument as to why MBIO stock is not a good speculative bet, it’s counter-intuitive.
Mustang Bio had cash and short-term investments of $61 million at the end of 2017. At the end of 2018, it was down to $34 million, a reduction of around $29 million, not too far off the operating losses for the year.
The company announced on March 29, a $20 million venture debt financing agreement at 9% plus the amount by which the one month LIBOR rate exceeds 2.5%. It’s currently at 2.48%. With interest rates stalled and possibly heading lower if a recession rears its ugly head, it looks like Mustang Bio’s on the hook for about $1.8 million in interest on the loan.
That gets it to $54 million on the balance sheet, close to two years worth of operating losses and into 2021.
At that point, should everything about MB-107 remain positive, Mustang Bio will have plenty of financing options to get itself through the next two years, including issuing some more MBIO stock.
As speculative biotech plays go, Mustang Bio seems like a good one.
Why It’s Not
When it comes to biotech investing, there’s no sure thing. The company still needs to confirm the benefits of a handful of patients who’ve received the experimental gene therapy. Those patients could fail to benefit from MB-107, as the others did.
In 2020, Mustang Bio takes over the trial program from St. Jude Children’s Research Hospital, which is licensing the gene therapy to the company. It’s possible, but unlikely, that something could go wrong from a clinical perspective once the trial is in Mustang Bio’s hands.
However, CEO Manny Litchman doesn’t think so.
“The data are extraordinary for every single patient,” Litchman said. “It’s that compelling nature of the data, in particular for those who don’t have a matched sibling donor, that we believe will convince the FDA to do this.
Of course, just as in life, we don’t always get what we want. The FDA could say no to Mustang Bio and then it’s back to the drawing board after more than $150 million in losses.
The Bottom Line on Mustang Bio Stock
I’m not a big believer in investing in money-losing companies. However, as Fortress’ Rosenwald said, you’ve got to take a lot of shots in biotech to be successful. The same goes for biotech investing.
If you can afford to lose your entire investment, I wouldn’t see a problem putting down a small wager on MBIO stock. While you’re at it, you might put a small amount in Fortress as well to spread your bets and all that cautionary advice.
At the time of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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