This Just In: Upgrades and Downgrades

At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.

Former buyer Brean says: "Sell Celsion!"
In a downgrade that some might call dramatic, others downright "theatrical," and pretty much anyone can agree is long overdue after the stock's run-up, analysts at Brean Murray have just declared Celsion (NASDAQ: CLSN  ) a "sell."

For those not familiar with the story, Celsion is a cancer researcher, currently awaiting results from a phase 3 study of its ThermoDox liver cancer drug. These results are said to be due out "in January," and seeing as the month is starting to get a bit long in the tooth, this basically means that any day now, the market could receive make-or-break news on Celsion's future.

And that's why Brean thinks now is an excellent time to get out of the stock.

Why the sudden reversal of opinion? After all, up until just earlier this week, Brean had a "buy" rating on the stock -- so what made it pull a quick 180 and scream "sell" all of a sudden? Well, according to Brean, Celsion deserves a downgrade from "buy" to "sell" basically for the simple reason that it's enjoyed "robust share price strength." Shares have doubled in price since November, and are up an astounding 368% over the past year.

Promise ... and peril
Problem is, according to Brean, the anticipated ThermoDox announcement will be a "highly binary event." If the news is good, Celsion shares will prosper. But if the news is bad, the company may not even be "viable" anymore.

Celsion's not profitable, you see. (In fact, it has no revenues, so hardly could be profitable without a drug to sell). The company only had $17 million or so in cash net-of-debt at last report, and with a cash burn rate in excess of $21 million annually, it probably can't survive another year without a cash infusion -- regardless of whether Thermodox is a success.

According to Brean, therefore, the valuation on Celsion today -- about 22 times book value -- creates "more downside from negative results than sustainable upside from positive results." Basically, it all boils down to the fact that while good results could spark a small rally, and make an already expensive stock slightly more expensive, bad results could basically wipe Celsion out.

Pish-posh
Not everyone feels this way, of course. Deriding Brean's reversal as a "bear raid," analysts at Roth Capital analogize the stock's steep drop yesterday to the drop that Dendreon (NASDAQOTH: DNDNQ  ) experienced ahead of its phase 3 IMPACT trial results. Worries about Dendreon ultimately proved prescient, of course, when in July of last year, the company confirmed that despite having a successful drug in Provenge, sales weren't stacking up as quickly as hoped, and the company had to ratchet back growth expectations.

In contrast, Roth says there's nothing behind the Celsion selling, other than a nervous analyst who's cutting bait when he should be still fishing for profits. No data about the trial results have leaked out, and Celsion's still as likely to report banner results, as much as bummer results. In short, if you liked Celsion's chances on Wednesday, you should like them still today.

Foolish takeaway
As for me... I just don't know. Like Roth says, no one knows what the data will reveal when they ultimately come out later this month. What I do know is that even if ThermoDox turns out to be an effective and safe drug ... well, Provenge was an effective and safe drug, too. And look how that turned out for Dendreon shareholders!

Seems to me, investors who buy Celsion today are taking a pretty big risk that 22 times book value, infinity time nonexistent revenues, and negative profits are reasonable prices to pay for "just another cancer drug."

My advice: If you want to invest in cancer research, go with an established, profitable megapharmaceutical firm like Pfizer (NYSE: PFE  ) or Eli Lilly (NYSE: LLY  ) . With P/E ratios of 21 and 14.5, respectively, neither stock is anywhere near as expensive as Celsion. More importantly, because their numbers are positive, it's easier to wrap your head around the valuations and decide if the prices are cheap enough to be worth paying for low-to-no growth.

On the other hand, if you want to gamble with your money, just go to Vegas. You'll have more fun, the drinks are on the house, and I can't imagine your odds of losing money are any worse than what you'll get by investing in unprofitable Celsion.

Dendreon's run over the past four years witnessed sub-$5 share prices skyrocket to 10-bagger status before tumbling all the way back down below $5, as its revolutionary prostate cancer vaccine Provenge became a lightning rod of debate. But where does that leave investors -- other than a bit nauseous from the roller-coaster ride? Our own David Williamson answers this question, and many more, inside our brand new premium research report on Dendreon. Inside, he details every key issue facing the company and outlines just how Dendreon intends to regain its former glory. The report also comes with a full year of analyst updates, so claim your copy of this exclusive report today by clicking here now.


Read/Post Comments (4) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 18, 2013, at 10:15 AM, Hope4GoodFuture wrote:

    Why do stock analysts exist? Do they exist to put a value on a stock? Or do they exist to influence the value of a stock and help their most valued clients profit from timing around that influence? When Brean rated CLSN a BUY with a price target of $7 during 2012, CLSN's trial was a highly binary event based on progression free survival (PFS), not overall survival (OS). Then, results were due in a year. CLSN's trial is still a highly binary event with PFS primary endpoint. It was NEVER based on OS and Brean knew this then, and now. The only thing that has changed (at least that the public knows about, and I assume Brean does not have access to any more information than I do) is that we are weeks away from announcement of top line results instead of a year. Since the stock price was over Brean's $7 target (mid $8's to $9's), I could understand the analyst downgrading to a SELL but maintaining a price target of $7. How can the value of the company be less now, than a year ago when no other factors except time have change? The fact that he downgraded to $1 means that either (1) he knows more than anyone else does (i.e. has inside information) but he did not report anything new as a driver for the downgrade or (2) he is not an "analyst" in the sense that he does not actually analyze the fundamental value of a company, but rather uses target prices to try to push investors/potential investors to move either in our out of a stock for whatever reason he may have. He must have sniffed an opportunity to get his clients into a stock that he didn't think had fundamental value but thought would be over-hyped and run up prior to trial results. In other words, he would be a PR / psychologist / game player, not a person that understands or cares about the potential value in a new drug. All this means is that, going forward, when Brean assigns a rating to a stock, anyone reading the press release (that is not a valued client of the firm) should know that Brean is just trying to set us up for the long con, take advantage of our stupidity, and ultimately help their valued clients rip the rest of us off.

  • Report this Comment On January 18, 2013, at 10:54 AM, jjhantsch wrote:

    An amazing analysis but ignores two facts. First, the type of trial conducted, where a set number of events were required. This is indicative of one thing; Celsion knew the treatment (drug plus ablation) works in a significant % of patients and calculated that number to show very significant efficacy. The HEAT trial is hardly a shot in the dark; the FDA approved the trial, so they know as well. Second, hepatocellular carcinoma is rare in the developed world (normally only metastasis here.) The treatment's target is China, Egypt and Indonesia where 3/4ths of the deaths from HCC occur. All three will approve shortly after the trial results are announced, not waiting for the FDA. Celsion already has major collaborations in all three countries, hence marketing won't wait long either. This treatment could be a $1.0 billion seller in 2014, not to mention start selling well by 2013Q3.

  • Report this Comment On January 18, 2013, at 11:05 AM, poneman wrote:

    Hope4goodfuture: I agree with you 100%. Good post.

  • Report this Comment On January 20, 2013, at 11:22 AM, lebronz wrote:

    The only thing that moved the stock price downward was the massively planned shortselling tied to the sell rating which triggered stoplosses, etc...which exacerbated & accelerated the decline. Analysts and their Hedge fund clients want to own all 35 million OS shares of CLSN just as bad as they want to own all of ARNA & DNDN. Stay long CLSN!

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