Free Cash, But Be Careful

Want to buy a dollar for $0.80? Sure you would, but as with anything that looks too good to be true, there's a catch.

Nabi Biopharmaceuticals (Nasdaq: NABI  ) had about $100 million in cash and short-term investments at the end of the first quarter. The company got a $5 million milestone payment in April and is due another $5 million after the launch of Fresenius USA Manufacturing's Phoslyra. In the first quarter, the company burned through $8.6 million. Assuming the second quarter was the same, the company's cash position sits around $100 million.

But yesterday, it closed with a market cap of less than $80 million. The reason for the discrepancy? Like all companies, investors are anticipating the future value of Nabi when they think it will have burned through some of that cash on a worthless pipeline.

Nabi announced yesterday that its first phase 3 trial for NicVAX failed. The nicotine vaccine is supposed to help patients stop smoking, but the approximately 11% of patients that stopped smoking after taking NicVAX was similar to those that got placebo.

Another trial is scheduled to read out at the end of this year or early next year. But considering the first failure and a similar flame-out by a vaccine being developed by Cytos Biotechnology and Novartis (NYSE: NVS  ) , the prospects don't look good. Nabi said it plans to decrease expenses, but there will still be some cash burn as the company waits for the second set of data.

Even under the best case scenario where Nabi gets a Christmas miracle, I doubt the company could gain FDA approval with just one positive trial. If InterMune (Nasdaq: ITMN  ) couldn't make a 50% success rate work for a life-threatening illness, I doubt the agency would sign off on a smoking-cessation product.

Another trial would take well over a year to enroll and run, and working from a 50% success rate, there's no guarantee of a positive result on the third trial. Nabi's partner GlaxoSmithKline (NYSE: GSK  ) has the option of developing a next-generation vaccine, so if the second trial comes back positive, the best strategy might be to move straight to the next-generation vaccine. In that scenario, Glaxo might acquire Nabi for a price slightly above the cash level since it would eliminate royalties Glaxo would owe to Nabi.

There could be value left in Nabi -- including royalties from the aforementioned Phoslyra -- but the ifs and the waiting will keep me from buying at this point.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. Click here to see his holdings and a short bio. The Motley Fool owns shares of GlaxoSmithKline. Motley Fool newsletter services have recommended buying shares of GlaxoSmithKline and Novartis. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On July 19, 2011, at 4:39 PM, avlamal wrote:

    what a retarded and incredibly stupid analysis!

    im sorry for my vitriol.

    the idea a company being acquired,on the verge of approval, would give away the drug for free basically,as u suggest co. would agree - in your warped brain-to being acquired for slightly more than cash, is laughable.

    and a real feeble attempt of bashing to boot!

    in cases like this, to eleiminate the royalties,glaxo would pay for those future royalties in the form of a very big premium to the stock price MORON.

    really im besides myself reading this bs.

  • Report this Comment On July 19, 2011, at 6:36 PM, TMFBiologyFool wrote:

    The elimination of the royalties would have to be risk adjusted. Glaxo isn't going to overpay for the elimination of royalties if the drug has passed one and failed one phase 3 trial (and assuming we're talking about moving on to a next-generation vaccine, as I suggested, there's addition unknown risk of failure).

  • Report this Comment On July 19, 2011, at 6:48 PM, avlamal wrote:

    so where avlamal should this stock trade u ask?

    it will and shoud trade at 3 wuithin 2 weeks. i guarantee it!

    corp sponsorship and cash on hand add up to 3 factoring clinical challenges and 0 debt!

    y is it trsding down here

    margin salls of insiders are waying down stock right now

    they borrow against their holdings for cash

    now they r reaping pain for

    their greed

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