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Last week Cell Therapeutics (Nasdaq: CTIC ) submitted its marketing application for its non-Hodgkin's lymphoma drug pixantrone to the Food and Drug Administration. Again.
You'll recall the FDA advisory committee panned the drug, which was subsequently turned down by the FDA. Cell Therapeutics appealed the decision to the higher-ups at the agency, which didn't reverse the decision, but did give Cell Therapeutics a road map to potentially gaining FDA approval.
At least, that's Cell Therapeutics' side of the story. The other side -- the FDA's side -- is a big black box because the FDA doesn't discuss unapproved products.
A bet on Cell Therapeutics is basically a bet on the company's management. If you trust that they haven't presented a rosy picture of the situation, an approval seems pretty likely.
But knowing the FDA, I have a hard time seeing the agency just suddenly reverse their decision. The advisory panel of outside experts voted unanimously against the drug, and saying the FDA's comments during the meeting were negative would be an understatement. An approval remains a long shot in my eyes.
How the bet wins and how it loses
Like any biotech facing an FDA decision, Cell Therapeutics wins if the FDA says yes and loses if the FDA turns down pixantrone again. That's pretty obvious.
Figuring out how much the stock might move is more difficult. Any way you look at it, though, there's a lot more upside than downside.
Cell Therapeutics is currently valued at about $250 million. At the end of last quarter, the company had $45 million in cash and equivalents and received another $8 million in connection with the settlement of a lawsuit since then. Over the last two quarters, it's burned through about $15 million per quarter in cash from operations. Let's call the bottom $23 million, although I can't possibly see it getting that low. The company has other pipeline assets, and Cell Therapeutics' investors are eternal optimists.
The upside is hard to call since it's a difficult to know how much doctors would really take to prescribing pixantrone. Data that's only able to convince the FDA to approve the drug on a second look is going to have a hard time swaying doctors to use the product. Suffice to say it's hard to see pixantrone hitting the level of Dendreon's (Nasdaq: DNDN ) Provenge or Onyx Pharmaceuticals' (Nasdaq: ONXX ) Nexavar at their prospective peaks. The application for pixantrone is to use it as a third-line therapy after all, which will limit its use. I'd say a valuation in the billions -- with an s -- is asking a little much. Spectrum Pharmaceuticals (Nasdaq: SPPI ) , a specialty pharma with cancer drugs that are far from blockbusters, sports a valuation of about $550 million. Based on that, there's certainly room for a double from here -- and potentially considerably more, given investors' infatuation with the stock.
Money where your mouth is?
I wouldn't suggest shorting Cell Therapeutics though even though I see the chance of approval as fairly slim. The potential to lose your shirt is too great if the FDA decides to make a Vanda Pharmaceuticals-like (Nasdaq: VNDA ) long-shot approval.
Options aren't much help here. Buying a put would limit your loss to the cost of the bearish bet, but the options are so thinly traded, the only person likely to make money on the deal is the market maker.
Through two well-timed picks on Cell Therapeutics, I'm currently one of the score leaders in the Fool's CAPS game. I've had a red thumb -- betting that it'll fail to match the S&P 500 -- since Aug. of 2009 and I don't have any plans to remove it prior to the FDA's decision next year.