Anavex Life Sciences (AVXL -2.65%) is a small-cap stock with big ambitions. It has a potential Alzheimer's treatment that fared well in recent trials and could be a game-changer for the business. But the company remains unprofitable, and the stock is heavily shorted and volatile.
Is Anavex Life Sciences too risky a buy, or is this an investment you might consider adding to your portfolio today?
Analysts are bullish on Anavex Life Sciences
The consensus analyst price target for Anavex is $41.80, which represents an upside of more than 300% from where the stock is right now. While some analysts are less bullish, analysts by and large expect to see Anavex rise in value in the near term.
The reason for the optimism comes from the company's potential Alzheimer's treatment, Anavex 2-73 (blarcamesine). Late last year, the company announced that in its phase 2b/3 trials, Anavex 2-73 met both primary and secondary endpoints, including reduction of clinical decline. The next step is to go over the results with regulators, which could pave the way for a potential approval of the treatment in the U.S. and international markets.
An approved Alzheimer's treatment could generate billions of dollars in revenue for Anavex, so it's easy to see why there could be significant upside for the stock. But crossing the regulatory finish line is by no means a certainty. Plus, an approved drug may still face stiff competition from healthcare heavyweights Eli Lilly and Biogen, both of which have Alzheimer's treatments that could soon be approved as well.
Short-sellers are betting against the business
Despite the potential upside for Anavex's stock, there are plenty of short-sellers who don't share the same optimism surrounding its business and Alzheimer's treatment. As a percentage of float, short interest has been rising since late last year and is now around 22%:
AVXL Percent of Float Short data by YCharts.
This doesn't mean the stock is doomed, but a high short interest can make it difficult for shares of Anavex to rise in value. The company would effectively need to prove a lot of the doubters wrong. And if that does happen, the result could be a short squeeze, which would send shares of Anavex skyrocketing.
For investors willing to take that chance and buy the stock, it's important to consider the company's cash flow.
How strong is Anavex's cash position?
Some figures that biotech investors should always be aware of are how much money a company has on hand, and how much it's burning through. Those can give you a good idea as to how soon (and often) it may need to issue shares, or raise debt, in order to fund its operations. If more shares are issued, that has a dilutive effect on a stock and can quickly send the share price down.
AVXL Cash from Operations (Quarterly) data by YCharts.
Anavex's average quarterly cash burn from day-to-day operations, at just $6.3 million, isn't a high enough level for investors to be concerned about the healthcare stock. That's because as of Dec. 31, the company's cash and cash equivalents totaled $143.6 million. Even if Anavex's cash burn were to worsen, the company is in an excellent position to absorb it without having to issue stock and dilute its shareholders.
Is Anavex Life Sciences stock a buy?
Anavex is a risky stock to own because it's not generating any revenue today. And while the promising results from Anavex 2-73 are encouraging, that doesn't mean the treatment will obtain approval from regulators.
However, for biotech investors, this is still a safer stock than most, because its rate of cash burn is sustainable for a long stretch -- and that could make it a more tenable investment. As with any company that's still in clinical stage, you'll have to accept some risk in buying Anavex. But if you're OK with that, this could be a great buy.
