When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether its possible upside outweighs its risks. Let's take a look at Threshold Pharmaceuticals
Threshold offers many reasons to draw your interest: Sporting a market cap around $370 million, its return on assets over the past three years has been -37%, but its stock has averaged 65% annual growth over the time, as well. Clearly, something's going on with the company.
So why might you buy into Threshold? Its business, biotechnology, is one reason. Our global population now tops 7 billion people and is still growing. Life expectancy is growing especially briskly in developing nations, where it was 41 years in the early 1950s and was recently 66 years. All these people living longer will have health issues during their lives, and especially in old age. Thus, new and better medications and treatments will be needed.
With any biotech company, you need to assess its pipeline, as up-and-coming products are the key to the future. Threshold's biggest expectations right now are for its pancreatic cancer drug TH-302, which might be able to tap a $1.5 billion market. Earlier this year, investors were excited to learn about good results from TH-302's phase 2b trial results, where it was found that the drug worked well in combination with Eli Lilly's
A look at the company's pipeline reveals ongoing testing of TH-302 to address soft-tissue sarcomas, solid tumors, and leukemias, among other conditions.
In its favor, Threshold's balance sheet holds substantial cash and no long-term debt. Much of the cash is likely due to a partnership with Merck KGaA (OTC: MKGAY) to co-develop and commercialize TH-302. When biotech companies line up partners, they typically give up part of the potential profits from a treatment -- but they also get to share the risk and expense.
Despite all that promise, there are still some reasons to consider selling, or passing, on Threshold. For one thing, it's posting net losses instead of gains and it hardly even has any revenue to speak of -- just $62,000 in fiscal 2011, and $252,000 in its last quarter.
Another concern is its promising TH-302 drug: Despite all its promise, it might not gain FDA approval, in which case its stock is likely to take a big hit.
Plenty of investors doubt Threshold, as many have shorted it considering over 22% of its float is sold short. This negative can actually turn into a positive, though, if the company foils its doubters and starts performing well. In that case, the shorts will have to cover their short positions by buying shares, thereby driving up the stock price.
Finally, there's dilution. The company's share count has risen sharply, more than tripling since 2008. This is a concern for investors, as it shrinks the value of existing shares.
Given the reasons to buy or sell Threshold Pharmaceuticals, it's not unreasonable to decide to just hold off. You might wait for TH-302 to gain final approval, or even for it to start selling briskly. You might wait for net losses to turn into net gains for one or more quarters, too, and for dilution to slow down or stop.
I think I'll be holding off on Threshold, at least for now. It may well perform spectacularly in the coming years, but there are plenty of compelling stocks out there with more certain futures. Still, everyone's investment calculations are different; do your own digging and see what you think.
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Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, owns no other position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.