First Research Report - GENTA (GNTA)

By popular demand - a new research report is out today. The first stock research report was on The9 (NCTY). Since it was discussed it has already gone up 10%.........and I have not had an entry yet. Hopefully it will pull back into 16-17 range as I am expecting so that I can grab it.

Now - back to matters at hand. A reader has requested stock reports on both Genta (GNTA) and Applied Digital (ADSX). Today we will look at GNTA and tomorrow ADSX. A quick overview from the Yahoo Profile:

"Genta Incorporated, a biopharmaceutical company, engages in the identification, development, and commercialization of drugs for the treatment of cancer and related diseases in the United States. Its research portfolio comprises two primary areas, DNA/RNA medicines, which include drugs that are based on chemical modifications of oligonucleotides; and small molecules. The company’s lead product from the DNA/RNA medicines program is Genasense, which completed phase 3 trials in combination with chemotherapy in the treatment of malignant melanoma, chronic lymphocytic leukemia, multiple myeloma, nonsmall cell lung cancer, small cell lung cancer, and prostate cancer. Genasense inhibits production of Bcl-2, a protein made by cancer cells that is designed to block chemotherapy-induced apoptosis. Its lead product from small molecule program is Ganite, which is used for treatment of cancer-related hypercalcemia that is resistant to hydration. Genta’s preclinical pipeline includes research programs in antisense, RNA interference, and decoys. In addition, the company is evaluating oral formulations of gallium-containing compounds. Genta was founded in 1988 and is based in Berkeley Heights, New Jersey."

Now that has probably put you completely to sleep - how can we sift through that entire profile to figure what is going on? I went ahead and pulled up a longer term chart and looked for the big volume moves during the past 1-2 years as this stock is currently trading around $1.60 - WAY DOWN from its 2004 trading area of $15-20 per share. Here is the 5-year chart on this one:


Basically, GNTA had a medicine/drug in the bag which it thought would sell well for melanoma - named "Genasense", but at the last minute - it was cancelled by FDA, etc. and they had to drop the plans completely and in addition announce a restructuring and new focus on their "flagship" product - Genasense. But wait - isn't that the same friggin drug? It sure sounds like it. I think they have just changed the purpose. Instead of being used for melanoma - it will be used to help prevent leukemia remission. There is only one problem.........and this is why I think the stock is trading at $1.50 instead of $150 - the company does not appear to have any other significant drugs or medicines in development or clinical trials. Thus they have effectively bet the bank on this one medicine.

Here is an additional excert from the WSJ:

"Genta's development of Genasense has been troubled. Last year, an FDA panel declined to approve Genasense for treatment of people with advanced skin cancer, or melanoma. And the company later said a study of Genasense in patients with advanced multiple myeloma failed to show significant improvement over standard therapy.

Earlier this year, Genta and Sanofi-Aventis terminated their development and commercial collaboration for Genasense. Aventis wanted to end the partnership partly due to the FDA committee's rejection of Genasense for treatment of melanoma."

Their financial condition is quickly deteroriating. They currently have enough cash to keep going and they have some revenue coming to generate cash flow - but without doing another secondary or debt offering I think it is doubtful they will remain solvent for more than one more year. It looks like they are burning through about $12 million in cash per quarter.

So, fundamentally - I don't think there is anything here RIGHT NOW. Technically, I think there is a short-term move here - which may or may not pan out. Here is the 60-day chart:


The bottom line though on this one - is that I don't think it is an investment. I think that it is a spec play on a biotech company with a promising drug that may or may not pan out. I do not know the first thing about science or biotech, so I cannot really tell how promising their medicine is or how much longer it would take until it is available for sale. Here is a graphic regarding the FDA approval process (they are currently in phase 3):


So bottom line..........unless I had the inside track here - either as an employee or someone who knows something - I would not be buying it - because it is outside my risk profile. I am confident the stock could run to $10 on favorable news. However, I also think that it could go to $.50 or bankrupt in the next two years on unfavorable news. I consider myself a speculator to some degree. I believe that everyone needs some spec in their portfolio to juice the returns from time to time. This particular stock/industry is not my cup of tea however, because I do not know enough about the specifics of either to want to commit a lot of capital to it. When I decide to take on a spec play - I like to leverage myself with margin or options into a high quality stock when the sector is either a) extremely weak and beginning to strengthen, b) in the middle of broad secular move. When I do it - I want to buy something with improving fundamentals - and I want to buy the "A+" company in the group. I also don't care if the stock is $10 or $200 - because with options and margin - I will get the leverage that I need and a 25% move in the common - will give me the 200-300% move on my total investment that everyone is looking for - the elusive "ten-bagger," etc.

So the takeaway here I think - is that if you are looking to add some biotech spec to your portfolio and you have a high risk tolerance - sure buy 10,000 shares. However, if you are like me and don't know a friggin thing about the inside track on this one very important medicine which is a key for them - then I would steer clear. I also do not buy into the thing - that the public by reading news releases and reports can properly evaluate the success of the drug/stock prospectively.

My best colleague from lawschool works for a $1 billion dollar biotech company in their licensing department. This guy has a PHD in bio-chemistry and is a certifiable genius. He has basically told me over the years that getting FDA approval for anything is basically a crapshoot and it is very tough to tell how successful any type of medicine (short of the cure for cancer) will perform once in the market, etc. My buddy also told another funny story though. And that is - Viagra was originally developed as a heart-medicine and it went on to give American's great sex for many years and was a blockbuster. Our scientists don't know enough about any medicine to always know where it will fit best. Maybe this medicine is much more usefl for leukemia or as a preventive medicine. Who knows?.........

Basically - unless you know something - I would stay back. And if this thing runs to $10 a week later - I would actually not feel bad - because bottom line - I want to pick and choose my speculations - and have 100% control over matching my investment plan with my stock picks - so that I can imagine the story.

In my mind I can tell and understand the story of NCTY success selling Wacraft in China. I can also understand the promise of gold in an inflationary economy, with a lot of pressure on the dollar's continued strength and with oil at $60 per barrel. What I can't do, right now at least is have any clue how well GNTA's medicine will perform in clinical trials, if it will get final approval to be sold, and finally - of its sucess in the market.

The only real framework I think you can apply to a stock this spec - is that the following things could move it: - a) Any type of substantive/favorable news release - (re: medicine has 90% sucess in phase 3 trial), b) A broad move in the biotech sector which lifts all boats, c) a buy-out.

On the flip-side though - these are things that could move it down and quickly - a) FDA rejection, b) biotech/nasdaq sell-off, c) debt issuance / share issuance to strengthen their capital.

That wraps up this report - please e-mail with any comments/questions.

Thank you,

BG