Heat Biologics (NASDAQ:HTBX) known for its oncology research has now joined the race to develop a COVID vaccine. As a result, its stock price is up by more than 500% since March when the medical research firm announced COVID-19-related developments.
Figure 1: HTBX price evolution
Data by YCharts
Now, gone are the days when small biotechs like Moderna (NASDAQ:MRNA) would announce vaccine-related news and benefit from a “first-mover” advantage in terms of investors’ interest. The COVID vaccine development space is now crowded and some may wonder whether all the news are just a means to benefit from media coverage and stock price appreciation.
I therefore look at whether HTBX has the technical capability and financial means to undertake the complex tasks of not only developing but also manufacturing doses to be used for clinical trials.
First, I analyze the market.
The market for COVID vaccines
There are many biotechs and giant pharmaceuticals that are already involved in the search for a vaccine. However, the market for vaccines is so large given the fact that the coronavirus can infect anybody more significantly than flu.
This means that even if multiple vaccines emerge, the companies producing them are likely to survive as each can specialize in treating different COVID-19 conditions.
Figure 2: Different treatments for COVID-19
Source: Keylogin Biotech analytics
As for HTBX, it is already involved in advanced medical R&D and has ongoing collaborations with research institutions and universities. In this context, the company has been collaborating with the University of Miami on a point-of-care test for COVID-19 since March.
Figure 3: Number of studies where HTBX is involved
Secondly, the company is already involved in testing for lung cancer. The gp96 platform which was originally designed to activate the immune system is now being used for developing COVID-19 vaccine.
Figure 4: HTBX’s pipeline
Source: Heat biologics
Thirdly, to the credit of Heat Biologics, it already works with the likes of Bristol-Myers Squibb (BMY) and Merck (MRK) as part of a phase 2 clinical trial in a treatment using HTBX developed HS-110, a biologic product used to stimulate patients’ T-cells for the purpose of combating cancer.
In fact, it is the use of T-cells which differentiates HTBX’s approach to COVID vaccine development when compared to peer Moderna. The latter instead uses antibodies.
Figure 5: HTBX Vaccine program
Source: Heat Biologics
Finally, in addition to COVID-19, there has been promising clinical activity for NSCLC (cell lung cancer) therapy, which is an important consideration for those wishing to invest in the company.
While the company’s researchers strive, the share price has already been benefiting from June after positive news concerning the first clinical trial of PTX-35, designed to harness the body’s natural antigen immune activation.
Therefore, given the market size, HTBX researchers’ experience in the field of immune system activation and investors’ confidence, an investment in the stock starts to make sense.
I next evaluate the finances.
HTBX is a loss-making company with most of its revenue consisting of grants earned under a contract to develop treatment for cancer patients.
Figure 6: Statement of operations
Source: Q1-2020 SEC filings
Now, as of March 31, 2020, the biotech had made a loss of $6.4 million for the first three months of the year with total debt standing at $2 million.
Moreover, operating expenses are on the high side at $6 million and should rise further to cover for coronavirus development. Also, cash flow from operations stood at minus $5.8 million as at March 31, 2020.
Moreover, the company had approximately $26.4 million in cash and equivalents, sufficient to fund operations for the year ending on 31 March 2021.
Moreover, the bulk of the cash generated was through the launch of a public offering consisting of 20 million shares of common equity together with warrants. This was in January 2020 and the gross proceeds were approximately $7 million.
Figure 7: Balance sheet
Source: Q1-2020 SEC filings
Finally, as of March 31, 2020, the company had outstanding warrants to purchase 5,779,064 shares, which based on an exercise price of $2.03 per share can provide an amount of $11.7 million.
With the company looking to have sufficient cash for operations to fund vaccine research and trials for both cancer and antivirus, I now turn to possible challenges.
One of the challenges which come to mind is the financial capability of this small biotech to manufacture the high quantity of doses normally used in trials. However, in this case, HTBX has already found a partner in the form of Waisman BioManufacturing, an organization specializing in the manufacture of cost-effective therapeutics used for early-stage clinical trials.
Interestingly, the biotech research company has already worked with the manufacturer before.
Secondly, there is the fact that developing a vaccine with T-cells instead of antibodies as for Moderna can take a longer time. In this respect, the company may have to incur significant expenses in the longer term.
Exploring this further, as at March 31, the company had undergone accrued clinical trial expenses of $626K, which is a significant amount.
Hence, one factor which could play against the stock price is higher costs than originally planned with the market losing patience because of the resulting delay in vaccine development.
However, there are two factors which should counter this with the first stemming from the fact that HTBX has joined the Alliance for Biosecurity for COVID-19-related work.
This alliance is a Washington D.C. based coalition of pharmaceutical and biotechnology companies that works to ensure medical countermeasures are available to protect public health.
Joining this organization could open the way for additional funding with the fight against the coronavirus being a national priority.
Finally, just like Moderna, HTBX could benefit from government funding during later phase studies.
In conclusion, there are challenges, but current exceptional circumstances should mitigate these. Ironically, the highly-infectious rate of the coronavirus favors any biotech with proven research experience looking for a cure against the deadly virus.
Valuation and takeaways
Given that the company generates neither earnings nor sales, I will not use the conventional valuation metrics.
Hence I consider the momentum.
In this respect, HTBX is working on developing a medical product which is of strategic importance for the US.
The stock price is therefore currently benefiting from news-led momentum. Even news concerning the secondary equity offering performed back in January, which normally results in a prolonged downside, only temporarily affected this momentum.
Figure 8: HTBX’s stock price evolution with the triggering events
Source: Seeking Alpha
Taking into consideration that the stock price has already appreciated by 500% since March, the question is whether there will be further appreciation and by how much.
Now, since there is adequate liquidity for the year, there is no need for any immediate secondary offering which could come as bad news and adversely impact the stock price.
However, the $6-7 level seen two years back is unlikely unless there is a major development in the research.
In this context, the T-Cell approach being used by HTBX could be complementary with Moderna’s antibodies strategy and there could be some agreement between these two under the aegis of the FDA.
Therefore, traders should settle for a medium term $2.5-3.5 price level for this small but diversified medical research company having a platform being used for COVID-19 vaccine development.
However, expect a high degree of volatility along the way.
Finally, with cash from outstanding warrants, HTBX can last till the end of 2021 without generating revenues, but in the context of a national emergency, funding could become less of a problem going forward.
Therefore, at current prices of $2.5, the stock is still a buy.
Disclosure: I am/we are long HTBX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This is an investment thesis and is intended for informational purposes. Investors are kindly requested to do additional research before investing.