Kythera Biopharmaceuticals Inc (NASDAQ:KYTH) stock was halted Monday as an independent advisory committee reviewed its double-chin treatment, ATX-101. The Food and Drug Administration, while not required to do so, usually approves or denies drugs in accordance with the advisory committee meeting, so KYTH stock has a lot riding on what the panel says today.
KYTH stock took off last week, soaring 28% after the FDA released documents touting the benefits of ATX-101, suggesting FDA approval was likely.
Unfortunately, even if the double-chin treatment is approved, as I suspect it will be, the KYTH stock price has become prohibitively expensive.
If you don’t want to get burned, sell Kythera as soon as its shares start trading again.
Unreasonable Valuation
Kythera, which has never been profitable, is graced with a $1.2 billion valuation after the KYTH stock price ran up 47% in the last six months. The company has never generated revenues that exceeded $20 million annually, and in the last two years it hasn’t made a dime.
Its 10-K filing reads like a horror script, with several cringe-worthy sections that investors should know. They include:
- “Even if ATX-101 is approved for commercial sale, we do not expect to generate revenue from product sales until at least the latter part of 2015, if at all.”
- “We have no manufacturing and distribution facilities and all of our manufacturing and distribution activities are contracted out to third parties.”
- “Additionally, we currently utilize third-party clinical research organizations, or CROs, to carry out our clinical development and we do not yet have a sales organization.”
- “Adequate funding may not be available to us on acceptable terms, or at all.”
Do you realize what KYTH is telling us? At the time of this filing — one week ago — Kythera wasn’t able to manufacture, distribute, develop or sell its own product. They’re strapped for cash. And even if its flagship drug is approved, it’ll take a while to throw off cash. (Even this isn’t guaranteed.)
That sounds like a $1.2 billion nightmare waiting to happen.
KYTH and Its Investors Are Betting the Farm
What you can’t accuse Kythera of is being risk-averse. In a 2014 stock-and-debt deal worth $84 million, the company bought back its rights to develop and market ATX-101 outside of the U.S. and Canada from Bayer AG (ADR) (OTCMKTS:BAYRY).
That’s a steep price to pay for a biotech with no sales, ongoing R&D costs, and under $100 million in the bank. Through the end of 2014, KYTH had plowed roughly $175 million into the development of ATX-101. One wonders if it would’ve been more economical to, oh I don’t know, develop the drug on its own.
But let’s stop harping on the fact that Kythera perennially hemorrhages cash, and start focusing on why investors should get out before KYTH stock implodes.
Biotech stocks — particularly ones with all their eggs in one basket — tend to be wildly volatile when their flagship drugs come up for FDA approval. MannKind Corporation (NASDAQ:MNKD), which makes an inhalable insulin product called Afrezza, ran up dramatically last year in anticipation of Afrezza gaining FDA approval.
Between April 1 and June 30 — the first day of trading after the FDA’s formal approval — MNKD stock soared an incredible 172%. You had to be willing to take on tons of risk to participate in those gains, as Afrezza was no sure thing.
The situation with KYTH stock is a bit different. After last week’s news, ATX-101 looks like it’ll get approved. That means less upside for speculators betting on a favorable decision. But what’s more worrisome, if we return to the MNKD example, is what will likely happen to KYTH after it’s approved. In classic “buy the rumor, sell the news” fashion, investors piled out of MNKD stock Afrezza’s approval. Shares now trade for less than half what they dead at their post-FDA approval peak last June.
Listen, I’m all for cosmetic products that help people with their self-image. But if you’re buying into KYTH stock on the illusion of massive profits, stop. Sell instead. Because Kythera is going to get hammered in the aftermath of the FDA’s ATX-101 decision … one way or another.
As of this writing, John Divine was long MNKD stock, and was long $7 Jan 2016 MNKD calls. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
