After almost 12 months of underperformance, Lixte Biotechnology (NASDAQ:LIXT) has skyrocketed by 200% in today’s trade. As an overview, Lixte is a clinical-stage biotechnology company. The massive rally in LIXT stock has been triggered by a positive news related to preclinical trials. The company’s lead clinical cancer compound, LB-100, has shown encouraging results in developing more effective cancer therapies.
Should investors take a plunge? Or is it time to remain on the sidelines?
I believe exposure to LIXT stock at current levels might be a trap. The initial euphoria from the news is likely to be followed by another downtrend.
The first reason is the fact that the positive results are still coming from pre-clinical trials. The company does not have any commercialized drug. It will still be few years before clinical trials are completed and the drug is approved by the Food and Drug Administration (FDA). There’s no investor or analyst who can say with firm conviction that LB-100 will clear all stages of clinical trials. So, this is not the best time to buy.
Another important reason to remain cautious is the prospects of equity dilution. With the company still in the early stages of trials, significant research and development expenses are lined up for the coming quarters.
In the annual report, Lixte mentions that “it will need to raise additional capital to fund its operations.” The company tentatively believes fresh funding will be required in the third quarter of 2022. However, this came with a disclaimer that it could need the funds sooner than expected.
The big surge in LIXT stock might be an opportunity for the management to raise funds through dilution. This is likely to take the stock lower.
Lixte claims that LB-100 increases anti-tumor activity without increasing the toxicity of chemotherapy, radiotherapy and immunotherapy. If this claim holds true, there is a big addressable market globally. However, it’s too early to draw conclusions, and funding requirements will keep the stock depressed.
At the same time, there will be trading opportunities from oversold levels. The recent rally is a good example. I would therefore steer clear of LIXT stock and not get caught when its share price falls.
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On the date of publication, Faisal Humayun did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.