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Biotech Stock Mailbag: Bubble Debate, Cel-Sci, Zogenix, Zalicus

Lastly, keep a wary eye on the increasingly preposterous excuses sell-side analysts are coming up with to justify higher and higher stock valuations. I red-flagged a particularly egregious example this week in Celldex Therapeutics (CLDX). I realize analysts have little choice but to cheerlead stocks higher, but their behavior only fuels bubble behavior.

Speaking of fundamentally toxic companies, Tim R. writes:

Being that you're the only logical person that understands Cel-Sci (CVM), can you please shed some light on its recent stock split. I'm amazed how this company continues to devalue and dilute without ever producing one piece of data showing progress with Multikine.

Cel-Sci is in desperate financial shape. The 1-for-10 reverse stock split is intended to keep the company solvent so its top executives can continue to receive their lavish and undeserved compensation.

The Multikine phase III study in head and neck cancer is a train wreck with little hope of being completed. As of April, only 117 patients were enrolled. The study is supposed to enroll 880 patients. Cel-Sci began this study in December 2010, which means the company is enrolling 4.2 patients per month. At this rate, Cel-Sci will complete enrollment of the Multikine study in 2028.

Let's assume Cel-Sci figures out a way to triple the rate of patients entering the study. If it can do that, the study will still take another five years to reach 880 patients.

Cel-Sci closed the second quarter with $3.5 million in cash, enough to remain operational through December. The company hasn't raised any new cash this year despite an incredibly hospitable environment for bio-pharma finance. Investors are throwing money at biotech and drug companies, but apparently not at Cel-Sci.

To pay for the rest of the Multikine study, Cel-Sci must raise $37 million. At $1.49 per share (Cel-Sci's closing stock price Wednesday, after the reverse stock split took effect), the company would need to issue another 25 million shares to raise $37 million. With 46 million fully diluted shares, options and warrants already outstanding, Cel-Sci would have to dilute existing shareholders by 54% just to raise enough money to complete the Multikine study. This calculation doesn't even take into account the cash needed to pay the company's everyday expenses, which, by the way, includes paying Chairman and President Max de Clara $166,000 per year in interest payments on a $1.1 million loan he made to the company in 2009.

Yes, that's right, Cel-Sci's own chairman is the sole creditor on a loan to the company that bears an interest rate of 15% and is secured by all of the company's assets. What a guy.

Did I mention Cel-Sci also pays de Clara $363,000 in annual salary, plus options and other perks? Cel-Sci CEO Geert Kersten takes home $477,000 in annual salary. His total compensation package last year was worth $882,000.

Back to the rationale for the reverse stock split. Without it, Cel-Sci would be delisted and end up on the bulletin boards, which would all but guarantee the company's bankruptcy. With the reverse stock split, the company has a fighting chance to raise more money. Vulture funds are more likely to give Cel-Sci money -- at usurious terms, of course -- with a balance sheet that appears healthier, at least superficially.

Cel-Sci executives know Multikine is a zero but any money raised provides them with prolonged job security -- and extravagant pay checks -- for the foreseeable future.

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