The One Hit Wonder
How connected are you? If you take away Facebook friends and second & third degree Twitter connections, how many influential people do you know? I have met a couple of famous athletes and entertainers. I have even had meetings with mutual fund managers (the dullest people on earth). I know a few movers and shakers but wish I knew more.
Even a blind pig finds a truffle every now and then. A friend of mine says he knows the CEO of a company called Ritter Pharmaceutical (RTTR) that was looking to do an IPO and asked for my opinion about it. After some investigation, I advised him that if he wanted to buy two or three hundred shares as a courtesy to his friend that was OK, but otherwise stay away from the IPO. He could probably get in at a better price in three to six months. I was afraid I would lose my friendship. My first shot at a true insider relationship and I was running away from it.
The hesitation came from the fact that RTTR is a one hit wonder. They are only looking to cure one thing. Their sole focus now is the gastrointestinal disease lactose intolerance. The entire future and fortunes for this biotech company depend on its ability to successfully create, test, and market one drug. There is no fallback position. Even if they are successful in finding a cure for lactose intolerance, the market for it is dwarfed by the markets for cancer, diabetes, and heart disease. In summary, a brand new company + a cure to just one disease + a small market = fabulous riches or complete failure.
Most investors would shy away from this stock. There is too much uncertainty. There is too much to go wrong. If it needs more money, RTTR would most likely sell more shares and dilute current shareholders. The company now has a very small market cap of less than $10 million (if there is a term for the two steps below microcap, this stock is in that category). On the other hand, RTTR is a good choice for speculators. Early in 2016, they announced they have started a Phase 2b/3 trial and they announced that they have secured two US patents. Late in 2015, RTTR entered into a common stock purchase with an institutional investor, Aspire Capital Fund, LLC. The facts that make RTTR toxic to most investors make a very good asymmetrical trade. There is more upside than downside.
The reason? The IPO price was $5 per share. The deal with Aspire was done when the share price had withered to $2 a share. Then after the deal, the stock dipped to $1. Can you imagine having to deliver that quarterly report? “After months of professional equity research and bare-knuckled negotiation, we are only down 50% on RTTR after 90 days.” At this point, there is very little negative left in the stock and any weak shareholders have taken their losses and moved on. Almost any news would be good news. There could be a run-up into the Phase 2b/3 results. There could be additional patents. There could be rumors of an acquisition or a strategic partnership. The optionality is built into the stock at this point. The chance of it going lower is very small compared to fantastic upside of a little good press.
If there was any time to practice sound money management, this is it. Scale in the share purchases and only when you have a profit on the previous purchases. Take profits to recover your cost basis when you have double in the account value.
Note: The author of this column, and his friend of the CEO, do not own any shares of RTTR at this time.
Category: Biotech Stocks
