Biotech companies are always a gamble. Prices can rise in anticipation of a successful clinical trial, only to gap down overnight following a bad result, pulling the rug from underneath investors. Attempting swings with biotech stocks is risky - these are growth stocks that are best looked at as longer-term holds. Enter G1 Therapeutics (NASDAQ: GTHX), an American-based biopharmaceutical company focused on improving the lives of those living with cancer with their flagship product, Cosela. Cosela is the brand name of the chemical trilaciclib, a kinase inhibitor that is used to treat chemotherapy-induced myelosuppression. More on that later.
Cosela has been FDA approved for use in patients suffering from end-stage small cell lung cancer (SCLC) who are receiving chemotherapy. In addition, the drug is currently being studied for use with multiple other kinds of cancers - a good indication that researchers see potential. In Q1 2021, shortly after the FDA approval, G1 announced a partnership with Boehringer Ingelheim to aid in the commercialization and widespread availability of Cosela, and in Q3, Cosela received a permanent reimbursement code (J-code) from the Centers for Medicare and Medicaid, meaning that the therapeutic now has one consistent, easily recognizable code across all submitted insurance claims. In my opinion, this can only bode well for the future of the drug.
Cosela and its mechanism of action
Biotech companies generally become profitable from one blockbuster product, so let’s focus on G1’s crown jewel, Cosela. Cosela has been shown to ameliorate the quality of life for chemotherapy patients suffering from chemo-induced myelosuppression, myelosuppression being the clinical term for bone marrow damage. When bone marrow is damaged, the body produces fewer blood cells, leading to an increased risk of infection and anemia among other complications. This greatly reduces the quality of life for cancer patients, causing many to be too tired to even get out of bed. Cosela could help people maintain a more normal life while undergoing chemotherapy.
I’ll be assessing G1’s Q3 2021 earnings report for the period ending September 30th. At first glance, it would appear as if the firm has had a disastrous year, reporting just $4.9M in total revenue compared to $26.6M in the same period a year prior. But dig a little deeper, and you’ll see that the 2020 Q3 revenue was strictly from licensing deals, whereas in Q3 2021, the firm reported $3.6M in revenue from sales of Cosela. G1 currently holds $212.1M in cash/cash equivalents. With quarterly operating expenses of $46M, G1 has secured enough capital to fund operations for over a year, barring any unforeseen emergencies. In addition, the firm has recently upsized their debt facility with Hercules Capital, a prolific venture capital group that has provided financing for numerous growing companies in emerging sectors, such as FanDuel, Lyft, and FuelCell. G1 expect to be fully funded into 2024 thanks to this agreement.
Operating expenses have risen due to increased spending on both the R&D side as well as the commercial side, with G1 hiring a Cosela sales force to accelerate the adoption of Cosela, supplementing the existing Boehringer sales team. There was a net loss per share of $(1.00) in Q3 2021, compared to $(0.31) in Q3 2020. This of course isn’t uncommon for growing companies, especially in the biotech arena, where it can take years and years of R&D investment to finally see a big payday.
Source: G1 http://investor.g1therapeutics.com/node/9711/html
I wouldn’t put too much stock into the charts for G1. I don’t see this as a company to day trade, or even swing trade - I see this as a longer-term value play. Nevertheless, at the time of writing this article, the stock has an RSI of just 38, indicating that it is somewhat oversold, so the potential for a short-term reversal is there. Aside from August 2021 (a bear market in general), the RSI has shown support around 30, at a price point of approximately $12. The price action has certainly been bearish, as the stock is down nearly two-thirds from its 52-week high of $37.07 (triggered by FDA approval for SCLC), but as we’ve seen time and time again with biotech firms, one great trial result could send the stock soaring again.
G1 is attempting to initiate several new trials and studies after strategically choosing to halt phase 2 trials in 2L/3L non-small cell lung cancer, due to evolving treatment protocols that may lessen the market opportunity for Cosela. Instead, the company is shifting resources into other areas where they see more potential ROI.
Cosela could fail. There certainly aren’t many indications of that happening, especially with the drug clearing the major hurdle of obtaining FDA approval, albeit only for one usage, but it could very well fail to be approved for any additional uses. Should Cosela stall or flop over the coming years, G1 would be in deep financial trouble, and that would mean plunging share prices.
G1’s stock is also heavily shorted - 26% of the float has been sold short. Combined with its low valuation, this puts G1 in an unenviable position. The market does not seem optimistic about the company’s future. However, this heavy shorting only serves to up the potential reward for investors. If the shorts are wrong, and the price does rise again, they will eventually have to cover their positions, which would of course further drive up the share price.
The bottom line
Investing in G1 is betting on positive trials. In my view, it is likely that Cosela continues to perform well based on the trajectory it’s on. FDA approval and a permanent J-code mean that the drug has proven itself to be a legitimate treatment. The partnership with Boehringer means that G1 will continue to commercialize and tap into an established sales network. Demand for Cosela is tremendous - people aren’t going to stop getting cancer, and as long as chemo is the most common treatment, people will continue to suffer from myelosuppression. The stock is also about as recession-proof as can be, as the demand for healthcare is fairly inelastic.
There is no middle ground for this company in my view. Should Cosela succeed, the stock will skyrocket, and should it fail, the stock will plummet. The next year or two will determine the future of G1, meaning any investment is inherently risky. I do believe that the potential reward outweighs the risk. Yes, the market is down on G1 right now, but many of the best trades are made by going against the grain.