Celsion -- A Simple Model to Determine Fair Value
LOS ANGELES, CA -- (Marketwire) -- 01/29/13 -- Investors in Celsion
Corporation are eagerly awaiting the announcement of Phase 3 results
from the company's HEAT trial of Thermodox + Radio Frequency Ablation
(RFA) in treating liver cancer.
Arguments for the trial's success and failure have been made in
several articles published across the internet. Most buy side
investors we have spoken to feel that the trial is likely to fail in
meeting its primary efficacy endpoints. Nevertheless, it is
interesting that the company has not taken advantage of the recent
run-up in share price from under $2 in June to just over $9 last
week, to raise capital despite having a $75 million Shelf Offering on
file. Management is either really confident in the outcome of the
HEAT trial, or they are simply being reckless by not raising capital
when the financing window is open.
Fair Value Model
Ahead of binary events, one must always determine whether or not the
current share price justifies the risk of holding through the event.
For firms such as Celsion, where there really is only one viable drug
candidate, a fairly simple model can be used to determine fair value.
To begin, we assume that, upon trial failure, the stock will be worth
net cash on hand. Based on Celsion's Q3 10-Q, the company had
approximately 50 cents per share of net cash ($22.7 million cash
minus $5.09 million debt divided by 35.01 million shares). Note,
Celsion recently received $5 million from their Chinese
pharmaceutical partner; however, since the company utilizes
approximately $5 million cash per quarter, this payment does not
change the cash position calculations materially from those based on
Next we make an estimate of the fair value of the stock upon trial
success. Without getting into detailed analysis, let us assume that
fair value for Celsion if Thermodox + RFA works is $1B market cap.
This value assumes that Celsion could see Thermodox all the way
through approval, but for a ballpark estimate, it is reasonable to
say that a successful liver cancer therapy should be worth at least
$1B in market cap or $28.56 per share.
Using these two extreme values (50 cents and $28.56), one can
calculate a probability weighted fair value for Celsion s
of the binary event. The general formula for the model is:
Fair Value = Price_success x Prob._success + Price_failure x (1 -
For example at Red Acre we believe that, optimistically, the HEAT
trial has a 20% chance of success. Therefore fair value would be
calculated as the sum of the probability weighted extreme values
Fair Value = 20% X $28.56 + 80% X $0.50 = $6.11.
Working From These Numbers
Our simple model for fair value helps determine whether the risk of
being long the stock is justified by the probability weighted
outcomes of the binary event. To work from our model, one can adjust
either the extreme values (our estimate of $28.56 on positive news is
likely overly optimistic in the short term), or the probabilities of
success and failure.
One useful way to work with these numbers is to calculate the implied
probability of success given a certain price level of the stock. For
Example, Celsion closed at $8.18 on January 25th. Using our extreme
values of $0.50 and $28.56, the $8.18 price implies a 27.4%
probability of trial success.
Another useful analysis to perform is to look at what the price
should be on a successful outcome if the current price reflects an
equal probability of success or failure. At $8.18, if the market is
considering the HEAT trial as having a 50/50 chance of success or
failure, the implied price of Celsion upon a successful outcome is
It is interesting to note that during the bear raid on January 16th,
Celsion stock traded as low as $6.17 -- close to our own estimate of
fair value at $6.11. In other words, those who managed to buy shares
at the lows of the bear raid got a good deal because their shares
were purchased at a fair valuation based on our assessment of the
This simple model helps determine situations where a stock has
reached unrealistic valuations ahead of a binary event. Different
investors will have different numbers for both the price levels on
success and failure and for the probabilities of the trial succeeding
or failing. The model is flexible enough to accommodate a wide range
of scenarios with a minimum of inputs. While more complex models
based on discounted future cash flows etc. could be produced, at Red
Acre we prefer simple models that let us identify stocks where the
correct trade is abundantly clear.
In the case of Celsion, the current price of $8.11 does not favor a
long position given our estimate of the probability of losing most of
the principle invested in the trade; however, it is clear that an
at-the-money call strategy would allow one to capture potential
upside while minimizing capital invested. Celsion option premiums
remain very high and we do not recommend this trade except for
entertainment purposes. Treat it like a lotto ticket and enjoy the
ride regardless of the outcome of the trial results.
Our mission at Red Acre Investments is to provide actionable analysis
on binary events, special situations, and mispriced securities. To
take advantage of our analysis and Get Ahead of the Curve, sign-up
Disclosure: Author Rajesh Patel, Ph.D. of Red Acre Investments is not
a registered investment advisor and the views and opinions offered
herein do not constitute investment advice. Investors should always
conduct their own due diligence before trading. You should assume
that Red Acre is trading the securities mentioned, generally in
accordance with the views we express, although their positions may
change as news evolves. They do not undertake any obligation to
update our views as market conditions evolve.
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