Why this Smallcap Biotech Will Soar Soon!

Dr. Thomas Carr

March 24, 2017 10:38am

Cempra, Inc. (NASDAQ: CEMP) is an American, clinical-stage biotechnology company focused on developing anti-infectives for the acute care and communal diseases sectors. Its 2 lead products in the pipeline are Solithromycin, which is in Phase III trials for the treatment of bacterial pneumonia in adults and children, and Fusidic Acid, also in Phase III for the treatement of bacterial skin infections. Obviously these are huge markets, and Cempra's products have an edge over competitors due to their wide range of distributive options. Cempra also has a third drug, Taksta, which is set to read out Phase III results sometime this quarter...so any day now. Shares of CEMP were hit hard late last year on an FDA rejection, but the concerns were more about safety issues than about effectiveness. The drug involved, Solithromycin, also has other applications at a lower dosage which may help resolve this issue. And European regulators are more optimistic on the drug than their US counterparts since curing the otherwise fatal disease, in their estimates, is a better payoff than the risk of liver disease associated with the drug.

On 2/27/17, ROTH Capital gave Cempra an upgrade, moving its assessment from "Neutral" to "Buy." This followed a successful Phase III trial for its skin drug. Prior to that, in late December, Margan Stanley move shares from "Underweight" to "Equal-Weight". Our research shows that for every upgrade a company receives from a major analyst, shares rise 500 basis points more than the S&P 500 over the next quarter. This means we should expect at least a 10% alpha move from CEMP over the next 3 months. Cempra has also recently retained Morgan Stanley as a business strategist. The company has $215M in cash which is greater than its market cap, giving the company low Price to Book and low Price to Cash valuation metrics. The company also has very little debt and saw sales rise 36% last quarter. Funds own 66% of the shares.

Rumors are out there that Pfizer is interested in buying Cempra. I consider this to be the most likely move for the company going forward. The Morgan Stanley retainer is likely a precurser The other important sign of a likely buyout soon is that Cempra has two Phase III's in the pipeline that larger companies like Pfizer cannot replicate, and both are looking good for FDA approval. But the most important sign that Cempra is positioning itself to court buyers is that at the last conference call the CEO mentioned that the company is currently "exploring new strategic options" going forward. This is typically a euphemism for "we want to be bought out."

Thus my thesis: if Teksta proves viable, we get a big jump. If not, we should still get a huge ramp on a buyout. Risk is low here...maybe 40% on a Teksta miss, but upside in my estimates based on book value is arond +150%.

The daily price of CEMP shows a steadily rising trend off the late December lows on strong share accumulation. 4.75 is near-term resistance and shares are now holding steady at 4.10.

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Dr. Thomas K. Carr (aka "Dr. Stoxx")

Founder, CEO of DrStoxx.com and IXTHYSLetter.com

http://www.drstoxx.com

Posted to Dr. Stoxx Options Letter on Mar 24, 2017 — 10:03 AM
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