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Opthea share price lifts on clinical trial update: Is it a spec buy?

The Opthea Ltd (ASX: OPT) share price is up 2.4% to $3.83 today after the eye disease treatment biotech updated investors on progress over its Phase 2b clinical trial into its OPT-302 with ranibizumab (Lucentis®) treatment compared to ranibizumab alone.

According to the company the therapy could be used to treat “wet age-related macular degeneration (wet AMD) and diabetic macular edema (DME). Wet AMD and DME are leading causes of blindness in the elderly and diabetic populations respectively, and are increasing in prevalence worldwide.”

It also has a number of other Phase I and Phase II clinical trials planned or in progress to develop treatments for eye diseases.

It seems the market is impressed with its chances of commercialisation given the company has a whopping $949 million valuation based on 249.8 million shares on issues and a $3.80 share price.

We can see that the valuation is based almost purely on investor expectation over clinical trial success followed by commercialisation given it made a loss of $20.9 million on revenue of $914,800 in fiscal 2019.

In total it actually made a $35.5 million loss over the year before adding back a $14 million tax benefit to take the net loss to $20.9 million. 

It has no debt and cash on hand of $21.5 million as at period end. 

I’ll admit I know very little about Opthea or its treatments, but I would point out that Phase III trials that Opthea will eventually have to undertake almost always are the largest and most expensive for any biotech research business. 

Bank debt is also generally not an option for businesses with no or immaterial revenue so it’s possible the company will need to go back to the market for more funds in the year or so ahead if it’s to fund Phase III trials and other operations.

Another option is for Opthea to find a large pharmaceutical partner to help wear the cost of the trials in return for some sort of financial interest. 

Another obvious point is that it’s trials offer no guarantee of success (i.e. meeting their primary endpoints) and even if they do there’s no guarantee of commercialisation and profits.

Recently, a company like Sirtex Medial hit the big-time for lucky early-stage investors, but for every Sirtex there are dozens of biotechs that just end up swallowing capital.

Of course if you’re confident you’ve done your research and you’re convinced Opthea is onto a blockbuster commercial breakthrough you can happily ignore my thoughts and buy shares. Clearly, I’m not a buyer of shares myself though.

Other speccy biotechs to consider include the widely-tipped Paradigm Ltd (ASX: PAR), or regenerative medicine business Mesoblast Limited (ASX: MSB).

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Motley Fool contributor Tom Richardson has no position in any of the stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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