As sure as the sun rises everyday, share-market participants love to gamble.
I say 'participants', because owning shares doesn't automatically make you an 'investor'.
Oh no.
An investor buys a company (ideally with stable, growing revenues) for the long term, relying on management to improve the business and occasionally topping up his holdings with some extra cash or when prices decline.
Other market participants love to take a chance, chasing speculative wonder stocks up hill and down dale, all over the ASX.
Cynata Therapeutics Ltd (ASX: CYP) is the latest stock to excite the flock, following companies like Phytotech Medical Ltd (ASX: PYL), Freelancer Ltd (ASX: FLN), and many more.
Cynata soared this week after announcing that its patented 'Cymerus' stem cell production method was validated as suitable for production for therapeutic purposes.
While the low-cost and infinitely repeatable production process – which requires no costly and time consuming collection of candidates – has obvious appeal and should bring in strong revenues for the company, I have to sound several cautionary notes about Cynata's value as an investment.
First, the company earned $43,354 (yes, that's 43 thousand dollars, possibly less than your yearly wage) in revenue in the first half of 2015.
This may grow rapidly should demand for its stem cells ramp up, but the most recent reports have provided no indications for if and when this might happen.
Second, although Cynata has a low-cost, infinite source of stem cells, it has no application for them as its research has not yet reached human trials.
Cynata is currently preparing to conduct Phase 1 clinical trials, but this isn't very exciting considering how far away from regulatory approval Phase 1 trials actually are.
(You can find a full introduction to the four Phases of testing here)
Third, according to management, Cynata only has sufficient cash to see it through to the end of Phase 1 Clinical Trials.
Cynata's cash burn rate of ~$1.5 million every 6 months combined with the costs of clinical trials stacks up poorly against its cash balance of just over $6m.
So unless outside demand for stem cells picks up, Cynata is going to be looking for cash again soon.
Given the current high prices for shares, I think buyers at current prices are definitely at risk of some shock to their portfolio in coming months.
This is one company you're better off steering clear of for the time being.
For readers who are in the dark as to the process involved with treatment development and approval, I'm currently writing a series of articles designed to help you better recognise the risks of owning biotech stocks. You can find part 1 here.
