Cytodyn Inc (CYDY)

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CytoDyn: Bears Bring Out Their Champion To Take On The Army Of Bulls
Jul. 8, 2020 4:46 PM ET|7 comments | About: CytoDyn Inc. (CYDY)
Biologics
Biologics
Long/short equity, Deep Value, Growth, biotech
(4,400 followers)
Summary
CytoDyn’s stock is under selling pressure following a short-centric report from the notorious Citron Research. The report’s webpage was quickly deleted but the damage was significant with the share price.

Citron is the second champion to throw some mud on CYDY by focusing on the company’s promotional interviews and lack of data for Leronlimab efficacy for COVID-19.

I attempt to reassemble the bear report and come up with a bear thesis for CYDY. In addition, I argue a concise rebuttal against some of the bears’ talking points.

CytoDyn (OTCQB:CYDY) is starting to attract some attention from all corners of the market, including some of the best champions of the bears. Notorious bear research firm, Citron Research, has been summoned to take on the seemingly unstoppable CYDY that has run-over previous challengers, including Adam Feuerstein. According to some accounts, Citron’s report pointed out that the stock’s recent run-up is not justified and the company has no data to claim that Leronlimab is a cure for COVID-19. Unfortunately, I cannot reference the report directly because the post was pulled shortly after posting it. Of course one should suspect some foul play going on here for a number of reasons. Admittedly, the bear thesis does have teeth and should be considered by new longs and longstanding bulls. However, I have yet to see any legitimate argument against Leronlimab and its ability to address a broad array of medical conditions and diseases.

I intend to review the recent events and discuss some of the key bear talking points. Afterward, I will provide my own rebuttal to some of their points but will also highlight some key downside risks bulls should keep an eye out for.

CytoDyn LogoImage Source: CytoDyn

Citron Report Fiasco
Back on June 30th, I was performing my daily midday portfolio check and noticed CYDY was once again up to a new 52-week high. The company had announced that it received the go-ahead to start the COVID-19 trial for Leronlimab in Mexico, which has experienced several hotspots since the pandemic began. It looked as if the stock had turned into a monster and every press release triggered another 30% gain. I have been bullish on CytoDyn’s COVID-19 efforts but I was starting to think “this is getting out of hand.” Just as I was starting to look at the charts, the share price dropped through the intraday VWAP under a strong spike in volume. At first, I thought it was a big block trade, but the tape sped up and I decided to take some more profits just in case we were witnessing a “blow-off top.” Disappointingly, the selling pressure escalated and I started to scramble for headlines but I couldn’t find SEC filings or official press release. At that point, I knew a big downgrade or hit piece had hit the wire but I couldn’t find anything on my news feed. So, I checked Twitter (TWTR) and found some CYDY chatter referencing Citron Research, which usually brings in serious day traders and prop firms. Indeed, I was debating on unloading a large portion of my remaining position, but I reminded myself that nothing has fundamentally changed for the worse. After a brief chuckle, I decided to find the full report from Citron…but it was gone. My chuckle turned into a full-blown belly laugh because I came to realize something dubious had occurred and the evidence had been erased. Yes, we don’t know the details about why the post was removed but after finding some the excerpts from the report I figured the report was used as a tool more than actual fundamental analysis. It appears that Citron believed that CYDY was a “big joke” and that the company had zero data supporting that Leronlimab was a “cure” for COVID-19.

Was Citron Correct?

In a way…yes…CytoDyn has not reported any COVID-19 data from a human trial that shows it could be a cure. However, CytoDyn has not been able to report any clinical trial data because the trials are just getting started or is ongoing. Indeed, the company has reported some anecdotal reports from doctors and patients who were administered Leronlimab, but I have not heard or read any statement by the company that claims that Leronlimab is a “cure” for COVID-19.



Figure 1: CytoDyn COVID-19 (Source: CYDY)

Leronlimab is a CCR5 antagonist that could help reduce the RANTES chemokine, which is able to recruit leukocytes to inflammatory sites. The tissue damage caused by the COVID-19 virus creates inflammation, including the cytokine storms in the lungs, which has been one of the primary causes of death in COVID-19 patients. Essentially, Leronlimab’s mechanism of action has the potential to help patients with the hyper-inflammation from COVID-19, including patients who are fighting off a cytokine storm in the lungs. Leronlimab might not be classified as a cure but science supports the company’s efforts and should be worthy of investigating.

In regards to the stock being a “joke,” the company recently submitted their BLA for Leronlimab for HIV, which could eventually lead to over $1B in annual revenue. What is more, Leronlimab has several other clinical trials for cancer, NASH, GvHD, and HIV monotherapy. The company’s market cap is roughly $3B, which is undervalued exclusively based on the potential revenue from HIV and not including the potential revenue from the other indications. Let us assume the company will eventually hit $1.7B in annual revenue from Leronlimab in combination with HAART (Figure 2).

https://static.seekingalpha.com/uploads/2019/9/13/48523746-15683921427577004.jpg

Figure 2: Leronlimab HIV Market (Source: CYDY)

Using the industry’s average price-to-sales of 5x and the $1.7B in revenue, we would get a market cap of $8.5B or $16 per share. As a result, I don’t think the SEC needs to halt CYDY just because retail investors are looking to invest in a stock that has potential near-term and long-term prospects.

The reality is that CCR5 is involved or responsible in numerous diseases and illnesses, so until Leronlimab fails to show efficacy against a target indication. Thus far, CytoDyn hasn’t fallen short in a clinical trial, so I would say the potential value of CYDY should be unrestricted and decided by the investors willing to invest in the ticker.



Figure 3: Leronlimab in Cancer and Other Potential Indications (Source: CYDY)

Why Did It Work?
CytoDyn has several hallmarks of most pre-commercial biotech companies, including lack of revenue; a high cash-burn; regulatory risks; and dependence on secondary offerings to keep the lights on. Longstanding CYDY shareholders have endured years of waiting for a commercial launch and numerous offerings, so I have to concede that point to the bears. In addition, the company’s regular use of promotional interviews often used by other smaller OTC stocks that are trying to raise money and attention is concerning. Furthermore, the company’s CEO, Nader Pourhassan, recently sold a notable amount of shares while encouraging warrant holders to exercise.

Considering the points above, we can say there are several legitimate concerns that made CytoDyn an easy target for a bearish report. In addition, the stock is traded OTC, so the trading volumes can be extremely low and the shareholder base is primarily retail investors. These conditions make it ripe for shorts to follow the Citron signals and pile on to cut through a thin order book to hit retail stop losses. In addition, the stock had run from around $1.00 to $10.00 over the course of a few months, so, it was only a matter of time before we saw a solid pullback.

Key Points For The Bulls
First a foremost, Leronlimab’s record is still clean and nothing substantial has changed for any of its indications or trials. As I mentioned above, CCR5 is connected to a slew of diseases and conditions, so Leronlimab’s potential upside is immense both clinically and commercially if it is able to get approved in its current pipeline programs. Again, we don’t know Leronlimab will be successful in all its efforts, but we haven’t seen any sign that it won’t be. I know bears want to point out that Leronlimab is not a “miracle drug” or a “cure” but Leronlimab doesn’t need to eradicate a disease to be approved and offer a clinical benefit that generates a commercial demand.

Another important point to note for the bulls in the company’s recent executive or organizational progress. CytoDyn appears to be making deals left and right on numerous fronts to get Leronlimab prepared for a potential commercial launch in the U.S. for HIV; organizing clinical trials and studies in the U.S. and other countries, and making additions to their leadership team. In fact, CytoDyn recently signed a distribution and supply deal for Leronlimab for COVID-19 with American Regent in the United States. American Regent is a Daiichi Sankyo (OTCPK:DSKYF) company that develops, manufactures, and distributes injectable sterile pharmaceuticals. These partnership/collaboration deals required a large amount of due diligence and financial investments on both sides, so it should give investors some confidence that other companies or organizations were willing to commit their time and resources to Leronlimab’s success.

American Regent LogoImage Source: American Regent

Last but not least…is momentum and hype. The company and stock have been riding a strong wave of momentum in 2020 and it is starting to gain some attention from investors and analysts from all corners of the market. Unfortunately, the climb from ~$0.40 to $10.00 will attract naysayers and desperate attempts to derail the CYDY train. On the one hand, it is frustrating to see games being played with people’s money and investments. On the other hand, the attempts to discredit the company and its investors can be a good sign that their stock is worthy of a smear campaign in order to bring it down or demoralize its shareholders. There are plenty of other biotech companies that are very worthy of bearish reports but their decision to go after CYDY and their retail investors makes me believe someone was trapped or was looking to get in.

I will point to Tesla (TSLA) as a great example of a company that is attempting to solve some problems and change their industry but was hammered by some analysts claiming there was no way Elon Musk could deliver or the stock was extremely overpriced for its current fundamentals. Indeed, Elon Musk’s vision for the company might appear to be unattainable but the company continues to improve and could be one of the leading brands of the future, so the stock is trading at a premium valuation. I believe CytoDyn is following a similar scenario, where CytoDyn continues to expand Leronlimab’s potential uses and investors want to be involved in the stock because the possibility for Leronlimab to be a once in a lifetime drug is still intact.

Keep An Eye Out
The second half of 2020 should be filled with press releases and data readouts. I believe the data needs to be good in order to keep the premium valuation. I don’t expect the data to reveal astonishing results that shows Leronlimab to be a “cure”, so I expect the bears to have an “I told you so” moment. However, I am looking to see if Leronlimab demonstrates sufficient efficacy to be used in both moderate and severe cases but is able to maintain its impressive safety profile that other COVID-19 therapies tend to lack. The company expects the data from both clinical trials to be released at some point in July, so investors can’t fall asleep at the wheel.

Investors also need to keep an eye out for additional executive activity and agreements for Leronlimab. I expect the company to announce supplementary clinical trials, collaborations, deals, etc. in the coming months to further expand their efforts in COVID-19 and other endeavors. If the upcoming data is satisfactory, we could see other companies and organizations looking to tap Leronlimab for combination therapies or start new clinical trials in other jurisdictions. Moreover, investors should remain vigilant for potential announcements concerning government funding to help support CytoDyn’s COVID-19 programs and trials.

Conclusion
I believe the bears are going throw everything they got at CYDY in the coming weeks and months as the company moves closer to a potential approval for HIV and following COVID-19 trial data. Again, there is downside risk in CYDY and the bears haven’t been defeated yet. However, most of CYDY’s downside risks are typically endemic for most small-cap biotech stocks. As a result, I would recommend CYDY investors to have a list of bullish conditions that need to be maintained in order to hold their shares. Personally, I have trimmed my conditions down to CytoDyn receiving FDA approval for Leronlimab in HIV in combination with HAART and the company begins the process of uplisting to a major exchange by the end of 2021. I am going to focus on those two conditions and will not let short-sellers distract me with dated or erroneous downside risks that have little to do with my bull thesis.