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Centessa Pharmaceuticals (CNTA): A Recent IPO with Massive Potential

If there is one good thing about spending half the week waiting for the Fed, it forces me to start looking for companies worth investing in, stocks that can grow in any environment regardless of what the central bank says or does.

That often prompts me to look at pharma and biotech stocks, but there are a couple of problems in that industry for investors. So when I found something that addresses those issues and has huge potential, I got excited. To understand why I got excited about this particular company, first we need to understand the common problems with pharma and biotech investing, so let’s start there.

Pharma companies and biotech firms tend to fall into one of two categories. They are either huge and sprawling, or small and specific. For example, big companies, such as Pfizer (PFE) or Merck (MRK) have large portfolios covering traditional, small molecule drugs and large molecule biotech therapies alike, with multiple drugs in the pipeline at any given time. Smaller companies, on the other hand, tend to be focused on one disease state, or often even just one therapy.

For the large firms, the problem is that even with robust pipelines, it is rare that any one new drug moves the needle in terms of revenue and profit, especially as extensive analyst coverage means that the potential of that pipeline is usually priced into the stock, at least to some extent. Their stocks can appreciate, but big gains are unlikely.

Big gains are much more likely in smaller companies, but that potential always comes with big risks. One therapy that fails or even falters in clinical trials can destroy their prospects, and its share price can limit the profitability of even a successful therapy, or of therapies concentrated in one space.

Centessa Pharmaceuticals (CNTA) is a recent IPO Nasdaq stock, and has some of the advantages of both and limits the disadvantages in each case.

They are basically a holding company for multiple, research-focused companies. There are currently ten subsidiaries, covering large and small molecules in multiple areas of specialty, including oncology, immunology, and neuroscience, with more than 170 patents between them. That provides the advantage of diversity inherent with big pharma stocks, but a major breakthrough in any one of the sixteen therapies currently in development will have a massive impact on the stock, making triple digit gains look within reach.

That isn’t to say that there are no risks. Centessa is not just a young pharma company, it is a collection of them, so all of these potential problems are exaggerated. The period immediately before the launch of a new therapy is always a tough time for new drug companies, for example, with cash burn increasing as they ramp up for a launch. However, that is usually for one or two products in the early days, not sixteen.

Still, post-IPO, Centessa has nearly $300 million cash in hand, with negative cash flow of less than $9 million at this point, so even if another capital raise is needed, it should be far enough away to be of little concern to early investors.

Clearly there are others who feel that way, because the stock has gained around 25% since it debuted on the first of the month:

CNTA stock

Much of that gain came in a big jump yesterday, but if there is a pullback from that level today, as has happened in the past, it will offer an attractive entry point.

What we don’t have yet, as far as I can see, is any coverage from analysts. That is an important part of the risk/reward calculation here. If the first couple of reports are positive, which looks likely for all the above reasons, this is a stock that can absolutely fly. However, if the first one that comes out is less than enthusiastic, a big sudden drop will ensue.

For many investors, that will make this an unsuitable stock, but if you have some money set aside for high risk/high reward plays like this, CNTA is definitely one to consider.

* Disclaimer: The author took his own advice and bought CNTA this morning and is long.


Do you want more of Martin? If you are familiar with Martin’s work, you will know that he brings a unique perspective to markets and actionable ideas based on that perspective. In addition to writing here, Martin also writes a free weekly newsletter with in-depth analysis and trade ideas focused on just one recently underperforming sector that is bouncing fast. To find out more and sign up for the free newsletter, just click here.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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