The Lantern Pharma IPO Raises Some Questions
We recently published a report on seven AI healthcare stocks noting that six were the result of recent IPOs. Of those, two are involved in drug discovery. We’ve written extensively about how machine learning and computational chemistry are speeding up the drug development process and decreasing the likelihood that drugs will fail. It’s all about taking an incredibly large amount of big data and turning it into insights. Today, we’re going to talk about another company that uses AI for drug discovery and just filed for an IPO – Lantern Pharma.
About Lantern Pharma
Founded in 2013, Texan startup Lantern Pharma has taken in $5.5 million in funding. The company’s platform, RADR, promises to find drugs that failed in other efforts and find new ways to apply them. After identifying late-stage drugs with a suitable history of safety and tolerability, the company uses loads of big data to then find the optimal subset of patients to conduct trials on.
They then partner or license the drugs to pursue commercialization. The idea sounds great on paper, but it all comes down to execution.
The Devil is in the Details
We’ve been looking at S-1 filings for years and not all are created equal. (The S-1 is a document filed with the SEC for companies that are looking to IPO.) Most of the time we will have come across a company prior to their IPO and will be familiar with what they’ve been up to. For healthcare companies, we like to see partnerships with large pharmas that will help accelerate development. Notable venture capital firms backing a company say a lot about how well the technology has been vetted. Even when all the boxes are checked, some companies will still fail spectacularly. That’s why we always look for red flags that might disqualify our interest in a particular company so we can focus our limited resources on researching the most promising investment opportunities. The first red flag for Lantern Pharma is that we hadn’t heard of them until now.
We’re not experts in the AI drug discovery space, but we’ve talked to plenty of people who are, meeting with founders of notable computational discovery companies in Silicon Valley to map out all the key players. There were plenty, but Lantern Pharma wasn’t on that list. According to Crunchbase, they’ve taken funding from a handful of Texan venture capital firms, and the total amount raised according to their S-1 is under $8 million. As of December 2019, they employed a total of four full-time and three part-time employees in the areas of research and development, finance, and administration. They have $1.2 million in cash on the books with plans to raise around $28 million in the IPO. Leading the charge is CEO Panna Sharma who came on board a few years back after serving nearly eight years at Cancer Genetics Inc.
Cancer Genetics Inc.
Mr. Sharma spent nearly eight years as CEO, President, and Board Member of a publicly traded company called Cancer Genetics Inc. (CGIX) that seems to have failed spectacularly. After a recent reverse split, CGIX has a market cap of just over $5 million, and they hired an M&A firm to explore “strategic alternatives,” something that all but says “our strategy failed and we don’t have anywhere to pivot to.” Over the past five years, shares of Cancer Genetics have lost -99% of their value. Mr. Sharma may very well be the perfect person for the job, but his past tenure at Cancer Genetics Inc. raises questions, especially when the stock chart looks like this.
We’ve all spent time at shoddy outfits during our careers. What we’re concerned about here is the trajectory of CGIX stock happens to look like another publicly traded company in this story.
Lantern Pharma has three candidates in their pipeline, and one of them was purchased for $25,000 from a firm called BioNumerik Pharmaceuticals, “a life science company focused on advancing innovative cancer therapies.”
BioNumerik raised several hundred million dollars in funding and filed for an IPO in 2004 which never went through. Today, their website has vanished, and no record can be found of what happened to this firm. One of their investors removed any mention of having invested in them, and one of their management team is now acting CFO at Lantern Pharma. It’s all very strange when the S-1 talks about all the royalties Lantern Pharma is supposed to pay BioNumerik in the event the drug succeeds in being commercialized.
Then there’s another firm that’s working with Lantern Pharma, Oncology Venture. They’re a Danish company with a $27.5 million market cap and a stock price that’s on the same trajectory as CGIX.
At least that was until yesterday, when the company issued a press release which caused the share price to pop +75%. What they announced can be paraphrased as follows.
A bunch of Chinese researchers published a paper on how they used machine learning algorithms to discover an FDA-approved drug – the PARP inhibitor, Mefuparib (CVL218) – that has been shown to have promising antiviral activity against the virus that causes COVID-19. Turns out that Lantern Pharma has a PARP and tankyrase inhibitor in Phase II clinical trials for the treatment of ovarian cancer, 2X-121. The company now says they’re going to work with Northern Arizona University to see if 2X-121 shows any promise as a treatment for coronavirus.
We’ve already discussed the efforts being made by companies like Moderna and Johnson & Johnson to combat coronavirus, and expressed concern about how this isn’t necessarily a good thing at all. For companies like J&J that have deep pockets, it makes sense. For a micro-cap Danish company, perhaps not. That was already a point of risk raised in the Lantern Pharma S-1. “We are completely dependent on Oncology Venture for the development of the LP-100,” says Lantern Pharma.
While past performance does not predict future results, we have seen far too many stock charts with that slow slide to the bottom. There is typically some meteoric rise, then a fall, then aftershocks where the stock temporarily soars again before it inevitably continues its long downwards slide. Prior to today, Oncology Venture was a $15 million market cap company that Lantern Pharma was relying on to bring one of their three drugs to market. Now, they’re dabbling in coronavirus stuff.
What’s the Point?
We could go on. There’s another company Lantern Pharma worked with called Intuition Systems whose CEO was the brother of Lantern’s ex-CEO. Intuition is developing POS systems using machine learning, and it seems that technology can be applied to drug discovery as well. The press release announcing the partnership implies something much bigger than the $39,085 that Lantern Pharma says they gave Intuition in 2018 to provide services relating to development of their technology infrastructure and artificial intelligence platform, cloud computing, and computational biology. Training AI algorithms costs tens of millions. There’s probably some reasonable explanation, but we don’t see it in their S-1 filing, and we shouldn’t have to dig for it.
There are many exciting companies using machine learning for drug discovery, some of which are publicly traded. If Lantern Pharma manages to raise $28 million which they expect will fund a year of operations, that will be a huge accomplishment in today’s environment. After a year passes by, and if everything goes well, they’ll need to raise again. This hardly seems like a good environment to be raising money for survival. This is where some large pharmaceutical partners with deep pockets could provide some reassurance.
It’s incredibly easy to lose money in the rapidly-changing world of emerging technologies. Even when all the stars are aligned – top-shelf investors, multi-billion-dollar corporate partners, rock-star leadership teams – companies still fail. Tech stocks are already risky enough, and we’re not interested in taking on any additional company-specific risk by trying to excuse red flags or trying to look for positives that can offset them. We simply pass on companies we have so many questions about and wish them the best.
If the IPO goes through, Lantern Pharma stock will trade under the ticker LTRN.
Update 4/29/2020 – A PR firm emailed us today stating ” I understand much of Nanalyze is user-submitted content, but this article is filled with so many inaccuracies that it’s tough to know where to begin. I respectfully suggest you remove it. If you need content, I can certainly make recommendations to companies to submit accurate, non-biased information to replace this one.”
We responded with ” We don’t remove articles. This is not user-submitted content. This is based on their S-1 filing with the SEC. Submit your points of contention and we will go through them if they have merit. Again, this is based on the S-1 filings.”
Here at Nanalyze, we hold the lion's share of our investing dollars in a portfolio of 30 dividend growth stocks. Become a Nanalyze Premium subscriber to access our report on Quantigence - A Dividend Growth Investing Strategy. We'll show you how we selected our 30 stocks and teach you how to build your own dividend growth stock portfolio.