After the exhaustive analysis of Synta Pharmaceuticals, it’s time to make the call to buy the stock or put it on the watch list (I haven’t seen any real red flags that would lead me to throw it out completely).

My biggest concern is with their cash flow. Even with the cash from the IPO, Synta is going to run out of money sooner rather than later. In fact, their CEO, Safi R. Bahcall, said in a slide show talk at the Lehman Brothers Global Healthcare Conference (free registration required) that they were planning on finding a partner in 2007. Depending on the deal, I could see a partnership sending the stock price in either direction. Certainly the more desperate they are (due to lack of money), the more likely they’ll take a partnership that is giving away more of the potential profits than the stock holders would like.

Synta’s IPO was fairly recent, so there’s potential for the initial (private equity) investors to liquidate some of their position, but, some of the major early investors were buying additional shares at the IPO, so the end of the lock up agreement is probably not a major concern. At any rate, I’ll keep an eye on the 28 million shares that will be available for sale after the lock up agreement concludes (180 days from Feb 6th, 2007 which is August 5th if I counted correctly). There are some potential extensions of the lock-up agreement if there are earnings calls prior to the agreement, so that date has potential to change.

Here’s my predictions for the stock:

First quarterly report-I’d imagine this will continue to say they’ll run out of money in mid-2008 so there won’t be much change in stock price. UPDATE:It came out two days ago: As of Jan 1st, they had $91.5 million in the bank (including $44.7 from the IPO after expenses) and they had a burn rate of $57.2 million for 2006. Given that the clinical trial will cost $22-24 million, their burn rate will likely be higher in 2007, and my mid-2008 prediction for them to run out of money looks on target. The stock didn’t really move on the earnings announcement (although there was a big (7%) drop at the close today on a large volume, but no news as far as I can tell).

Phase 3 clinical trial for treating melanomas with STA-4783 announced-I’ll bet there’s an unjustified small bump in price just because people like to see progress, even if it’s on target progress.

Partnership-It will result in a large boost in stock price. It will alleviate fears that they’ll run out of money and give support to their product since it means other scientists think that their product will work. The biggest question is when this will happen.  Look for the stock price to head down slowly until the partnership occurs.

So, I think I’m going to take a wait and see approach. The problem is really in the cash flow and Synta really needing a partnership to complete their clinical trial. We could bet on them getting one sooner rather than later, but I prefer to bet on good science rather than the managements ability to make partnerships.

I’ll revisit the stock after their first quarter 2007 report when I can get a better idea of their current cash flow.

Filed under: Synta Pharmaceuticals (SNTA)