A word to the wise!

Firstly, the small caps are again underperforming with the Russell 2000 rolling over. As we have told you, market is waaaaay overdue after the easy money-induced move higher. The only sign we need to look for is the small caps as they have shown the way when the market is ready to correct. We think the overdue correction is at hand but have no clue yet as to size and duration. Just keep in mind, things that haven’t rallied with the market will roll over first.

Now…a word to the wise.

Neothetics priced its upsized 4.65 mln share IPO at $14, the mid-point of the $13-15 expected price range, raising total gross proceeds of $65.1 mln. Neothetics (NEOT) is a Phase 3 ready specialty pharmaceutical company that is developing therapeutics for the aesthetic market with a primary focus on localized fat reductions and body contouring. Their lead product candidate, LIPO-202, uses salmeterol xinafoate to reduce bulging in the abdomen due to subcutaneous fat through an injectable formulation. Salmeterol has been proven to reduce fat and shrink fat cells when injected. The company has completed six trials to date with over 800 patients to test the efficacy and safety profile of LIPO-202. In the Phase 2 trial already completed, their product demonstrated a statistically significant reduction in central abdominal bulging while being well tolerated and delivering a safety profile almost identical to that of a placebo injection.

As with most clinical-stage pharmaceutical companies, Neothetics has no meaningful source of revenues and is therefore strictly running at a consistent operating loss. For the nine months ended September 30, 2014, the company reported a net loss of $7.9 million, down from $12.2 million for the same period in 2013.

DO YOU SEE THE SECOND PARAGRAPH? “NO MEANINGFUL SOURCE OF REVENUES AND IS THEREFORE STRICTLY RUNNING AT A CONSISTENT OPERATING LOSS.

We mention this because in the past year, there have been dozens of Biotech ipos foisted upon an unwary public at valuations that are off the charts considering these dozens all had one thing in common…NO SALES! Yes…NO SALES. We did not say NO EARNINGS…we said NO SALES. Some of the companies have billion dollar market caps…some less. We bring this up because not only have these companies come public, but many have doubled in price because of the sector strength. Investment banks know how to read the public’s greed and appetite and do not care about the ultimate outcome. Here is what we think the outcome will be. From our studies of bear markets, companies that lose money will drop a ton…usually 50% or more. Companies with no sales will most often drop 75% or more with some going bye-bye because of their clear lack of sales and massive losses.

When we started in this business, we sold penny stock IPOs with more sales than these companies and came out with $3 million market caps at 5-10 cents/share. You get the hint. So maybe we will never have a bear market again. The Fed is doing their darndest to make sure one never occurs. But just in case, we have made a list of all these “no sales Biotech IPOs and will be watching closely. In bear markets, the carnage never fails as the curtains always come down on valuation when fear is back into the equation. Just a word to the wise.