It’s a sign of the times. Donald Trump’s presidency has ushered in a new era for companies that rely heavily on federal grants to pay for costly research and development projects until they are profitable. Nowhere is that more true than in the healthcare sector, which is already reeling from the proposed funding cuts in the Republican overhaul of the Affordable Care Act unveiled last Friday. For that reason, we are closing out our positions in research-stage biotech stocks such as Argos Therapeutics (NSDQ:  ARGS) and Ziopharm Oncology (NSDQ:  ZIOP), two microcap companies harnessing the human immune system to fight cancer.

Now more than ever, the rocky and unpredictable transition from Obamacare to Who-Knows-What-Type-of-Care leaves little room for error in research-stage biotech investing. In any case the seeds were sown some time ago for small biotech companies to implode the way they’re doing now. The truth is the U.S. healthcare system’s financial underpinnings are stretched thin, as investors slowly pull in their horns.

Where there were once vast fountains of government grants and private investors pouring dollars into long-term research projects, now what little money remains is being redirected to more immediate priorities, such as the burgeoning Medicare funding crisis. That leaves biotech companies starved for the cash they need to survive, even when their prospects of making an important healthcare breakthrough look good. For the companies with drug trials that blow up abruptly, the situation is dire, which brings us to Argos Therapeutics.

Argos Struggles to Survive

Earlier this week Argos announced it is cutting 40% of its workforce. The company’s cash is drying up as it struggles to determine its next move. The shares have been falling since Feb. 22 after Argos’ phase 3 drug trial for Rocapuldencel-T combined with sunitinib to treat kidney cancer was halted permanently. The survival rates for patients on the combination therapy were no better than those for patients on sunitinib alone. The announcement came as a shock to investors because the trial had reportedly been progressing well, and the company was preparing to seek approval from the Food and Drug Administration. The company had even leased manufacturing space to produce the drug.  

Argos is an unusual case. Not only did it base its treatment on dendritic cells, a specialized cell in the immune system that can produce person-specific antibodies to kill cancer cells, but Argos promised that it could mass-produce the therapy through its Arcelis platform, a proprietary method of coaxing the cells into manufacturing the antibodies. Investors plowed in because the therapy showed promise in small studies and individual cases and because the antibodies could be mass-produced. But after the failed trial, investors are asking what’s the point of mass-producing an ineffective therapy?

Meanwhile, Argos is facing a cash crunch. As of Sept. 30, Argos had $70 million of cash on its balance sheet, but also $88 million in liabilities. At the time this wasn’t a problem because the phase 3 trial seemed to be going well. Now, the company’s silence is deafening, with the only news that of a workforce reduction. With limited cash that can’t cover expenses indefinitely and no leading drug prospects, Argos is in a deep hole. 

Ziopharm’s Liabilities Raise Questions

While Argos is running out of money, Ziopharm may be running out of time. True, the company has a stout partner in the MD Anderson Cancer Center, and a competitor, Juno Therapeutics, has suffered setbacks lately, including a clinical trial that was shut down after patients died. Nevertheless, the road ahead looks difficult for Ziopharm because Juno has a much deeper research pipeline and even deeper pockets.  

Ziopharm has a fairly sound balance sheet, with some limitations. According to its most recent earnings report, the company had $81 million on hand, twice the cash needed to cover the total liabilities on the firm’s previous quarterly report. Ziopharm has enough cash to fund operations until the fourth quarter of the year, but there was no mention of current liabilities in the recent quarter. Meanwhile, the company expects to burn through more cash in 2017 to cover the costs of its accelerating research.  These issues raise serious questions about the company’s ability to continue beyond the fourth quarter this year without diluting shares from another equity sale, raising money via the debt markets, or selling part of the company to a big suitor.  Although investors have been buying the stock, nothing justifies the recent rise in price. 

So here is the bottom line: Ziopharm’s cash is dwindling while expenses are about to rise, and it has no other internal revenue sources or major late-stage clinical trial candidates. Under different circumstances we might hold the stock longer to see how its product pipeline develops, but we can’t justify owning a stock that has limited access to capital in the years to come. That’s unfortunate because this type of activity, particularly involving potential cures for some of the deadliest forms of cancer, could have the greatest benefit to society. Still, cancer research is a roll of the dice, and under the Republican healthcare plan, small biotech companies will become an endangered species.

Sell Argos Therapeutics and Ziopharm Oncology.