Three Possible Biotech Breakouts

Includes: DNDN, VRX, WINT
by: Guru Alternatives

Clinical trial and approval news flow are the main determinants of value for a biotech. Incredibly, we have seen little biotechs soar to great heights during drug trials only to fall apart when the drug gets commercialized. If we have a reasonable appetite for extraordinary risk and still have any money left after 2008, there are three opportunities that can get very interesting in the next three months. Two of the three stocks has a catalyst that could either make or break it.

The wrinkle remover Medicis (MRX) is awaiting the approval of Reloxin, a type A botulinum vaccine. In 2006 the French drug company Ipsen granted Medicis rights to develop and commercialize its botulinum toxin product in the United States, Canada and Japan for aesthetic use. The development hit some wrinkles in 2007 when the FDA requested a re-filing of the BLA (Biologics License Application). The application was finally accepted in May 2008.

In January 2009, MRX announced the FDA action date of April 13, 2009. This would allow the company to participate in an estimated (2008) $300-$400 million market and compete against Allergan's (NYSE:ALG) Botox. The approval would be a nice boost to its prospects especially in the aftermath of its steep decline to the low teens. There are analysts who have modeled $35 Million in revenues from this product for fiscal 2009. The consensus average of 15 analysts who cover this stock is an EPS of $1.67 for 2009. We believe that the low valuation and a powerful catalyst with a very high likelihood of approval is a decent trade. If you have the appetite for some risk, this may be a good start.

Our second candidate is a small biotechnology story Discovery Labs (DSCO) which simply ran out of luck with its FDA application after coming in with stellar data in 2002. We grew numb after watching the company get one approvable letter after another due to a seemingly endless list of manufacturing and stability issues. Our interest in this story is because of the strong trial data set and the fact that the FDA never asked the company to re-do its clinical trials. The product candidate is Surfaxin which is a synthetic version of the lung surfactant that allow normal lung function. After several stumbles we believe that the company may have finally gotten it right. The company is expecting FDA action on April 17, 2009. The approval is extremely crucial in this tough credit environment as the company may simply run out of time if it gets its wrong again.The more crucial the nature of the news flow, greater are the chances of a big move in either direction.

Our final candidate is an option play and has fans on both sides of the fence Dendreon Corporation (NASDAQ:DNDN). The only product that really matters in this story is Provenge for the treatment of prostate cancer. The company is set to release the final analysis of its trial data on April 30, 2009. The company achieved a 20% reduction in the risk of death compared to placebo in an interim analysis that was announced in October 2008 for data collected up to May 2008. However, for approval the company needs to announce a 22% reduction. We believe that the extra eight months data between May 2008 and January 2009 would allow the needed 2%.

In each of the above special situations we have a powerful catalyst that has a high likelihood of success. All three belong to our aggressive risk portfolio and you should only get involved with money that you can afford to throw away. If things work out as expected the rewards could be stellar.

Stock position: None.