When it comes to investments in speculative biotech companies there are many unique aspects to evaluate. One of the most important considerations for investors revolves around the potential impact that each company's new products might have in healthcare. To be a success, biotech companies need to have large enough markets to promote their new products. Although important, these large markets in themselves are not enough to guarantee success. Companies must also consider how much competition already exists in the space. The more completion, the harder it is to gain any market shares from the established competitors.
That being the case, let's focus on three companies that have products with immense potential. These companies potentially have the winning combination of large markets coupled with limited competition.
Arena Pharmaceuticals, Inc. (ARNA)
Our first business is the well known biotech company named Arena Pharmaceuticals. ARNA is a biopharmaceutical company focused on discovering, developing, and commercializing novel drugs for weight management, cardiovascular disease, inflammation, and other disorders. While ARNA has several products in its pipeline, its premier product is Belviq (Lorcaserin HCl), which is used for chronic weight management. In June 2012, the US Food and Drug Administration (FDA) approved Belviq and gave it clearance.
The question is how will ARNA's new drug reshape the healthcare landscape? The answer to this question comes from the enormous size of the weight loss market and the fight against obesity. If current trends continue, it is estimated that by 2030 more than half of all Americans could be classified as obese. The health and financial implications of such a statistic are truly sobering.
This is the world where ARNA's drug should thrive. To make this a reality, ARNA had the foresight in July of 2010 to enter into an agreement with Eisai (ESALY) for the exclusive right to market and distribute Belviq in the United States. Fast forward to the present and we see that in addition to the United States, new territories have been added that now include most of North and South America, including Canada, Mexico and Brazil. As in the original agreement, Arena will manufacture the product at its facility in Switzerland and sell the finished product to Eisai for marketing and distribution. Under the expanded agreement, Arena is eligible to receive increased payments based upon Eisai's net sales in the United States and expanded North and South American territories. Additionally, Arena will receive an upfront payment and is eligible to receive regulatory and development milestone payments.
As bright as the future seems, there are always challenges to contend with. As large as the weight loss market is, there will always be lots of competitors. One such competitor is the new drug Qsymia, which was introduced by Vivus (VVUS). Being launched in late 2012, VVUS had a head start, but initial sales results were tepid and did not meet expectations. The advantage now may switch to ARNA's Belviq as this product has demonstrated a much greater safety profile when compared to Qsymia. Investors will not have to wait long to see if ARNA is going to be successful. Best estimates are that Eisai will launch Belviq sometime in March 2013 for the U.S. markets. After a set period of time the sales figures and overall demand for the product can be measured and applied to current stock valuations.
While ARNA investors await the product launch, they can turn their attention to the company's financial statements. Currently the company has had no meaningful revenue except what was received in connection with the FDA approval of Belviq. ARNA received an initial $20.0 million non-refundable milestone payment from Eisai, and plans to receive further milestone payments totaling $65.0 million in connection with the DEA's scheduling designation for Belviq. If all goes according to plan, ARNA will receive payments based on Eisai's net sales of Belviq. This will be the key to ARNA's future. If ARNA can establish a large enough market share then the company and investors will have lots to smile about.
On top of the Eisai financing, it is known that ARNA will also receive another upfront payment of $5.0 million from the company's November 2012 agreement with Ildong. Ildong is responsible for the regulatory approval and, ultimately, marketing and distribution of BELVIQ in South Korea.
With ARNA's share price hovering in the $8.50 range, it is a challenging decision to know what to do. If Belviq's sales figures mimic the same disappointment that was generated by VVUS's Qsymia, then the stock price will suffer. On the other hand, if both physicians and patients fully embrace Belviq then ARNA stock should have a precipitous rise in value. Investors holding the stock should still consider ARNA as speculative until such time that a history of sales figures is compiled. That being the case, anyone long in the stock can easily buy protective puts to mitigate risks. For example, January 2014 $7.00 puts can be purchased for $1.40 per contract. These can help the ARNA investor sleep better at night while awaiting the final outcome of this company's great endeavor.
ZIOPHARM Oncology, Inc. (ZIOP)
The next company looking to make a name for itself in the healthcare market is Ziopharm Oncology. ZIOP is a biopharmaceutical company focused on the discovery and development of new cancer therapies. The company's portfolio is comprised of five clinical-stage product candidates in all phases of development, as well as multiple research-stage candidates. Of all the products, it is the palifosfamide program that is leading the charge for the company in the chemotherapy cancer arena.
Chemotherapy agents are extremely toxic and labor-intensive drugs. This is one reason why palifosfamide is so important. ZIOP's new drug is much easier to administer, and its safely profile seems to be better than traditional chemotherapy. Palifosfamide belongs to a group of chemotherapy drugs called alkylating agents. In the simplest terms, this drug works by halting tumor growth by binding to cancer cells' DNA and interfering with their function. Alkylating agents have demonstrated activity in a wide range of solid tumors and hematologic cancer. Palifosfamide is currently being investigated in two Phase 3 studies. The first study, named Picasso 3, is an ongoing study evaluating palifosfamide in combination with doxorubicin for the front-line treatment of patients with metastatic soft tissue sarcoma. ZIOP has also commenced another adaptive Phase 3 trial named Matisse. In this study ZIOP will evaluate palifosfamide in combination with carboplatin and etoposide (PaCE) as a treatment for patients with extensive-stage small cell lung cancer (SCLC).
Investors' excitement in ZIOP is starting to build based upon the upcoming Picasso 3 trails. Results will be released to the public during the last week of March 2013. While investors wait for news, let's consider the two markets that palifosfamide is being tested in. According to the company, the worldwide prevalence of sarcoma is estimated at over 100,000 cases. Of that number approximately 23,000 individuals are being treated in the United States and Europe for front-line metastatic disease. The patients diagnosed with the metastatic form of the disease have median survival rates of approximately 8 to 12 months. No new therapies have been approved for front-line use in sarcoma in more than 20 years.
When looking at the small cell lung cancer market, we see that it is almost exclusively associated with cigarette smoking. According to the American Cancer Society, approximately 15 percent of lung cancers are classified as small cell lung cancer. This is calculated into approximately 33,400 patients yearly in the U.S. There is expected to be a substantially growing incidence worldwide, particularly in China, where the annual incidence is expected to grow to over 150,000 cases per year. While these two markets that are being tested are relatively small, it should be known that the potential use of the drug could extend to bigger indications, like breast cancer. The market possibilities for this drug are huge.
While ZIOP investors await the results, they can always look to the company's financial statements. In the latest SEC 10Q quarterly reports the company stated that, as of September 30, 2012, it had approximately $95.3 million in cash and cash equivalents. This was a drop when compared to $104.7 million in cash and cash equivalents as of December 31, 2011. ZIOP's management anticipates that the cash resources will be sufficient to fund operations into the second half of 2013.
ZIOP has very little revenue at this time. Research and development expenses for the nine months ended September 30, 2012 increased by $4.0 million from the nine months ended September 30, 2011. The total research expenses booked for the nine months was $48.4 million. General and administrative expenses for the nine months ended September 30, 2012 increased by $4.4 million from the nine months ended September 30, 2011. The total for the nine month period is $15.4 million.
ZIOP's stock price has had quite a ride over the last year. With a high of around $6.00 in July of 2012, shareholders have seen the stock consolidate around the $4.00-$4.70 level. As the company is to report findings in March 2013, the volatility of ZIOP's stock should pick up. The trial findings will be a major catalyst for the stock. Successful finds should drive the stock price higher, while any reported failure will have a profoundly negative impact on the stock.
Advanced Medical Isotope Corporation (ADMD.OB)
Our last company looking to reshape the healthcare industry is Advanced Medical Isotope Corporation. Like ZIOP this company is involved in the cancer treatment arena. ADMD also operates in the areas of heart disease and neurological disorders as well. ADMD engages in the production and distribution of medical isotopes and medical isotope technologies. This small company's goal is to provide essential medical isotopes that, until now, have not been practical or economical to produce.
A complete analysis of ADMD's products would take an article in itself. That being the case, let's focus on ADMD's potential game-changing technology known as brachytherapy and Radiogel. The company's unique take on brachytherapy is an advanced cancer treatment where radioactive seeds or medium are placed in or near a tumor. Once implanted these localized seeds give a high radiation dose to the tumor. While this technology is quite successful, it does have problems. The seeds' radioactivity can persists for weeks and will irradiate healthy surrounding tissues along with the cancer. This is where Radiogel comes into play.
Radiogel is best described as a water-based injectable biodegradable polymer that delivers yttrium-90 microspheres (seeds) directly into tumor tissues. The solution warms to body temperature upon injection and then polymerizes into a lattice that traps the radioactive microspheres in place. At this point is where the seeds go to work by irradiating cancer cells within the localized area. The key to Radiogel systems is that very little radiation escapes. Radiogel may also be administered transdermally or intraoperatively when treating solid tumors that cannot be removed safely by surgery. This means the treatment can be applied to a variety of conditions such as inoperable liver cancer, brain tumors, head and neck tumors, kidney tumors, and pancreatic cancer.
In February 2011 ADMD obtained the exclusive license to eight patents for the Radiogel technology. As part of the license, ADMD will have the right to make, have made, use, and sell the Radiogel system. The company's goal is to manufacture Radiogel in Washington State by building a new facility in Richland, Washington. As exciting as this technology is, it is still early in its development. On February 5, 2013, ADMD submitted data on Radiogel to the FDA and requested a collaborative meeting. This action would represent the initial step in the FDA's pre-market review process of the Radiogel.
Advancing this technology will be expensive. ADMD estimates this project could cost approximately $5,500,000; however, the company recognizes the costs could be as high as $8,000,000 before it gets to production. Luckily for ADMD, a source of funding was secured to help with costs. On October 28, 2010, the company received $1,215,000 net proceeds from the Department of Energy in the form of a grant. ADMD chose to recognize the grant money as income as it incurs costs associated with the project. The result of this accounting decision is that the company will classify the unused funding as Deferred Income on the balance sheet. Below is the breaking out that shows the current rates of income recognition:
Like all speculative biotech companies ADMD is blessed with ground breaking technology, while cursed with a lack of funding. In its last SEC filing the company stated that is anticipated a requirement of $1.5 million in funds over the next twelve months to maintain current operation activities.
The key to ADMD's future will be to see if it can secure the necessary funding to reach the finish line. ADMD is a high risk and possibly high reward investment. No options exist for this stock. Investors who are long this stock and believe in the company's vision will need to hold on tight. The nature of small cap biotechs leans toward a higher risk than established companies.
The three stocks mentioned above represent companies that truly have unique products to offer the medical community. Although each is in different stages of the commercialization and the FDA approval cycle, all should still be considered speculative in nature. If successful in their endeavors, investors holding their stock should be richly rewarded.