Biotechnology stocks are some of the most volatile investments around. They are hard to analyze because unlike almost all other stocks, the fundamentals aren't typically as important as the potential. And the potential is usually based on upcoming catalysts that the company will face. These catalysts vary but typically include FDA decisions, drug trial results, and advisory panel decisions. The catalysts can send a particular stock soaring to new highs or back to where it began. Understandably, investors typically get quite nervous around these decisions as they are extremely important in determining the company's future. I screened for the two companies below based upon the following criteria:
- Upcoming catalyst within 60 days
- Average equity volume of at least 400,000 shares per day to provide investors with liquidity
- Market Capitalization of at least $150 million
Biotech Company #1 - Sarepta Therapeutics (SRPT)
Profile: Sarepta Therapeutics is a biotechnology company focused on the discovery and development of ribonucleic acid (RNA)-based therapeutics for the treatment of rare and infectious diseases. Its product candidates include Eteplirsen, AVI-6002, AVI-6003, and AVI-7100. The company is primarily focused on advancing the development of its Duchenne muscular dystrophy drug candidates, including its lead product candidate, Eteplirsen.
Technical: As the 1 year chart below shows, Sarepta has been one of the biggest winners over that time period.
Sarepta saw a 52 week low last year of $2.58 and got as high as $45.00. Currently, the stock trades at $30.21. Additionally, the stock appears to be in a slight uptrend as the stock has moved from roughly $22 per share towards the end of December to its new price of just over $30 per share.
Fundamentals: Sarepta reported its fourth quarter earnings and 2012 year end report on March 7, 2013. The company reported some strong numbers. For the fourth quarter 2012, Sarepta reported an operating loss of $10.4 million, compared to an operating loss of $9.0 million for the same period in 2011. However, this was mostly due to a loss of a government contract that cost the company $6.3 million in revenues. Excluding that, the company managed to decrease corporate operating expenses by $4.9 million. When a developmental biotechnology company can manage to decrease operating expenses in the middle of expensive trials and FDA developments, management should be commended.
Revenues for the fourth quarter 2012 came in at $7.3 million. This was down by $6.3 million from the same period a year ago. This was due to the loss of the Ebola Marburg U.S. government contract that cost the company $6.3 million. This was not due to any fault of Sarepta but rather, because of a lack of U.S. government funding.
For the full year 2012, Sarepta's operating loss was $29.7 million, compared to 2011 which saw an operating loss of $35.9 million.
Phase II Results: Sarepta's flagship product is Eteplirsen, used to treat Duchenne Muscular Dystrophy. This is a type of muscular dystrophy that results in muscle degeneration and eventually death for those unfortunate enough to be diagnosed with this terminal illness.
On July 24, 2012, Sarepta reported that it achieved clinical benefit with Eteplirsen after 36 weeks in its Phase II study. The primary outcome was a 6-minute walk test. The study showed that the patients treated with Eteplirsen showed a 69.4 meter benefit over patients who received a placebo.
Catalyst: Eteplirsen is likely a $500 million market opportunity in the U.S. alone, which has only about 2,000 patients with the missing exon-51 gene. This equates to roughly 6% of the Duchenne Muscular Dystrophy market. It is thought that Sarepta's technology could be used to treat other forms of the disease, perhaps reaching at least 30,000 patients. Should that occur, that would result in billions of dollars of revenue generation for Sarepta.
Sarepta is meeting with the FDA to determine whether Eteplirsen will be granted accelerated approval. This is a game changing event for the company because if the FDA does grant accelerated approval, the company will be in the driver's seat to get its product out to market first. This will put it ahead of GlaxoSmithKline's (GSK) competing product, Drisapersen.
Sarepta has confirmed that the meeting with the FDA will be completed by the end of March. Additionally, Sarepta has confirmed that it will make an announcement about the results no later than 30 days after the FDA meeting is finished. So investors can expect this announcement by April 30 at the latest. For the option traders reading this article, this means that results could come either during the March expiration, April expiration, or May expiration periods. Be cautious!!
Risks: There are really three big risks facing Sarepta and its investors. The biggest risk is that the company will not be granted accelerated approval by the FDA. Currently, the May 30 strike option straddle is priced for $13.50. So investors can expect at least a $13.50 move either to the upside or downside after the FDA's decision. A second risk is competition from GlaxoSmithKline. GSK has a competing product called Drisapersen. However, this product has a great deal of safety issues including tolerability and toxicity. Again, this could impact the FDA's decision on Eteplirsen but it may have no impact at all. The important thing is that Sarepta has the opportunity to be first to market if granted accelerated approval. If not, GSK may have the upper hand. Lastly, a third risk is dilution. As the company is still in development stage and is burning through cash quickly, the company may need to do an additional secondary offering. This may dilute the existing investors causing their ownership stake to decrease.
Biotech Company #2 - Cellceutix Corporation (OTC:CTIX)
Profile: Cellceutix is an early stage, development biotechnology company focused on discovering small molecule drugs for a variety of diseases including psoriasis and cancer. The company has two notable products called Kevetrin and Prurisol. Kevetrin is being tested to treat advanced solid cancerous tumors and Prurisol is being tested to treat psoriasis.
Technical: Although Cellceutix trades on the bulletin boards, the stock has an average daily volume of 479,000 shares. Additionally, the stock typically is only a penny or two side on the bid/ask spread. So the stock offers investors plenty of liquidity as well as the ability to enter and exit without having to give up too much on the bid/ask spread.
As the 1 year chart below shows, Cellceutix has rewarded its investors with outsized returns over the past year.
Over the past 52 weeks, the stock has seen a low of $0.45 per share and traded as high as $2.47 per share. Currently, the stock trades at $1.73. The stock has also been ticking up recently. The stock traded just under $1.50 per share on March 5. With significant news just around the corner, this may be a compelling entry point for new investors.
Fundamentals: The market capitalization of Cellceutix currently sits at roughly $165 million. With biotechnology companies this small, the future is typically based on potential and catalysts rather than current fundamentals. Nevertheless, it is important for investors to understand the current financial state of a company to address concerns like future dilution, which happens more often than not in the land of microcap biotechnology companies.
Cellceutix completed its 10-Q for the period ended December 31, 2012 on February 13 of this year. The company reported that its cash position had increased to roughly $223,000. This was an increase of almost $200,000 from the June 30 financial report.
Cellceutix signed a deal with Aspire Capital to raise $10 million through a series of equity offerings. Cellceutix has complete control of when the shares are issued and they are retroactive. This means that Cellceutix, not Aspire Capital, will get to see where the share price closed before the shares are issued. In a perfect world, this will allow the company to issue shares at favorable prices and reduce dilution for its current investors. Its great to see a young, early stage biotechnology company complete such a favorable financing deal. Typically it is the financier, not the biotech company, that has control.
Primarily, this deal was signed to help pay down the company's liabilities which stood at roughly $8.2 million on the company's latest balance sheet. Not only will the $10 million deal allow the company to pay down these debts but it will also allow the company to fund future cohorts and trials.
Upcoming Catalyst: There are two main catalysts that will be taking place within the next 30 to 90 days. The first catalyst, and main one, will be a company update on the Phase I trials for Kevetrin. Kevetrin has been shown to be effective against several types of cancer in pre-clinical studies on mice. The company expects to announce its update in mid-March, although this could extend into April if necessary.
A second catalyst will be an update from Prurisol regarding its Phase II/III trials. The company has already partnered up with Dr. Reddy Laboratories on this, which adds a lot of credibility to its process.
Both of these catalysts have the potential to send the stock soaring, given the potential of the treatments and the micro-cap market capitalization that the company currently has.
Competition: The competition for Cellceutix is intense. The three main competitors are Pfizer (PFE), Sanofi-Aventis (SNY), and Merck (MRK). Very soon, Merck and Sanofi-Aventis will begin their FDA Phase 1 trials for their compounds to activate the p53 gene. Both companies will be closely monitoring the safety profiles of the compounds in order to determine future steps. Although most investors would think both of the previously mentioned competitors would be ahead in the "p53 race," the fact is that Cellceutix has the current lead. While Cellceutix has already started Phase I and is on the verge of a major update, Merck and Sanofi have yet to even start Phase I.
Risks: In addition the competitors, there are some big risks facing Cellceutix. First, the company is extremely early in the process. It is unclear how many more financing deals the company will need to ink in order to keep the company running. Additionally, because the company trades on the OTC, the stock is prone to manipulation. Back in late December of last year, the stock had a sudden surge where it ran from $1.40 per share to a high of $2.47. As soon as the stock hit its high, it immediately ran back below $1.80 per share. It appeared that this was a coordinated bear raid. Investors need to be cautious about this and understand the inherent volatility that comes with trading bulletin board biotechnology stocks.
Conclusion: Biotechnology stocks can be some of the most promising and exciting investments around. The potential for investors to make money and dying patients to receive the treatment they need is a win-win for all. But it's also important to understand the volatility inherent in these investments, especially around catalysts. I believe Sarepta Therapeutics and Cellceutix Corporation will both be long-term winners, and hopefully that up move starts with their upcoming catalysts.