Biotechnology stocks share one thing in common, and that is an important event/announcement/catalyst than can propel shares to all-time highs or sink them to all-time lows. Investors understand this risk but expect to be rewarded in the case of good news. The next few months are going to be especially busy with two biotechnology stocks facing important catalysts. The following two stocks were chosen based on the following criteria:
- Upcoming catalyst in the next 60 days.
- Must be facing either a Phase III trial release or a meeting with FDA to discuss accelerated approval. These events typically cause the largest move in the share price.
- Average equity volume of at least 1 million shares per day to give investors plenty of liquidity.
- A market capitalization of at least $400 million.
Sarepta Therapeutics (SRPT)
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. The company's focus at this point is to develop, market, and commercialize its Duchenne muscular dystrophy drug candidates, with the focus being on its flagship product, Eteplirsen.
Sarepta has already released its Phase II trial results in the summer of 2012. The company achieved clinically meaningful results which caused the stock to soar. Before the announcement, the stock had been trading as low as $2.58. Since then, the stock has soared to as high as $45.00 and currently trades at $33.44.
The company expects to meet with the FDA to discuss the potential for accelerated approval of its lead drug, Eteplirsen, within the next few weeks. The company also expects to announce the results by the end of April, setting up a showdown between longs and shorts.
We can use the prices of the May options to try and gauge where the stock might go. Currently the May 33/34 strangle is priced at $14.80 (this includes the May 33 Put and the May 34 Call). So investors are essentially expecting a stock move of 44%. That is calculated by dividing the option strangle by the current stock price. So in a word, this announcement will cause extreme volatility in the underlying price so investors should be both excited but also exercise extreme caution.
It's also important to note that Sarepta is more than a one trick pony and the company does have strong fundamentals. Based on its last quarterly release on March 7, 2013, the company reported revenues of $7.3 million. The company was also able to decrease its operating expenses by roughly $4.9 million. This is extremely important since a developmental biotechnology company must spend its cash wisely or else face a secondary offering which investors never want to see. The fact that the company is generating millions of dollars in revenue and reducing its expenses should give investors hope, even if the accelerated approval decision doesn't go as planned.
As a start-up biotechnology company, there are several risks facing investors. As already mentioned, if the company doesn't get accelerated approval, it may face the need to do a secondary offering in the future to keep the company going until it can complete its Phase III trial for Eteplirsen. These trials are long and expensive so investors should be aware. A second risk is from competition from GlaxoSmithKline (GSK). This company has a competing product called Drisapersen. However, this isn't as big of a concern now as it was several months ago. This drug has had several problems including reports of poor tolerability and high levels of toxicity. This has caused delays and potentially given the opportunity for Sarepta to be the first one to sell its product for muscular dystrophy.
Ziopharm Oncology, Inc. (ZIOP)
Ziopharm Oncology is a biopharmaceutical company that focuses on the discovery and development of new cancer therapies. Ziopharm is applying its technologies in cancer research to develop therapeutics for patients. The company's portfolio consists of five clinical-stage product candidates as well as multiple research-stage candidates. The company's flagship product is Palifosfamide, used to treat metastatic soft tissue sarcoma.
The company initially reported positive Phase II trial results in 2009 and, as the chart below shows, the stock appreciated significantly at that point.
One unfortunate thing for investors has been that the stock has remained fairly stagnant since the exciting results in 2009. However, that should change with the upcoming Phase III trial results.
The company will release its Phase III trial results by the end of March. This announcement will have huge implications for the company. As we did with Sarepta Therapeutics, we can use the option markets to help us predict how big of a move might be coming Ziopharm's way. With the stock trading at $5.43, we can use the price of the April 5/6 strangle to figure out what percentage move may be coming. Currently, the April 5/6 strangle is priced $2.25. If we divide that by the current stock price, that translates to a 41% move. This event is extremely important to the company and its future likely depends on it.
Fundamentally speaking, the company is not as advanced as some other biotechnology companies. The company's last financial statement was filed on November 8, 2012. Although the company is sitting on plenty of cash at roughly $95 million, it did generate a large loss from operations than it did in 2011. The loss for the quarter ended September 30, 2012 was $17.8 million compared to a loss during the same period in 2011 of only $802,000. That's obviously not what investors want to see, but they're hoping that this drug will pass the primary endpoint of its Phase III trials, and then the company and investors can turn their attention to getting FDA approval.
A couple risks do face Ziopharm. The biggest one is, of course, that the Phase III results are not as expected. Should this happen, it is likely that the stock would fall at least below $3.00 per share and the company would most likely need to do a secondary offering and decide what its next course of action will be. A second risk is from competition from Threshold Pharmaceuticals (THLD). Threshold has its own drug that it's working on to treat metastatic soft tissue sarcoma. There is another article titled "A Biotech Winner For 2013" that details all the strengths, financial position, and timetable for Threshold. The company is partnered with Merck KGaA (MKGAF.PK) and has an extremely deep pipeline which may help fund the company going forward.
It's extremely exciting and interesting to follow these all important catalysts for biotechnology companies. They can send a stock soaring or cause a massive collapse. Sarepta and Ziopharm will both have their day within the next couple of months and investors will be crying tears of joy or tears of sadness soon enough. Both companies have demonstrated their capabilities to get to this point, but the question is will it be enough? We will soon find out.