A speculative biotechnology stock can abruptly change directions with just one catalyst, but when there are several catalysts for an undervalued stock, this change of direction can be sudden and large. I believe there are three biotechnology stocks that finished the week in a strong way. Each company has a number of valuation-changing catalysts over the next several weeks that could lead to much heftier returns, and each reflected trading tendencies during the last week that make a position even more lucrative.
Countdown to Launch
Arena Pharmaceuticals (ARNA) lost 6% of its market cap during the last five sessions as investors impatiently await the launch of its obesity drug Belviq. During this period the stock has fallen beneath its trading range above $8.50 and below $10.00, with the stock currently priced at $8.00. One reason to be optimistic, despite these losses, is the catalysts that could arise in the next few weeks. With each passing day, the launch of Belviq draws near, and at that point the company will receive a $65 million payment from its partner Eisai, and will then begin to benefit from a large marketing campaign aimed at the millions of individuals who are obese.
The current problem with Arena doesn't have as much to do with fundamentals as with investor sentiment. The launch has taken much longer than investors prefer, and while the stock has always done well at maintaining a trading range, the stock appeared to have lost steam during the last week. While this loss in momentum was discouraging, the continued pressure on shares of Vivus (VVUS) for weak sales hasn't helped sentiment for Arena either, and has added to its downfall.
The next few weeks will be vital for Arena, with the final DEA classification being the most watched factor. If the classification is favorable, then the stock could see a nice bounce; and because Belviq will not have the marketing restrictions placed on Vivus, it has a much better chance at commercial success due to the high obesity rates in the U.S. We already know that the company has priced a 60 ct bottle of 10 mg tablets at $199.50, which compares favorably to the competition; and because side effects are mild (if any) it should see strong coverage with obesity being such an American epidemic. After months of frustration the stock has priced in disappointment, meaning with any positive news, and an impending launch, the stock could and should return back to its range, and possibly trade much higher. The company fundamentals look strong with a solid cash position and well structured debt obligations.
Validation of Growth and Development to Move Stock Higher
NeoStem Inc. (NBS) is an international biopharmaceutical company that operates in the cell therapy and cell manufacturing segments. Like Arena, it has traded in a flat range for the better part of the last six months, but fell below that range last week. Unlike Arena this is a clinical development company. But also unlike Arena, it is a company that already creates revenue with its manufacturing segment. In the last year the manufacturing segment grew by 100%, and it is likely that the stock will see gains with yet more growth from this segment.
Last week NeoStem announced two important developments: It announced that its IP has expanded into ischemia-induced congestive heart failure and that it passed the second safety review for its Phase II trial PRESERVE. Both are important, as the IP will lower the costs associated with treatment and the review implies that its cell therapy continues to be safe for patients. When the company next announces earnings we should listen for more information surrounding these two developments, and watch for nice returns in shares of the company.
In addition to earnings, an expanding IP, and the company passing the safety review, it should also be crossing the halfway point of the Phase II trial in the coming weeks. This will mean that the company is 12 months from data. When this occurs, combined with earnings, it is likely that we will see more excitement surrounding the company, making the fall below its recent trend short-lived. The real big news for NBS was an analyst research report from Brinson Patrick Securities as they initiated coverage with a market outperform rating and established a $6.00 price target for the company. Fundamentals have been improving each of the last several quarters and the revenue growth from PCT has kept the balance sheet strong.
Expanded Use to Reignite Excitement
Amarin Corporation PLC (AMRN) is the maker of Vascepa, a drug that treats very high blood levels of the lipid type known as triglycerides (TG). Since 2009 Amarin has been one of the better performing stocks, but has lost 40% of its worth during the last six months and has traded between $7.60 and $8.70 for the last three months. Currently, the stock is trading at $8.50 and, after months of negativity, there are many who believe it could see a push higher with several catalysts ahead.
The current market for Amarin, as its drug is currently approved, is believed to be somewhere between $1.0 and $1.2 billion. This is based on the indications for high TG, but not for those with moderately elevated TG levels. Amarin completed both "Marine" and "Anchor" clinical trials, and both easily exceeded expectations. The approval from the Marine study is for the treatment of high TGs, but Anchor is for moderately elevated levels. The company has already filed an NDA for Anchor, and if approved this could increase the size of the targeted market to 45 million, from its current five million. Looking ahead to the next quarter, the speculation and ultimate approval from this trial will be a major catalyst.
One positive consideration with Amarin is that it is not valued as a company with a drug that has a current market of $1 billion and a potential market of $5 billion. Its market cap is just $1.25 billion, thanks mostly to the sell-off during the last six months. However, with the stock finishing this week near the top of its three-month range, it is possible that we could begin to see buying pressure soon.
Amarin's stock has strong institutional support at 53% ownership and is trading slightly above the 50 day moving average.
Based on my analysis, I think the short-term upside is greater for NeoStem compared to the others, but that both Amarin and Arena have bright futures. All three companies have seen recent declines, and are nicely positioned to close the week with several catalysts ahead. With the NeoStem IP news and coverage initiation, Arena being considered by many to be undervalued with an impending launch of Belviq, and Amarin finishing the week at the top of its range with an exciting couple months ahead, we could see nice gains from each stock.
Disclosure: I am long NBS.