The biotechnology industry can be one of the most alluring spaces for investors to try and achieve outsized returns. Unfortunately, success stories aren't anywhere near as common as failures, and investors can be wiped out easily. The following 2 biotech stocks that are set up for failure were selected based on the following criteria:
- Upcoming Catalyst
- Market Capitalization Of At Least $1 Billion
- Average Trading Volume Of At Least 500,000 Shares
MannKind Corporation (MNKD)
MannKind Corporation is a development-stage biopharmaceutical company. The company is focused on the discovery, development and commercialization of therapeutic products for diseases such as diabetes and cancer. The company's flagship product is Afrezza, used in the treatment of diabetes.
Afrezza is an insulin therapy that is currently in late stage clinical investigation for the treatment of adult patients with Type 1 and Type 2 diabetes. It is a drug-device combination product, consisting of Afrezza inhalation powder pre-metered into single use dose cartridges and the Afrezza inhaler.
MannKind certainly has a long history in trying to get Afrezza approved and available for public use. The original Phase III trial results (Study 009) were revealed on September 16, 2008. The release claimed that Afrezza has shown a significant reduction in post-meal glucose fluctuations, the ability to achieve comparable levels of overall glucose control, lower fasting glucose levels, a lower risk of hypoglycemia, and less weight gain than is normally associated with other insulin treatments. However, despite these claims, the FDA rejected Afrezza with a complete response letter on January 19, 2011.
In the letter, the FDA requested that two new clinical trials be completed. One trial was requested to be completed in Type 1 diabetes and another trial in the more common Type II diabetes. The FDA wanted MannKind to prove that a second-generation version of its device, known as the Dreamboat, is equivalent to a first-generation inhaler known as MedTone. More specifically, the FDA wanted additional information about the performance characteristics, usage, handling, shipment and storage of the device, an update of safety information and information on proposed user training.
Well roughly two years later, MannKind is headed back to the FDA. This time its trials are called Affinity 1 and 2 and the company is hoping against hope that they will satisfy the FDA. The company expects to reveal the data at some point in August and ideally get FDA approval sometime in early 2014. I don't expect these trials to be successful. Back in 2008, the trials didn't show great improvement vs. the placebo and I don't expect that they will this time. Not only that but lets focus on the recent run-up in the share price.
As the chart below shows, investors have enjoyed outsized returns over the past year.
This large gap in stock price has pushed the company valuation to over $1 billion dollars.
Here are the facts about MannKind. On their last annual income statement, MannKind generated $35,000 in revenue. The company had a net operating loss of $147 million and a total net income loss of $1269 million. I'm not quite sure how that justifies a $1 billion market capitalization.
I truly feel the company is in for a hard fall later this year. And this time, the company won't be able to recover. With no other products to keep the company afloat, the data that will be released in August will determine its fate. And unfortunately, I don't see a good ending for shareholders.
Vivus Inc. (VVUS)
Vivus Inc. is a biopharmaceutical company engaged in the development and commercialization of therapeutic drugs for underserved markets, including obesity and related morbidities, such as sleep apnea and diabetes, and men's sexual health. The company's flagship product is Qysmia, used to treat obesity.
Vivus was actually the first company to get its diet drug approved. On July 17, 2012, Vivus received formal approval of its drug. The drug was approved for adults with a body mass index of 30 or greater or adults with a body mass index of 27 or greater with at least one weight related condition such as high blood pressure, type 2 diabetes, or high cholesterol.
Unfortunately, Vivus was unable to convince the European Union's health agency that Vivus was safe. The Committee for Medicinal Products raised concerns about the cardiovascular safety of the drug, saying it would need more data before it could approval.
In addition to the Europe setback, the company simply hasn't been able to generate enough sales, which most people have been surprised by. Part of the problem is the company's lack of marketing, through no fault of their own. Vivus was limited to mail order drug operations, mostly due to the fact that the FDA, despite approval, had some serious safety concerns. Currently, Vivus is trying to get the FDA to allow it sell Qsymia in pharmacies such as CVS.
As the chart below shows, the stock has had a terrible performance over the past year. It has fallen from a high of $31.21 to a low of $9.86 and currently trades at $11.65.
Another problem for Vivus is the fundamentals, which are just getting out of hand. The company only generated $2 million in sales, despite being the only one at the time with a product that had been launched. Additionally, during 2012, the company suffered a net operating loss of $139 million. It will be a long road to profitability for Vivus and investors need to consider that before they invest here.
Lastly, Vivus now faces stiff competition from both Arena Pharmaceuticals (ARNA) and Orexigen (OREX). Arena is much further along than Orexigen and won't face the same marketing restrictions that Vivus did. Orexigen still needs to receive FDA approval for its drug, Contrave, as it is currently being evaluated for cadiovasuclar risk.
I would urge investors to exercise caution with Vivus. The company has another earnings report due out on May 6, 2013, and I would expect extreme volatility going into the event and certainly after the results are announced.