Seeking Alpha
Long/short equity, growth, research analyst, biotech
Profile| Send Message|
( followers)  

On the back of QE tapering fears and concerns regarding the health of the Chinese banking system, last Monday (6/24) saw the Dow Jones' 9th triple digit move in 10 trading sessions, a violent period of volatility not seen since Lehman et al set off the 2008 crash. The Dow Jones is down over 4% since its record high in May and the S&P is down a little under 5% from its all time high of 1,669 also hit in May. Both indexes fell below their 50 day moving averages which had been major levels of support during the last 6 month bull run. At the same time, the VIX Index, which measures volatility (and fear), has risen 48% in the 4 weeks since the 20th of May, right around when the major indexes hit their highs and just as Bernanke hinted at the end of QE3.

In times like this, when concerns and rumors about a major correction if not a bear market being around the corner are rife, investors tend to exit their riskier positions. Despite being somewhat immune to the macro situation, given how far removed many of these micro-cap, non-profitable, product-less companies are, the biotech industry, for all its hopes and dreams, is one of the market's riskiest areas - not far off junk-bond level. However, there are several biotech companies weathering the current storm well, which gives us a reason to believe that if the markets calm themselves down over the coming month(s), they could continue to strongly outperform the major indexes. This article briefly looks at one example that I believe is worth serious consideration.

Biodel Inc.

Biodel Inc. (NASDAQ:BIOD) is a tiny drug delivery focused company, with a market cap of only $76 million. BIOD's main drug candidate is BIOD-123; a ultra rapid-acting insulin for patients with Type 1 and 2 diabetes. Compared to the current standard of care, the speed with which BIOD-123 reaches peak insulin levels in the bloodstream is more closely aligned with the body's natural first phase release of insulin in response to the consumption of glucose. Current injectable insulin treatments can take 120 to 180 minutes to reach peak levels in the blood, which is far from ideal. This previously unavoidable delay can cause glucose levels to dangerously rise after eating a meal, potentially leading to hyperglycemia. Hypoglycemia is then an issue 3 hours after one's last meal, when glucose levels are too low. Major steps have been taken in recent years to reduce this time delay and there are some rapid-acting insulin products like Eli Lilly's (NYSE:LLY) Humalog on the market that take 60 to 90 minutes to reach peak levels.

However, clinical trials so far suggest that BIOD-123 may be delivered into the bloodstream faster than both rapid-acting insulin products and naturally produced insulin. If proven and approved, BIOD would have a product that would meet an unmet need to a disease that over 25 million Americans (8.3% of the population) have. Humalog generates $2 billion in revenue for Eli Lilly, offering a taste of BIOD-123's potential.

BIOD has a major catalyst in the form of top-line Phase II trial results for BIOD-123 due out sometime in Q3. BIOD-123 is being compared to Humalog in its Phase II trial having shown a higher level of tolerability and more attractive pharmacokinetic profile when compared to it in its Phase I trial. BIOD-123's absorption rate was also significantly better, with a 64% reduction in mean time to half maximal insulin concentration.

Investors should note this will be BIOD's second attempt at producing an ultra rapid-acting insulin. Their previous attempt, Linjecta, despite having positive Phase II results, received a surprise CRL in 2010, with injection site tolerability being one of the main issues. BIOD seem to have taken care of this issue as seen in the release of BIOD-123 Phase I results.

Technical Analysis


(Click to enlarge)

As far as technical analysis goes, BIOD stock is looking pretty range bound at the minute. After almost a 90% run from 8th April to 1st June, the stock consolidated around $4 before taking off again, setting a new 52 week high at $5.11. Bear in mind all this took place as the markets were selling off on QE tapering fears. The same day BIOD set a new 52 week high, the company announced an offering 4.5 million shares at $4.35 p/share immediately diluting the float and the price. As expected the stock sold off heavily the days following and is hovering right around its short term resistance level of $4. If it can consolidate here and move towards the recent offering price, riding out any further spikes in volatility, it stands a great chance of running hard into Q3. It has hit the $5 area twice in the last month, the first time it pulled back to consolidate and the second time it pulled back on a share offering.


(Click to enlarge)

Assuming no early leak of bad news or some catastrophic global black swan, BIOD stock should easily see $5 again over the next 3 months. If it can clear that on heavy volume, it has a major gap to fill towards $8, dating back to autumn 2011.

Bullish Indicators

A short float of 0.9% and a high number of open interest September calls compared to puts suggests the market is extremely bullish about BIOD-123's chances of positive Phase II results. With a market-cap of under $80 million, BIOD would be a steal for any company looking to capture some of the diabetes market. U.S. patents on Humalog expire this year, while BIOD have patents until 2026 in the U.S. on their ultra rapid-acting insulin formulations and until 2025 from the European Patent Office. A partnership between the companies if not a downright acquisition by Eli Lilly wouldn't be totally out of the question.

The Baker Brothers have a large institutional ownership of BIOD shares and a great track record in biotech to go with it. Felix and Julian Baker (Stanford and Harvard graduates respectively) had early positions in both Seattle Genetics (NASDAQ:SGEN) and Pharmasset (NASDAQ:PCYC), the latter of which was acquired by Gilead (NASDAQ:GILD). They currently own just under 30% of Acadia (NASDAQ:ACAD) among other biotechs. While I don't advocate investing like sheep and just following others with good records, it adds a certain level of bullishness to BIOD-123's prospects especially going into the 3 months preceding Phase II results.

Conclusion

While it looks like we could be in for a macro-fueled, shaky and uncertain summer, high yielding stocks are still out there to be bought. I believe BIOD is one such stock. It has a game changing catalyst in Q3, no cash concerns given the recent raise, a strong institutional ownership and a product that stands to generate billions in revenue, when compared to the current treatments, which its Phase I results suggests it outperforms.

As always, in searching and positioning themselves in potentially high return stocks, investors are exposed to high levels of risk. The possibility of a significant correction in the major indexes and the start of a bear market doesn't seem as farfetched as it did 2 months ago, before Bernanke mentioned tapering and it's worth considering how these conditions would affect micro-cap companies. This article is meant to offer a brief overview of what I believe is a very promising company, at a very cheap price.

Source: Biodel: A Biotech Company Weathering The Volatility