Seeking Alpha
Value, research analyst, author, long only
Profile| Send Message|
( followers)  

(Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.)

Back on February 25, I wrote an article that looked at five small-cap, somewhat risky, biotechnology stocks that had the potential to see gains with upcoming catalysts. After three months, all are in positive territory and four have significantly outperformed the NASDAQ. Today, I am revisiting this one article-to show retail investors how much can change within this space in just a few months' time.

Still Awaiting The Big Catalyst

NewLink Genetics (NASDAQ:NLNK) is involved with the discovery, development, and commercialization of immunotherapeutic products to improve cancer treatment options. Since my last article, shares are higher by more than 70% in anticipation of the company's interim Phase III randomized data for its HyperAcute Pancreas product.

HyperAcute is a platform that stimulates the immune system by targeting tumors with human cancer cells, which then causes the immune system to respond. The company combines this platform with cancer agents, and is in late-stage studies to treat melanoma and pancreatic cancer. However, all of the company's late-stage studies are using this same approach.

If NewLink can prove that its approach can treat pancreatic cancer, it would go a long way in validating the potential of HyperAcute in treating other cancers. During its previous Phase II study of 70 patients with pancreatic cancer, almost 96% of those treated with HyperAcute lived one-year.

Pancreatic cancer is very difficult to treat, with just 20% of patients surviving one year with the disease, which speaks volumes to the impressive results from the Phase II study. The big question is whether or not NewLink can produce equally impressive results in its current test of more than 700 patients. In this study, NewLink is comparing two different groups: those treated with HyperAcute and those who are not.

In the last article, I predicted a quick 30-40% move higher, but turns out there was even more upside than I estimated. Now, it will be interesting to see the outcome of this study, which was scheduled to be released in Q2 2013, but is yet to be seen. With peak sales potential of $500 million (Pancreas), NewLink could rally significantly higher with strong results, as it's currently trading at just one time the peak sales of its HyperAcute Pancreas product.

With data right around the corner, I'd watch the stock closely.

Upcoming Data From Two Studies

OncoSec Medical (OTCQB:ONCS) is a small biotech company, one that has developed a platform called the OncoSec Medical System (OMS), utilizing the company's proprietary electroporation technology. Since my previous article, it has rallied 25% in anticipation of upcoming data.

The most exciting data is surrounding the company's ongoing Phase II trial in the treatment of melanoma. In an update from this trial, we saw a local response of 45%, which is far better than Vical's 19% with Allovectin for treating the same disease.

The company is using an immunotherapy called IL-12, which is a very strong agent that produces the best of results, but leads to very unpleasant side-effects. OncoSec is using IL-12 because a smaller dosage can be utilized (limiting side effects), but uptake in increased (improving potency and efficacy) while the tumor is targeted through electroporation via the OMS System.

Personally, I am most excited about its treatment on Merkel cell carcinoma (MCC). This is an Orphan indication, a rare disease with no treatment alternatives. It is being tested in a Phase II trial, and with a 53% objective response in its Phase 1 trial, there is reason to be optimistic.

With two ongoing clinical studies, my outlook remains unchanged, as I believe it is still a stock worth watching. Not only should we see clinical data for melanoma within the next month but data for MCC should also be presented by the end of the year. So far, we have seen no negative data from either study, making it an interesting stock for the remainder of this year.

Minimum Potential Left In This High Flyer

Raptor Pharmaceuticals (NASDAQ:RPTP) has rallied 125% since my last article. I predicted an FDA approval of its drug Procysbi, for the management of nephropathic cystinosis, which occurred on April 30. But the company was also granted seven-years of Orphan exclusivity, which pushed shares higher by another 25%.

The problem with Raptor is that its drug, Procysbi, only has peak sales potential of $100 million. When I wrote the previous article, I was basing the upside on a company that was near approval with a market cap of just $262 million.

Today, Raptor is value at $585 million, meaning it's trading at 6 times peak sales potential. Raptor is blowing through about $10 million a quarter, and is yet to spend money on marketing and advertising for its new drug.

With these things considered, Raptor is no longer a speculative biotech, but is now a company with an approved product in the launch stage. Due to its spending, I don't think it will earn profitability and I think 6 times peak sales potential is way too expensive for a company with minimal upside.

Bottom line: I think all upside is priced into the stock, and I no longer believe that catalysts are present.

Two Strikes Are More Than Enough

ArQule (NASDAQ:ARQL) has been a bit disappointing, producing gains of just 8% since my last article. In the last piece, ArQule was coming off a failed Phase III study of its lung cancer drug, tivantibib, but investors were optimistic because this trial included various "Met" expressions.

Bulls believed that its Phase II study on colorectal cancer, using the same drug, could show more promise due to only high Met expressions being enrolled. These bulls believed that the different levels were in some way affecting the effects of the drug. The company was expected to present data in March/April, and my theory on it producing upside was based on expectations being so low, and the possibility that bulls were right.

On June 1, the company announced final data from this trial, and the stock has since fallen 10%. The primary endpoint was not met, but data analyses showed a one month advantage for the study's "median" progression free survival. Moreover, "median" overall survival increased almost three months in the treatment arm.

My problem is that this just feels like data mining to me. The company had its first chance with lung cancer, and failed. Then, had a second change in colorectal cancer, and did not meet the primary endpoint. Now, the company is sorting through data to sell something to investors. Surprisingly, some investors are still buying it!

Personally, I don't like it! And in a space that is full of promise, I typically only give one shot to biotech companies.

Massive Upside, But Large Risk As Well

Zogenix (NASDAQ:ZGNX) is a clinical stage company developing therapies for the treatment of central nervous system disorders and pain. The company's lead product is an extended-release hydrocodone drug called Zohydro. My first article followed a 50% loss in the company's valuation, as the FDA panel voted against Zohydro due to it being a stronger version of the abused drug hydrocodone.

Upside in shares of Zogenix was a bit of a long shot from the start, as the FDA rarely ignores the advice of the panel. But just two days after my first article was published, the FDA extended its PDUFA date for the drug. The stock surged 44% higher on this news, as the FDA did not note any problems with the filing of the drug.

Zogenix remains the quintessential high risk, high reward biotech play. But in my opinion, the risk might still be worth the reward. The stock is still trading lower by almost 40% over the last year, and the fact that the FDA did extend its decision date might very well be a good sign that it is considering Zohydro for approval.

With a market cap of just $165 million, there is limited downside on a denied approval. The company has other products in its pipeline and approved products. Thus, the entire valuation is not tied directly to Zohydro, but if approved, it could provide real competition to the most prescribed drug in the U.S. (hydrocodone).

Therefore, I think a very, very, very small position might be worth the risk.

Final Thoughts

In the first article, I tied all of these selections to upcoming catalysts, and believed that each of these stocks were presenting upside. After three months, we see that catalysts from just one of these companies (Raptor) have already materialized. Yet, all were expected to present data. NewLink presented data on its Phase II lung cancer study, but its biggest catalyst is still yet to be seen.

As you can see, my outlook has changed for several of these companies. In biotechnology, I feel that it is imperative to continuously reassess your positions and change your outlook based on the changes in valuation, and to always compare the value of a stock to the potential of its lead product.

In biotechnology, the outlook of a stock can change in a matter of months, and in this piece, my goal is to show that in just three months, the valuation and catalysts for a company can remarkably change. This is a space that is driven by speculation, as every single stock moving event is only to aid in the prediction of whether or not a drug will eventually earn an FDA approval.

With that said, take this article and let it serve as a reminder of how quickly the landscape does change within this space.

Source: 5 Speculative Biotech Stocks With Catalysts Pending: Revisited