December is here and the New Year is right around the corner. This is a good month to look for bargains that have potential catalysts coming in the New Year or have had some negative news that make the price right for a long position. Even if many investors decide to realize some profits from a market that has performed quite admirably in 2013, these three stocks could soar on positive results from upcoming catalysts. The price of each of these is right, but let's consider the potential of each, especially for the coming year.
Chelsea Therapeutics (NASDAQ:CHTP) - $3.64 a share (December 13th)
Chelsea Therapeutics has had a tough journey trying to get its drug Northera, for the treatment of symptomatic neurogenic hypertension symptoms related to Parkinson's disease, approved. Despite being granted Orphan Drug status by the FDA way back in 2007 and given priority review along with FDA panel approval recommendation in early 2012, Northera was not granted approval. According to the FDA, the data was deemed to be inadequate and did not provide sufficient evidence to prove the efficacy of the drug. Shares plunged 40% after the news broke and investors have been left wondering if Northera was going to end up being a bust.
In February, the FDA determined that Chelsea's data from an earlier study (called 306B) could be used and went as far as saying that the data did show compelling evidence of short-term clinical benefit. The long-term benefit of Northera still remains a point of contention and the same Cardiovascular and Renal Products Committee of the FDA will be the one again reviewing the drug. A post-approval study could be another requirement for proving durability or long-term benefit but dialogue looks positive enough to look for or anticipate the potential of successful results on January 14th of the upcoming year.
The potential revenue for Northera has been estimated to be between $300-$375 million per year for the first five years of the product launch. This positive outlook could easily double the market capitalization currently around $270 million. Another positive for investors is the 9.4% stake in Chelsea owned by one of the top biotechnology funds in the world, the Baker Brothers. This includes a 1 million share purchase that was initiated during this quarter effectively increasing their stake in Chelsea. The only hiccup in Northera's approval process could be a post-approval study that could be costly and run into 2015 drawing down Chelsea's already strained cash position currently at just about $20 million. This cash position will be more than just a minor consideration if Northera receives even more bad news from the FDA.
Chelsea currently has no revenue and that makes Northera's approval more of a necessity for the health of the company and investors alike. The only other product moving along in clinical trials is CH-4051 for the treatment of rheumatoid arthritis. Last quarter's cash burn of just over $3.8 million makes Chelsea's cash position of about $20.9 million even more perilous. On a good note, Chelsea has no debt and the stock is pretty solid with only about a 6.6% short interest and a healthy 336% 52-week gain with plenty of investor interest. All things considered, the FDA's tenor, the Baker Brother's position and Orphan Drug status make Chelsea Therapeutics a little too difficult to ignore.
Neurocrine Biosciences (NBIX) - $ 9.28 a share (December 13th)
There have been many in the investment community that think Neurocrine's shares have become oversold. After all, Neurocrine does boast a 52-week high of $16.74 a share and even a 200-day moving average of $12.23. According to Zacks Equity Research, Neurocrine's shares have an RSI value of 26.0 and Zacks has even initiated a "#2 buy" on the stock because of this RSI value. Neurocrine shares are dipping down close to $9 a share and even close enough to its 52-week low of $7.33 and yet the company is no stranger to success.
These past two years Neurocrine has been profitable with a nice $37.6 million profit on revenues of $77.4 million in 2011 and a respectable $5 million profit last year. Neurocrine is free of debt and does have about $157 million in cash to burn for future endeavors. Third quarter 2013 results were essentially the same or better than anticipated with a loss of $11.1 million which was less than expected. Thanks to lower than expected expenditures in 2013 management estimates less of a loss at the end of the current year and a better than anticipated cash position at the end of the year. Payments from collaborations with AbbVie (NYSE:ABBV) and Boehringer Ingelheim did come to an end in 2012, but that was not a surprise and was anticipated by Neurocrine's management. That is a big reason for the declining profit in 2012.
Revenues for the last three quarters have been only about $730,000 while Neurocrine's cash burn has been between $11.1-12.24 million per quarter during this span. This might come as a shock when compared to results from 2011 and 2012, but thanks to such a nice cash position and strategic collaborations, Neurocrine is pretty sound financially. Neurocrine also has a pretty productive pipeline of its own with drugs currently in all phases of clinical development and coupled with this favorable cash position and expenditures pretty much in check its shares have plenty of upside.
Neurocrine specializes in neurological and endocrine diseases and disorders and has two phase III trials conducted by Abbott (NYSE:ABT) going for drug candidate Elagolix for treating moderate to severe endometriosis-associated pain in women. The second trial of about 788 participants was initiated in August of 2013 and the first trial with 875 participants has top-line results expected in the later half of 2014. Elagolix is also in a phase 2b trial conducted by AbbVie for assessing uterine blood loss due to uterine fibroids. Neurocrine also has a very promising VMAT-2 program with VMAT inhibitor NBI-98854 in two trials, KINECT-1 for treating patients with schizophrenia or schizoaffective disorders and KINECT-2 for treating patients with even more disorders including mood, bi-polar and gastrointestinal disorders on top of others like schizophrenia. Data for the KINECT-1, 50 milligram dose levels, will be out sometime before the end of the first week of January as well as data from the KINECT-2 trials which should be released shortly thereafter.
The effectiveness of NBI-98854 in 100 milligram dose levels has already been documented and positive results in early January should act as a catalyst for Neurocrine's shares.
Avanir Pharmaceuticals (AVNR) - $2.84 a share (December 13th)
Avanir's shares took a plunge after reporting fourth quarter earnings results that were far from spectacular. Despite almost $22 million in revenue with most of it coming from Nuedexta sales, Avanir experienced a net loss of just over $15 million which was disappointing to investors. Avanir had a 50% increase in operating expenses from a year ago even though revenue and Nuedexta's performance seemed to be in line with expectations. Avanir's release of fourth quarter results was compounded by a downgrade by Mizuho which downgraded Avanir's shares from buy to neutral. The 35% drop in shares last week alone seems like a little bit of overreacting from investors for a company that still has a drug that is approved and bringing in revenue.
Investors likely were impatient with Avanir because Nuedexta sales have been pretty positive and yet profit has been elusive. Exacerbating this negative vibe is Avanir's cash position of about $55 million that is not going to last through 2014 at the current burn rate of around $10 million a quarter. Additionally, research and development expenses shot up to $27.9 million from only $6.1 million a year ago while sales and marketing expenses increased over 350% from a year ago and even general and administrative costs rose over 50% year over year. What is hard for many investors to stomach is last quarter's loss of just under $35 million that represented an increase of over 210% in one quarter alone. Additionally, the company does have just over $29 million in debt in addition to the tenuous cash position already noted. With $27.9 million in research and development costs, one might surmise that the pipeline is full of potential.
Avanir does have more in the pipeline in addition to royalties from Abreva and a marketing deal just signed with Merck (NYSE:MRK) to help promote Januvia abroad. Nuedexta has been approved for the treatment of pseudobulbar affect (PBA) and is the first and only FDA-approved medication for this indication. Abreva is outlicensed and approved for the treatment of HSV1. Avanir's current lead candidate is AVP-923 which has four different trials with a phase III trial for treating diabetic peripheral neuropathic pain and three other trials in phase II for treating other indications of pain and agitation in Alzheimer's disease, Parkinson's disease and multiple sclerosis. Another drug candidate, AVP-825, is in phase III trials for the treatment of migraines which should represent a pretty lucrative marketplace. Avanir also has AVP-786 for various indications and more investigator led trials with AVP-923 for the treatment of depression, autism and bulbar function. There is plenty of potential with this pipeline and this could make Avanir's current market cap of just over $412 million a bargain.
The recent Avanir share price drop presents a good opportunity for initiating a long position. The cash position might present another bump in the road, but all things considered the current tag is quite nice.
There is no telling if any of these three stocks will offer gains that are guaranteed and despite any optimism there is always great risk when investing in biotechnology issues. They each seem to present some potential catalysts in 2014 and offer good value for a December entry point. Neurocrine and Avanir have experienced success and Chelsea seems to have the potential for good news coming right around the corner. Chelsea might offer the greatest short-term reward with more risk, but Neurocrine and Avanir look better for the long haul.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NBIX over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.