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

Some biotechs have followings that would make the Beatles blush. Unlike popular musical acts, however, throngs of adoring fans don't necessarily translate into mounds of cash in the whacky biotech world. In fact, some of the most popular stocks in the sector have languished this year, while complete unknowns have stomped the broader market in terms of year to date performance.

So with this theme in mind, here is a look at three biotechs with varying degrees of retail investor popularity, and their respective chances of doubling in share price next year.

Arena Pharmaceuticals (NASDAQ:ARNA) is perhaps one of the most followed healthcare stocks of all time, and for good reason. With its flagship obesity medication Belviq hitting the U.S. market this year, retail investors appear to believe they've found a real life version of The Giving Tree.

But instead of giving investors apples, houses, and boats for Christmas this year, Arena stock was more akin to something emanating out of The Nightmare Before Christmas. Specifically, Arena shares are down nearly 40% year to date, and have only recently shown any signs of finding a bottom.

The problem is that Belviq sales haven't been strong enough yet to assuage the Biotech Gods, who are responsible for assigning, among other things, market caps. While the Biotech Gods have seen fit to hand out a plethora of multi-billion dollar market caps to Arena's peers in the sector, they are clearly displeased with the course Belviq is tracking so far.

What does the Street think? It's no secret that the Street thinks Belviq is a loser and Arena is destined to become a dilution machine. As evidence of this sentiment, I proffer to readers Arena's gargantuan short interest that exceeds 30%, and the anemic institutional interest that stands at less than 50% of outstanding shares. Moreover, short interest has actually been climbing in recent weeks. Simply put, professional investors are betting against Arena.

What's my take? I think the Street has been drinking too much egg nog on this one. Arena certainly had a rough year, and that was fairly predictable for logistical reasons. I pointed this out time and again on Seeking Alpha. The tide is starting to turn for Arena, however. Arena and its marketing partner Eisai are ramping up marketing efforts for the drug in the U.S., and Belviq stands a good chance of becoming commercially available in a wide swath of countries next year. In short, I believe Arena does in fact double in 2014.

Inovio Pharmaceuticals (NASDAQ:INO) is carrying the hopes of an entire field on its back next year, i.e., DNA-based vaccines. With the company's lead vaccine candidate VGX-3100 for cervical dysplasia expected to report topline results by mid-2014, investors will undoubtedly be focused on this seminal event. In a nutshell, DNA-based vaccines have long been hailed as game-changers in the vaccine space, but their clinical performance has been nothing short of a disaster so far. Simply put, they have repeatedly failed to provide better immune responses than traditional protein-based vaccines (see my article hyperlinked below).

As I've mentioned elsewhere, the issue is that DNA-based vaccines are notoriously difficult to get into cells in the first place. Inovio's scientific team thinks they've solved this riddle via their proprietary electroporation technique, and have basically built an entire platform around it. So it's safe to say that if the company's lead clinical candidate fails, there will be immense doubt surrounding the remainder of its pipeline, making Inovio a prototypical high risk, high reward biotech.

So will Inovio double in 2014? Despite my doubts about VGX-3100's ability to succeed where a mountain of others have failed, I still think Inovio will double from current levels. After consulting the Biotech Gods about Inovio, they informed me that the short interest has finally started to reverse course of late, and institutions have more than doubled their stake in the company recently. Moreover, insiders have been buying decently-sized chunks of shares lately. Overall, these three signs would seem to indicate that Inovio is shaping up to be a strong bio run-up candidate next year.

As investors in the sector are fully aware, run-ups ahead of a pending clinical catalyst can dramatically affect share price, and the falling short interest is good sign this phenomenon will indeed occur with Inovio. Put more succinctly, don't fight the tape on this one.

Nektar Therapeutics (NASDAQ:NKTR) is proof positive that the Biotech Gods have gone crazy. The company's clinical pipeline and list of big pharma partners are an embarrassment of riches. Despite having a whopping eight late-stage candidates, Nektar's market cap is a paltry $1.3 billion at the time of writing this article. I can name at least a dozen other developmental stage biotechs with only a single late-stage candidate with markedly higher market caps.

And unlike the companies listed above, Nektar barely generates a whisper on social media. One would think that a company with multiple shots on goal, a relatively low market cap, and major partners already lined up would generate significant buzz in the investing community.

Nonetheless, even though the retail crowd hasn't picked up on Nektar yet, Mr. Market is all over this one. Short interest is relatively low at 4.8% and dropping. Furthermore, institutional ownership sits at an impressive 92% of outstanding shares.

What's all the fuss about? Next year could be a transformational time for Nektar, and it all begins with its New Drug Application, or NDA, for naloxegol. Naloxegol is being developed as a once-daily oral tablet for the treatment of opioid-induced constipation, and is licensed out to AstraZeneca. Cutting to the chase, if the drug is approved next year, Nektar will receive up to $245 million in milestone payments-some of which has already been triggered by the filing of the NDA.

Why is naloxegel's NDA critical? Nektar has a cash problem due to its rapidly developing clinical pipeline. As it stands now, the company only has about twelve months of working capital. So naloxegel's approval would essentially give the company enough breathing room to continue developing their exciting pipeline without missing a beat.

Looking ahead, I think naloxegel does get approved next year based on the strength of the late-stage clinical results, and the fact that AstraZeneca is no stranger to the regulatory game. After that, investors can finally focus on Nektar's remaining late-stage clinical candidates, without having to worry about imminent dilution, or even worse, the stoppage of a pivotal clinical trial.

Overall, I think Nektar has the lowest chance of doubling of these three stocks largely because of its lack of a large retail following. That said, the Street isn't betting against Nektar now that the pieces finally seem to be falling into place.

Source: 3 Biotechs That Could Double In 2014