Looking For Value Among Biotechs After Precipitous Declines In Stock Price

by: Intrepid Investor


Recent, precipitous price declines in some biotech stocks highlights big risk.

However, when the herd stampedes out, it sometimes leaves a bargain behind.

Fallen stocks of biotechs with a novel drug approved or a multi-drug pipeline, growing revenue, and reasonable valuations make interesting prospects.

Geron's market cap (NASDAQ:GERN) recently got pushed off a cliff. This has happened to a few biotech companies over the past year, and I have been tracking them and noticed that about half of the stocks were experiencing a nice recovery. I listed these in an article focused on the GERN drop.

As a value investor, the high valuations in biotech have limited my choices to life sciences companies and to a few promising biotherapeutics companies that I considered reasonably valued. Biotech stocks with reasonable valuations are hard to find, and I'm not even sure how to define "reasonable" in this industry. I generally consider a P/S>20 pretty expensive, >50 too expensive ("P/S" actually means Market Cap/Revenue since most of these companies don't have sales).

In doing research to write an article about forecasting earnings growth and profitability in biotech, I found the seven most successful biotherapeutics companies of the past five years had already five years ago: 1) one product on the market, 2) rising revenue, 3) deep pipelines, 4) healthy R&D budget, and 5) lots of assets on the balance sheet. For the current article I looked for these features among biotech stocks that got pushed off a price cliff during the past year. They are listed in descending order of the largest price declines from 52-week highs.

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Zalicus (ZLCS) stock price was pushed off a cliff when its phase 2 trial of Z160 for chronic pain did not meet endpoints. ZLCS now has a tiny market cap of $35M, and $15M of 2013 revenue which gives it a low P/S of just over 2. Revenue for 2013 was up 17% over 2012 and 80% over 2011 revenues. ZLCS has no product on the market. The pipeline drug farthest advanced in a trial (to phase 2b) has been licensed out. Gross PP&E represents about 1/3 of total assets, and it has an aggressive R&D budget that is much larger than its revenue.

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Amarin (NASDAQ:AMRN) stock plummeted on October 16 when an FDA advisory panel voted against approval to use omega-3 Vascepa (hardly a New Molecular Entity) for expanded indications. Vascepa was approved in July 2012, and as Amarin's first product to market brought in $26M (no revenue prior year) which was 100% of its total revenue for 2013. Amarin spent $73M on R&D but almost twice as much on SG&A, and there are no novel molecules in its pipeline. PP&E on the balance sheet comprises a mere 0.2% of total assets. AMRN market cap of $301 gives it a P/S of 12.

AveoClick to enlarge

Aveo Oncology (NASDAQ:AVEO) stock was pushed over a cliff when the FDA expressed concerns about survival results in the phase 3 trial of tivozanib, a New Molecular Entity (NME) that blocks downstream the effects of activated VEGF receptors on cancer cell growth. There are 3 other early phase NME candidates based on its patented Human Response Platform. However, AVEO has been left with almost no revenue. Astellas bailed on tivozanib. P/S = 73 based on its $94M market cap and $1.29M revenue for 2013 which was down 93% Y-o-Y. R&D budget contracted from $102M in 2011 to $68M in 2013, but PP&E on the balance sheet has increased two consecutive years.

EnzonClick to enlarge

Enzon (NASDAQ:ENZN) has not posted any news on its website since April 2013 when it announced its assets were for sale. ENZN has been discussed on SA recently, and I will not discuss it further.

DendreonClick to enlarge

Dendreon (NASDAQ:DNDN) stock nosedived in 2011. After releasing its 2013Q2 earnings it suffered another precipitous decline. DNDN has one product on the market and several in the pipeline, one of which is in phase 2. Annual revenue declined from $326M in 2012 to $284M in 2013; market cap of $477 gives it a P/S <2 . R&D budget is stable but is only about 1/5 of revenue. PP&E on the balance sheet is also stable and represents a 55% of total assets. Cash horde diminished in 2012 and again in 2013, while debt increased.

InfinityClick to enlarge

Infinity (NASDAQ:INFI) was included in this article because of a 67% price decline in a 2-month period beginning in April 2013 at the time of a secondary offering and when there was no revenue coming in ($0.0M for 2013) to maintain the $25M quarterly research budget. PP&E is stable and represents 12% of total assets. INFI has no products on the market but has an oral inhibitor of PI3K-delta and PI3K-gamma in phase 3 (PI3K-delta is the same tumor enzyme targeted by Gilead's idelalisib for which phase 3 results for CLL were published in the March 13, 2014 issue of the New England Journal of Medicine). INFI pipeline includes another novel molecule in preclinical development.

AriadClick to enlarge

ARIAD's (NASDAQ:ARIA) stock drop demonstrates herd behavior at its most mercurial. Even after marketing of Iclusig was allowed to resume by the FDA, stock price has not recovered to near its prior lofty heights. With a market cap of $1.46B, and exploding revenue growth to $46M in 2013, P/S = 32. ARIA has one new novel molecule in its pipeline. R&D budget is stable and was nearly 4x revenue in 2013. PP&E has grown to 40% of total assets.

VicalClick to enlarge

Vical (NASDAQ:VICL) stock dropped in August 2013 after Allovectin failed in phase 3. VICL licensed out a melanoma vaccine for dogs that is on the market. Vaccines for CMV and Herpes are in advanced trials. Revenue has declined ($7.7M in 2013) and so has R&D ($15M). VICL PP&E accounted for 39% of total assets at the end of 2013. With a market cap of $133M, P/S =10.

AchillionClick to enlarge

Achillion (NASDAQ:ACHN) stock tanked when the FDA put on clinical hold its protease inhibitor sovaprevir for hepatitis C. With no products on the market, it has no ($0.0M) revenue but R&D expanded again during 2013 ($46M) with 4 anti-HCV drugs in its pipeline. PP&E represents 8% of total assets.

AEterna ZentarisClick to enlarge

AEterna Zentaris (NASDAQ:AEZS) stock has been pushed off a few cliffs the past couple of years due a few issues including legal ones, also secondary offerings. Revenues have trended upward over the past few quarters, were up 300% ($6.2M) in 2013 Y-o-Y, and up 31% over 2011. AEZS has submitted an NDA for a diagnostic molecule, has a novel hormone-specific-cancer drug conjugate in phase 3, two other NME in phase 2, and four in phase 1 which is a deep pipeline for a $71M market cap company. R&D budget is a healthy 30% of market cap, and gross PP&E is 20% of assets and stable. P/S=11.

GeronClick to enlarge

The biggest barrier to GERN getting its first drug to market is the FDA. The ongoing saga of Geron's most promising candidate Imetelstat is well-known to many readers. GERN revenue in 2013 was a multi-year low ($1.28M). There are no other drugs in the pipeline. R&D budget has declined but much of that decline was due to a divestiture which also caused PP&E to shrink to 2% of assets.

SareptaClick to enlarge

Sarepta (NASDAQ:SRPT) stock plummeted on FDA concerns about its exciting RNA-based therapy for Duchenne muscular dystrophy. With no products on the market, annual revenue is only $14M down 62% Y-o-Y and down 70% versus 2011 revenue. Yet SRPT commands a market cap of $1B which means P/S = 100. R&D on the numerous phase 1 and preclinical drugs in its pipeline continues to increase and so has the PP&E on its balance sheet.

RigelClick to enlarge

Rigel (NASDAQ:RIGL) had no revenue in 3 of the last 5 quarters ending December 2013. But it has maintained R&D budget for its pipeline (2 other novel molecules), and PP&E on the balance sheet has increased. The stock tanked upon the release of unimpressive phase 3 trial results for fostamatinib for rheumatoid arthritis.

ChemoCentryxClick to enlarge

ChemoCentryx (NASDAQ:CCXI) stock declined sharply in August 2013 after releasing quarterly financial results and after GSK released interim phase 3 results on one of CCXI's chemokine receptor antagonists. CCXI has no products on the market but four novel molecules in its pipeline. Revenue for 2013 was up 11% ($6M) Y-o-Y but has declined in each of the last four successive quarters. R&D budget has declined slightly. PP&E accounts for only 5% of assets but is stable. P/S=54.


Predictors of consistent 3- and 5-year earnings growth and positive profit margins for the previous 1-year were identified in a previous article about biotech. These predictors are discussed above and listed in columns 2 through 5 of the table below for the 14 companies whose fallen stocks are the subject of the current article. Revenue growth is year over year for 2013. Pipeline drugs are counted only if in advanced clinical trials, i.e. beyond phase 1. PP&E is gross before depreciation. P/S is market cap divided by TTM Revenue rounded to nearest integer.

Predictors of future EPS growth and positive profit margins
Company Approved

>phase 1

R&D % of
Mkt Cap
PP&E %
of assets
AMRN + + 0 24% 0% 12
ACHN - - 1 14% 8% -
AEZS - + 3 30% 20% 11
ARIA + + 1 11% 40% 32
AVEO - - 1 74% 20% 73
CCXI - +/- 3 10% 5% 54
DNDN + - 1 15% 55% 2
ENZN - - 0 68% 14% 2
GERN - - 1 7% 2% 271
INFI - - 1 16% 12% -
RIGL - - 2 20% 12% -
SRPT - - 1 7% 11% 100
VICL - - 2 11% 39% 10
ZLCS - + 1 100% 7% 2
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None of these companies rate well in all categories. Amarin has a product and revenue growth but its focus is sales not research. Dendreon has a product on the market but is not growing revenue. Ariad has the best profile, but it does not have a pipeline to justify a P/S of 32. AEterna Zentaris does not yet have an approved product but rates well otherwise, and has submitted an NDA. I bought AEZS on rather low valuation after reading the turn-around story in SA and the 10K. Of the three companies with P/S around 2, only ZLCS has revenue growth.

R&D expenditure is essential for growth, and can be a predictor. However, items can be included in that line that don't result in growth. Of the companies with the largest R&D budget relative to their market cap, AVEO would interest me the most because of the drug platform which it is aggressively researching.

Asset heavy companies tend to have barriers to entry that provide a competitive advantage. The paragon of biotech that comes to mind is Regeneron. Of the companies rich in PP&E according to the table above, VICL would interest me on valuations.

I hope this helps.

Recommendation. My strongest recommendation is to look for biotech companies that have developed an FDA approved New Molecular Entity, that have revenue growth, that are conducting research on a pipeline of novel drugs; and above all, wait for the market to correct stock over-valuation, a process which is bound to occur broadly within this industry, and may have just started.

Disclosure: I am long AEZS. 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.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.