- The biotech meltdown of March has unmasked a number of value traps, but has also created value at the same time.
- Clovis is a company that's maintained value, despite limited upside and an overvalued stock.
- Acadia Pharmaceuticals and Celldex Therapeutics remain two oversold biotechs that now present a great investment opportunity.
The biotech meltdown has greatly affected most biotechs of all sizes, but especially those of small and midcap, and particularly those in the clinical development space. However, Clovis Oncology (NASDAQ:CLVS), an oncology-focused company with tremendous annual returns, has surprisingly not been affected to the same degree. Meanwhile, companies with late-stage proven data like Acadia Pharmaceuticals (NASDAQ:ACAD) and Celldex Therapeutics (NASDAQ:CLDX) have traded considerably lower. With that said, and using a formula to determine peak sales potential relative to market capitalizations, we can identify at least two cases of significant upside value.
Clovis is good, but unworthy
Look, before people start thinking that I'm bashing Clovis, I should set the record straight: Clovis is a great clinical-stage company, with data in two products (one in particular) that supersede anything we've seen in treating patients who are difficult to treat, but the problem is that it's too expensive.
CO-1686 is its epidermal growth factor receptor (EGFR) inhibiting drug to treat non-small cell lung cancer (NSCLC). It was data with this candidate that has been largely responsible for the stock's one-year 160% return and its now $2.6 billion market cap.
There are other EGFR-inhibiting drugs on the market, but all have problems when certain mutations are present. CO-1686 has proven in its early trials that it can inhibit EGFR regardless of the most problematic of mutations, like T790M and del19. On Wednesday, the company announced Phase I results showing a 64% objective response rate in patients who had this T790M mutation. Furthermore, the drug was well-tolerated in all but one of the 62 patients, essentially proving it as a safe and effective drug for this patient population.
In addition to CO-1686, the company also has a PARP inhibitor called Rucaparib to treat breast and ovarian cancers, although the company will face stiff competition from other PARP inhibitors already in the market and the many in clinical testing. With that said, Clovis still has further testing to determine the market potential of both drugs, but in regard to the bulk of its market capitalization, CO-1686 is the real gem.
According to Clovis, it expects to submit a New Drug Application (NDA) in 2015, meaning it could be 2016 at the earliest before CO-1686 is on the market. Yet, under a best-case scenario, including CO-1686 being used as a front or second-line treatment, Leerink Swan estimates that peak sales are $1.5 billion. This means that with at least two years until FDA approved, and questions regarding the likelihood of additional trials, Clovis already trades at nearly two times peak sales for its most significant product; Rucaparib peak potential varies, with some questioning whether it'll be FDA-approved or produce any meaningful revenue. Nonetheless, Clovis trades with an inflated premium in an industry that has seen massive declines; Clovis has lost only 4% of its value last month.
2 stocks with more loss and better value
While Clovis has remained relatively flat during a harsh month of biotech selling, two of the elite clinical companies in this space, Celldex Therapeutics and Acadia Pharmaceuticals, have lost 36% and 19% of their value, respectively. Now, with Celldex's market cap at $1.6 billion and Acadia's at $2.2 billion, and significant fundamental upside, there is reason to believe that both present great upside potential.
First, Celldex, a company with many moving parts, an oncology company that may have compared to an early-stage Celgene. This is a company whose future revolves around its breast cancer drug CDX-011, glioblastoma drug CDX-110, and to a lesser degree, its massive pipeline of candidates like CDX-1127 in the treatment of various cancers.
CDX-011 and CDX-110 are the two candidates nearest to an FDA approval, depending on final data and meetings with the FDA, both should be on the market within the next couple years. CDX-011 has all but been awarded an FDA approval, after having already proven itself in clinical trials. In a hard-to-treat population of breast cancer patients who have failed to respond to two or three prior treatments, CDX-011 significantly extended life and delayed the growth of tumors.
In treating glioblastoma, CDX-110, also called Rindopepimut, has completed three Phase II trials, with all showing consistent results in median survival and in three-year survival rates. The company is currently testing Rindopepimut in an ongoing exploratory study, which was expanded by an additional 75 patients, adding to the original 70, due to early evidence of antitumor activity. Clearly, Celldex is doing all it can to ensure a near-term FDA approval.
While Celldex has a large and promising pipeline, the bulk of its valuation is tied to Rindopepimut and CDX-011. Oppenheimer estimates that Rindopepimut could earn U.S. sales of $400 million. However, the firm estimates that CDX-011 could earn peak revenue between $1 and $2 billion, depending on whether it's used for third-line, second-line, or as a first-line treatment. Based on the data, a second-line indication looks assuring, in which Oppenheimer predicts $1.5 billion in peak sales.
With that said, Rindopepimut and CDX-011 have peak sales potential of nearly $2 billion combined, meaning that Celldex trades at just 0.8 times peak sales, with a speedier regulatory path than Clovis and significantly more data. Given this fact, it looks like a far better opportunity after having experienced an enormous period of profit-taking.
Acadia Pharmaceuticals is a far less complicated company to assess: It has completed the trials, and is now conducting pre-commercial activities for its anti-psychotic pimavanserin before its planned NDA later this year. Essentially, pimavanserin will be on the market by next year, as a top drug in a massive space.
Pimavanserin will be the first FDA-approved drug for Parkinson's disease psychosis (PDP), an indication with a U.S. population estimated at one million that has been treated with off-label anti-psychotic medications. Pimavanserin is unique in that it significantly reduced psychotic events, with the most common side-effect being headaches. The drug's efficacy and lack of side-effects is what makes it so unique, as most anti-psychotics are known for having harsh side-effects like anger, anxiety, and in some cases, death.
In addition to PDP, Acadia is testing pima to treat Alzheimer's disease psychosis and Schizophrenia, two additional indications that most analysts expect to become part of pima's revenue stream. With that said, the consensus for peak sales in pimavanserin is mostly $2 billion, which means Acadia is trading at 1.1 times peak sales, far less than Clovis. However, I believe it is a far cheaper multiple relative to what pima can and will become.
In an article I wrote back in October entitled, "Pimavanserin: The Most Underestimated Blockbuster In Biotechnology", I lay the groundwork for how peak global sales of pima could actually become closer to $10 billion. Already, since Acadia first announced data in 2012, peak sales estimates have risen drastically from $400 million to $1 billion, and now $2 billion. My model lays out the market size of pima's targeted indications, the fact that it is a best-in-class agent due to the absent of side-effects, which means that it could become a favorite for other off-label indications, such as bipolar, depression, anxiety, OCD, anger management, etc. In the noted article, I discuss everything from pricing, peak penetration by countries, royalty rates, and many other factors. Hence, given my projections for sales of pimavanserin, I think it trades at a much more attractive ratio of 0.22 times peak sales, making it far cheaper than Clovis.
Clovis is a great clinical-stage company, but its data is still very much immature, and its valuation is leaving very little room for operational error. In my opinion, Celldex and Acadia's recent loss, combined with peak sales potential make both far superior investments.
With that said, I clearly believe that Acadia is the best choice. Some bears will note that the company does not have any catalysts leading up to its late-year NDA with the FDA. However, Pharmacyclics (NASDAQ:PCYC), another company with a blockbuster drug, saw its stock more than double in the year prior to its NDA in July 2013 and in the few months following the submission. It had no real catalysts during this period, but it did have a fury of analyst upgrades and bullish outlooks as more analyzed the potential of Ibrutinib, and its peak sales outlook climbed from $4 billion to $6 billion, and now $9 billion. In many ways, I expect the same from Acadia, and is why I think it presents the best value given its recent loss.