I wanted to share some thoughts about high risk, high reward biotechs in 2011. Eighteen months ago at optionszone.com – on July 8, 2009 – I recommended five stocks, ostensibly involved in biotech but essentially cutting edge medical products companies.
Here is how they have done:
Cepheid (CPHD): Up 168% from $8.83 to $23.65
Cerus (CERS): Up 261% from $.86 to $3.11
Curis (CRIS): Up 127% from $1.33 to $3.02
Illumina (ILMN): Up 122% from $31.10 to $69.04
Questcor (QCOR): Up 202% from $5.06 to $15.29
Do I have your attention? All five of these stocks have legs but the run has been so great and grand for some of them I have modified the list for 2011. And, since the market has been kind to you the past twenty seven months, these are all very high risk, stop your heart stocks facing major binary events that could make or break the stock
Cerus (CERS): Cerus developed and markets the INTERCEPT system. It's a blood pathogen inactivation system to purify blood platelets. It is the only game in town and approved in most large European countries, it has been held up in the U.S. by an incredibly ridiculous FDA staff person even though it hit the primary end points in its pivotal phase III trial and gets grants from the U.S. military. INTERCEPT kills HIV, XMRV and a zillion other pathogens in the blood, making the blood platelet supply donor independent.
Cerus is working on developing an INTERCEPT system for whole blood and the program is on schedule and funded with a recent stock offering. Management has bumbled working with the FDA – they don’t fight back - but this will be fixed over time. There is no scientific or product risk in the stock and it is the number one medical products company pick for 2011 by Stephens & Company. The target price in 1-3 years is $14. Downside risk is market risk. I own the stock.
Curis (CRIS): This little gem has developed a series of cancer treatments in various stages of clinical trials based on a technology that disrupts intercellular signaling in the Hedgehog pathway. Disrupt communications and you disrupt cell duplication, the foundation of tumor growth. More than twenty trials with Genentech/Roche and the National Cancer Institute are underway. This year, Genentech will probably report out results of a basal cell carcinoma trial for skin cancer. The company has said it will go from this mid-Phase trial to an application for approval if the results are strong enough. One success means a volcanic eruption in the stock as it will prove their core technology is viable as a platform for cancer treatments. A failure could put their entire program – and the company – in jeopardy. I believe they will be. Upside is $40-$44, downside $.50. I own the stock.
Compugen (CGEN): Compugen is easily the world’s leading molecular intellectual property company. Based in Israel, the company has revolutionized the early phases of drug development through a highly automated process of exploring and selecting molecules with the greatest promise to serve as the basis for a particular treatment. Simply put, Compugen is an automated super smart factory, versus building something by hand, with each worker having a different and hideously expensive approach. Its partners span the entire Big and Little Pharma industries, with upfront payments and back end royalties. CGEN Just sold one of its twenty molecules for $10 million to an investor. This gave it $200 million or more in real value for its bank of molecules with many more on the way. This also sets a floor price for future partnerships on molecules. Target: $20 in 3-5 years. Risk is market risk.
Spectrum Pharmaceuticals (SPPI): The company specializes in rescuing treatments abandoned, in development stages, by other companies. It has had a tremendous run based on market introductions and partnerships in the past two years but now has even greater potential for a blockbuster with a drug called Zevalin. This drug is currently approved as a salvage and adjunct therapy for NHL - non-Hodgkins lymphoma – and the company is in mid stage trials for use of Zevalin as a front line treatment, a monster market that is much larger than its current share for Zevalin. Spectrum should report out some results this year. A failure would hit the stock quite hard, while success could propel the company into the big leagues. A target is $32, and SPPI also a takeover target. The risk in this stock is high – the stock could be cut in half or more on bad news from one of several clinical trials. I put chances of approval at 65%
Impax Laboratories (IPXL): This not-so-small generic drug maker has arguably the best manufacturing technology for time released drugs in the entire generic industry. The Lipitor patent expires this year. Now this is an $11 billion drug- and it is already known due to legal actions- IPXL has figured out how to make a generic Lipitor. I expect it to market the drug through a partner, either in November of this year or six months later in May of 2012 due to FDA regulations. Two other major product introductions are anticipated in 2011 – generic Concerta and Solodyn, currently with combined sales of $1.8 billion – developed with Teva (TEVA). A 1-2 year target is $35-$40, while IPXL is also the possible target of an acquirer. Downside risk is market risk.
Human Genome Sciences (HGSI): This outfit has seemingly been around forever, sucking in capital and producing more headlines than treatments. However, the company recently made very big news with positive results in trial for the first new treatment for lupus in two generations. HGS is a seemingly diverse company that has had a very disappointing pipeline. A lupus drug changes everything. It is not only a large market; it is a chromic care market, an underserved market and a growing market. An FDA decision is expected by yearend, a double to triple with an approval – maybe even an acquisition of HGS. If there is a rejection, the stock could also get cut in half, maybe worse, given its constant losses year after year. I put chances of approval at 75%.
Vertex (VRTX): I write about Vertex because it is a cult stock among biotech investors and has enormous downside risk if it does not get an approval for a new hepatitis treatment. The drug, Telaprevir, is considered a shoo in and its approval is priced into the stock. If approved, the stock may go up 50% to 100% temporarily then retreat to its current level, perhaps less. The company has a $7 billion market cap and the drug will have lots of competition. If, for some reason, the FDA asks for more data, puts a strict label on the drug or rejects it outright, this could be the short of the year. I am a contrarian by nature and would be very careful with VRTX. I put chances of approval at the low end of other analysts estimates, around 70%
Orexigen Therapeutics (OREX) has an obesity drug that successfully completed clinical trials and is due for an up or down from the FDA as early as the end of January. The stock has bounced around the past year based on its trial results and other actions by the FDA. These actions scream buyer beware – two other obesity drugs from Arena and Vivus have been whacked by the FDA. The Vivus drug, Qnexa, had even been approved by an FDA panel and later rejected by the FDA staff over safety concerns. The stock is around nine, it could easily double in a day with an approval and keep going into the high twenties. It could also end up around three bucks with a rejection. I put chances of approval at 50/50.
Dendreon (DNDN): I made my bones in biotech – and doubled my subscriber base from a service I discontinued – with Dendreon. I predicted a panel approval for Provenge, against all odds and oddsmakers. The stock went up 450%, from $4 and change to north of $22. The day after the panel approval I told my subs to sell; I did not like the body language of the staff at the hearing. Sure enough, the FDA staff, for the first time ever, rejected a cancer drug approved by a panel. The stock lost most of its gains.
It got an approval with a new trial and the stock is now $35 – but a critical decision looms from CMS, the people who approve products for Medicare. There is no doubt that Provenge will extend the life of prostate cancer victims and will put a subset of the patient population into full remission. The problem is the exorbitant price tag, $100,000 and change. CMS is not legally allowed to consider price when approving a drug for use by Medicare recipients so this one is tricky. A decision is moments away. Always the contrarian. I believe CMS will compromise, put a very strict usage requirement on the treatment and negotiate a better price. DNDN is way overpriced as a stock anyway. CMS approval gets you from $35 to maybe $65, max. A rejection or strict limitation cuts the stock in half, maybe more – private insurers often take their lead from CMS. I put the odds at 50/50, and, here comes the hate mail, DNDN is a cult stock.
Disclosure: See above