Revisiting 6 Speculative Biotech Stocks That Hedge Funds Love

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Includes: AEZS, ARNA, DNDN, MNK, SNSS, VCEL
by: NakedValue

We previously highlighted these six biotechnology stocks in our article, 6 Speculative Biotech Stocks Smart Money Loves. We got a lot of positive messages because of the article. As such, we think it is about time to summarize some updated information about these biotech stocks.

AEterna Zentaris Inc (NASDAQ:AEZS)

Noteworthy Shareholders: D.E. Shaw & Co, Renaissance Technologies LLC

The Canadian drug company develops late-stage oncology treatments. Its research and development focuses primarily on colorectal, endometrial cancer, ovarian cancer and multiple myeloma. Its exposure to personalized treatment and oncology drugs warrants a premium valuation because of the demand in this area. The company has multiple drugs in Phase 3 clinical trials but the company's fortunes may ultimately lay at the results for Perifosine in colorectal cancer. The drug is being developed by Keryx Pharmaceuticals (NASDAQ:KERX) through a partnership.

Since May 23, 2011, the company's stock price has dropped from $2.25 to $1.98. But shareholders should be aware that they entered into an At Market Issuance Sales Agreement dated June 29, 2011 to sell up to 9.5 million common shares for a maximum aggregate price of $24 million. This appears to put a ~$2.53 per share ceiling on the price of the stock in the near term. According to the SEC filing, the company intends to

use the net proceeds from the sale of common shares for general corporate purposes, which may include research and development expenses, clinical trial expenses and working capital.

Cadence Pharmaceuticals (CADX)

Noteworthy Shareholders: Wellington Management Company LLP, Capital Research Global Investors

Since May 23, 2011, the company's stock price has risen from $8.52 to $8.65. As we previously wrote, the company could see significant growth if U.S. hospitals adopt IV acetaminophen, a proprietary treatment that they licensed and got approval for use in the U.S. Still, there are meaningful risks along the way. On June 30, the FDA revealed that a generic company filed an ANDA against OFIRMEV. On July 13, 2011, Cadence received a notice from Exela Pharma Services notifying them that Exela had filed an ANDA for a generic version of Cadence's drug, OFIRMEV. The outcome of this challenge could meaningfully affect the stock price and as such, investors should pay close attention to subsequent developments.

In addition to fundamental stock price drivers, the company could also see a more immediate catalyst in the form of an acquisition. In June, UBS AG strategists listed Cadence Pharmaceuticals among 44 M&A candidates.

Dendreon Corp (NASDAQ:DNDN)

Noteworthy Shareholders: SAC Capital Advisors LLC, Soros Fund Management LLC, Capital Research Global Investors

Since we initially profiled Dendreon, the company has more than doubled its productive capacity following the June 29 FDA approval of its Orange County California facility. By August 28, Dendreon should continue the momentum when the FDA approves its Atlanta facility.

In addition to the positive supply side news, the company also received positive news from the Centers for Medicare & Medicaid Services. The group released a decision memo communicating their belief that PROVENGE improves health outcomes for Medicare beneficiaries enough to justify coverage for the treatment. At $93,000 per patient, this willingness to cover Medicare patients is a huge boost to the company's prospects.

Since May 23, 2011, the company's stock price has dropped from $39.51 to $36.90. Further stock price weakness could present a buying opportunity.

Arena Pharmaceuticals (NASDAQ:ARNA)

Noteworthy Shareholder: Wellington Management, D.E Shaw & Co Inc

The company develops oral drug treatments for inflammatory, metabolic, cardiovascular and nervous system diseases. Its most notable drug is Lorcaserin, whose rejection by the FDA in October 2010 caused the stock to drop. The company has not given up on Lorcaserin and a successful resubmission of the drug to the FDA could be a huge boon to the shareholders. The data from Arena's Phase 3 BLOOM-DM trial appears to be positive, but patients suffered from elevated risks of side effects such as headaches, upper respiratory tract infection, back pain, nasopharyngitis and symptomatic hypoglycemia.

On July 12, 2011, the company announced results from a Phase 1 clinical trial of APD811, which is designed for the treatment of pulmonary arterial hypertension. The news was positive and could provide further catalysts down the road, but in the near term, the stock price did not move on the news.

Since May 23, 2011, the company's stock price has jumped from $1.40 to $1.61. Despite the company's hurdles, the stock is worth a closer look because of the huge potential market for effective options to help individuals lose weight. Outside of FDA approval for Lorcaserin, the next best possible catalyst would be a new and more enthusiastic drug partner to replace Eisai Inc.

Sunesis Pharmaceuticals Inc (NASDAQ:SNSS)

Noteworthy Shareholders: Royce Value Trust, Moore Capital Management, Bay City Capital

Sunesis is small cap biotech company focused on research and development of hematologic and solid tumor cancers. Its most important product is Vosarioxin, a first-in-class anti-cancer quinolone derivative. Perhaps the company's biggest strength is its large cash hoard. With nearly $50 million in cash and investments, Sunesis could persist for two years at the current corporate burn rate.

Since May 23, 2011, the company's stock price has stumbled from $2.73 to $2.00. Much of this price decline happened June in the days following the company's presentation at the American Society of Clinical Oncology conference in Chicago. At the conference, the company presented plans for its Phase III clinical trial for ivosaroxin.

For a small company, Sunesis has a rich history of collaboration with large pharmaceutical companies like Biogen Idex (NASDAQ:BIIB), Millenium Pharmaceuticals, Johnson & Johnson (NYSE:JNJ) and Merck (NYSE:MRK). These agreements should provide a floor to the company's stock price because at the right price, it would make sense for the larger partners to acquire the company outright to protect their intellectual property interests.

Aastrom Biosciences Inc (ASTM)

Noteworthy Shareholders: Geode Capital Management LLC, Stark Offshore Management LLC, Millennium Management LLC

The company's stock priced has faced headwinds from delayed phase III trials, but there is a deep-seated market enthusiasm for the company because of its innovative patient specific steam cell treatment for critical limb ischemia (CLI). This disease affects blood circulation in arms and legs and can lead to amputation. In the U.S., the disease leads to around 160,000 limb amputations per year. The company's drug, Ixmyelocel-T, has shown promise in early studies.

On July 26, 2011, the company announced that it formulated an FDA approved Special Protocol Assessment (SPA) before it can move on with its phase III trial. This is a major positive development for the stock. The next catalyst could be in November 2011 when Aastrom presents the data from its RESTORE-CLI Phase 2b clinical trial. Considering the company's stock price actually dropped following the announcement, shareholders may be upset that the company does not release its phase 2b results sooner, but the go ahead on the phase III trial is still very positive.

Investors should pay close attention to the company's funding decisions down the line. As a $100 million market capitalization company with almost $24.62 million of cash, its phase III trial funding decisions could have huge consequences for shareholders. While there is a lot of potential for partnerships among larger drug companies, there are no obvious partners. As such, we should assume that Aastrom will fund its trials alone through issuance of common or preferred equity. The dilutive nature of such a transaction will be dependent on the strength of the stock price.

Since May 23, 2011, the company's stock price has declined from $2.80 to $2.52.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CADX, AEZS, DNDN over the next 72 hours.