Salvage Operations in the Biopharma Wreckage

by: Michael J. Ray

One of the most risky and challenging types of investing is in the world of speculative biotechnology. In this type of investing fortunes are lost and won in a matter of seconds as companies try to develop the next breakthrough in medicine. The attraction for investors is easy to see as a small investment can quickly turn into outsized gains in a relatively short amount of time. Of course with high rewards also comes great risk and extreme volatility. Every year several biotechnology companies fail to meet expectations and as a result their stock price usually plummets in value. Needless to say, investors in this sector will often sell first and ask questions later, making a volatile stock price even more so. It is these companies that might still have some value left in them for someone who will take the time to analyze the situation. It is at this point when the fear and panic might be a good thing for those willing to go on a salvage operation looking for value. Let’s take a look at some recent wreckage to see if there might be something that was overlooked.

Arena Pharmaceuticals, Inc. (NASDAQ:ARNA): ARNA is a biopharmaceutical company that is focused on discovering, developing, and commercializing oral drugs in the therapeutic areas of cardiovascular, central nervous system, inflammatory, and metabolic diseases. The company’s best shot at the big time was the drug Lorcaserin. Lorcaserin is an investigational drug that is intended for weight management. After completing a pivotal Phase 3 clinical trial program, the company submitted a New Drug Application to the FDA for regulatory approval in December 2009. The FDA issued a Complete Response Letter in October 2010 which threw investors for a loop. In the CRL the FDA was concerned about the classification of benign versus malignant mammary tumors in female rats in a two year study. That was pretty much all investors needed to hear, and as a result the fear and panic set in. A word like “tumors” is just scary enough to deter any investor. As a result the stock sold off badly leaving the wreckage you see today.

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The question is if there is anything salvageable? ARNA does have other drugs in the pipeline but none are as far along as Lorcaserin was. Arena has recently released results addressing some of the issues regarding the carcinogenicity in the rats and plans to go back to the FDA to be reconsidered. So once again it turns into a gamble to see if the FDA will be more accepting this time around with the new data. So it will be the FDA that does the salvaging and with their track record for putting safety first, the situation really becomes very questionable for investors. If one were looking for high stakes gambling then this might be the stock for you, but I would steer clear of this wreckage until more information becomes available.

MannKind Corporation (NASDAQ:MNKD): MNKD is a biopharmaceutical company, focuses on the discovery, development, and commercialization of therapeutic products for diabetes and cancer. Its lead product candidate, AFREZZA, is a rapid acting insulin that has completed Phase 3 clinical trials for the treatment of diabetes. If this treatment is ever approved, the diabetes patients will be able to inhale Afrezza instead of treatments with needles.

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MNKD’s stock has been beaten down following two rejected applications to the FDA to sell the product. The company received two response letters (CRLs) regarding its insulin platform from the U.S. FDA, in March 2010 and in January 2011. As the FDA asks for more information about the product, it makes it more likely that the delay for Afrezza could be measured in years. As Mannkind addresses the FDA’s concerns, the delay is bleeding needed cash from the company’s coffers. As of June 2011, the company had approximately $24.7 million left with a burn rate close to $40 million per quarter. On the FDA front the company confirmed protocols for two studies in which the device will be tested on patients with type 1 and type 2 diabetes. The good news is the chance for approval is back on the table. The bad news is that Mannkind said that they do not expect the trials to be completed by 2012.

So the question here is if MNKD is salvageable for investors? That answer will depend on where investors think Mannkind will get their funding. If they partner or complete a meaningful Joint Venture (JV) then the prospects look good that eventual FDA approval might happen. Of course anyone willing to partner with this company will take advantage of MNKD’s cash crisis, which means the company might not get the best deal at hand. If no partner can be located, the company and investors might go through the painful dilution process as more equity hits the markets.

Orexigen Therapeutics, Inc. (NASDAQ:OREX): OREX is a biopharmaceutical company focused on the treatment of obesity. The product was (noticed how I write was) called Contrave. With more than 75 million Americans now considered to be obese, the company felt their drug was going to be ground breaking. Unfortunately the FDA had other ideas. This came about when the FDA, ignoring the advice of their own Advisory Committee, rejected a proposal by Orexigen to bring Contrave to market. It seemed that the FDA was concerned about cardiovascular risk which ground the process to a halt. In response OREX proposed a large study where up to 12-15,000 patients would be enrolled. As big as that seemed, the FDA baulked and using their black box methods, wanted the size to be 50,000-100,000 patients. Now a study like that would be tough to pull off even for the largest pharmaceutical companies. As a result OREX just pulled the plug.

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Orexigen ended the second quarter with $71 million in cash and is burning through about $7.5 million in the latest quarter. OREX needs a new product and if they are going to get one, they will need to act fast. There is just too much uncertainty surrounding this company right now to determine if it is salvageable of not. That being the case, it should only be viewed as the purest of speculation by investors brave enough to invest.

BioCryst Pharmaceuticals, Inc. (NASDAQ:BCRX): BCRX is a biotechnology company which designs, optimizes, and develops small-molecule pharmaceuticals that block key enzymes involved in infectious diseases, cancer, and inflammatory diseases. The company has three novel late-stage compounds in development, which include Peramivir, a neuraminidase inhibitor for the potential treatment of influenza; BCX4208, a purine nucleoside phosphorylase inhibitor for gout; and Forodesine, a PNP inhibitor for cutaneous T-cell lymphoma and chronic lymphocytic leukemia. BCRX’s lead product is Peramivir which is being developed under a contract from the Biomedical Advanced Research and Development Authority within the United States Department of Health and Human Services.

Take a look at this chart for the stock.

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At first glance it seems that the company might have had some catastrophic event to drive their stock down to the current price. Far from it, one of the main problems was that Peramivir was thrust into the limelight during the influenza scare back in 2009. Peramivir was approved for emergency use and then touted in a high profile newsletter, and as a result the stock price appreciated at a rapid pace. The influenza epidemic never really took hold and the hype quickly faded, as did the stock price.

BCRX’s stock price might look like a train wreck, but in actuality it is just going through the motions that all speculative biotech stocks do. BCRX reported a net loss of $16.3 million for the three months ended June 30 versus a loss of $10.2 million a year earlier. The revenue fell to $3.7 million from $7.6 million as government funding decreased because some clinical trials of the drug Peramivir are complete.

This is one example where a more in-depth analysis of the company might prove to be profitable. Only time will tell, but BCRX might be one of the safer bets on the table for companies mentioned in this article.

Cell Therapeutics, Inc. (NASDAQ:CTIC): CTIC is a biopharmaceutical company engaged in the development, acquisition, and commercialization of drugs for the treatment of cancer. The company is developing a drug called Pixantrone which is a treatment for Non-Hodgkins Lymphoma. In April of 2010 the FDA issued a complete response letter where they stated concerns that Pixantrone did not prove to be a sufficiently effective drug. Needless to say, the stock price did not react to well to this.

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Since then the company met with the FDA and received guidance for resubmission of the new drug application. It seems that the FDA is going to allow CTIC to re-submit the NDA for Pixantrone for review without the need for an additional trial. This is actually a big deal in that it will save a great deal of time and money for the company. The FDA will review the submission within 6 months of receipt. Cell Therapeutics is planning to re-submit the NDA in the fourth quarter of 2011 and is hoping to receive an approval in April 2012.

No matter how positive the future seems, any investor holding this stock took a brutal beating. In an effort to remain on the NASDAQ stock exchange, Cell Therapeutics enacted a reverse stock split where the terms were one-for-six. This was successful in bringing the shares up above the $1 requirement but was viewed as being toxic for shareholders. Then in late June of 2011 Cell Therapeutics announced that it was selling $30 million worth of stock for $1.70 per share. At that time the price was $1.96. The deal was that the investors buying the shares also got warrants where for every two shares they bought, they received warrants that allowed them to buy additional shares at $2.15 each. So if one steps back and thinks about it, the company had a reverse stock split followed by a secondary offering that diluted the shareholders by 10%. It is obvious that CTIC was and is in survival mode which means the stockholders are thrown to the wolves to fend for themselves.

Of all the stock mentioned here, this one is the most curious when considering if the stock is salvageable. So much goodwill has been destroyed between the company and stockholders that it makes it incredibly hard to overlook the recent events of the past. CTIC had approximately $38.9 million in cash and cash equivalents as of June 30, 2011, including $5.8 million of partially received funds in the $30 million equity offering which closed in July 2011. The operating expenses as of June 30, 2011 decreased 15% to $16.9 million compared to$20.0 million for the same period in 2010. So the question now is how well funded is the company as they wait for the FDA to make a decision? In the end, no matter how tempting this stock might be, I think it would be best to wait on the sidelines and see how it plays out. If past history is any indication, the story for this stock is just beginning with all the drama of a daytime soap opera.

In conclusion, one can see that there might be some value still left in the wreckage that litters the biotech world of investing. Finding it takes time as one has to comb through lots of volatile events and try to understand the ramifications. There is still a high level of risk, but in the end one might be able to find that diamond in the ruff.

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Disclosure: I am long BCRX.