'Beat Up' Biotechs To Buy: Part 2

by: StockMarketPundits

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This is part two of our “Beat Up” Biotechs to Buy trilogy. As we noted in part one, our approach to biotech investing is to do the research and then “cherry pick” your favorites and then buy a “basket” of your favorites. Our next four candidates are as follows:

Arena Pharmaceuticals, Inc. (NASDAQ:ARNA)

Arena is a clinical stage biopharmaceutical company. Its lead product in development is the novel lorcaserin which has completed Phase 3 clinical trials for the treatment of weight management and is the subject of a Complete Response Letter from the FDA. The company has a market cap of 202 million and trades around 2 million shares per day. The FDA holds weight management and cosmetic drugs to a higher standard and as a result all three weight control drugs submitted for FDA approval last year were declined. The Arena data submitted appeared to have a favorable safety profile to us, however, the FDA raised several issues. We believe that most if not all of the issues raised will turn out to be gales red herrings (primarily related to rat tumors). After listening to the August 9th Arena Q2 conference call we feel it is more likely than not that Arena’s response to the CRL will satisfy the FDA. The hoped for roadmap now is for Arena to refile with the FDA before the end of the year and obtain final approval in mid 2012. If approved lorcaserin has many fans that think it will quickly obtain blockbuster status because of the vast potential addressable weight control market The stock is well off its 52 week high of $4.80 and down further from its 2010 high of around $8.00/share.

Aastrom Biosciences, Inc. (ASTM)

Aastrom is a clinical stage biopharmaceutical company engaging in regenerative medicine through autologous cell therapies. The company has a market cap of $95 million and trades around 230,000 shares a day. The company is focused on critical limb ischemia (CLI) and dilated cardiomyopathy (DCM). They will launch a Phase 2b DCM study in Q1 of next year and the pivotal Phase 3 CLI trial launches in Q4 of this year. The CLI Phase 3 study is being done pursuant to a Special Protocol Assessment with the FDA that was finalized in July of this year. The company estimates the market potential of the CLI program at over $2 billion and the DCM program at over $1 billion per year. Clearly, Aastrom is “elephant hunting.” The roadmap calls for final results from the Phase 3 CLI clinical trials in 2014 with approval the following year. With cash on hand of only $19 million Aastrom will need to do a capital raise next year or sign up a deep pocketed partner. The stock is off its 52 week high of $4.45.

Dendreon Corporation (NASDAQ:DNDN)

Dendreon is a biotechnology company that engages in the discovery, development and commercialization of therapeutics to enhance cancer treatment options for cancer patients. The company has a market cap of $1.77 billion and the stock trades over 5 million shares a day. The company’s lead product is PROVENGE which is the first FDA approved autologous cellular immunotherapy for the treatment of asymptomatic or minimally symptomatic metastatic castrate resistant prostate cancer. PROVENGE had a turbulent path to FDA approval which was finally achieved in April of 2010. The initial launch was capacity constrained, however, the company now has brought on immunomanufacturing facilities in New Jersey, California and Georgia. The company elected to “go it alone” in the U.S. but will consider partnering strategies in Europe where approval is hoped for in the first half of 2013. The stock fell off a cliff in early August when the company reported Q2 gross revenues of only $51 million and announced a shift in the PROVENGE launch trajectory to one based on a more gradual adoption. Additionally, it appears there are still some reimbursement issues to be worked out and a greater need for both physician and patient education. Subsequent to the quarter we have learned that the company has about $600 million cash on hand and feels that should be sufficient with their announced restructuring to get them to cash flow breakeven which they think is $500 million in sales. August revenues were only $22 million so clearly Dendreon needs to see a ramp up in sales. If PROVENGE sales ramp the way its many fans feel it will the stock could see an explosive move up as the shorts are squeezed. It appears all of the bad news has been discounted into the present price.

MannKind Corp. (NASDAQ:MNKD)

MannKind is a biopharmaceutical company focused on the discovery, development and commercialization of therapeutic products for diabetes and cancer. Its lead product candidate AFREZZA is a rapid acting inhaled insulin that has completed Phase 3 clinical trials for the treatment of diabetes in the U.S., Europe and Japan. AFREZZA has blockbuster potential. Two clinical trials will be conducted in 2011-2012. FDA confirmation of final trial protocol should reduce the regulatory risk of approval. The new target date for FDA approval is 2013. Cash on hand at quarter end was $25.3 million so the company will have to go to the market or partner to fund the final clinical trials through approval. As most know the founder has invested millions of his own money in the pursuit of AFREZZA approval. We think because of AFREZZA’s novel advantages and likely blockbuster status that this company will surprise the market (and the shorts) by obtaining the necessary funding to see AFREZZA through final FDA approval.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.