Wednesday's Big Biotech Losers That Are Poised For Big Rebounds

by: GuruFundPicks

The NYSE ARCA Biotech Index ($BTK) has been extremely active lately, and it fell 3.3% yesterday. The following are buy ideas based on selected biotech companies that experienced sharp declines yesterday.

Buy Amarin Corp. Plc Adr (NASDAQ:AMRN): AMRN is a clinical stage Ireland-based global pharmaceutical group, which develops novel drugs for the treatment of cardiovascular diseases using its proprietary advanced oral and trans-dermal drug delivery technologies. It fell 8.0% yesterday after a story in the British national daily newspaper The Guardian opined that recent weakness in AMRN shares after it peaked near $20 in May was due to the disappearance of strategic buyers seeking to acquire the company. It further elaborated that these buyers may stay away for the next 12 to 18 months as there are no short-term catalysts; the results from the pivotal ANCHOR clinical trial that expands the addressable market to 40 million patients are now expected in the second half of 2013. Furthermore, there are lingering patent issues, including a ruling on ‘New Chemical Entity’ or NCE status for AMR 101 that may need to be resolved prior to getting firm interest from potential buyers.

We covered AMRN earlier on August 15th, indicating our belief that AMRN was a buy, whether it goes ahead solo or gets acquired by another drug manufacturer. Possible suitors include Merck & Co. (NYSE:MRK), Astrazeneca Plc (NYSE:AZN), Pfizer Inc. (NYSE:PFE), and GlaxoSmithKline Plc (NYSE:GSK), all of whom have a strong cardiovascular portfolio and would benefit from the synergies of a potential acquisition of AMRN. Specifically, GSK markets Lovaza, a prescription drug fish oil capsule that is currently approved by the FDA to lower very high triglyceride levels. GSK’s patent on Lovaza expires in September 2012, and it could thwart potential competition from generics by acquiring AMRN whose AMR101 treatment supposedly has a better safety profile than Lovaza and also lowers the low-density lipoprotein (NYSE:LDL) or “bad cholesterol” in the bloodstream.

Alternatively, if there is no buy-out interest and/or AMRN goes it alone, peak sales of AMR101 are estimated to be in the $1.25 billion range. Since drug development companies on average sell for three to five-times peak sales, AMRN trading at just one times peak sales at yesterday’s closing price of $9.56 is a bargain buy here. We believe that concerns over the threat from generic Lovaza and patent issues may be over-blown. Lovaza generated $800 million in sales last year, and AMR101 actually has a better safety profile and also sometimes lowers LDL (contrary to increasing it as in the case of Lovaza). We believe that the current weakness in AMRN offers those with a longer-term horizon to get in at a bargain price in a drug company that has a multi-billion dollar drug in its pipeline. However, we would gradually scale into it to take advantage of any further weakness.

Buy Dendreon Corp. (NASDAQ:DNDN): DNDN develops targeted therapeutics to treat cancer using active immunotherapies, monoclonal antibodies and small molecules. Among investor circles, it is probably best known as the maker of Provenge® for Prostate Cancer. The stock was down 9.4% yesterday, testing the bottom of the range that it has traded in since it received close to an 80% shave after reporting slower than expected growth in Provenge on August 3rd.

We covered DNDN earlier on August 8th and August 15th, opining that its miss last quarter was a sales and marketing failure that is part of the growing pains of going from a research and development to a commercial stage. Although admittedly, management did a poor job in making that transition, these issues are fixable by revamping their marketing and re-training their sales force. Already, on September 8th, DNDN reported August gross revenue of approximately $22 million from Provenge® sales, a significant month-to-month increase of over 15% over reported July sales of $19 million. Meanwhile, current DNDN valuation at $1.36 billion is assuming Provenge® annual sales will peak at $300-$500 million, based on a three to five multiple to peak sales. With $22 million in sales in August, a growth trajectory of over 15% month-over-month, and potential international sales starting with the EU in 2013, even the top-end of this range seems within easy reach. Furthermore, the company announced restructuring plans that lowers the cash flow break even position in the U.S. at an annual run rate of approximately $500 million in revenue.

Buy Zalicus Inc. (ZLCS): ZLCS, formerly known as CombinatoRx, develops new drugs built from synergistic combinations of approved drugs and new chemical entities to treat immuno-inflammatory and metabolic diseases. Its shares fell 10.9% yesterday on no company-specific recent news; rather, shares have been weak and have fallen off by almost two-thirds since early July on weak sales for its pain drug Exalgo that it has licensed out to Covidien Plc (COV), an Irish developer of medical devices, pharmaceutical and imaging products.

We believe that at yesterday’s closing price of 98c, ZLCS shares are rapidly entering buy territory. Besides royalty revenues from Exalgo sales, however disappointing they may be, the company also has Synavive in phase 2b development for rheumatoid arthritis, a huge opportunity given that there are over 100 million people in the U.S. alone that suffer from rheumatoid and osteoarthritis. Furthermore, ZLCS has a robust early stage pipeline that includes collaborations with Novartis (NYSE:NVS), and also with Sanofi (NYSE:SNY) for persistent allergic conjunctivitis. Furthermore, ZLCS has over $55 million in cash and short-term investments and $11 million in debt, so that its cash balance is currently 44c per share. Wall Street analysts are also bullish on the company, and of the five analysts that cover the company, four rate it at strong buy and one at buy; and the mean price target is $4.40. Specifically, Rodman & Renshaw, Wedbush and JMP Securities have $5 price targets on the company, and Oppenheimer recently reduced their target to $3 from $4.

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