Picking biotech stocks for short-term and long-term investment could be a good practice if investors know what to pick. In most cases, picking biotech stocks that have no near-term catalysts could be disappointing, leading investors to wait and wait, then get bored, and sell their shares at a great loss. To pick firms in early- or mid-phase development, the firms should have very advanced technologies and product pipelines with strong evidence of promise that they are the envy of rich pharmaceutical firms. The large-pocketed drug developers usually desire what they need and buy what they desire. Most are currently in dire need of breakthrough products, as the patent lives of many of their bestsellers are expiring.
Investors must be aware of the fact that stocks of development-stage firms are destined to fall after each and every quarterly financial results announcement, as they have no revenues or incomes. They also fall after shareholders become disappointed in the negative performances of their stocks, hence, trash them. Compensation can come early. However, in the event of takeovers, alliances that pay huge upfront payments, or the announcement of stunningly positive clinical trial results of products that deal with life-threatening diseases with large markets. Focused investors may be able to catch big fish in situations exemplified by the following three circumstances:
1. Investor-instigated undervalued firms: Investors might have caused the undervaluation by overlooking a firm's breakthrough technologies expected to positively influence the biotech industry. The best picks in this category are firms having drugs developed through proprietary technologies that reached late-stage clinical trials having promising results in mid-phase trials.
PROLOR (PBTH) fits well in this group. The firm’s technology has demonstrated success in extending the half-life of protein therapeutics. This advancement is significant, as proteins in general have short half-lives. Extending the half-life of proteins increases their stability in the plasma, and improves their pharmacokinetic and pharmacodynamic profiles, which renders the therapeutics safe, effective and cost-effective, in addition to increasing patient compliance. Instead of requiring daily injections, patients would inject the drugs only once a week, or less frequently.
Prolor’s promising technology means a lot because many conventional technologies have failed to extend proteins’ half-lives without compromising their actions or safety. The number of first generation therapeutic proteins has grown rapidly over the last decade. Annual worldwide sales are estimated to be over $35 million. Their producers face many problems, including patent expirations of their blockbuster products and competition from small molecule alternatives and biosimilars. In short, next-generation therapeutic proteins are expected to have extended half-life versions. Prolor, we believe, is on the right track to grabbing its first big portion of the large protein therapeutics market as early as the first quarter of 2013.
Prolor extends the half -life of protein therapeutics by linking naturally occurring carboxyl terminal peptide (CTP) to the therapeutic candidate. The firm has exclusivity on the use of this approach from Washington University in St. Louis for all proteins, except four fertility-related proteins granted to Merck (MRK). One of Merck’s four drugs, a long-acting follicle stimulating hormone (FSH-CTP), has already been approved in Europe and marketed under the trade name Elonva. The drug is administered subcutaneously once a week compared to the daily injections of conventional hormone therapeutics.
With the absence of news during the time Prolor was testing its human growth hormone (hGH)-CTP, investors, like usual, lost enthusiasm for PBTH. In other words, what excites investors and analysts, i.e., revenues and incomes, were obviously non-existent and positive news from products wasn’t yet there. The truth is that what was there, but overlooked, was the approval of Merck's extended half-life follicle stimulating hormone produced through CTP technology, which provided proof of concept for Prolor’s technology. Those who got bored and sold PBTH also overlooked the huge market Prolor can secure, working its CTP procedure to extend the half-life of blockbuster therapeutic proteins that are losing their patents and of the unlimited number of newly discovered proteins that promise playing major roles in the treatment of various diseases.
hGH-CTP is on its way to Phase III trials in adult patients with hGH deficiency. Prolor has confirmed the proof of concept now that the positive Phase II trial results were out, showing efficacy with once weekly injections. With regard to Prolor’s plans, in addition to proceeding to Phase III trials with hGH-CTP on adults, the firm has scheduled a Phase II trial with the same product in hGH-deficient children.
Financially, the firm has enough cash to last through 2012. Some believe that Prolor might sign licensing deals with deep-pocketed pharmaceutical companies or top-tier biotechs in order to fund the remainder of its development-phase drugs. About the missing catalysts that caused the stock to bottom in 2011, we expect 2012 to have much exciting news, which could boost the value of PBTH. The expected catalysts include results of hGH-CTP Phase III clinical trials on adults and Phase II on children among other results from other drugs in Prolor’s pipeline. The most important stimuli that would boost PBTH are the firm’s filing for hGH-CTP approval for adults in the second half of the year and attracting new partners, bringing in more cash to its coffers.
EXELIXIS (EXEL) has a great small molecule drug technology and a pipeline with many promising cancer therapeutics. Investors’ enthusiasm had peaked when results from preliminary tests demonstrated that the firm’s lead product cabozantinib erased prostate cancer bone metastasis, as confirmed by digital imaging. Investors were sensitized to react positively as, according to Exelixis, cabozantinib demonstrated objective responses in 12 out of 13 tumor types, and demonstrated activity against metastatic bone lesions in four tumor types, in addition to prostate cancer. The tumors include renal carcinoma, breast cancers, thyroid cancers and melanoma. After reaching around $13, the stock plummeted as Exelixis announced it could not come to an agreement with the FDA on a clinical trial design for its pivotal prostate cancer trial, but will still go ahead with its own design.
Some analysts and investors magnified the negative consequences of the disagreement between the firm and the agency, causing the stock to come down from around $12.80 to a little over $4. Other experts, however, believe that the company is on the right track. Exelixis, they suggest, knows better than anyone else the promises of its prostate cancer drug and can select the clinical trial plans that could highlight all its advantages and best applications.
Cabozantinib is both a MET and VEGF inhibitor. The emerging understanding of MET has helped provide insight into the mechanisms of bone lesion development. MET is expressed not only in tumor cells and endothelial cells, but also in bone-forming cells (osteoblasts) and bone bone-removing cells (osteoclasts). Activation of MET in tumor cells appears to be important in the establishment of metastatic bone lesions. Activation of the MET pathway in osteoblasts and osteoclasts may lead to pathological features of bone metastases, including abnormal bone growth or destruction lesions. Thus, targeting the MET pathway may be a viable strategy in preventing the establishment and progression of metastatic bone lesions.
2012 catalysts include:
- Results of clinical trials with cabozantinib on various cancers
- Results from clinical trials on other drugs
- Filing for FDA approval of the drug for medullary cell carcinoma
The Exelixis product pipeline is rich with promising drugs that attracted alliances from both the pharmaceutical drug developers as well as biotech firms.
2. Persistent stock rally: Sound scientific firms that all of a sudden several analysts decide to upgrade, causing an unstoppable rally in their stocks. Stock rallies that persist without the usual profit taking and analyst downgrades for overvaluation would usually hide a real possibility of an upcoming takeover.
ARIAD (ARIA) now fits this category. Recently, its stock moved upward without interruption and with no significant profit taking or downgrading by analysts. Ariad has an excellent small molecule therapeutic discovery technology, alliances and a sarcoma drug, ridaforolimus, expected to be FDA approved in a few months.
Usually, all these positives would not stop bearish analysts from finding reasons to halt a firm's rally. In this case, bearish analysts remained silent. The only news that could silence bearish analysts is a possible takeover, probably by Ariad’s partner on the drug or others. Ridaforolimus is an mTOR inhibitor that demonstrated promising clinical trial results. The drug is expected to be soon granted approval by the European Medicinal Agency.
For us, takeover is not the only reason for investing in ARIA. The firm has great potential and will put many of its promising pipeline products on the market.
3. Stocks cremated for temporary issues unrelated to products: In this category, the firms have experienced stock sell offs after recently approved drugs had a poor market penetration. The sell offs occurred in spite of the fact that the problems that caused the poor sales are well known to be temporary and solvable.
We already wrote about two biotech stocks that plummeted because the market penetration of their recently approved drugs did not meet Wall Street expectations. These are: Dendreon (DNDN), which has solved its two problems, reimbursement and manufacturing, and Human Genome (HGSI), which is doing its homework to familiarize the specialists with the optimal uses of the drug. The sales are now picking up.
Analysts used these two firms as examples to deter investors from getting enthusiastic and buy shares of companies that are granted drug approval. This example, we believe, was inappropriate and the choice of firms they tried to convince investors not to invest in was also out of place. Topping the list of firms that experienced sell offs as a result of the scary tactic are Incyte (INCY), which experienced a sell off that brought its stock down from over $20 to around $12. The stock is now rebounding, reaching around $16.40 on its way, we believe, to crossing its 52-week high, i.e., $21.15. Also impacted was Seattle Genetics (SGEN), which was pushed down to around $14 from over $22. The stock is trading now at $17.54. We believe the stock will soon cross the $22.40 mark, its 52-week high.
Disclosure: We are long these firms.