In parts I and II we looked at 8 stocks with significant upside potential of at least 100% in the biotechnology industry. In part III we are looking at the top two stocks with the most upside potential of any biotechnology stock. The top two on this list were decided based on valuation compared to similar companies, overall growth and upcoming developments, and pipeline potential. I believe that not only do these two stocks have significant upside potential in 2012, but even greater upside potential in the next 10 years, which is what makes both companies so special. Here I will be comparing the top two stocks with companies of similar size so that you can see the value being presented.
In part I of this series I began by showing a Google screener which returned 51 stocks, with a market cap greater than $50 million that returned 100% over the last year. And of the 51 stocks, 18 were biotech companies, including the top 5 gainers in the market over the last year. Biotechnology stocks have the ability to return the most outrageous gains in the market. It doesn't take much to create optimism among biotech investors, with so many catalysts for growth at various stages of a company's development.
Spectrum Pharmaceuticals (SPPI)
Anyone who has ever read a biotech article that I have written is probably very surprised that I am listing SPPI as the stock with the second most upside potential. I have been very bullish on Spectrum over the last two years. It's one of the fastest growing companies in the market and is ridiculously cheap.
Spectrum has two FDA approved drugs: Fusilev and Zevalin. Fusilev has been the company's growth drug -- treating colorectal cancer -- a disease with 400 new cases per day. The patent protected drug returned revenue of $41.01 million in its most recent quarter, which is a 21% gain over the previous quarter. Sales of Fusilev have increased at an incredible rate and are showing no signs of slowing down.
The company's other drug, Zevalin, hasn't grown at near the same rate because of high costs associated with the treatment. Last quarter Zevalin accounted for just $6.94 million of the company's revenue. So far, Zevalin has been somewhat disappointing considering it treats non-Hodgkins Lymphoma, a disease with 180 new cases per day.
However, what's exciting is that the FDA just recently lifted a bioscan requirement which will make it much less expensive for both the physician and the patient. This bioscan requirement has hindered growth, but since it's no longer a requirement I believe we can expect a much more aggressive marketing strategy from the company to increase sales of a drug with such large potential. This strategy was evident when the company recently paid Bayer $24.7 million, plus royalties, to expand Zevalin to a global platform, which could be huge for both the company, Zevalin, and even Fusilev which should be affected.
In addition to Spectrum having two fast growing drugs, it has two late-stage drugs as well, Belinostat and Apaziguone, which could be approved later this year. Both candidates have been flawless in clinical trials and are much anticipated with the potential to return substantial revenue for the company. Belinostat treats Peripheral T-cell Lymphoma and other solid tumors and Apazinguone is an exciting synthetic bio-reductive prodrug that treats non-invasive bladder cancer. Both drugs have great data behind its clinical trials and should have no problems being awarded an FDA approval. These two late-stage candidates are just two of eight that Spectrum is testing in clinical trials.
After reading the above information it's obvious that Spectrum is a great company. But what makes it so appealing is its valuation. The company trades with a market cap of $820 million which is just 4.62 price/sales and 13.75x future earnings. The company is trading nowhere near a valuation that should be expected for a company that is growing revenue by more than 200% and that's posted earnings of $45 million over the last 12 months compared to a loss of $48 million in 2010. In my opinion, SPPI should be trading at 50x earnings like many fast-growing biotech companies with bright futures. To better explain, take a look at the below chart.
|Spectrum Pharm||Questcor Pharm|
As you can see, aside from margins, SPPI is almost equal on all fundamental measures aside from market capitalization. But what you must remember is that Questcor Pharmaceuticals, which is one of the faster growing biotech companies, is growing at half the rate of Spectrum. In fact, after Spectrum announces earnings in March it will most likely be the larger company, since the CEO of Spectrum just recently stated that Q4 earnings will be as good, if not better, than its Q3.
Right now SPPI is just an $815 million company, but with a solid pipeline, two drugs that have significant upside potential, and a valuation that is smaller than some companies that don't even have one approved drug, SPPI is almost certain to double over the next year with fundamentals that continue to improve. But beyond this year, I think what makes it so special is that the company's pipeline is so large, and its full of candidates that can return large amounts of revenue in addition to its current drugs which are nowhere near full potential. In my opinion, Spectrum is an amazing investment that could give investors the opportunity to buy the next "big pharma" before it becomes a multi-billion dollar company over the next several years.
Immunocellular Therapeutics (IMUC)
I've stated on several ocassions that my favorite treatment in biotechnology is immunotherapy, and my favorite company that focuses on this treatment is Immunocellular Therapeutics. IMUC is a speculative biotechnology company that I believe is presenting unprecidented upside potential in 2012, and beyond. Some may question this choice, but when you look at its potential, trial results, capital positioning, and its valuation compared to similar companies then I don't believe there is any other company that comes close to matching its upside potential.
IMUC is a biotechnology company that's working on a next-generation immunotherapy targeting cancer stem cells. Its lead candidate ICT-107 treats Glioblastoma, a very common yet deadly form of brain cancer. The company recently completed its phase one trials, and the results were remarkable. The company's now enrolling patients for its phase II, which should be complete in Q2.
In the past, Glioblastoma was considered to be a death sentence, with little to no hope, if using the most conventional treatments. Once diagnosed, the patient's life expectancy, with standard care alone, was 14.6 months, with just 6% of patients surviving three years. What's so encouraging about ICT-107, and IMUC, are the results from initial testing on glioblastoma. So far, 100% of all patients who used ICT-107 surpassed their first year and 40% of the patients with glioblastoma were disease free after three years. Without ICT-107 only 6% of patients lived 3 years, but with ICT-107 40% are disease free, which is incredible.
The fact that IMUC is trading with a $60 million market cap seems too good to be true. The reason that ICT-107 has been so successful is because of its next generation immunotherapy treatment. IMUC uses immunotherapy to identify cancer stem cells, by stimulating the immune system, without affecting healthy cells. This form of treatment is showing unprecedented success in fighting cancer against the traditional methods of the past. In part two of this series I discussed how we've already exhausted our ability to treat cancer via chemotherapy and radiation therapy, which are harmful to our bodies, and how monoclonal antibodies have advanced the field of treatment but is yet to prove itself as the transcendent technology that we once thought.
Cancer has seen little improvements in survival over the last three decades. But with new research and better technology we are now making strides in the right direction, and realize that by stimulating and re-programming the immune system we can identify and treat malignant tumors that are foreign to our bodies. It's quite genius to use our body's natural defense system to fight the most vicious of diseases, and so far, all data suggests that immunotherapy can not only identify but can treat individual tumors while causing very little, if any, damage to normal cells.
Immunocellular Therapeutics is becoming a very bullish stock among investors, as shares are being bought with authority. During the last four months of 2011 the stock traded with volume of near 50,000 but in the last month volume is up by more than 8x, and its price has increased 80%. Yet despite its large gains, I don't believe it's anywhere near its potential in 2012. This is evident when looking at the valuation of IMUC compared to other companies with similar technology.
IMUC is not the only immunotherapy stock to trade significantly higher in 2012. Lately, there has been a substantial amount of interest from big pharma, and after a series of acquisitions it's left several of these stocks trading higher. But as we know, no two companies are created equally, and IMUC is returning the best results, but just so happens to trade with the lowest valuation. One of the most high profile acquisitions was just a few weeks prior, when Amgen (AMGN) purchased both Biovex and Micromet (MITI), two companies with a focus on immunotherapy. Micromet which has a solid pipeline and encouraging early data was purchased for $1 billion, and Biovex for $1.2 billion. Verastem (VSTM) which is very similar to IMUC, but is at least 3 years behind IMUC in the approval process, is valued at $230 million after its IPO, nearly 4x greater without the clinical data to back its price.
Besides having a technology that's showing mass improvements over all other forms of treatment against glioblastoma, investors have several other reasons to be optimistic. First, when you look at the distinction in value between Immunocellular and Verastem it is obvious that IMUC is the better company. Not only is IMUC ahead of VSTM in the approval process, with better results, but it has 10 patents issued, with 18+ pending, and is well capitalized.
The company has $16 million in cash with a burn rate of just $1.8 million per quarter with no outstanding debt. This should allow IMUC to move forward at least 2 more years without needing additional funding. By that time, if all data continues to impress, then I believe it will present similar value as both Biovex and Micromet which were purchased for more than $1 billion.
The upside for this company is significant: It has a great technology that has been successful in treating glioblastoma, its treatment is cheaper than alternatives, it has a strong pipeline of treatments in immunotherapy, it's well capitalized with several patents, and it's massively undervalued compared to similar companies.
The distinction of value in immunotherapy treatments is mindboggling. In my opinion, it's because we don't fully understand the concepts of treatment and are hesitant to embrace the new technology. IMUC is one of the best in this class and just so happens to be the cheapest. I think the acquisition of MITI and Biovex reflects the growing interest among big pharma, and the valuation of VSTM reflects the inequality of valuation. I believe that throughout 2012 immunotherapy stocks will control the large gains in biotechnology, not just IMUC. I expect to see continuously strong data, several acquisitions, and incredible gains as investors become more familiar with this technology that continues to save lives.