The first quarter of 2012 has resulted in massive gains within the biotechnology industry. Several of the industry's small and midcap stocks are leading the market in YTD performance, and have traded with conviction during the start of 2012. Yet because of such large gains during Q1 some analysts are expecting a much slower pace of gains throughout the remainder of the year.
However, the biotechnology industry is known for its large movement in Q2, thanks to the announcements of clinical data and several well-known meetings that produce market moving developments. And with market fear being so low, as the VIX index has traded down over 50% in the last 6 months, it seems logical to imply that investors may be more willing to invest in speculative biotech companies than in previous years, which could result in additional gains. Therefore, I am looking at several companies that could trade higher in Q2 thanks to one of the most anticipated annual events that always produce large gains: the ASCO meeting.
The NASDAQ Biotechnology Index (NBI) has traded higher by more than 18%, meaning it has traded even with the NASDAQ. What's so impressive is that this particular industry is known for its movement in Q2, yet still has the largest number of 100% gainers in the market during Q1 of 2012. Therefore, it seems as though because the right events are in place, with strong movement in biotechnology and fear being so low, several of these big performers could continue the momentum into the second quarter of 2012. With market fear being so low, it seems logical to expect momentum and investor optimism as we approach these key events that typically move small cap biotechnology stocks.
As mentioned in the beginning of this article, the ASCO (oncology society) conference takes place towards the end of the second quarter, during the first five days of June. In fact, the ASCO event is perhaps the most important meeting of the year for biotechnology companies that develop drugs in cancer research. The meeting consists of physicians and other oncology professionals who learn about the newest advancements in the field of treating cancer. It is an honor to present at this meeting, seeing as how it has become a meeting that always produces market moving news.
A primary reason that market moving news occurs at the ASCO meeting is due to the attendance of a large number of companies that present clinical data. This year there are several small cap biotech companies presenting phase data, and every year several of these small cap stocks move higher ahead of the ASCO meeting. As a result, investors will be searching through the list of presenters to try and determine which stocks may trade higher ahead of the meeting, in anticipation of strong clinical data.
Back on March 14, TheStreet.com published its list of stocks to watch prior to the ASCO conference, and other sites have released several versions as well. These lists consist of companies that are announcing clinical data or some other presentation anticipated by the market. What's so intriguing about this particular meeting is the movement that it usually attracts combined with the level of gains that have already been posted during Q1 of this year. And with market fear being so low it is very possible for several of the large YTD gainers to continue trading higher throughout the months leading up to the annual event. Therefore, let's take a look at a few companies that are presenting at the event that may be worth watching (in no particular order).
- Array Biopharma (ARRY) has traded higher by nearly 60% YTD and has a market cap of $210 million. The stock had been a momentum stock after partnering with AstraZeneca (AZN), back in 2011, which created a new level of optimism among investors. However, the stock then crashed back in February due to a negative reaction after a proposed public offering. The stock has since recovered, and received net proceeds of $56.1 million from its offering. As a result, the company is now well-positioned with stock performance, optimism, and cash, yet the company's presentation of Selumetinib will be the most important factor to determine its short-term trend. The market appears to be optimistic, but with some data from the Phase II study already known it will be the drug's efficiency and response rate that will determine its trend following the presentation. Investors should note that some have speculated on the timing of the company's public offering and wondered why it wouldn't have waited until after the ASCO meeting, since it may trend higher if news is positive.
- ArQule (ARQL) will present the phase II study of ARQ-197 in second-line liver cancer. The stock has returned a gain of 25% YTD despite falling 12% since February 3. The presentation will provide details into how each dosing of ARQ-197 performed, seeing as how the dosing was changed due to issues with blood cell count. The stock had traded higher in January when it announced that the study met its primary end points. However, the question will be the drug's effectiveness once dosing was lowered. This news has the potential to move the stock by a significant margin and could affect the stock leading up till the meeting. I consider it somewhat high risk because so much depends on whether or not the treatment will outweigh the risks once dosing is lowered.
- Ariad Pharmaceuticals (ARIA) will present the six-month follow up data from Phase III study of ponatinib in chronic myelogenous leukemia. ARIA has been one of the better momentum stocks of the last three years, with its 1,200% return. And the stock has continued the trend into 2012 with a YTD gain of 30%. The stock is priced high due to high expectations, in large part due to the expected success of its compound ponatinib. ARIA will most likely be one of the more watched stocks of the next few months (leading up till its presentation) with the market expecting results to show a much higher response rate following the six month study.
- Allos Therapeutics (ALTH) will announce data on FOLOTYN at the upcoming conference. The opinions surrounding the treatment which treats patients with peripheral T-cell lymphoma have been somewhat harsh over the last year, driving the stock to a 50% loss. In January the European Medicines Agency (EMA) Committee for Medicinal Products for Human Use (CHMP) issued an opinion recommending against conditional approval of FOLOTYN (pralatrexate injection). Europe was one of many applications submitted seeking regulatory approval of FOLOTYN, but responded with a negative opinion. Yet when the company announced interim results from its Phase I combination study the results were encouraging, which makes this upcoming presentation of data quite important to investors. Following the release of interim results the stock went from $1.55 to $1.76, but has since retraced to $1.48. Therefore, it is possible that ALTH could trade higher leading up to the meeting, and if results are strong it could trade significantly higher as investors would then expect regulatory approval. However, there is also a risk of negative results which could push the stock much lower. Either way I am fairly certain that its YTD gain of 4% will soon be changed, one way or another.
- Exelixis (EXEL) is a stock that trades without a great deal of conviction and a significant amount of volatility, due to uncertainty surrounding its lead agent cabozantinib. The company's had problems with the FDA, questions surrounding its primary end points, and concerns over its single arm study. However, if cabozantinib can shrink bone metastases and show an effect on overall survival then this treatment has significant potential. The company's expected to present Phase II results for the treatment and its chemo-pretreated prostate cancer patients. This controversial treatment's results are highly anticipated and if encouraging could result in substantial stock movement.
- Celldex (CLDX) is one of two stocks that I think could move the most prior to its ASCO presentation. The stock has returned a YTD gain of 95% as a results of increased optimism surrounding immunotherapy and high expectations for its two lead candidates. The company is expected to present data for its randomized Phase II trial in breast cancer with CDX-011. It appears the outlook for the company is gaining momentum, however I worry about its response following the meeting. I worry that results will be criticized due to it only targeting a single antigen, which was an area of criticism for its glioblastoma drug rindopepimut. Either way the stock is trading with momentum and could very easily continue its trend up till the ASCO meeting. However, I would be careful if planning to hold throughout the meeting.
- ImmunoCellular Therapeutics (IMUC) has been a great performer in 2012 with a YTD gain of 120%. The $115 million company has the potential for significant movement before and after it presents survival data for its late stage candidate at the ASCO meeting. I think investors are anxiously awaiting this data and are hoping that IMUC discusses its expected results following the treatment of glioblastoma after five years with ICT-107. The company's lead candidate treats glioblastoma, which is one of the most deadly forms of cancer, with the average patient living just 14 months. But when treated with ICT-107, all patients surpassed one year with the disease, and 40% were disease free after three years. The survival rates of ICT-107 have been responsible for its recent rally, along with the company continuing to acquire additional patents and a diversification of intellectual property. The company is testing its technology on multiple antigens to determine if its therapy can be successful in treating other cancers. At the ASCO meeting I am sure the early results from ICT-107 will be discussed on long-term survival especially disease free survival over 4-5 years. If the company provides additional data, and an update on the patient enrollment for its Phase II trial, it is very likely that it could trade higher. And if the market expects additional data it could very well continue to trade higher leading up to the meeting.
ASCO is the perfect opportunity for smaller companies in cancer research to showcase promising drugs. In the past, companies such as Dendreon (DNDN) have presented data, along with other companies with some of the most innovating drugs in the treatment of cancer. This meeting is now receiving more attention than ever before, with real advances in the treatment of cancer. It's a disease that has seen little medical advancements over the last 30 years and with promising results in cancer stem cell targeting therapies, among others, the optimism has never been higher for this year's ASCO meeting. Another reason to be excited for small companies presenting data is because of the large pharma presence at the meeting. Typically, large companies such as Amgen (AMGN), GlaxoSmithKline (GSK), Johnson & Johnson (JNJ), etc will attend and present at the meeting, but also have the opportunity to identify possible acquisition targets. Several of these large pharma companies have made big acquisitions in this space, over the last couple years. The large companies in the biotechnology industry are always trying to stay one step ahead of the competitor, which often leads to a number of high priced acquisitions in one particular field (hepatitis C virus in 2011). As of late the oncology space, and more specifically the new treatment of targeting cancer stem cells has been a hot buy that continues to gain in momentum.
GlaxoSmithKline initiated the race when it licensed OncoMed's therapies for $1.4 billion. Amgen then acquired both Micromet (MITI) and Biovex for over $1 billion, to acquire both lead candidates and patents. And most recently Boston BioMedical was purchased for its lead candidates and large patent portfolio including intellectual property for up to $2.6 billion. The activity, interest, and acquisitions in the space is really starting to heat up, and with so many large companies that are yet to make a big splash this meeting could impact the market far past its short-term activity.
It seems that every year there are several stocks that trade higher in preparation of the annual meeting. I believe that all of the aforementioned stocks above have the potential to trade higher prior and following the ASCO meetings. This year is very important for the advancement of cancer treatments and with market fear being so low, I wouldn't be surprised to see investors buy biotech with authority prior to ASCO in preparation of large gains.
Disclosure: I am long IMUC.
Additional disclosure: The information within this article is intended for educational purposes only and is not to be used to make any investment decisions without first consulting with a financial advisor.