Which Q1 Biotech Movers Can Build Off Momentum?

by: Brian Nichols

The first quarter of 2012 has been one of satisfaction for the majority of investors, following a period of loss in the final 6 months of 2011. For some biotechnology stocks it has been particularly rewarding, as biotechnology once again has the most number of stocks with 100% returns in Q1. These stocks have performed with great gains, but now that we start Q2 some will be re-evaluating the performance and making changes to their portfolio. Therefore, I am looking at the ten biggest gains in biotechnology during the first quarter of 2012, and then identifying catalysts and the potential direction of each stock throughout the remainder of Q2.

Threshold Pharmaceuticals (THLD)

Threshold Pharmaceuticals has been the best performing stock in the biotechnology space with a Q1 gain of 621%. The company is one of many in the cancer treating industry to trade with a significant amount of optimism to start 2012. The stock's gains have centered around several key developments related to its small molecule hypoxia-targeted drug, TH-302. The stock traded flat till February, until the company announced a global agreement with Merck KGaA (OTCPK:MKGAF) to co-develop and commercialize TH-302, which instantly resulted in a 150% gain. Soon after, the company announced that its Phase 2b study met its primary endpoint with a 63% improvement in progression-free survival. The strong clinical results have since encouraged a continuous rally, and, with the company now progressing with the study of its lead candidate, the stock has traded with authority.

With a 621% quarterly gain, some probably assume that profit taking will occur at some point in the near future. In the first four days of the second quarter the stock has lost 16% of its value, as the very volatile stock traded lower with the market. Whether or not the trend will continue is unknown, however, the company will most likely release various updates over the next few months regarding its current trial, which will be market-moving information. As an investor, I am most concerned with the questions surrounding the drug's safety, overall survival, and side effects. These questions must be answered to maintain its current level of optimism so that THLD can continue to trade higher, or at least hold its gains. As a person who has lost a loved one to pancreatic cancer, I am hoping for the success of both this company and its drug; and if THLD can continue to produce solid results, then there is no doubt it will trade higher, although an immediate pullback does appear possible. It's definitely a stock-to-watch because, with positive results from future data, the upside is quite large.

Galena Biopharma (GALE)

Galena Biopharma began trading higher on January 5 when it announced the approval for a Phase II trial with the treatment of NeuVax and Herceptin. Almost immediately the stock began to trade higher as optimism surrounding the company's lead candidate, NeuVax, and was encouraged by several key developments, including a patent on the drug and a dividend payment in the form of RXI shares. As a late stage candidate, NeuVax's potential has become an area of optimism, as a result of few treatments in breast cancer and NeuVax being the most advanced treatment under-development. As a result, the stock posted a Q1 gain of 373% due to it being significantly undervalued at the beginning of the year.

Much like THLD, GALE has performed with loss during the first few days of the Q2, a loss of 15%. However, the stock has several short-term catalysts for growth that could spark additional gains, especially considering its value-presenting price. The company will present 48-month data at the ASCO meeting regarding the long-term durability of NeuVax. This could help prove breast cancer to be a maintenance disease that includes boosters every six months, which would be good for patients and give GALE much stronger commercial opportunities. The company is also planning to have 100 clinical sites enrolled for its Phase III trial by mid-2012, which is important to investors. The NeuVax with Herceptin combination study is expected to start near the same time, and if successful could open several revenue producing doors. Overall, I believe the stock is undervalued considering potential, and believe there are enough short-term catalysts to result in a higher trend during the immediate future.

Agenus Inc. (AGEN)

Agenus is a very volatile stock that has traded in wild swings over the last year. It lost 60% of its value during the last 6 months of 2011 as the market was trading lower, but has since recovered to post a gain of 230% in Q1. The stock's most recent gains have been led by an abundance of speculation that AGEN could potentially be purchased because of its corporate partnerships and the latest encouraging data surrounding several of its late- stage candidates. The company does make a very enticing acquisition target with a therapy that is showing signs of being able to effectively treat several conditions. The company uses immunotherapy, which has been a therapy of choice for investors in 2012, with several immunotherapy stocks trading significantly higher.

The question for investors is whether or not AGEN has reached a limit or can continue to trade higher. I think AGEN's immediate trend is completely dependent upon the direction of the market. In November the company released strong data for its Phase II trials of G-200 but continued to trade lower until January, when the market reversed. The company is expected to provide several clinical updates at this year's ASCO meeting, in addition to its upcoming presentation for its glioblastoma vaccine in mid-April, which could move the stock further, assuming the market trades flat or slightly higher.

BioDelivery Sciences International (BDSI)

BDSI is the final biotechnology stock to return over 200% in Q1. It has been a bumpy road for the company: back in September of 2011 the stock dropped from $3 to $1 after its Phase III efficiency study for chronic pain with the use of Buprenorphine produced less than stellar results; but in 2012 the tide turned for BDSI after Endo Pharmaceuticals agreed to pay $180 million for licensing rights to market the pain treatment BEMA Buprenorphine. In addition to the deal with Endo, the company won its patent- related charges and reached an agreement on BNX's developmental plan with the FDA.

In my opinion, BDSI is second to only GALE in having the most amount of upside from its current position. The company's candidate Buprenorphine/Naloxone with the BEMA technology has the potential for a massive market in revenue. Suboxone is quickly growing in revenue, and because of its high cost, the drug probably hasn't reached its potential, since it caters to a majority of low-income populations. BDSI has managed to bypass the patented technology of Suboxone with its own delivery technology, and then if you incorporate the potential of Buprenorphine to treat pain, but with lower dependency risk than other strong drugs, it seems as though BDSI could become a very large company with revenue in the billions. As an investor, it is encouraging that BDSI is using drugs that are already proven effective and that could be awarded an approval by simply altering the delivery of an already approved and successful drug. Therefore, I believe the stock still has upside potential, yet its immediate upside is limited to its number of short-term catalysts; and at this time it appears as though most of BDSI's catalysts are long-term.

Alimera Sciences (ALIM)

Alimera Sciences has returned a YTD gain of 172% after trading with significant loss in the last 6 months of 2011. In November the stock went from $9 to $2 following a response letter from the FDA after its second rejection of the company's eye drug Iluvien, citing risks that were not worth the reward. Yet in late February the stock recovered a portion of its loss after its eye drug Iluvien received an approval to treat diabetic macular edema (DME) in seven major European countries. As a result, the stock has traded relatively flat and has held its gains following the news of the approval.

I think ALIM has a good chance to hold its recent gains and possibly trade higher in Q2. The stock is still trading with a 56% one year loss, therefore I believe investors are willing to hold at this level due to the company now being awarded an approval. The European approvals include several benefits that give ALIM a variety of options. First, the company will return a significant amount of revenue from sales in the seven European countries; and because of future sales, and a $100 million valuation, the company is a very attractive acquisition target for large pharma. Most investors are hoping for the company to be purchased in the next few months, however I wouldn't be surprised to see a licensing deal rather than an acquisition. The European approvals do not mean that Iluvien will be awarded an FDA approval, but they can't hurt. ALIM was highly criticized during its last attempt for approval because of safety concerns; but if it succeeds in the European market, it could provide proof that the rewards outweigh the risks, and the company could put to rest any possible manufacturing concerns. However, it is also possible that its European experience will be a failure and result in further loss. Overall, I think it's a great value considering its possibilities. Investors are most likely to hold and see how the events unfold, which will allow the stock to maintain its price or possibly trade higher in Q2.

There is no doubt that it was an eventful quarter for several biotechnology companies and investors who owned the stocks. So far we have discussed the top 5 performers in this space. However, there are several additional stocks that have performed well. In fact, the biotechnology industry produced 35 companies that traded higher by more than 70% in Q1. Therefore, in Part II we will be looking at the remainder of the top 10 best performing biotechnology stocks; and this list will include several large and small companies that still present significant upside potential.

Disclosure: I am long GALE.

Disclaimer: The information in this article is not to be used to make any investment decisions. It is for educational purposes only.

Continue to Part II >>