Which Q1 Biotech Movers Can Build Off Momentum? Part II

by: Brian Nichols

<< Return to Part I

In a previous article I discussed the market's performance in Q1 and looked ahead to the remainder of Q2. In Q1, with the markets trading higher, there were a large number of strong performing stocks. For the most part, stocks such as Caterpillar (CAT), Apple (AAPL), and Bank of America (BAC) have been responsible for the large gains in Q1. However, what some don't realize is that biotechnology has produced the most 100% gainers in the market. In part one, we looked at five of the top ten best performing biotechnology stocks in Q1. We identified what moved the stocks in Q1 and then looked ahead at any possible catalysts in Q2 that could move it higher. The goal is to determine whether or not these big time performing stocks have reached a limit, and are overvalued, or if some are just getting started and can trade even higher. Therefore, I am looking at the remainder of the biotechnology stocks that traded with this level of momentum, in particular, over 115% in Q1.

Orexigen Therapeutics (OREX)

Orexigen Therapeutics posted large quarterly gains of 155% thanks to encouraging developments surrounding its weight loss drug Empatic, along with optimism regarding its chances of approval following the developments of Qnexa: a weight loss drug from Vivus.

Vivus' Qnexa had been denied twice before, but with it finally getting a recommendation, it seemed likely that it would be awarded an approval. Though this news may seem irrelevant to OREX investors, there was an unspoken belief that the FDA would not grant any weight loss medication an approval due to several deaths related to heart issues following the use of such medications in the past. This new found optimism, along with OREX reaching an agreement with the FDA for a special protocol assessment regarding a cardiovascular outcome trial, has resulted in a belief that Qnexa will soon be awarded an approval.

By all accounts, OREX is still undervalued and has many catalysts for large returns heading into the future. The potential market for a safe and efficient weight loss drug is unprecedented in terms of revenue, and Orexigen's Empatic is one safety trial away from capitalizing on this massive market. The stock has been very volatile over the last year, losing a significant amount of its valuation when the FDA requested the study to determine any heart risks. It then saw gains in 2012 after Qnexa's recommendation and the outline for its trial was announced by the FDA. I think the recent news of Qnexa's stalled decision date will affect shares of OREX in Q2. I think if Qnexa isn't approved, then OREX will trade much lower, as a result of an unspoken belief that the FDA will not approve a weight loss drug. Q2 will be a very volatile quarter for OREX, as the market sorts through opinions and conspiracy theories regarding the FDA's motives behind the extended decision date on Qnexa. Although Qnexa will steal the spotlight from OREX in Q2, the company still has a safety trial that is ever so important in its chances of getting approved.

Omeros Corporation (OMER)

Omeros is a late- stage biotechnology company that is trading at all-time highs with a significant amount of optimism. So far, 2012 has been very eventful for the company, and has led to gains of 151% in Q1. The large gains were driven by two developments: It added 10 unlocked class A orphan GPCRs to its portfolio, bringing its total from 23 to 33, which is important for the development of new drugs, and it also traded significantly higher in mid-March when it announced successful results from its late-stage trial of OMS302, which was followed by a patent and upgrades for the stock.

Omeros is still considered an under-the-radar stock with very little in daily volume and receives little in media coverage. The company has a diversified pipeline, and is running several late-stage trials that should provide many catalysts for growth. The stock is trading with its highest level of momentum in its history and the company is currently enrolling patients for its second late-stage trial for OMS302. Omeros is expected to file for marketing approval in the U.S. and Europe in 2013, and I believe it will have the key developments and updates to result in larger gains for the $215 million company throughout the next year.

Vivus (VVUS)

Vivus has been perhaps the most talked about biotechnology stock of Q1, and traded higher by 129%. The strong gains were led by Qnexa finally being recommended for approval from the FDA. The company has been let down in the past, but with the advisory committee voting 20-2 in favor of its approval, it seems as though the company has a very good chance at being awarded an approval and capitalizing on a massive market.

If you had asked me two weeks ago if VVUS will trade higher in Q2, then I would have said "without a doubt". After the committee voted 20-2 in favor of the Qnexa's approval it seemed like a guarantee that it would get the nod from the FDA; and with revenue of potentially $10 billion, it seems as though VVUS' valuation is somewhat cheap and its chances for trading higher were likely. However, everything changed on Monday April 9 when U.S. health regulators extended their deadline for making a decision by three months. As a result, the decision will take place in Q3 of 2012, and Q2 will most likely be filled with speculation and opinions as we attempt to predict the decision of the FDA. In this market we don't like uncertainty, and considering the recent price increase of VVUS, it is likely that it will trade lower in Q2. However, there is an enormous amount of pressure on the FDA to approve a weight loss drug in an overweight society, and with rewards that outweigh the risks it seems logical to bet on an approval. Unfortunately, at this point, you are simply betting on an expected outcome, and considering the unusual nature of the FDA, I don't think anyone would be surprised if Qnexa was once again shut down when it finally makes its decision.

ImmunoCellular Therapeutics (IMUC)

ImmunoCellular Therapeutics attracted investor interest with several key developments in 2012, resulting in a Q1 gain of 120%. The early results from its lead candidate ICT-107 were a primary driver, showing 40% of patients treated with its drug having no progression of glioblastoma over a period of three years. The results were incredible and created instant optimism surrounding the future of the company; considering glioblastoma has a 3 year disease-free survival of only 5%. As a result, some believe the company's technology can be successful in treating other cancers, and with unprecedented success. IMUC has been acquiring intellectual property at a rapid rate and diversifying its patent portfolio with a multitude of antigens for further testing. The company is succeeding where others have failed by targeting a number of antigens expressed in cancer, and being able to attack cancerous cells without harming healthy cells. IMUC is now believed by many to have one of the best technologies in cancer research, which could result in the company being very attractive as an acquisition target.

With a 120% Q1 gain, some may think its upside is limited, however, the stock has several catalysts for Q2. The company's submission of IND for ICT-121 for recurrent glioblastoma is expected in Q2. The company is also presenting survival updates from the Phase I trial at this year's ASCO meeting, which could attract new investors and interest from large pharma. Also, the completion of its 200 patient enrollment is expected to complete at some point in Q2. This company's valuation is still very attractive with a $110 million market cap, which leads me to believe the stock could continue to trade higher. The results from its initial trials are encouraging and I think it is reasonable to believe that its technology can be just as successful at treating other cancers as well. I feel strongly that IMUC has significant long-term growth and revenue potential. The company has a solid cash position and a very low burn rate; those two factors will allow the further development of their growing pipeline. Currently the company meets the AMEX listing requirements and a jump to a major exchange is usually followed by additional interest from institutional buyers. IMUC should not only see a significant increase in share price in Q2, but through out all of 2012.

Amylin Pharmaceuticals (AMLN)

Amylin Pharmaceuticals posted a Q1 gain of 120% thanks to the FDA finally approving its long awaited drug and the company turning down a $3.5 billion offer from Bristol-Myers (BMY). The stock's first jump came in late January both before and after its FDA approval of Bydureon. Bydureon is the company's one-a-week injection for diabetes that had previously been denied twice, before finally being approved. The second and most significant gain came in late March when the company reportedly turned down a $3.5 billion offer from Bristol-Myers. The strong reaction created optimism that the company may have a large bidder or that it plans to partner with another company. This is important because the company's previous partnership with Eli Lilly (LLY) ended last November and some investors are concerned that AMLN cannot effectively market the drug itself.

In my opinion, AMLN is most likely to trade lower in Q2, and possibly made a mistake by not accepting the BMY offer. The market for diabetic medication is very competitive and there are a number of questions surrounding its drug. It is directly competing with recently approved Victoza, and some worry that physicians will be reluctant to prescribe Bydureon because of the many questions throughout its trial process, which lasted longer than a decade. There are many predictions for future sales of the newly approved drug, with most being around $750 million by 2015. Overall, I don't think there are enough short-term catalysts to carry this stock higher, and I wouldn't be surprised if Bydureon is a disappointment due to a lack of resources from the company to market the drug in the competitive market.

In the first quarter of 2012 there were approximately 10 biotechnology stocks that traded higher by over 120%. The exciting fact surrounding the performance of these stocks is that several present the possibility to continue trading higher with further developments expected in Q2. The majority of these stocks are still under-the-radar, but with such catalysts in 2012, I feel confident in saying that several of these stocks won't be unknown this time next year.

Disclosure: I am long IMUC, AAPL.

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