3 Hot Biotech Stocks To Consider Now, 1 To Avoid

by: Dividend Kings

Investors sometimes write off companies that are priced too low or that have plummeted recently. This is sometimes the best thing to do, even if you stand to make a small profit by buying low. There are opportunities out there that offer nothing more than throwing money down the investment drain, but there are also low-priced options that stand to gain big. The key is to mine that one unexpected opportunity and get in at the best time. This is easier said than done, of course, except in those rare, magical instances. I want to take a look at two low-priced options available that are what I believe to be a great example of discovering a great opportunity versus throwing money away on a wasted investment.

The first of these companies is Keryx (KERX), the one that gets my vote as a poor investment. Not that long ago there were high hopes for Keryx, but hope faltered following failed phase three clinical trials of perifosine in April 2012. The drug was intended for treatment of advanced colorectal cancer and had it succeeded, would have really given Keryx a boost. Instead, Keryx fell 66% to less than $2.

Keryx claims it will now focus on the only other drug in its pipeline, Zerenex. Zerenex is an oral, iron-based compound that will be used to treat chronic renal failure. The main reason Zerenex has gotten so little attention so far is because everyone was focused on perifosine. Zerenex is a phosphate binder, which is nothing new in the pharmaceutical field and there are already several competitors capable of performing just as well as the drug.

Keryx is surely a bargain at the moment, but any of its value is likely short lived. Some still have hope and believe that buying now is a great move, especially if Zerenex gives the company a bump. Many who currently own Keryx and bought higher than $2 are certainly hoping this happens, providing them the opportunity to get out at around $5 or $6. Unfortunately, I think this is unlikely to happen and I would strongly recommend avoiding Keryx, regardless of how tempting its low price might seem.

A better option for those considering Keryx is Achillion (ACHN). It was up at the end of March after a competitor released disappointing study results for its hepatitis C treatment. Achillion focuses on treatments for infectious diseases, specifically hepatitis C and resistant bacterial infections. Achillion has six drugs in its pipeline, five of which are intended to treat HCV and which treats bacterial infection.

Achillion is also addressing concerns over resistant infections and developing anti-infective drugs and is developing tools that make management of its compounds more efficient. Two of the most notable of these tools is the Achillion Automated Chemistry Platform, a software program that facilitates the synthesis of thousands of small molecules in parallel by automating several cumbersome steps, and the Compound Acquisition and Repository Tracking, a software tool that streamlines scientists' ability to select and acquire compounds for lead identification.

Achillion is a little pricier than Keryx, though, and my original goal was to help investors find the best "dirt-cheap" biotech options. My pick for a strong low-priced investment is Arena (ARNA). It is part of the group of booming weight loss industry options and is currently selling for just under $3 a share. It is a clinical-stage biopharmaceutical company with a focus on developing and commercializing oral drugs targeting G protein-coupled receptors in the areas of the central nervous system, cardiovascular disease, inflammatory disease, and metabolic disease.

The most notable of Arena's pipeline drugs is lorcaserin, which is well into phase three clinical trials and intended for use in weight management. Arena is addressing specific concerns from the FDA with the drug and the company's ultimate goal is to receive approval for both U.S. and global markets. Unlike Keryx, which had only Zerenex behind perifosine, Arena has a strong pipeline, so even if lorcaserin does not work out, there is no need to panic.

Hopes are high for lorcaserin. The drug is intended to help with weight management, including weight loss and maintenance of weight loss, in patients who are clinically obese or seriously overweight with at least one weight-related co-morbid condition. The drug should help control and suppress the appetite, making it easier to diet and maintain a healthy body weight. Obesity is a serious problem and growing worse. Studies indicate approximately one-third of U.S. adults are considered obese. A recent report (pdf) issued by the Organization for Economic Cooperation and Development (OECD) predicts at least 75% of Americans will be obese by the year 2020. However, just a small weight loss can have profound health effects, so many are banking on weight loss drugs to make a big splash. If the medical industry can curb the obesity problem just a tiny bit, there could be a significant reduction in other health problems.

Biotech companies focused on weight loss and weight related diseases are expected to do very well in the near future, but Arena is not the only option. Vivus (VVUS) is another major player in the obesity market and saw a bump following the OECD report. Its current price is just under $23, so it obviously is not on my list of low-priced options. However, it is a great option for those who are looking for more security than Arena offers. Experts expect Vivus to do well in the near future, due in part to its weight loss drug Qnexa. Qnexas is expected to receive approval from the FDA before lorecaserin and will be the first weight loss drug approved in more than a decade. Approval should come in April, but most investors think the drug is as good as approved because of a positive report issued by the FDA in February.

The bottom line is there are very inexpensive investment options out there, but not all of them are worth even a small amount of money. If you are looking for something that is likely to provide a return without a major investment, look to markets that are surefire bets, like weight control. Arena has a lot of hope and I would be willing to take a risk, especially at prices this low.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.