The "risk-off" investment climate in April only exacerbated the recent woes of Halozyme Therapeutics (HALO). Halozyme's shares were momentum darlings entering the month. What's more, a savvy biotech insider had been averaging up the price of his holdings since last summer. That was looking very smart as the firm continued to post positive clinical results for the handful of milestones the company passed successfully in Q1.
But HALO's momentum was rudely interrupted by an analyst downgrade on April 10th in the teeth of a bad-sentiment day for the market as a whole. Less than a week later, Halozyme sinned again by receiving disappointing news from the FDA. The net result was that HALO shed more than a third of its market cap within a two week period-giving investors another good entry point to bet on this development stage biotech.
Halozyme's trademarked 'Enhanze' technology uses a proprietary enzyme to facilitate the absorption and dispersion of drugs or fluids that are injected under the skin. When injected under the skin, the enzyme transiently generates channels in tissues underlying the outer layers of the skin to increase the absorption and spread of injected drugs.
The system promises to be a better delivery alternative for various drugs that are presently administered via intravenous (IV) infusion, and Halozyme has already inked several partnership deals with such established players as Roche (RHHBY), Baxter (BAX), ViroPharma (VPHM), and Intrexon to apply Enhanze technology to drugs that are already FDA approved, and which the partners are already generating substantial revenues from.
HALO is actually an alumni of InsiderInsights' Recommended List, and one that departed on very good terms. Between September 2006 and January 2008, we pocketed 137% in this position. That return was actually a bit disappointing as well. We had a near 300% gain in the stock in April 2007 before the financial crisis began to squeeze risky assets. HALO ended up halving in price again after we took our still-decent profits before finally hitting its crisis nadir.
Biotech investor and CEO Randall Kirk was the main insider buyer at Halozyme when we bought in 2006, and he remains the major part of the bullish insider signal in HALO now. Mr. Kirk showed his smart insider chops last summer when-after a long pause trading HALO-he invested another $6 million in the stock last August as it traded around $6. Two other insiders made minor buys then as well. But we were in bearish cash raising mode last August, and not looking for another dev-stage biotech to add risk to our List.
Though raising cash last August and September was generally correct, HALO leapt last higher October after a string of positive FDA trials with partner drugs were announced. Tellingly, Mr. Kirk bought that strength, spending another $7.4 million last November as HALO traded north of $8-just in time to profit from further good FDA news last December.
In February, Mr. Kirk upped his exposure yet again with a $14.4 million purchase of HALO for $10.61. That transaction increased his total holdings by a notable 7.8%, and HALO duly traded up to $13.50 before rolling over in April.
Laid low by HyQvia
It was the Baxter product that failed to be approved earlier this month, and caused the major decline in the stock. Halozyme has been testing HyQvia in Phase III trials with Baxter, to better treat patients with primary immune deficiency. The firms filed a Biologics License Application (BLA) for HyQvia midway through 2011, and expectations were high for approval by the end of this month.
But, as is always the risk with a dev-stage biotech--it wasn't. And the drastic gap down in HALO after the FDA failed to approve the drug is testimony to just how much the decision caught investors by surprise. The subsequent price action hasn't done much to inspire confidence either. HALO is lower now than after its initial panic gap down.
Yet all is hardly lost with Halozyme, For one, the FDA's failure to approve HyQvia was not an outright rejection. The FDA is requesting additional information to complete its review of the BLA, and Baxter and Halozyme will undoubtedly work out a new timeline to answer the concerns that were raised about the long-term chronic use of HyQvia, and the proprietary rHuPH20 enzyme it contains.
Analyst Gregory Wade at Wedbush Morgan Securities believes that investors are incorrectly assuming that the setback for HyQvia may bode ill for other products in Halozyme's pipeline that contain HyQvia's rHuPH20 enzyme. This includes Hylenex-which is already approved.
The non-approval of HyQvia is definitely a set back, however, and Mr. Wade has added another 18 months to the approval schedule of HyQvia as a result of the added hurdle. He has also lowered his target price by $1, to $16, which is more than enough upside potential to keep an 'Outperform' rating from Wedbush Morgan on the stock.
Eun Yang at Jeffries is not as optimistic, but her 'Hold' rating also seems to indicate little downside risk from HALO's present price. Ms. Yang was the analyst whose April 10 downgrade is credited (by us, at least) as having exacerbated the stock's initial break in upward momentum. But even Ms. Yang acknowledges that she did not foresee HyQvia's set back.
In reaction to last week's plunge, she has assumed a 2-year delay in HyQvia's approval, and reduced her odds on eventual approval from 95%, to 65%. And after reducing her price target on HALO on April 10, to $10, she has lowered her target again, to $8.
So even one of the more negative analysts on HALO doesn't expect more downside from here. That price target also only makes sense if Ms. Yang further believes that the other, numerous milestones that are in store for Halozyme in 2012 won't be derailed by a general questioning of the long-term effects of the firm's proprietary rHuPH20 enzyme.
Sentiment counts with biotechs, and HALO may well not be quite done correcting in this generally skittish environment for equities. But taking a cold look at HALO right here and now, we believe the stock has overreacted to the past month's setbacks. Halozyme's pipeline is too broad and (still) too promising not to bet on an eventual rebound in its shares.
Disclosure: I am long HALO.
Additional disclosure: Clients of Insider Asset Management llc also own HALO.