One Stock To Buy, Two Avoids, And A Swing Trade From Last Week's Big Biotech News Movers

by: GuruFundPicks

The biotech group, as represented by the SPDR S&P Biotech (NYSEARCA:XBI), has had a stellar year so far. It's up about 40% YTD, with many small-cap biotech companies up multifold during the year. The index is up about 5% so far this month, and although it was about flat last week, many biotech companies made strong, mostly upside, moves during the week. We scanned these big biotech movers, and the underlying stories driving them, aiming to separate out the ones where the moves are likely sustainable.

Astex Pharmaceuticals (NASDAQ:ASTX): Astex is engaged in the development of therapeutics targeting life threatening diseases, with a particular focus on oncology and hematology. It has a broad pipeline of drugs in early- and mid-stage development. It is developing some of these drugs independently, and some in collaboration with leading pharmaceuticals companies, including Novartis (NYSE:NVS), AstraZeneca (NYSE:AZN), GlaxoSmithKline (NYSE:GSK), and others. Besides, it also has one drug on the market, DACOGEN, that is approved for the treatment of myelodysplastic syndromes (NYSE:MDS) in over 30 countries -- including the U.S. and most key markets -- and for which it receives royalties from its marketing partners.

The strong move Friday, during which the stock initially rose 30% to its $2.78 intra-day high before finally settling down at $2.50 at the close, was based on much anticipated news that DACOGEN received positive regulatory recommendation in the EU for the treatment of acute myeloid leukemia (AML) in patients aged 65 and above. The strong move attempted to reverse a "mirror" down move in early February, when the FDA's Oncologic Drugs Advisory Committee voted 10-3 against DACOGEN for the AML indication. The company expects to receive approval from the European Commission by the end of Q3.

ASTX has a strong balance sheet, with over $1.25 million in cash per share and no debt, a broad pipeline of oncology drugs in mid-stage development, a currently globally marketed drug for which it receives royalties, and most likely another cancer indication that will be approved in Q3. Wall Street analysts are also bullish on the stock. Both analysts that cover it rate it at buy/strong buy, with a mean price target of $4.25, well above Friday's closing price of $2.52.

Stemcells Inc. (STEM): Stemcells engages in the research, development and commercialization of stem cell therapeutics, and related tools and technologies to treat, and possibly cure, human diseases and injuries such as Parkinson's disease, hepatitis, diabetes, and spinal cord injuries. Its shares made a sharp upward move Tuesday, more than doubling at the intra-day peak, after the company announced that its proprietary human neural stem cells, when transplanted into the hippocampus region, restored memory and enhanced synaptic function in two different animal models. This has profound implications for Alzheimer's disease, where reduced density in the hippocampus leads to memory loss.

While this is certainly positive news -- not just for Alzheimer's patients but for stem cell therapy in general -- the results are far too preliminary, and drug approval and commercialization too far away, to factor into the valuation. More than anything, it further proves the promise that stem cell therapy holds for the future, and makes a stronger case for having a basket of stem cell stocks in a diversified portfolio. At just $40 million in market-cap, the stock is still very cheap, and the promise too huge, especially considering that the company has other stem cell drugs in the pipeline. However, we would not recommend it as a core holding, as it is very likely to see many wild swings and dilutive offerings in the future.

Other big movers in the biotech space last week included:

  • Pluristem Therapeutics (NASDAQ:PSTI): Pluristem is an Israeli developer of placenta-based cell therapeutics, targeting severe degenerative, ischemic and autoimmune diseases. By using human placenta, a non-controversial adult stem source, it avoids the political and regulatory conflicts surrounding those engaged in the use of human embryonic stem cells. Its shares rocketed up Wednesday after the company announced that it had entered into a collaborative agreement with CPC Clinical Research (NYSE:CPC) for services related to enrolling and sustaining clinical sites. Pluristem entered the agreement in anticipation of initiating a Phase 2 study using PLX-PAD cells for the treatment of Intermittent Claudication (IC), a condition caused by peripheral arterial diseases. The stock enjoyed a massive three-day run-up of almost 40% to its intra-day high on Friday, but technically, the rally appears to have reversed, and the stock will most likely consolidate here. Until the next significant news, that is.
  • Onyx Pharmaceuticals Inc. (NASDAQ:ONXX): Onyx is a biotech company engaged in the development of small molecule drugs designed to target mechanisms that cause cancer cell proliferation and angiogenesis. Its shares made a sharp move up on Friday, rising 16% intra-day, before settling down for an 11.7% gain at the end of trading. The stock gapped up at the start of trading, aided by an upgrade from Leerink Swann. And just before noon, after the stock was halted, the company confirmed that the FDA had granted accelerated approval for Kyprolis to treat patients with multiple myeloma who had received at least two prior therapies, include treatment with Velcade and an immunomodulatory therapy. The approval follows the 11-0 positive vote by the FDA's Oncologic Drugs Advisory Committee on June 20. Overall, the stock is up a massive 70% since before that news came out.
  • Vivus Inc. (NASDAQ:VVUS): Vivus is a biopharmaceutical company developing therapeutic products to address unmet medical needs in obesity, diabetes and sexual health. The only loser on this list, its shares have been exceptionally volatile this past week. The stock fell 5.7% for the week, but with wild swings of about 30%-50% up and down three times during the week. First, shares dropped about 30% in advance of the much-anticipated Qnexa decision from the FDA, then they rose 50% from those levels over the next two days before finally falling off almost 30% at the lows on Friday. The approval got mixed reaction from the Street, with many claiming the approval to be clean, while others expressed doubts related to execution. In particular, Wells Fargo cited that the company faces reimbursement challenges, a restrictive distribution network, and patient compliance issues. Technically, the wild swings suggest that the $30 highs will hold, and the stock is likely to remain range-bound for a while, albeit with wild swings that may be attractive to a swing trader.

Disclaimer: Material presented here is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock, you should do your own research and reach your own conclusion. Further, these are our 'opinions' and we may be wrong. We may have positions in securities mentioned in this article. You should take this into consideration before acting on any advice given in this article. If this makes you uncomfortable, then do not listen to our thoughts and opinions. The contents of this article do not take into consideration your individual investment objectives, so consult with your own financial adviser before making an investment decision. Investing includes certain risks including loss of principal.

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

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