A handful of smaller biopharmaceutical stocks have bucked the markets recent downward trend and are trading higher on heavy volume. This appears to be a positive sign for these biopharmaceutical companies with the market being battered most of this week due to everything from Europe's debt crisis to risks with China, to the possible slowing down of the economy if congress allows the tax hikes to take effect. Solid volume in a positive direction can definitely be construed as a good sign under these conditions.
NeoStem (NBS) has more than doubled its three month average trading volume of 1,380,000 to over 2,700,000, as the stock swung upward of 30% during the last 11 trading days. Therefore, what is contributing to the volume and rise in the value of the stock so shortly after NeoStem was removed from the Russell 2000 and Russell 3000 indexes back in June? One only needs to take a closer look at the company itself, which has had several key developments over the last few weeks that have led to this rally. WBB Securities, a boutique independent investment bank, upgraded NeoStem on Monday, July 9th, from buy to strong buy. One reason could be the positive sign that its revenue continues to rise. In the last three years, NeoStem's revenue has risen from roughly $10,000,000 to just over $73,000,000, with a continuing upward trend. While its operating expense has also risen significantly over the past two years, one has to remember that NeoStem is a development-phase company and that most of those costs can be attributed to SGA expenses.
What should also bolster the company's bottom line is the sale of its 51% interest in Suzhou Erye Pharmaceutical Co. Ltd, for $12,280,000 in cash. Not only does the sale give them cash flow, but it also allows the company to focus on what it does best, stem cell therapies. To further cut costs and bolster its profit margin, NeoStem announced that the company is merging its Cambridge facility with Progenitor Cell Therapy (PCT), a contract development and manufacturing company that was acquired in January 2011.
On July 9th, NeoStem released a Letter to shareholders, which focused on the second half of this year. Dr. Robin L. Smith, Chairman and CEO of NeoStem, spelled out the progress in the company's acute myocardial infarction (AMI) trial enrolling the first patient in the PreSERVE Phase 2 trial, giving the company strong presence in both the cardiovascular and non-cardiovascular cell therapy markets. Dr. Smith discussed how PCT service continues to grow:
...setting the stage for expansion into larger and substantially more lucrative commercial manufacturing contracts. Each new client and business development opportunity affirms our belief that we have a unique technology platform capable of supporting both our internal development as well as the global cell therapy market.
NeoStem has much going for it now, any of which could have a catalyst emerge at any time providing additional momentum to the company's current bullish run. The company has presented positive results from its successful AMR -001 stem cell therapy for treating cardiovascular disease, now in Phase 2 trials. It also has other therapies in its pipeline and has just been awarded a $592,250 grant from the National Institute of Allergy and Infectious Diseases for the development of Human, Autologous, Pluripotent Very Small Embryonic Like (VSELs) Stem Cells as a Countermeasure to Radiation exposure. Along with its contract manufacturing of stem cell therapies for companies like Baxter (BAX), there is good reason for the stock to continue moving back upward. NeoStem, like most small biopharmaceutical companies, will have its wild swings and is still off its 52 week high; but given that the company is also pursuing additional strategic relationships with major pharmaceutical and biotechnology companies, it appears to be moving in the right direction with a clear path for growth.
Another stock that bucked the trend is Arena Pharmaceuticals (ARNA), though it has given up some of its gains in the past few days. There has been very positive news lately as Arena won approval last month from the FDA for its obesity drug lorcaserin, marketed under the name Belviq. Belviq "tricks" the brain into feeling full after consuming less food than the dieter would normally eat. Compared to a placebo, over the course of a year of dieting and exercise, patients taking Belviq lost an average of 3% to 3.7% of their initial body weight. Additional chatter of a possible takeover helped the stock leap from a yearly low of $1.23 in September 2011 to close on Tuesday July 9th at $11.97, giving the stock a tremendous run up of over 500%.
The FDA first rejected lorcaserin in 2010 due to cardiovascular concerns. Arena sponsored huge trials in which patients taking Belviq, or a placebo, received regular echocardiograms to see if the drug was harming their valves. The FDA panel concluded Belviq was safe enough to go on the market, but recommended an extensive post-marketing study to rule out cardiovascular complications. Though similar to fenfluramine, (the fen in the fen-phen, the appetite-suppression drug combination which was pulled from the market 15 years ago when it was linked to heart valve abnormalities) there are differences. Belviq is supposed to be safer because it acts on just one serotonin receptor found almost exclusively in the central nervous system, whereas fenfluramine stimulated serotonin activity indiscriminately, including serotonin receptors on the heart valves. Fen-phen was a blockbuster in 1996 as doctors wrote some 18 million prescriptions a month for the drug.
Piper Jaffray estimates Belviq annual sales will reach $2 billion. The Jefferies Group has a target price of $20, while Bank of America analysis has the target price at $7, mostly due to delays and various safety concerns. So what makes Arena an attractive takeover bid? According to WW:
The large pharmaceutical companies are all on the edge of seats looking at Arena… Large pharma are wonderful at marketing drugs and this is a product that lends itself to marketing.
This makes Arena a possible good long shot play for profits to be made if and when a larger pharma company, such as Japan's Eisai which already have licensing agreements to sell Belviq, makes a bid to acquire Arena.
Also seeing three times its average daily volume over the past few days was BioMimetic Therapeutics (BMTI). BioMimetic specializes in the development and commercialization of clinically proven products to promote the healing of musculoskeletal injuries and diseases. It has surged over 23% after the company announced that it submitted an amendment to its Pre-Market Approval application for its Augment Bone Graft to the Food and Drug Administration (FDA) in which it will be used as an alternative to autograft in hindfoot and ankle fusion procedures.
In January The Food and Drug Administration declined to approve marketing of BioMimetic's Augment Bone Graft product and asked for additional safety and efficacy data from a late-stage trial. BioMimetic, in the amended application, provided supplemental information requested by the FDA stated Augment and stated that "Augment is not inferior to autograft" in the press release. President and CEO, Dr. Samuel Lynch, said,
We strongly believe that the additional information provided in this amendment is fully responsive to the FDA's requests… No matter what populations are considered, after treating approximately 400 patients, the clinical benefits are virtually identical between the two treatment groups. Therefore, in its totality, we believe this information strongly supports the robustness of the findings and the PMA approval of Augment. Additionally, the conclusion we have reached based on the data, that Augment is safe and effective, is consistent with the recommendation of the overwhelming majority of practicing physicians on the FDA's Advisory Panel and the unanimous votes by the orthopedic foot and ankle specialists on the Advisory Panel.
The FDA has 180 days from the date of the filing to review and respond to the PMA amendment. The Franklin, Tennessee-based company expects a final decision from the regulator between April 2013 and January 2014, even if the FDA has a second round of questions.
Prior to the recent run up, BioMimetic had lost about 40% of its value so far this year. As with most small biotechnology companies, there will be wild swings upward and downward. However, BioMimetic appears to be gaining an upward momentum in a down market, and might just be a stock to ride upward, but caution is in the air as it nears its trading range high of $3.51. Investors should watch for it to break out and potentially move closer to its yearly high of $5.17.
With the bears swatting down at the major movers, some of the small biopharma companies like NBS, ARNA, and BMTI are getting a closer look. With encouraging volume and runs to the upside, how high can these three companies trade? How much will previous resistance points come into play? Perhaps until more news about a possible suitor for ARNA, the upward trend might slow for the stock if not turn bearish. NBS and BMTI, however, both have continued to buck the downward trend and look as though each have more room to the upside. Each of these three companies is likely "investment grade" for the long-term with much upside potential probably becoming more evident for the mid- and longer-term.
Disclosure: I am long NBS.