In a world that only seems to get busier by the day, individual investors often find themselves hard-pressed to find the time to adequately research investment options for their portfolios. I have found four investment-quality pharmaceutical companies that fit the bill for me as mid- and longer-term holds that have upside potential. I believe these are strong candidates for consideration. They have diverse levels of clinical development, varied market capitalizations, and distinct financial conditions, and they present treatment options for a wide range of indications.
Immunotherapy And The Fight Against Cancer
ImmunoCellular Therapeutics (IMUC) has been in the spotlight in 2012 for a number of reasons, giving it an extremely bullish stock chart for the year. The company is a clinical stage biotech company that is focused on immune-based products used in the treatment of brain cancer. The company operates at the forefront of technology, as its lead vaccine candidate, ICT-107, targets multiple antigens found on regular cancer tumor cells as well as cancer stem cells (CSCs).
Most of the typical research in the field thus far has been focused on antigens specific to single tumors. ICT-107 targets multiple antigens associated with an aggressive form of brain cancer called glioblastoma. Cancer stem cells are thought to be very resistant to most current cancer treatments, which is unfortunate, as if they survive the initial treatment, they can then generate additional ordinary cancer cells that are often more resistant to the therapy that killed their first-generation predecessors.
With the successful completion of a phase 1 trial, a new phase 2 trial initiated in early 2012 should complete enrollment in late August or early September for the company's lead product candidate. There has been a spate of interest in cancer stem cell biotechnology with Amgen (AMGN) acquiring both Biovex and Micromet (MITI) for over $1 billion. OncoMed, another CSC targeting company with phase 1 product candidates announced that it is filing for an IPO to raise up to $115 million. OncoMed also has the support and financial involvement of large companies GlaxoSmithKline (GSK) and Bayer (BAYRY.PK), validating the potential investment quality of a company with a novel CSC immunotherapy candidate, such as ImmunoCellular.
Adding to its impressive year, ImmunoCellular has recently uplisted to the New York Stock Exchange. Up to this point, the company has had to bear the burden of being an OTC stock, complete with the associated stigma and investor distrust. The uplisting opens the doors to a new universe of investors the company could not reach earlier by eliminating the restrictions inherent to investor participation in OTC stocks. Institutional investors have problems investing in OTC stocks, while many brokerages do not allow their investors to purchase OTC stocks. OTC stocks also have no chance of being included in large and lucrative indices, which means they cannot benefit from the large increase in index investing from institutional investors.
Additionally, ImmunoCellular is taking steps to protect its intellectual property. It has been granted 10 patents, with another 20 applied for and awaiting approval. It has recently been granted approval in Japan for a patent for its multi-antigen approach for the treatment of brain cancer. Taking these steps will allow the company to protect the value of its pipeline drugs and attract candidates for licensing, as well as potential acquirers.
Because it may have found a way to tackle one of the complexities of cancer treatment, the company presents itself as an attractive investment candidate. ICT-107 -- its lead candidate -- is the first multi-antigen vaccine approach. This enables the drug to attack the disease while preventing it from mutating and spreading to other parts of the body if it exhibits any of the six targeted antigens. Early results in its glioblastoma cancer treatment have been encouraging, though it will be quite a while before conclusive clinical trials are reached. Phase 2 interim data are to be reported when 32 patient-related events occur, meaning the longer it is before the data are announced, the more promising the drug will likely be. Positive data at this point in the trial would likely be a huge catalyst for the company and a strong share-price driver.
Blockbuster Potential In Obesity Fight
Another investment that stands out now both for the upside in the short-term, as well as the longer-term, is Arena Pharmaceuticals (ARNA). Arena was the first company in 13 years to receive FDA approval for a new anti-obesity drug, Belviq. Obesity has become a nation-wide epidemic, as more than one third of Americans can be classified as medically obese. There is huge market potential for a drug that can address the problem. Soon after Belvig's approval, it was announced that the obesity drug Qsymia (formerly Qnexa), developed by Vivus (VVUS), had also been approved by the FDA.
Analysts' estimates place revenues for both drugs at similar levels. According to Bloomberg, revenues from Qsymia are expected to be in the region of $1.2 billion by 2016. Arena's Belviq should generate revenues of $1.5 billion at its peak, according to Barclays, and $2 billion by 2020, according to a Piper Jaffray & Co.'s analysts. Belviq is expected to be available in early 2013 from a manufacturing facility in Switzerland. Marketing and distribution in North America will be handled by Eisai, the Japanese pharmaceutical major that holds these rights.
Arena is fortunate in having this support in the United States, which is by far the biggest market. The company will also receive $1 billion in price adjustment payments, while its Japanese partner will also bear most of the costs relating to post approval clinical trials. Arena is receiving a very high rate of royalty payment, while having to pay only a small portion of the costs. This could give it the financial muscle to concentrate on the rest of its drug pipeline.
Arena is now concentrating on international expansion, and has filed an application for approval with the EMA (European Medicines Agency). The CHMP (the Committee for Medicinal Products for Human Use) reviews and evaluates marketing applications, and the approval is centralized, meaning that it would be marketed throughout Europe if approved. Arena has been careful about intellectual property protection, whereas a recent report from Citron Research has outlined the inadequate patent protection for Vivus. Moreover, there are continuing safety concerns about Qsymia, and the FDA approval contains some restrictions as well as the need for Vivus to carry out further studies, including an aftermarket study for cardiovascular safety. I believe that all these will combine to limit the growth potential in sales for Qsymia. With Qsymia having multiple obstacles, Arena needs to establish Belviq as a genuine blockbuster to stay ahead of its competition.
Multiple-Indication Approval In One Product
Another company that I believe deserves attention is Questcor Pharmaceuticals (QCOR). Unlike many biopharmaceutical companies, Questcor has an established product with solid revenues and profits earned from its marketing. The company's results for the second quarter of 2012 demonstrate the viability of its operations. The company crossed $100 million in quarterly net sales for the first time in Q2 2012, with sales of $112.5 million compared to $46 million for Q2 2011 due to expanded use by physicians of its flagship drug, Acthar Gel.
Acthar now has an expanded-label use for 19 FDA-approved indications, including for the treatment of serious, difficult-to-treat autoimmune and inflammatory disorders, most prominently idiopathic nephrotic syndrome and multiple schlerosis exacerbations. Net income was $41.5 million (earnings per share of $0.65 a share) compared to $13.9 million ($0.21 a share) for Q1 of 2011. The company shipped 4,710 vials of Acthar during the second quarter of 2012, up 94% from 2,430 vials the previous year. Because Acthar has many approved uses, the company has successfully expanded its nephrology sales force and is expanding its neurology sales force. It has also established a pilot sales force for rheumatology.
Questcor has been controversial because its only asset is Acthar. Further, because there is no patent protection, there is generic competition. The company also has gross operating margins in excess of 80%, and skeptics wonder if this is sustainable. With that said, the company has performed quarter after quarter.
Nonetheless, a recent report from Citron Research bashed the company so effectively that the share price dropped considerably. Citron is not a known specialist on biotech investments, and biotech experts at several analysts such as Jefferies, Piper Jaffray, Oppenheimer, and Roth Capital are all bullish on Questcor. When you consider that Acthar is priced at about $25,000 a vial, and the company sold over 4700 vials in the second quarter of this year, it seems that there is a considerable market among its many indications.
Questcor hinted that there are major barriers to entry, and that it is not easy to copy their successful drug. The company also hinted that it has found a secret method to extract Acthar from the pituitary glands of pigs through a proprietary manufacturing process. It seems to me that this makes sense because, given the obscenely high margins on the drug, it is almost a certainty that other pharmaceutical companies have tried to copy it and failed. This makes Questcor an attractive acquisition target, because other pharmaceutical companies could acquire an extremely profitable drug without the necessity of expanding their own research and development spending. Even if a competitor succeeds in developing a comparable drug, it could be many years before it can be commercially launched.
Meanwhile, Questcor's efforts to expand the range of applications, particularly in the potentially lucrative field of rheumatology, and its efforts to beef up its sales force, should be adequate protection for its market position.
I have presented a diverse group of candidates for mid- and long-term investment consideration. ImmunoCellular is an early-stage biotech with solid phase 1 data behind it and a phase 2 trial nearing enrollment completion. Whenever the company presents its interim data, the results could be substantial for shareholders, whether to the upside or downside. However, to gauge the therapy's degree of success, investors should take into consideration that the longer it takes for the company to present the data, the more successful the trial data would likely be, so it could start garnering much more attention as time goes on.
Arena is a large, blockbuster-level company that has been in the spotlight for quite some time due to its large potential revenue due to a large market need for its obesity drug. Arena's patent protection may make a huge difference in the longer-term, but Vivus' product does have impressive efficacy backing its potential sales. Therefore, the competition factor between the two companies should not be discounted.
Questcor doesn't have the risk and possible upside potential that ImmunoCellular has, and it doesn't have Arena's blockbuster potential. However, it does present investors a low-risk, solid revenue alternative of a company with an expanding product label and successful marketing efforts, as evidenced by its growing profitability. For current and future shareholders of these investment-quality pharmaceuticals, 2012 and beyond could be exciting times.