If you are looking for high returns, biotechnology may very well be your best bet. The industry is positioned to outperform broader indices, since it is "macro-blind" - that is, largely unaffected by the economic ups and downs relative to, say, consumer goods, software producers, gold miners, etc. Instead, the industry develops what many hope to be "breakthrough solutions." Sometimes, even the speculation that these "breakthroughs" will materialize is enough to ride your portfolio towards an attractive return.
Vivus (VVUS) and Arena (ARNA) are two good examples. They were both exploring anti-obesity drugs and, while both were approved, many market commentators are coming together and saying that all of the market excitement was overblown. That is to say, the future fundamentals will be a wet blanket to all of the bulls who pushed up the stock.
At the same time, four analysts recently raised forecasts for Vivus. Erectile dysfunction drug Stendra and anti-obesity drug Qsymia still have a lot to prove in their very crowded markets. Lower-cost generics for the latter are particularly disconcerting for future value creation. Pfizer's (PFE) Viagra is also a household name that will challenge share gains in the ED market. The market excitement has nevertheless been very high, with shares touching a high of over $30 following the FDA approval. Consolidation volume in trading indicates bullish developments will take some time to be supported by actual sales.
30 million men in the United States have ED and only 20% of those with the condition actually seek treatment. While Viagra was a gamechanger to many sufferers when it came out, Cialis has since taken the lead. Could Arena's Belviq or Vivus' Qsymia do the same in their respective market? Like when HDD was competing against Blu-ray, there may be a winner-takes-all model to the market. Those who currently like Viagra or Cialis have, in my view, little reason to try an alternative drug. There are weight loss products out there that are not pharmaceuticals and thus are attractive to a niche segment of the market; but, obviously, that is neither the case for Arena nor Vivus. I currently recommend holding out and buying shares of healthcare companies that target markets with significant barriers to entry and strong unmet demand.
To get a sense of what I am talking about, contrast Arena and Vivus with Neuralstem (CUR). While both have attractive products supported by a scientific foundation, Arena and Vivus have already closed their discounts through market excitement, while Neuralstem has not. Moreover, unlike the other two companies, Neuralstem is entering a market with significant barriers to entry and strong unmet demand. It is exposed to neither current nor future competition like Arena and Vivus are.
Neuralstem is (1) developing treatments for central nervous system ("CNS") conditions based on transplanting small molecule drugs and human neural stem cells. It also (2) owns a series of molecule compounds that can efficiently cross the blood/brain barrier. The "brain market" remains a largely untapped field given the limited scientific understanding, and, should Neuralstem be successful in getting any of its solutions to treat CNS diseases, the upside is huge. Stockpickr recently highlighted the company as 1 of 5 possible "big breakout" stocks based on technical indicators.
Neuralstem recently completed Phase I of its NSI-566 spinal cord neural stem cells for treating ALS - also known as "Lou Gehrig's disease." This trial began in January 2010 and enrolled 18 patients to test merely the safety of the candidate. It was groundbreaking for being the first FDA-approved trial to test neural stem cells in patients with ALS. The procedure was found to be "extremely safe" and, in some patients, it currently appears that ALS is no longer progressing. Neuralstem has been awarded orphan status by the FDA, which enables the company to better gain marketing approval as a result of targeting a rare medical condition.
Neuralstem's underlying fundamentals and promise have caught the media's attention. FOX TV recently featured a story about a man, named Ted Harada, who underwent a human stem cell transplant for ALS as part of an Emory study conducted by Neuralstem. Ted explained how the "fact" that what Neuralstem was offering was so "cutting edge [in] science and medicine" motivated him to enroll. Stem cells were transplanted into Ted's lower spine and, despite the poor prognosis of ALS, conditions got better. He was able to walk through his neighborhood without a cane and, when pains came back, he had more than enough stem cells alive to make a surgery operation viable. Hitherto, ALS was believed to be invariably fatal; but Ted now says he is doing okay, and the hope motivates him.
Fortunately, Neuralstem recently received a patent covering the culturing and transplanting of CNS cells into the spinal cord to treat neurodegenerative diseases, such as ALS. The company is also targeting other major CNS conditions with its cell therapy platform, such as spinal cord injury, ischemic spastic paraplegia, and chronic stroke. An Investigational New Drug application was submitted to the FDA for a Phase I safety trial studying chronic spinal cord injury. And Neuralstem is also doing a Phase 1b study on NSI-189, a neurogenic small molecule compound targeting major depressive disorder ("MDD").
With tremendous promise and certainly groundbreaking hope for sufferers, Neuralstem is likely to see greater liquidity as the trials advance. The firm cultures stem cells in its very own laboratories, so stories like Ted will convince others to seek enrollment in the orphan solution. While the lack of scientific understanding behind ALS precludes emerging entrants (read: potential competition) and downside, the impressive data thus far support nothing but reward going forward. Over the last 3 months, Geron (GERN) more than doubled in value through developments for its cancer therapies that are - while some time off from showcasing meaningful outcome - very promising. Neuralstem's stock is likely to achieve similar results from speculation in the short-term and the fundamentals in the longer-term. Accordingly, I recommend buying shares now to capitalize off this breakthrough story.
In conclusion, Arena and Vivus are worthy of, at best, a "hold" right now. While it certainly merited the market excitement that it generated, at this point, there is too little room for a "value play." Other firms, like Geron and Neuralstem, however, are targeting markets where few have gone far before... and succeeding in the process. The moral of the story is "try not to be too late to the punch bowl"... and, if you are late for the one you wanted, just go to another party.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.