At the end of August, I wrote an article entitled "4 Biotech Stocks With Large 2012 Gains That Still Present Significant Upside." In that piece, I looked at stocks that had traded with large returns in the first eight months of the year, but could still trade higher in the final four months of the year. These stocks were all leading performers in biotechnology, but had upcoming catalysts that could take shares even higher. Now, after five weeks, a couple of the stocks on this list have returned enormous gains, and all have returned some gains. As a result, I am re-visiting the list, looking at each stock and its current valuation, to determine whether or not additional upside exists.
Celldex Therapeutics (CLDX)
At the time of the first article (Part One), Celldex traded with a valuation of just under $300 million. Since then it has increased its valuation by over $80 million, a gain of more than 25%. In 2012 the stock has increased by 150%, thanks to strong data from two late-stage clinical phase products. In that article, I suggested that upside could occur due to anticipated data regarding overall survival for its breast cancer drug, CDX-011, which is expected later this year. If overall survival is impressive, then the stock could perhaps double; conversely, then it could trade significantly lower. The good news is that the company has more than just one product. It also has a glioblastoma Phase III candidate, Rindopepimut, which is now enrolling patients. But as for all immediate catalysts, all eyes are on CDX-011.
Looking ahead at the remainder of this year, I believe the stock still presents upside, although it is getting expensive. At this point it is priced for the assumption of positive data, as investors expect strong results from the company's clinical study. I am a bit surprised by its rally during the last month, but with the level of excitement among shareholders combined with analyst upgrades, I suppose the rally should be expected. As an investor I would watch the stock closely; however, I am not sure the upside exceeds the downside in spite of a 25% gain over the last month. I think it's an interesting stock in the final two months of the year, and I wouldn't be surprised to see it trade higher prior to the expected results. Please be aware of its valuation and its performance, and be certain to properly assess the risk/reward ratio when deciding on whether to open a position.
NewLink Genetics Corporation (NLNK)
Since August 29th, NewLink Genetics has appreciated to become a $333 million company, adding $56 million to its market cap, for a 20% gain. In Part One I was amazed at the level of profits that had been taken from the stock, especially with crucial data regarding its most advanced product, HyperAcute Pancreas, right around the corner. Earlier this year the company announced data for its pancreatic cancer product, including a 42% increase in overall survival at three years. Such strong results are incredible considering the seriousness of the disease, which is why the stock has rallied 125% in 2012.
The company is not expected to announce any new data for the rest of this year. Instead, it is expected to announce data for its HyperAcute Pancreas product in Q1 of 2013. Earlier in the year, the stock rallied to new highs prior to the results of its melanoma study, and I believe the same will occur in anticipation of its pancreas study, which is more important due to it being a more advanced trial. Taking that into consideration, I do think it has reached the top of its range in 2012, and that it will fluctuate between $15.00 and $16.50. In any case, I don't expect any drastic moves downward because of the anticipated data. The stock has already recovered from profit-taking and is pricing itself accordingly in preparation for clinical data in Q1. I think this is a stock to watch in Q1 of 2013 (perhaps already in January), but that it should be fairly quiet throughout the remainder of this year allowing patient investors to choose good entry points.
Sunesis Pharmaceuticals (SNSS)
Sunesis has been the best performer of the group since August 29th, increasing more than 80% from a $150 million to a $273 million market cap. The stock has returned gains of 400% YTD, and thanks to encouraging developments from its vosaroxin Phase III trial, the stock remains promising. In my previous article, I chose Sunesis, which was a $150 million company at the time, because I anticipated excitement prior to the results of its interim analysis for the Phase III study. However, I did say that it was a toss-up. I believed that if data was bad, the stock would fall in excess and, if positive, that it could double. Obviously, we now see the results, including its 80% gain. So one may ask: What happens next?
The 80% rally in shares of SNSS was a result of the company increasing the size of its trial by 225 patients after a Data and Safety Monitoring Board made the recommendation. The larger trial could increase survival, give data more validity and will provide longer follow-ups, hence increasing its chances of success. The increase in patient enrollment also triggered an investment payment from Royalty Pharma, due to an earlier agreement, in the amount of $25 million. Vosaroxin is intended to treat a rare and deadly form of leukemia, as the sole product in the space. Ergo, the excitement is quite high for the future of this company and its product-a product that has been granted fast-track status and an Orphan Drug designation.
Unfortunately, my outlook for this stock hasn't changed; I'm still not sure of which direction it may trend. After a 400% gain you'd think it would pullback. However, it has consistently defied the odds-and with potential sales of $600 million, the stock is still presenting upside potential. Consequently, SNSS remains a stock worth watching, though I don't see the immediate catalysts taking it much higher this year. Conversely, I don't see any reason that it would fall either. Accordingly, I think it could be a quiet Q4 for Sunesis, and I believe the company will be preparing for what could be an incredible year in 2013.
Galena Biopharma (GALE)
Galena was my choice as the company with the best combination of value and potential upside. Last month, the stock was valued under $110 million-and today it's trading with a market cap of $126 million, for a 15% gain. The stock has traded with gains of nearly 300% in 2012. My outlook for the company is based on its clinical studies, in which Phase II trials of a total of 187 patients found its lead product, NeuVax, to be effective at preventing the recurrence of breast cancer in patients with low to intermediate levels of HER2. The company is currently enrolling between 700 and 1,000 patients for the therapy's Phase III trial, which will be attempting to meet the same endpoints that were successfully met in the Phase II trials of 187 patients. Eventually, the valuation of a company will reflect clinical results, and although GALE still has a long way to go, it is trending in the right direction towards reflecting the potential of a product that could return solid revenue.
Galena's performance has been a bit surprising to me because there hasn't been any news to report over the last month, although it is consistently trading higher. The company's stock has been very attractive since its Q1 rally-a rally that took its price from $0.50 to over $3.00 with very high volume. In fact, there were some days when the micro-cap stock would reach volume that exceeded seven million shares traded, and one day volume of over 30 million. Since then the stock has fallen to $1.10 (in May) and has rallied higher ever since on slow and steady volume. In the Q3, GALE increased by nearly 70% and is currently hovering around the $1.90 range. Moving forward, I think GALE will be the best performing stock of this group in Q4. Not only has it traded higher on a consistent basis, and maintained its gains, but investors will be anticipating final data analysis of its Phase II trial, which should occur in the coming months. This data will provide a clear picture of what we may expect from its current Phase III trial. If encouraging, the final analysis could lead to Sunesis-like upside, as investors realize the true market potential of NeuVax. There's no reason to believe that final analysis will be discouraging seeing as how all other data has been incredible. To that end, if the data is strong, this stock could break into a new level.
Since August 29th, the S&P 500 has rallied by 3.70% while each of the stocks in the above group has outperformed this benchmark by a significant degree. Looking ahead to the final two months of 2012, and even into 2013, each of these could trade much higher. Each company has encouraging clinical data to compliment stock performance, thus providing long-term upside in addition to short-term gains. Because of this, I'd watch each of these stocks beyond the short-term upside that is being presented, as there is no question that some of these stocks will, once again, lead the market in performance in 2013 and beyond.
Disclosure: I am long GALE.