Have you ever walked up to a roulette table in a casino and noticed that the two primary colors are red and black? Those colors carry some very nice odds at 2 to 1, for those of you out there who don't gamble. When it comes to the biotech sector, there are two catalysts that can very well carry similar weight to the colors of red and black. Those catalysts are positive and negative news; not just any positive and negative news, but the news surrounding both FDA decisions and earnings announcements. Since we happen to be in thick of earnings season, I wanted to focus on two biotech names that could be considered fairly speculative plays with the ability to achieve some very nice upside potential in the wake of a recent earnings miss.
Zogenix (ZGNX) which is based in San Diego, California is "a pharmaceutical company which engages in the development and commercialization of products for the treatment of central nervous system disorders and pain. Its commercial products include Sumavel Dose Pro which is a delivery system that offers needle-free subcutaneous administration of sumatriptan for the acute treatment of migraine and cluster headaches." On Thursday, the company announced quarterly EPS results of -$0.21/share on revenue of $8.45 million, which is a pretty big miss since analysts were expecting ZGNX to post a loss of -$0.16/share on revenue of $9.75 million.
Is there a potential upside to Zogenix? There happens to be one scenario in particular that could in fact be the catalyst long-term investors have been waiting for. In most cases, when a net income miss of $0.05/share is combined with an obvious revenue miss of nearly 8.66%, potential investors would almost certainly consider a short strategy. However, I strongly believe that Zogenix has some very promising upside potential due largely in part to an upcoming FDA review of the company's drug Zohydro ER.
This review, which is scheduled to take place on December 7th, should be completed by no later than March 1st, 2013. According to FlyOnTheWall.com, "Zohydro ER is Zogenix's lead investigational product candidate for the management of moderate-to-severe chronic pain when a continuous, around-the-clock opioid analgesic is needed for an extended period of time." If the company receives any indication of an approval from the FDA, shareholders could easily see the company's share price double from the current price of $2.35/share. If the company's NDA is rejected, shareholders could be in for a wild ride toward the downside.
Jazz Pharmaceuticals (JAZZ), which is based in Dublin, Ireland, is "a specialty biopharmaceutical company focused on the identification, development, and commercialization of pharmaceutical products to meet unmet medical needs. Its marketed products include Xyrem, a sodium oxybate oral solution for the treatment of cataplexy and excessive daytime sleepiness in patients with narcolepsy; FazaClo (clozapine, USP) LD and FazaClo HD products, which are orally disintegrating clozapine tablets for the treatment of resistant schizophrenia; Luvox CR extended-release capsules for the treatment of obsessive compulsive disorder; and Prialt, a non-opioid analgesic for refractory severe chronic pain." On Thursday, the company announced quarterly EPS results of $1.29/share on revenue of $175 million, which is a pretty solid miss since analysts were expecting JAZZ to post a profit of $1.32/share on revenue of $179 million.
Should investors begin to consider a position in Jazz Pharmaceuticals? In the case of JAZZ, there are a few things potential investors should consider. First and foremost, the company has demonstrated solid earnings over the last four quarters, with only exception coming during the most recent quarter. In the last 12 months, JAZZ has surpassed estimates by an average of 6.46%, with the only anomaly coming in the company's most recent earnings report.
The second catalyst to consider would be long-term growth. According to the company's CFO Kathryn E. Falberg, the company reported "net sales for the third quarter were $174 million, up over $100 million from the third quarter last year due to the addition of products from the 2 acquisitions we completed this year and strong growth of Xyrem." If the company can subsequently demonstrate not only strong results in terms of Xyrem, but a continued strategy of "growth by acquisition," I see no reason why Jazz shouldn't be trading in the $58/share to $63/share range.
For potential investors looking to establish a position in either Zogenix or Jazz, I'd take a closer look at each company and keep in mind the primary positive and negative catalysts moving forward. As is the case with any speculative biotech play, the slightest hint or indication of negative news with regard to earnings or the FDA, and these stocks could essentially fall from the heavens. If potential investors are looking to scoop up shares based on value, in the wake of a dismal quarter, I'd do so with a small to medium sized position and sit on it for at least another 90 days.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.