Biotech Weekly Recap: The Market Holds While Biotech Crumbles

by: Bio Insights

Here is a recap of some of the major events that moved the biotech stocks mentioned below in the trading week of December 3-7th 2012. This should brief you on the most important events that the market had its eye on as they occurred throughout the week. Whether you have any positions in the stocks mentioned in the article, or whether you are just trying to keep up to date, and I hope this helps you!

For the most part, it has not been a good week for the biotech sector. We did see a few tickers bucking the trend, but the broader market did a bit better. The S&P 500 inched up .13% higher, while the Dow drifted 1% higher by Friday's closing bell. The iShares NASDAQ Biotech Index (NASDAQ: IBB), on the other hand, moved .79% lower.

The heavily-watched omega-3 play in the world, Amarin Corporation (NASDAQ: AMRN), saw smooth bearish trading until after-hours trading on Thursday, December 6th. I noted that the stock had dropped 21% in reaction to a company press release that revealed that the company had secured $100 million in non-equity financing from Pharmakon Advisors. It was also revealed that the company was going to go forward with their plan to hire 250-300 sales reps for the drug, and was initiating plans to market Vascepa in other ways.

Quite frankly, that was the last thing that most Amarin shareholders wanted to hear. The general consensus is that Vascepa has enormous potential in the US market (and abroad), and does put up barriers to protect itself in the form of patents. The NCE status of the drug (which would give the drug 5 instead of 3 years of exclusivity if granted) is still a big concern to investors, but the major debate is still M&A related.

In their most recent quarterly report (Q3 2012), the company basically revealed that the NCE status was the biggest factor that was interfering with buyout talks (I wrote a more in-depth explanation here.) What's important to realize is that an Amarin buyout is not off the table, although the likelihood of an acquisition in the near term is drastically reduced. The only people who should be panicking are those who are only long on AMRN through out-of-the-money December '12 call options, since the likelihood of a buyout before December 22nd (expiration) is getting quite close to zero. It's still very possible that we may see a big pharma acquisition in 2013, maybe as early as Q1.

Note: I am long AMRN myself, although I sold December '12 covered calls to bet against an acquisition of Amarin prior to December 22nd. This worked out favorably thus far, although there are still two weeks to go.

The oncology drug developer Exelixis (NASDAQ: EXEL) fell another 10.45% this week on profit-taking following cabozantinib's FDA approval for the treatment of medullary thyroid cancer on November 29th. For the record, also know that cabozantinib (XL184) is now also referred to as "COMETRIQ".

The 10.45% drop this week, combined to the immediate sell-the-news reaction on November 30th, brings total post-FDA approval losses to 17.3%. Shares seemed to have bottomed out though. EXEL does not seem eager to go below $4.30/share.

The company's market capitalization north of $800 million is clearly optimistic for a drug that is only approved for the treatment of a disease that sees only 1,700 new cases per year, but anyone following Exelixis knows that the real value potential for cabozantinib is in the treatment of metastatic castration-resistant prostate cancer (MCRPC). The phase III COMET-1 trial will provide results for cabozantinib in this indication in March of 2014.

Note: I bought shares of EXEL due to the severity of the post-approval selloff, although I did sell $5.00 December 2012 call options against the position, anticipating that EXEL was not exciting enough to warrant a recovery rally big enough to breach that level

Neuralstem (NYSE: CUR) started off the week with a bang, moving 19.2% higher on Monday due to a huge buying spree that started at 2:10 PM EST. Shares moved another 10% higher or so on Tuesday morning, until they were crushed by an enormous sell order made around 10:30 AM EST that brought the stock nearly 20% lower. This move was big enough to bring CUR into the red, where it remained for the rest of the week. At Friday's close, CUR was down 7.2%.

I wouldn't reach too much into the massive spike in CUR, since it's a small and very volatile ticker, but I did provide a summary on Neuralstem earlier in the week that summarized what was driving the stock in recent trading. Neuralstem is at the exhaustion point of a recovery rally that begin a bit after the company announced Q3 results on November 9th that had neither bullish nor bearish implications.

While I'm not very keen on technical analysis-based trading, I will say that I think this stock is being traded more so on chart indicators than on fundamentals. This makes a lot of sense, since there are very few fundamentals to work with when it comes to Neuralstem. It's a stem cell stock, after all.

What we do know at this point is that more clinical data on Neuralstem's line (called NSI-566) is being created in their phase II trial for ALS (Amyotrophic Lateral Sclerosis, or Lou Gehrig's Disease) at Emory University, as well as the phase I/II trial for the treatment of ischemic stroke (IS) in China.

Another biotech that was trading on sheer market momentum was Peregrine Pharmaceuticals (NASDAQ: PPHM). After moving up 77% between November 26-30th, PPHM pulled back 19.3% this week as short volume picked up a bit. We saw lots of PPHM shorting on December 3rd in particular - over 3.5 million shares were put into fresh short-selling positions.

Peregrine's recent rally was a spontaneous recovery rally that occured after a monster drop of September 24th, which was caused by Peregrine's press release stating that the phase II results for bavituximab in the second-line treatment of non-small cell lung cancer (NSCLC) released on September 9th were not usable due to a data mix-up.

Peregrine did announce on December 5th that their cancer drug Cotara would progress into phase III trials for the treatment of GBM (glioblastoma multiforme) with the blessing of the FDA, but the market seemed to shrug off the news in another selloff. The "market factors" that are driving PPHM, like the growing short interest situation, may continue to take precedence over news for a while longer.

Zogenix (NASDAQ: ZGNX) only dropped 11.5%, but is set to drop much more on Monday, December 10th as ZGNX begins trading again. The drop represented apprehension over the Analgesic Drug Products Advisory Committee vote on their painkiller Zohydro, which ended up being well-warranted. The advisory committee voted 11-2 (with 1 abstain) against approval of the drug, primarily because of the drug's abuse potential. The final FDA decision in arriving in March 1st of 2013, although the results of the committee vote suggest that there is a very low chance of approval.

Yet another company that is looking bearish after bad news is Chelsea Therapeutics (NASDAQ: CHTP), which has had a rough year indeed. The stock dropped 36.38% on Wednesday due to the release of preliminary phase III "306B Study" data for their drug Northera (droxidopa). Droxidopa is being developed as a treatment for Symptomatic Neurogenic Orthostatic Hypotension (NOH), which is associated with Parkinson's Disease. The study did meet its primary endpoint (p=0.018), but the FDA basically told the company that there wasn't enough data for a successful NDA submission. Understandably, investors who have been holding Chelsea for lengthy periods in anticipation of these results were disappointed. CHTP ended the week 50.3% lower.

The biggest counter-example to my statement that biotech was bearish this week was the move in CombiMatrix (NASDAQ: CBMX) on Friday. Shares jumped 366% on the findings published in the New England Journal of Medicine, which showed that chromosomal microarray analysis was simply better than standard karyotyping for genetic analysis. This is a big deal to the scientific community, and a huge deal to CombiMatrix, who specializes in chromosomal microarray analysis.

There are many diagnostic tests that use genetic testing, and Wall Street expects CombiMatrix to have a much better future now that chromosomal microarray analysis got a giant popularity boost in the world of diagnostics. Expect Combimatrix to get a lot more volatile as the market attempts to gauge just how much better CombiMatrix's prospects have gotten.

Another ticker that saw a big move into the green this week (25%, to be exact) was Cyclacel Pharmaceuticals (NASDAQ: CYCC). Cyclacel got suddenly hammered back in November, as mentioned here, after its Q3 results which provided nothing new to fuel the rally CYCC saw in October. It's not surprising to see thinly traded small biotech stocks like Cyclacel to drop 20-30% on nothing but profit-taking and speculative shorting.

CYCC moved as high as $8/share on December 5th (and at the very start of December 6th), but pulled back due to large jumps in short-selling.

Cyclacel reversed its course throughout the last week, as their flagship drug sapacitabine continues to enroll patients into the phase III SEAMLESS trial. Also note that this trial is conducted under special protocol assessment (NYSE:SPA) by the FDA, which means that we may see a sudden approval for Cyclacel's AML treatment on unfinished phase III results.

Disclosure: I am long AMRN, EXEL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.