A Study Of 3 Biotechs - A Story Of Hope, Potential And Partnerships

Includes: ATHX, DRRX, EPRS
by: Craig Keolanui

Investing in biotechs is all about potential (product and investment) and anything that threatens a biotech's potential will likewise hurt your investment. On the other hand, investment in a biotech that simply passes key tests and hurdles can quickly double the value of your investment in very little time. Potential has to be forged and tested requiring guidance, money and scientific care and once realized there will always be the questions of manufacturing and marketing. Biotechs that look to partner products they develop will often gain an edge with manufacturing and marketing that in most cases can be worth the cost. Three companies who are no strangers to partnering their products are also currently at very reasonable valuations. The chance of being bought out, the power of having a more stable partner and the more money that can be allocated towards research and development all make these more attractive to many investors. Here are the three examples of inexpensive and possibly undervalued companies with great pipeline potential.

For a price at the higher end of this group, $1.55 a share with a $82.24 million (M) market cap (3/14 close), is Athersys Inc. (ATHX) with some lofty aspirations. Athersys has a unique blend of low valuation, high hope and huge potential. Consider first the high hope to see if that holds any true potential. The hope is for the treatment of the effects of disease and injury on organs and soft tissue in general. Athersys has marketplaces full plenty of hope and potential in its MultiStem technology and a positive FDA clearance in one area can lead to an explosion of potential use in other areas.

Athersys has developed MultiStem consisting of human stem cells derived from adult bone marrow. One donor can lead to several batches of MultiStem cells that are analogous in nature and can be used with patients of many different blood types. This treatment has the ability to provide cells that express therapeutically relevant proteins to aid in the repair and reconstruction of soft tissue damaged by injury or disease. Athersys has a trial for MultiStem for use in patients suffering from ischemic stroke and also a trail going with Pfizer (NYSE:PFE) for patients suffering from ulcerative colitis. Both are in Stage II clinical studies. Athersys has also submitted plans to the FDA for Stage II and III clinical trials of its own for MulitStem use in GvHD (graft vs host) disease. Remember the diet medication "fen-phen" or, Redux? The dark horse in the stable is the compound they are working on that stimulates the BHT2c receptor in the brain that regulates food intake/appetite without also simulating the "a" or "b" receptor like Redux. It was the inability of Redux to leave the "b" receptor alone that led to so many complications with "fen-phen". Athersys believes that MultiStem has great potential for use with cardiovascular disease, neurological and immune system disorders and inflammatory events.

Atherysys is still far away from paydirt, but with about $25 M under its belt and a cash burn consistently under $4 M per quarter, it can get well into 2014 without much worry. The market cap of $82.24 M is a plus and the share price of $1.60 (March 15th) is also rather enticing. The whole company seems to hinge on MultiStem's success and failure in any one of their trials might spell doom for the others. On the other hand, a lottery ticket type of an investment that could explode if MultiStem ends up passing all hurdles.

Another company that is poised to make some news is Durect Corp. (DRRX). Durect is currently priced at $1.22 a share (March 15th) and has a market cap of $124.3 M. This company has a stocked pipeline and even made some money last year ($16 M profit). Their specialty of drug delivery and anti-tampering formulations are focused on continuous around the clock drug release primarily for the use in the treatment of pain. This is interesting enough to draw the attention of Pfizer and with painkiller abuse on the rise and victims increasing in numbers, Durect has technology that takes on more meaning.

Durect has its primary drug candidate Remoxy, partnered with Pfizer, ready for a meeting with the FDA near the end of the month. Pfizer is leading the charge to provide further details (mostly manufacturing) to the FDA after receiving a Complete Response Letter. Remox is an oral oxycodone extended release gelatin capsule for use with patients suffering from chronic pain. The next candidate in the pipeline is Posidur, a post-operative pain delivery system for delivering Bupivacaine following surgery for up to 3 days. Durect is looking for a partner for Posidur to move it forward and allow more concerted efforts to be given to the rest of the rich pipeline candidates. Two transdermal patch products that are being developed are the Transdur Sufentanil patch for delivering up to 7 days of Sufentanil release and the Eladur patch for delivering Bupivacaine for a period up to 3 days following patch application. Durect is working with Orient Pharma for using its Oradur technology for treating ADHD patients and with Xogenix (NASDAQ:ZGNX) for using Risperidone to treat schizophrenia in Phase I clinical trials with its Relday collaboration. A couple of specialty products Alzet (osmotic pumps) and Lactel (biodegradable polymers and excipients) have been developed for the biotech marketplace.

Durect has experienced the rise and fall in share price that many in this industry can attest to. Durect shares have reached a high of $1.35 a share in March of the current year, but spent most of January under $1 a share. Durect is still up over 20% for the year and has a low cost ($1.22/share) for such high overall potential. Durect currently has about 5 quarters of cash to burn and any collaboration they can agree to with Posidur or either of the transdermal patch products can only help increase Durect's potential and share price. Look for any news from Pfizer to affect Durect's share prices in one way or the other.

Remember the investor love and hate relationship with Zalicus (ZLCS)? Zalicus was marching toward $2 a share when they pulled the plug on their trial for Synavive, a drug for rheumatoid arthritis. Zalicus shares plummeted and even hit the low $.40's in November. Despite a pretty strong pipeline, Zalicus has yet to recover and at a present valuation of $.69 a share (March 15th) is starting to gain back just a little of that investor interest.

The good thing is that Zalicus still has two important trials with drug candidates Z160 and Z944 and does have some modest revenues coming in for Exalgo (hydromorphone HCI) a drug for moderate to severe pain. Exalgo is a revenue spliting partnership with Covidien (COV) that is not exactly a home run. Z160 is a first in class oral state dependent, N-type calcium channel blocker. N-type calcium channels are recognized as the targets for controlling pain response from the spinal nerves to the brain. Z160 is in a Stage II trial to prove that it can effectively block chronic neuroscopathic pain response to patients suffering from lumbrosacral radiculopathy. Z944 is a novel oral T-type calcium channel blocker for use in multiple inflammatory and acute pain models. Results of Z944's Phase I multiple ascending dose trial should be out any time now and the start of a Phase II trial might help shares of Zalicus experience a little pop.

Zalicus is the riskier of the bunch and did have a loss of just over $8 M last quarter, but does have about $35 M in cash and short term investments in reserve. Zalicus is good at finding partners for any of its candidates that exhibit huge potential, so cash burn might not be a huge issue or cause of concern when compared to the hope that is still there for its products. Zalicus still has agreements with Novartis (NYSE:NVS) for an oncology collaboration and Sanofi (NYSE:SNY) for the development of prednisporin. The current valuation of $.69 a share has bounced around after hitting a low of $.43 on November 12th. This valuation is pretty low considering it was just over $1 a share at this time last year. Zalicus investors might still be licking some wounds, but newcomers might want to use this time as a buying opportunity.

All three of these companies are still risky investments. If hope is met with potential that is achieved, an investment in any one of the three can be handsomely rewarded. In this case, at least the hope and the investment don't have to cost too much.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in ZLCS over the next 72 hours. 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.