2 High Risk Biotech Stocks Under $2 That Could Yield A High Reward

Includes: CORT, CYTK
by: C.R. Jackson

Over 2,000 years ago, the Roman poet Virgil wrote, "Fortune favors the bold." A number of investors have made their fortunes by investing in the biotech industry, but investing in the industry is very risky. Pharmaceutical and biotech companies must receive approval from the U.S. Food and Drug Administration (FDA) to market their drugs. The FDA approval process is expensive, time consuming, and very selective.

An economic analysis conducted by the Tufts Center for the Study of Drug Development found the average out-of-pocket cost of developing a new drug, from inception to approval added up to $494 million. Other studies have found that it usually takes about 10 years for a drug to be developed and approved for prescription.

The FDA is also very fastidious. Of the 5,000 compounds discovered in the pre-clinical stage, only about five drug candidates will make it through the entire FDA approval process.

In addition to the scientific, technical, and regulatory risks involved during clinical trials, there are also financial and liquidity risks due to the amount of time and money required to get a drug candidate to market. Even if the drug is approved, there are execution risks involved when the product is launched onto the market. There are reimbursement risks because insurance companies may balk at the high cost of a drug as was recently seen with Dendreon's (NASDAQ:DNDN) prostate cancer drug, Provenge (Sipuleucel-T). Even after being tested for years in clinical trials, a drug may be found to be unsafe after being on the market as we saw with Darvon/Darvocet (propoxyphene), Meredia (sibutramine), Vioxx (Rofecoxib), and numerous other drugs.

While the risks of biotech investing are great, so are the rewards. At the end of 2012, Chelsea Therapeutics (NASDAQ:CHTP), Cell Therapeutics (NASDAQ:CTIC), Aeterna Zentaris (NASDAQ:AEZS) and Progenics Pharmaceuticals (NASDAQ:PGNX) were all down over 70%, but Sarepta Therapeutics (NASDAQ:SRPT) was up over 500%, Biodelivery Services International (NASDAQ:BDSI) was up over 400%, and Arena Pharmaceuticals (NASDAQ:ARNA),Galena Biopharma (NASDAQ:GALE), and Celsion Corp. (NASDAQ:CLSN) were up over 300%.

I like investing in the biotech sector because these stocks may not only yield high returns, but could also help save lives. Corcept Therapeutics (NASDAQ:CORT) and Cytokinetics Inc. (NASDAQ:CYTK) are two stocks under $2 that I believe are undervalued and could show impressive gains in the future.

Corcept Therapeutics

52 Week Range $1.27-$4.55

Market Cap 177M

Since May 1998, Corcept Therapeutics has developed mifepristone, a glucocorticoid receptor that blocks cortisol activity. The active ingredient in Corcept's drug, Korlym, is mifepristone, also known as RU-486, "the morning after pill." Korlym utilizes a different aspect of the drug, which is its ability to block cortisol.

On February 17, 2012, the US Food and Drug Administration (FDA) approved Korlym to treat Cushing's syndrome. While receiving its first FDA approval was a milestone for the company, Korlym's potential to treat psychotic depression and antipsychotic associated weight gain are why most investors are excited about the company.

Psychotic depression is a serious psychiatric disorder that affects approximately three million people annually in the United States. It is more prevalent than either schizophrenia or manic depressive illness. There is no FDA approved treatment for psychotic depression.

According to IMS Health, the number of annual prescriptions for atypical antipsychotics rose to 54 million in 2011 from 28 million in 2001, an 93% increase. The weight gain associated with these drugs has become a serious public health issue. Psychotic depression and antipsychotic associated weight gain both represent potential billion dollar markets.

The company is currently conducting a Phase III trial to see if Korlym administered at a dose of 1,200 milligrams per day for seven days will lead to a rapid and sustained improvement in patients' psychoses. Past studies had promising results. Last summer, the company began increasing the number of sites in the trial with the goal of enrolling sufficient patients by the end of 2013 to permit a successful interim analysis of the study with a new drug application (NDA) filing with the FDA shortly thereafter.

Corcept has numerous GR-II antagonists in its portfolio and a discovery platform that continues to identify additional compounds for development. As of December 31, 2012, Corcept had over $93 million in cash, so the company is going to be around for a while.

Analysts have mixed feelings about Corcept. On January 3, 2013, Corcept Therapeutics Incorporated upgraded by equities researchers at Piper Jaffray analysts put an "Overweight" rating on the stock and set a $4 price target, Janney Capital researchers initiated coverage of Corcept with a "Buy" rating and set a $3.00 price target on the stock. On December 10, 2012, Cowen downgraded shares of Corcept from an "Outperform" rating to a "Neutral" rating. On November 13, 2013,Credit Suisse reinstated coverage of Corcept with an "Outperform" rating and lowered their price target from $6 to $4. On November 2, 2013, Oppenheimer downgraded from an "Outperform" to a "Perform." On July 13, 2013, Bank of America maintained coverage of Corcept with an "Underperform" ranking and lowered their price target from $4 to $2.

The market has punished Corcept for the poor launch and disappointing sales of Korlym. The stock lost half its value last year. If the company's Phase III psychotic depression is successful, the price of Corcept's shares should skyrocket. A more in depth analysis of Corcept Therapeutics can be found here.

Cytokinetics Inc.

52 Week Range 0.57-$1.28

Market Cap 163M

South San Francisco, California-based Cytokinetics Inc. is a clinical-stage biopharmaceutical company focused on the research and development of drugs relating to the biology of muscle function.

Cytokinetics' lead drug candidate from its cardiac muscle contractility program is omecamtiv mecarbil. Omecamtiv mecarbil is in Phase 2 clinical development for the potential treatment of heart failure.

On January 3, 2007, Cytokinetics announced that the company had entered into a partnership with Amgen Inc., (AMGN) to discover, develop and commercialize novel small-molecule therapeutics that activate cardiac muscle contractility for potential applications in the treatment of heart failure. In May 2009, Amgen exercised an option to participate in the future development and commercialization of omecamtiv mecarbil. The company's alliance with Amgen is showing promising results.

Researchers have found that omecamtiv mecarbil could become a first in class therapeutic agent for systolic heart failure, a condition affecting about 20 million people in the United States and Europe. The company is also developing tirasemtiv, a fast-switch skeletal muscle troponin activator. This investigational drug is a potential treatment for diseases and conditions associated with aging, muscle weakness and wasting or neuromuscular dysfunction.

Tirasemtiv has been granted orphan drug designation and fast track status by the FDA as well as orphan medicinal product designation by the European Medicines Agency for the potential treatment of amyotrophic lateral sclerosis (ALS), also known as Lou Gehrig's disease, a devastating and debilitating disease. ALS afflicts 20,000 to 30,000 people in the United States.

Tirasemtiv is being investigated in a Phase 2b study comprised of approximately 400 ALS patients. A recent pilot study found that the investigational drug could also be a treatment for myasthenia gravis, a chronic autoimmune neuromuscular disease characterized by varying degrees of weakness of the skeletal muscles of the body.

All of Cytokinetics drug candidates have arisen from the company's muscle biology focused research activities and are directed towards the cytoskeleton. The cytoskeleton is a complex biological infrastructure that plays a fundamental role within every human cell.

Most of the analysts covering Cytokinetics are positive about the stock. On April 2, 2013, Needham and Company reiterated their "Buy" rating for Cytokinetics and put a $2.50 price target on the drug. On January 4, 2013, Piper Jaffray initiated coverage with an "Overweight" of Cytokinetics with a $4 price target. On November 27, 2012, Dawson James downgraded Cytokinetics to "Market Perform" and set the stock's price target at $2. On August 1, 2012, Cowen initiated coverage of Cytokinetics with an "Outperform" rating.

Cytokinetics has shown impressive growth so far this year. Shares were selling for 67 cents on January 2. On April 15, shares were at $1.21. You may want to wait for a pullback, but growth has been relatively stable and consistent so far this year. Over the past 52 weeks, Corcept has declined nearly 55% while Cytokinetics has increased 10%.

Both Corcept and Cytokinetics have investigational drugs that have demonstrated impressive results in clinical trials. Investors should look closely at these companies to see the potential. The best advice with biotech investing is never invest more than you can afford to lose. The risks may be great, but so is the potential reward.

Disclosure: I am long CORT. 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.

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