Substantial Value Potential In Recently Underperforming Biotechs

Includes: AMRN, RXII, SGYP
by: Bio Insights

Editors' Note: This article covers one or more micro-cap stocks. Please be aware of the risks associated with these stocks.

In the last three months of trading, the largest biopharmaceutical companies (with a market cap higher than $10 B) moved up about 6% on average. Medium-sized biopharmas ($2 B - $10 B) fared much better, moving up an average of 26%. Small pharmaceutical companies ($300 M - $4 B) rallied about 22% in this timeframe. Companies smaller than this - mostly clinical development-stage companies - only rallied 2% in the last three months due to highly scattered market performance. While it's good that the biotechnology sector has moved up with the rest of the market, many of the top performers this summer have become far too expensive.

In this article we will identify and analyze some of the companies on my radar that have significantly underperformed the biotech sector on a 3-month timeframe, in an attempt to find value plays heading into the second half of 2013.

Amarin Corp (NASDAQ: AMRN)

Amarin has been one of the biggest disappointments of the year (AMRN is down 27% in the last month three months), although it appears that the Vascepa launch is continuing to make progress and can't really be considered a failure at this point. The prescription growth is still quite positive at this point, and we've also seen declines in sales for other omega-3 products (most notably Lovaza). This is diminished by Amarin's recent public offering, and the fact that the stock remains alarmingly close to its 52-week lows. It is also demoralizing to see that the 1-year return on AMRN is -60%.

Nonetheless, the valuation of AMRN versus the implied size of the hypertriglyceridemia drug market currently targeted by Vascepa is attractive for the longs.

Traders are generally expecting that the stock will run up prior to huge upcoming catalysts, which is also reflected in AMRN options activity. This is where near-time upside is possible, although it is heavily dependent upon a successful sNDA submission to the FDA for the ANCHOR indication (TG ≥ 200 mg/dL).

Amarin also contains significant downside risk as we approach the advisory committee decision and subsequent FDA decision for Vascepa's ANCHOR sNDA. The lingering indecision over the NCE decision for Vascepa is also a major issue, and the possibility that Amarin will launch Vascepa into the ANCHOR indication without a partner.

Synergy Pharmaceuticals (NASDAQ: SGYP)

Synergy is still relatively obscure after its post-merger IPO earlier this year, although analysts are optimistic about the prospects of lead compound Plecanatide / SP-304 for chronic constipation, inflammatory bowel disease, and other GI disorders. SP-304 is a guanylate cyclase-C (GC-C) agonist, meaning that the molecule binds to and triggers the GC-C receptor, which triggers increased production of a regulating molecule which facilitates the release of intestinal fluids that aid in digestion.

In a completed Phase I and IIa trial for idiopathic constipuation, plecanatide was able to achieve a noticeable decrease in the time needed for patients to have a bowel movement. A larger patient population enrolled in a huge number of US clinical sites produced these results in the Phase IIb/III trials, and achieved statistically significant results and an implied linear correlation between dosing (the highest arm being the 3mg daily dose) and reduction in time before bowel movements.

The company's financial position as of March 31st was not so great, with $21.1M in cash and a quarterly burn rate of about $11 M, although the company's $406 M market capitalization will not hurt shareholder positions too badly if a public offering occurs. Investors may also grow more confident in the still-undiscovered commercial potential of plecanatide, which can target many of the ~2-3 M American patients on constipation medication.

The stock can see significant upside with the results of the Phase IIB trial for another indication - irritable bowel syndrome C (IBS-C), which is expected in Q1 2014. The stock should be able to move at least 70% higher in anticipation of these results and other pipeline developments. This would bring SGYP significantly closer to the double-digit price targets put out by analysts in recent reports.

The downside risk should be more gradual. In the event that the company does not excite investors with progress in the IBS-C development program, Synergy may find itself in a situation where it needs to raise money during a period of poor stock performance. This is always demoralizing to shareholders, and could trigger more selling.

RXi Pharmaceuticals (RXII.OB)

RXIID dropped about 36.5% in the last three months, although the company is actually having a great year. Particularly good for the company's reputation was a partnership arranged earlier in the year between OPKO Health and RXi, which gave RXi control of the bulk of OPKO's siRNA (small interfering RNA) pipeline assets. RXi and OPKO also completed a $16.4 M private placement of RXi common, making OPKO (Philip Frost) the company's single largest stakeholder.

RXi is an RNA drug developer that has created a proprietary RNA interference platform, which can silence messenger RNA coding for the production of undesired proteins. The flexibility of RNA interference has attracted a growing amount of attention from Wall Street, although many companies have had trouble with the delivery of these unstable molecules. RXi has improved the stability and overall usability of typical RNAi oligonucleotides with "sd-rxRNA" - a specially modified oligonucleotide that does not require a delivery vehicle.

While still up significantly for 2013, with YTD gains of 85%, RXi has pulled back significantly in the last three months (-37%) and looks substantially more attractive following the conclusion of two successful Phase I trials that established safety, dosing optimization, and scientific validation for the company's flagship compound RXI 109. The therapy is designed to downregulate a protein known as CTGF (connective tissue growth factor), which plays a big role in the scarring process. Due to this correlation, RXI 109 is being developed as a local therapeutic used to prevent or at least reduce scar tissue formation.

The upside in RXIID may begin to truly materialize after the company begins Phase II development for RXI 109, although the company's recent NASDAQ listing application could result in an uplisting that would not only bring new attention to the stock, but new institutional support. It's much more difficult to value RXIID as a whole due to the platform potential of RXi's RNAi technology, but RXI-109 alone could justify a 40% upswing after Phase II enrollment.

Although the RXi data were good, investors should note that it is still early stage (and is based on a small number of patients). Phase I data is not nearly as reliable as Phase II or Phase III data, meaning that investors need to carefully consider the possibility that RXI-109 may not meet the market's expectations for efficacy in scar prevention.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in RXII.OB over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Long AMRN via short puts