Don't Be Scared Off By Risks In The Cancer Biotech Space

Includes: CLDX, IMGN, INCY
by: Cheryl Swanson

Inspiring stories in the investing business are rare as hen's teeth--but here's one you won't soon forget. An unknown cancer researcher, working alone and unaided, has just blown the lid off the cancer market with a major breakthrough in the early detection of pancreatic cancer.

Not impressed yet? Keep reading.

This solo inventor has come up with a pancreatic cancer test that is 168 times faster, 26,667 times less expensive, and 400 times more sensitive than the sixty-year-old diagnostic technique currently used in thousands of laboratories and hospitals.

Baltimore, Maryland resident Jack Andraka is the modern-day Benjamin Franklin behind this early detection test, and here's the kicker. Andraka invented his groundbreaking cancer test without quitting his day job, which happens to be attending high school. Jack Andraka, you see, is only sixteen years old.

Andraka's pancreatic cancer sensor was unveiled at the Intel International Science and Engineering Fair, where it won the grand prize. While the cancer community is rife with bogus inventions, those Intel judges are not easily duped. Unfortunately, there's no chance of investing in this technology yet, or even benefitting from it at your doctor's, because Andraka's test has the usual multi-year pathway through licensing ahead of it. In the meantime though, according to a recent segment aired on Jack Andraka on Sixty Minutes by Morley Safer, "the biotech industry is already beating a pathway to this young man's door."

The SPDR S&P Biotech Index is up a sizzling 50% over the trailing-12-month period, showing that investment dollars are flowing rapidly into this sector. Cancer stocks, in particular, are popping right now. That's thanks to a series of "breakthroughs" that have helped researchers understand the genetic basis of the disease.

While many investors avoid the space entirely, or leave it to the big guys who manage the funds, that's not necessarily the wisest course. The basis of all biotech investing is trying to guess something that is inherently unknowable--how a new drug of a company you favor will progress through various clinical trial, when (or if) the drug will ever achieve FDA approval, and whether the drug will actually pan out to be as strong a play as the company hopes.

The big guys in this space employ fleets of researchers who pour through company reports, survey the competition and chat up the experts. More power to them. Nobody actually knows. It's still anyone's bet.

I'm writing for the little guy who is looking for new ways to sweeten his portfolio return and doesn't want to miss out on all the fun. My view is that we should play to our strengths in investing, and the little guy has the advantage of a better understanding and appreciation of a smaller, disruptive company that thinks out of the box. As Jack Andraka said, "sometimes new eyes are more likely to solve old problems."

The little guy has another advantage. He can put his stocks away for awhile, and not buy or sell in a panic, which is basically the only way for the small investor to be in this space. Yes, there will be dips and dives. But over time companies that have a innovative pathway and multiple shots on goal (not just one or two drugs) should be worth a great deal more than they are now.

Before taking a close look at individual picks, it's worth following Jack Andraka's story a little more. It's very instructive about how the little guy can sometimes achieve something that is beyond the reach of the big players.

Jack Andraka's quest to find a better way to detect pancreatic cancer started when he lost a close family friend to the disease two years ago. While Andraka's friends were out perfecting their skateboard tricks, this boy wonder started "googling" the Internet, looking for scientific papers on the disease. At first, Andraka said, he didn't even know what a pancreas was. But he soon learned it was a type of cancer so poorly detected that the five-year survival rate was a dismal 6 percent.

Instead of being discouraged, Andraka was stoked. Evenings and weekends he continued his solo quest, researching over 4,000 proteins and eventually finding a biomarker for pancreatic, ovarian and lung cancer.

All by itself, that would have been impressive, but Andraka wasn't done. Using a $50 meter from Home Depot, a humble piece of filter paper and a pile of carbon-laced dust, Andraka invented a sensor that could detect an unusually high level of mesothelin, a protein the body produces in pancreatic cancer's earliest stage.

When that Eureka moment happened, Andraka went into hyperdrive. He requested space from research labs to pursue his work nearly two hundred times. Two hundred times he asked. Two hundred times he was turned down. Finally, with the help of an oncologist at Johns Hopkins, he got a corner of a research lab to work in.

How could this 16-year-old-boy come up with something the biotechs with their billions to dish out to their medical superstar researchers haven't? Call me cynical, but the big pharmas and biotechs aren't run by gentle grandmothers. The major incentive in these companies is profit. And unfortunately, since the most profitable drugs are the ones that require repeated and prolonged dosing and treat symptoms without providing an outright cure, that's where the attention goes.

Since I have some skin in the cancer game (I mean that literally, I've had cancer and cancer surgery) I have a little different perspective on the cancer field. Having a potentially fatal disease puts you on a steep learning curve. Unfortunately, what you learn with cancer is the uncomfortable fact that the headlines have it wrong. Cancer research and treatment isn't progressing nearly as fast as we want to believe.

In fact, as I discovered when I was diagnosed with breast cancer eleven years ago, despite all the hype, cancer research is actually a very stodgy field and moves glacially slow. Genuine improvements in cancer treatment are few and far between. Statistical support for this comes from a new analysis reported in Forbes magazine. According to the report, the cost of a new drug is now 5 billion and 95% of the new experimental medicines that are studied in humans fail to be both effective and safe.

Here's how that staggering cost and grim statistic plays out in real life. I was fortunate enough to be treated at Stanford Medical Center, one of the ten leading cancer centers in the United States, and yet my prescribed course of treatment was the triad of therapies cancer doctors have prescribed for most of the last half century. Those treatments are surgery, radiation and chemotherapy, or what we hapless patients called slash, burn and poison.

The major drug prescribed didn't come from any of the labs of the leading biotechs. Instead, it has the distinction of being older than the "Peanuts" comic strip, having been discovered in the 1950s in the soil by a French farmer. Almost incredibly, that drug (Doxorubicin) is still considered more efficacious than almost all the supposed "blockbuster" drugs out there for many forms of cancer.

While this may sound depressing, it's important to stress that cancer is made up of more than 200 different diseases. Progress has been extremely impressive for some of the diseases, such as testicular cancer and childhood leukemia. It should also be noted that significant gains have been made in early detection of most cancers, and early detection is saving many lives.

However intimidating the disease may be, cancer stocks provide opportunities that are difficult to match with other investments. But while these stocks offer incredible growth potential, they can also blow up overnight. Cancer stocks are inherently risky assets. If you can't tolerate risk, you don't belong in the cancer space. It's not for the faint of heart... it's a gamble, pure and simple.

Why be in it, then? One reason is the outsized gains you're otherwise likely to miss. Another reason is that risk comes in a ton of flavors, and the greatest hazard is to risk nothing. Sometimes it's absolutely imperative to move out of your comfort zone. You may be generally a cautious investor, but by adding some more volatile stocks to holdings made up mostly of big boring blue chips, you can balance the risks of different asset classes against each other.

With that in mind, here are 3 promising picks in the cancer space. These companies are also recently reporting some good news.

Chicken Soup for the Immune System: Celldex Coming On Strong

Upstart Celldex Therapeutics (NASDAQ:CLDX) made the news twice last week. The first time was for its financial performance in the last quarter, which was generally lackluster. The second time was for good news that had come out for a promising Phase I clinical study.

From its closing price on December 30, 2011 through October 1, 2013, Celldex's stock price increased 15 fold.

That's mostly because Celldex focuses on one of the most compelling breakthroughs in cancer treatment, boosting the body's own immune response to cancer cells. Chemotherapeutic agents have traditionally been notorious for destroying the immune system, so these new therapies turn conventional thinking about cancer treatment on its head.

Dendreon (NASDAQ:DNDN) and Northwest Biotherapeutics (NWBO) are two notable competitors with Celldex in the immunotherapy area, and each is developing therapeutic vaccines. Celldex's promising news was about positive trial data from a Phase I study of human monoclonal antibody CDX-1127. Some analysts believe this news could mean the company will soon attract strong acquisition interest, which could send the stock much higher.

It's important to note that Celldex, like many innovative companies in this space, doesn't have any product sales, but depends on royalties for generating revenue. Another ding on the company is that Celldex's third-quarter results were even worse than expected. The company reported a net loss of $23.1 million per share from the same period in 2012.

Celldex fully expects to continue to spill red ink and looks terrible on paper, but that means much less in breakthrough companies. They need to pour cash into research and development, so they are almost impossible to place a value on over the short term. In Celldex's case, investors are somewhat safeguarded because collaborations and external funding help pay its growing expenses.

Celldex's stock has driven so high that the important question is: can it run higher? There has been a 30% decline lately, which most analysts say is due to profit-taking, and others attribute to the bad quarterly report.

Several catalysts are coming that might make a difference. Celldex's lead drug is Rindopepimut and the Phase III study in treating glioblastoma is underway. Results are also expected by the end of this year for experimental drug CDX-1135. There is yet another promising drug in Celldex's pipeline (CDX-011) which is used to treat metastatic cancer. Good news on any of the drugs could reignite its rocket ride for investors.

Keep your eye on this stock. Preliminary data from a Phase II study of its cancer vaccine will be presented at the World Federation of neuro-Oncology meeting on November 24. If data is disappointing, the stock might fall sharply. This fall (coupled with the recent fall) could present a significant buying opportunity.

One of the keys to profiting with innovative companies is understanding that they always experience setbacks. These setbacks damage the company's stock value over the short term, but they are necessary and often guide the path forward. More importantly to individual investors, that's your chance to scoop them up at a bargain.

Celldex is liked by contrarian investor Tocqueville Asset Manager, which increased its stake in Celldex, according to the latest 13-F filing. I like it because the company has a moat around it. The technology is tough for competitors to replicate. The various drugs also appears to have applications for multiple cancers.

Short-term movement in stocks like Celldex have everything to do with data from clinical trials, (or rumors of a possible acquisition). But neither really define the value of the company.

Celldex has seven product candidates in its pipeline, giving it that all important multiple shots on one goal. That gives the company a potential that far exceeds the one drug that is in the final trials.

Smart Bombs: IMGN misfires and reloads

Cancer specialists who actually treat cancer patients, as opposed to researchers, have more enthusiasm for "smart bomb" technology than any other forthcoming treatment. The reason is that the so called smart bomb drugs deliver their toxic payload inside cancer cells, where they do the most damage. But these drugs have come under severe attack recently.

ImmunoGen (NASDAQ:IMGN) is one of the biggest players in this space. ImmunoGen is in competition with Seattle Genetics (NASDAQ:SGEN) and Endocyte (NASDAQ:ECYT), who also have late stage cancer treatments that rely on small-cell technology that homes in on cancer cells.

IMGN tumbled after the disappointing shelving of its most advanced in-house therapy, IMGN901, a few weeks ago. Toxicity problems were cited for the shelving. In fact, the results were so bad, some observers even thought the whole idea should be scrapped.

Those observers are off base.

ImmunoGen already has an approved drug on the market that uses a "smart bomb" technology. The drug is called Kadcyla. The efficacy of smart bomb technology isn't in question anymore, there are multiple collaborative and licensing opportunities in place.

Interestingly, IMGN stock took off again almost immediately, when they announced good news of another collaborative licensing agreement with Novartis (NYSE:NVS). The agreement will allow the big pharma the rights to license its targeted antibody payload technology to research an unspecified cancer target. The licensing deal is similar to one struck a month ago, and includes an upfront payment from Novartis as well as ongoing royalties.

Novartis has an enormous pipeline of collaborative drugs in the works. ImmunoGen has more than a dozen combined in-house and partnered trials that are ongoing. At the very least, it's a name to watch closely.

Small But Lethal Cells: JAK Hits a Home Run

Incyte (NASDAQ:INCY) is a Wilmington, Del., biotech company that specializes in developing JAK inhibitors. What the heck is a JAK inhibitor? It's a technology that focuses on treating cancer through blocking Janus kinase (JAK) pathways that are involved in the body's immune response.

Still confused? So am I, but I'm not confused by Incyte's stock. Incyte has a host of drugs in Phase II and Phase III trials that will treat several rare types of blood cancer. It also has its crown jewel: Jakafi. Jakafi was the first JAK drug approved and was so innovative it got its approval for use against chronic leukemia in faster than PDUFA time.

Mid-year, Incyte shot up another 32% in one day after releasing promising data on Jakafi against yet another type of cancer--pancreatic cancer, the extremely deadly disease Jack Andraka targeted with his sensor. More recently, the company gained 5.5% and marked a fresh high on November 18, extending gains after Jefferies said that the drug is well positioned following data abstracts on two competitors. Jefferies said Geron's data for their competing drug shows potential, but comes with cautions, while Jakafi is a strong competitor of Sanofi's (NYSE:SNY) fedratinib.

Incyte has collaboration agreements in place with both Novartis and Eli Lilly for various aspects of its pathway. While most analysts rate the company a buy or outperform, it's worth mentioning that INCY showed up the The Street's "Perilous Reversal" list a few days ago. The Street Quant Ratings rate Incyte a sell. There are lots of "weak hands" in the biotech space, so reports like this can cause an immediate drop.

It makes sense to buy a stock after the waves of selling are over, so investors should be extra cautious. If you like INCY, step away from the crowd and wait until you can get in with a better chance of a successful trade. If the stock drops enough, opportunities might exist on the buy side.

Don't be intimidated by the cancer space, just be aware of the risk. If you're interested in a stock in this space, don't just read one article, read dozens, especially those that disagree. Research the company thoroughly, decide how it might fit into your overall financial plan, create a strategy and stick with it.

It's not a place where you want to put a lot of your hard-earned assets. But if you are creative and open to innovation in your investing, able to take the heat, and not in any hurry, it's a place where a lot of investors have made a lot of money.

The story of fifteen-year-old cancer investor Jack Andraka is extraordinary. It also validates something we tend to lose sight of as the years pile on. When you have an idea, whether it's in investing or for a new invention, don't just sit there. Go out and give it a try.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within 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.