3 Biotechnology Stocks Poised For Future Growth

Includes: CRIS, ICEL, MTEM
by: Craig Keolanui


The FDA's partial clinical hold on the development of CUDC-427 might have scared some investors away, but it also leaves Curis with stock now at a value price.

Cellular Dynamics enjoys solid revenue growth, eying a big marketplace with very little competition to stand in the way of even more future growth.

Threshold has been producing positive results, targeting an interesting characteristic that is evident in all tumor growths.

The rewards that are offered to investors in biotechnology stocks often extend beyond the financial gains. Investing in this sector is about the potential gains in science and benefits to mankind that somehow make up for the high risk that is inherently involved.

Despite all the best of intentions, the risk of the almighty Food and Drug Administration (FDA) rejection is always cause for great alarm. I prefer to place my bets on science, and weather the storm of prolonged trials, burning cash and demands of the FDA. The rewards can be immense, while the potential to help others can be rewarding.

Consider the push to cure cancer and the prospect of manufacturing human cells. Companies that are working on cures for cancer have become hot as the disease continues to take its toll. Stem cell research is coming of age, and producing cellular material is also producing its own exciting niche. The following three companies are looking to advance science in their own separate ways. If you are a fan of novel concepts, these might represent the right plays.

Curis (CRIS) - $3.04 a share (March 14th)

Investors in Curis jumped ship in mid-November as Curis announced that the FDA had put a partial clinical hold on phase I trials of its early stage cancer drug, CUDC-427. The partial hold resulted from the death of one of the trial participants from liver failure that happened a month after the patient stopped taking CUDC-427. This tragic and unwelcome event could prove to be unrelated to the trial protocol or the drug itself.

In February, Curis submitted the response and amended protocol to the FDA regarding the partial clinical hold. If the hold is lifted, Curis plans on re-starting enrollment in the monotherapy study for advanced or refractory solid-tumors or lymphomas, while also starting an expansion cohort enrolling patients with ovarian and fallopian tube cancers.

Curis has more products in its pipeline, and also has Erivedge, or vismodegib, already approved. Erivedge is being commercialized and developed by Genentech and Roche (OTCQX:RHHBY) under a collaboration agreement. CUDC-427, however, holds lots of promise for its method of action. CUDC-427 is a small molecule that antagonizes inhibitor of apoptosis (IAP) proteins, leading to cancer cell death. IAP proteins allow cancer cells to live longer by inhibiting programmed cell death, while also rendering cancer cells more immune to chemotherapy agents or immune system response. This evasion from apoptosis is the key to human cancer cells developing resistance to standard anti-cancer treatments, as well as avoiding the triggering of the body's natural immune system response. Due to its specific method of action, the potential exists to use CUDC-427 to treat even more indications of cancer. Curis plans on initiating phase Ib/II trials in combination with capecitabine or Xeloda for patients with HER-2 negative breast cancer.

Curis has three other inhibitors in its pipeline undergoing phase I trials. Their small molecule drug, CUDC-907 also has plenty of potential as an inhibitor of select HDAC enzymes, and PI3 kinase isoforms, to treat patients with relapsed or refractory lymphoma and multiple myeloma. While all these trials move along, Curis is able to get some financial support from the sales of Erivedge. Erivedge sales increased 30% in the fourth quarter of 2013, compared to the third quarter, totaling over $28 million. Roche is also testing Erivedge for more indications of cancer, hoping to create even more sales.

Curis had a net loss in the fourth quarter of $4.2 million with revenues coming in at $1.5 million, thanks to $1.4 million in royalty payments for Erivedge. Curis has a decent $68.9 million in cash, investments and marketable securities ready to burn. This is not a bad position, despite the many trials Curis has going on.

The stock can certainly be in a position to gain momentum if all goes well with CUDC-427 and the FDA. It currently has been beaten down, as evidenced by its -8.16% 52-week change, and even its 200-day moving average of $3.43. The science holds plenty of promise, and at the moment, the stock price does too.

Cellular Dynamics (ICEL) - $16.80 a share (March 14th)

Cellular Dynamics International (CDI) manufactures fully functioning human cells in large quantities which the company in turn sells to biotechnology companies and others who use them for research, product testing and trials. Cellular Dynamics is currently the only company to have industrialized this process. The marketplaces CDI plans on penetrating with its cellular products are quite large.

The use of cellular products for in vitro use in drug discovery, toxicity testing and chemical safety has an estimated marketplace of about $3.5 billion, while stem cell banking has a marketplace estimated to be $1.3 billion. The big one is in vivo cell based therapeutic research and development that is estimated to be a $5.0 billion market. This brings the total potential marketplaces available for CDI's products at about $10 billion. That makes CDI's potential worthy of plenty of consideration.

CDI currently has two product lines, the iCell product line, and MyCell product line. They have the potential of producing every cell of the human body, as well as replicating the genetic background of any given individual. The iCell product line consists of cells for the heart, neurons, endothelial cells and hepatocytes. The iCell product line is based on a standard genetic type without variations. The MyCell product line is relatively new, and only began shipping out last year. The MyCell product line consists of genetic variations of each particular cell type that might be requested. This allows researchers to test the response and performance of drugs and other products with cells from different individual genetic backgrounds. The future for this type of cell manufacturing is huge. The costs can be cut industry-wide, and the ability to test products on multiple genetic backgrounds without involving patients or sacrificing animals, can save lives, time and money.

CDI is a relatively new company, established in 2004, but has several significant clients and an intellectual portfolio that already contains over 800 patents. Major clients include Eli Lilly (NYSE:LLY) and AstraZeneca (NYSE:AZN), which accounted for about $4 million of revenue in 2013. CDI is well aware that sales to the top biopharmaceutical companies are essential to its success. Revenues in 2013 increased by 81% from 2012, in part due to CDI increasing the average sales to the top 10 clients from $445,000 in 2012 to $880,000 last year. This appears to be fantastic momentum with plenty of room in a $10 billion market to keep it up.

CDI's stock has recently enjoyed upward movement, rising above its 50-day moving average of $15.74 a share, and 200-day moving average of $16.66 a share. The 52-week high is $24.11 a share, and with all that potential a return to this level is not out of the question. CDI has a current market cap of just $264.8 million. The revenue should continue to grow and position ICEL stock for further climbs.

CDI still has a gap to fill when it comes to its fincancials. While revenue climbed, the loss at the end of 2013 went up as well. CDI lost $25 million last year, an increase over the $22.3 loss in 2012. The cash position is pretty solid with $62.0 million in cash and cash equivalents at the end of the fourth quarter of 2013. If CDI can reduce the burn rate in 2014, this should be enough cash to power the company until it achieves profitability. There are challenges ahead, but the market is there, the company is well-positioned with its patents, and it could only be a matter of time before any investment in ICEL reaps some rewards.

Threshold Pharmaceuticals (THLD) - $5.03 a share (March 12th)

Threshold Pharmaceuticals is another company involved in the battle against cancer. While Curis and many others target receptors and many of the critical pathways that allow cancer cells to proliferate, Threshold has a novel approach to selectively target the condition of tumor hypoxia. Tumor hypoxia is a condition that develops in most cancerous growths where the rapid tumor growth causes tumor cells to be cut off from the infrastructure that supplies blood to the cells. This results in a low-oxygen condition, or hypoxic environment. Threshold Pharmaceuticals has developed a compound, TH-302, that is designed to be activated only in these types of environments, and remain in a dormant state in normal conditions.

The significance of this approach is huge, as many untargeted therapies tend to cause damage to healthy tissues. If TH-302 is proven to be successful, it could provide a cure that produces fewer side effects and less systemic toxicity in the patients that use it.

TH-302 is a prodrug that is designed to release bromo isophosphoramide mustard (Br-IPM) within the hypoxic regions of a tumor growth. The potent DNA alkylating agent acts to hinder DNA replication leading to tumor growth, as well as interfere with DNA transcription that is vital to the formation of essential proteins. There is also evidence that TH-302 can diffuse into the surrounding regions of the tumor to create a "bystander effect," allowing it to attack more than just the extremely hypoxic regions of the tumor. The ability to use TH-302 in a combination therapy with other agents, and on a wide range of indications, is huge.

TH-302 enjoys orphan drug status from the FDA, and has currently initiated two phase III trials for treating soft tissue sarcoma and pancreatic cancer. The Phase IIb trial results from using TH-302 in combination with gemcitabine, for treating patients suffering from pancreatic cancer, showed a 41% reduction of risk of disease progression or death, and a 38% overall 12-month survival rate versus 26% for gemcitabine alone. In the soft tissue sarcoma trials, Threshold is testing TH-302 in combination with doxorubicin. In addition to TH-302, Threshold is also developing a PET imaging agent, [18F]-HX4, designed to identify and quantify the hypoxic regions of tumors in vivo. [18F]-HX4 is currently in phase II trials. TH-302 is also in several other trials for treating more indications of cancer. Threshold's success is very dependent on the success of TH-302, which makes an investment in Threshold carry a little more of a risk.

Threshold, however, is not alone in the development of TH-302, and has partnered with Merck KGaA (OTCPK:MKGAY) in its development. They have a licensing and co-development agreement that provides Threshold with a source of revenue. Merck has provided upfront and milestone payments that have been amortized over the relevant performance periods, instead of being recognized and run through the books at the time each payment was received. Threshold has a solid cash position with $82.0 million in cash, giving it plenty to cover the current burn rate of just over $7 million a quarter. Threshold is also free of debt.

Shares of THLD are coming off a 52-week low of $4.02, experienced in November of last year. The current market cap, just under $300 million, is a bargain if TH-302 is able to gain FDA approval. The science is smart, the trials have been positive, and the price is still right. If you can overlook the fact that without TH-302, Threshold's glass is more than half empty, the upside potential of THLD can certainly be worth the play.

While nothing constitutes a "sure thing" in this sector, the science can always provide some insight into the possibilities that many of these companies present. The hope that comes with a cure for cancer or the implications that cell manufacturing can represent make all three of these companies compelling stories. If you like the science, you might also like the current price.

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.