Bottom Fishing: Any Value in September's Losers?

by: StreetAuthority

by David Sterman

With reward comes risk. That's the painful lesson learned by biotech investors last month. Investors in Arena Pharma (Nasdaq: ARNA), Idenix Pharma (Nasdaq: IDIX), AMAG Pharma (Nasdaq: AMAG) and Vical (Nasdaq: VICL) all saw their investments plunge by nearly a fourth-- or more -- thanks to bad news on the drug approval front. Of the top four losers in the Russell 2000 last month, all are in biotech -- an industry for which you've got to have a strong stomach.

Company (Ticker) Recent Price September Loss 52-Week High 52-Week Low Catalyst
Arena Pharma (Nasdaq: ARNA) $1.54 -76% $8.00 $1.51 FDA spurns company's anti-obesity drug
Idenix Pharma (Nasdaq: IDIX) $3.14 -48% $6.11 $1.81 Setback in Hepatitis C trials
AMAG Pharma (Nasdaq: AMAG) $17.85 -32% $52.49 $16.70 Disappointing results for anemia drug
(Nasdaq: VICL)
$2.21 -29% $4.43 $2.20 Poor results from blood-vessel growth drug
Flagstar Bancorp (NYSE: FBC) $1.86 -26% $7.85 $2.91 False start on a capital raise
(Nasdaq: GXDX)
$14.39 -20% $39.00 $13.51 Pre-announced tepid Q3 results
Virginia Commerce Bank (Nasdaq: VCBI) $4.81 -17% $7.69 $3.01 Being acquired by Discover

Arena looks unlikely to rebound, as the FDA made it clear that Arena's weight-loss drug offered too little help for dieters. And in a similar vein, AMAG's iron-boosting drug for the treatment of anemia may be in deep trouble, as recent clinical trials have revealed troublesome reactions. And that's often a kiss of death with the safety-conscious FDA.

Yet Idenix Pharma may emerge as a rebound candidate. The company is testing a pair of drugs for the treatment of Hepatitis C. One drug yielded minor liver concerns (though those quickly abated) while the other drug appeared to work just fine. Trouble is, Idenix would like to use the two drugs in concert.

Hepatitis C is considered to be one of the largest causes of illness for which no permanent cure exists. That's why a range of companies are pursuing remedies in clinical trials. Bristol-Myers Squibb (NYSE: BMY) paid nearly $900 million in early September to acquire Zymogenetics (Nasdaq: ZYMO) for its promising, but unproven, drug pipeline.

Right now, Idenix Pharma thinks the recent issues are merely a delay, and the company hopes to resume clinical testing by year end. As a near-term milestone, the company is expected to release a lot more clinical trial information in late October, and as much of the data is expected to be relatively positive, this stock could see a nice pop on the heels of that event.

The outlook for Vical is the least clear of this group. The company's drug (licensed to Sanofi-Aventis (NYSE: SNY)) did not fare well in tests to see if it could create new blood vessels to help increase blood flow to distressed limbs. But the company has several promising drugs that are being tested earlier in the clinical process, and some analysts think this latest setback will be forgotten if those other drugs can make headway in clinical trials.

Flagstar's dilution problem
Michigan-based Flagstar Bancorp (NYSE: FBC) likely shot itself in the foot. The bank needs to shore up its capital base and had hoped to quietly raise $600 million through an equity offering. But word got out and existing investors ran for the hills, as their positions in the bank would suddenly become very diluted. Now, with shares shedding a quarter of their value in the past few weeks, the bank needs to figure if such an offering is still a good idea.

Flagstar doesn't actually need $600 million to cover its losses -- it instead wanted to build up a small war chest to make local acquisitions. With shares now below $2, management has likely had a change of heart. In fact, it increasingly appears as if Flagstar will sit tight and muddle through with a less-than-ideal balance sheet. In fact, shares rose roughly +3% on Friday as investors realized that such an equity offering is unlikely in the near-term. Shares look pretty enticing trading at about a fourth of book value.

Virginia Bancorp (Nasdaq: VCBI) had seemingly learned the dangers of unexpected dilution. The company's stock surged more than +20% in late July after it announced plans to cancel an equity raise. But management later had a change of heart and pulled off a $10 million equity financing late in September. Shares are off more than -20% since September 21. With the deal done, it may actually be safe to re-enter this name, as it is now selling at 60% of book value.

Genoptics (Nasdaq: GXDX)
I took a look at this maker of blood-diagnostic testing kits back in June after its shares had slid nearly -20% to around $18. [Read more here]

At that time, I cautioned that the company my see even more near-term weakness as "a new sales staff will need several more quarters to start gaining traction." Adding concern, the health care sector is seeing cost-containment pressures and competition is starting to build.

Sure enough, the company recently announced another quarterly shortfall, and shares recently touched an all-time low dating back to its late 2007 IPO. At this point, this has become a deep value play with half of the market value being accounted for in cash. And while per share profits are under pressure, they are likely to remain north of $1. As a result, shares have likely found a floor at current levels and could start to rebound over the winter as the company's new sales staff gains further traction. It's not yet time to buy this name, but shares are certainly worth monitoring.

The only names you should bottom-fish here are the two banks and Idenix. Both banks trade well below book value and are likely to rebound once investors realize how much they were oversold. Idenix still has many potential positive milestones ahead of it, though as with any biotech, it is a high risk play.

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

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