3 Biotech Companies: 2 To Buy And 1 To Day Trade

by: Blue Corn Investments

Biotechnology companies come in all shapes and sizes. Today I will discuss three very different biotech companies - one that I believe presents an outstanding long-term investment opportunity, one a speculative near-term investment opportunity, and one that I would short-term trade or day trade, for now.

Spectrum Pharmaceuticals (SPPI)

Spectrum Pharmaceuticals is a commercial stage biotechnology company that currently has two drugs on the market: Zevalin for non-Hodgkins Lymphoma and Fusilev for colorectal cancer. Spectrum has exploded to profitability, and looks undervalued when considering the following:

  • Mkt Cap - $818M

  • P/E Ratio - 18.27

  • Forward P/E - 14.25

  • P/S - 4.70

  • Net Income - $44.68M

  • Profit Margin - 25.69%

  • ROE - 37.59%

  • Approximately $150M cash

In addition to its fantastic balance sheet, Spectrum is growing sales over 200% Q/Q and shows no signs of slowing down. CEO Rajesh Shrotriya has adopted a similar strategy to Bristol-Myers Squib (NYSE:BMY), where he spent 18 years. That strategy is: Rather than developing drugs in-house, Shrotriya sends his business development team out to find new and promising experimental drugs that other companies either cannot or do not want to develop further. Spectrum picks these drugs up at bargain prices and moves them through to market.

Spectrum also has two drugs in late stage clinicals that look very promising and should have NDAs filed in 2012. Belinostat for Peripheral T-Cell Lymphoma and Apaziguone for non-invasive bladder cancer. In addition to Belinostat and Apaziguone, there are six other drugs in various clinicals stages - plenty of shots on goal.

Spectrum is announcing its 4Q and fiscal year 2011 earnings on March 1, 2012, before the market opens. The CEO has already said earnings for 4Q will meet or exceed the prior quarters earnings. In my opinion, Spectrum presents an incredible value right now and I believe the company will end 2012 over $30 per share. Due to its incredible growth and pipeline, Spectrum should be considered a viable acquisition target for large pharmas such as Bristol-Myers Squib, Abbot Labs (NYSE:ABT), Pfizer (NYSE:PFE), Merk (NYSE:MRK), Teva (NYSE:TEVA), or Eli Lilly (ELY).

My Opinion: Strong buy

AEterna Zentaris (AEZS)

AEterna is a Canadian late-stage drug development company that specializes in oncology and endocrine therapy. It has 11 compounds in the pipeline; its lead compound being Perifosine for refractory advanced colorectal cancer, currently in phase III testing via its partner Keryx Biopharmaceuticals (NASDAQ:KERX). AEterna also developed and receives royalties for Cetrotide for in-vitro fertilization that is currently marketed by Merck Serono (world ex-Japan) and Nippon/Kayaku Shionogi (Japan). AEterna also has taken AEZS-130 (a diagnostic in adult growth hormone deficiency) through phase III testing and is working on an NDA with the FDA that looks to be submitted in 2012.

Perifosine for refractory advanced colorectal cancer (the X-Pect trial) is the near-term catalyst most investors are waiting for. When the 360th event (death) occurs, it will trigger unblinding of the phase III study and top line results will follow. You can read more details about the trial here.

If the primary endpoint (OS) is met, I predict the pps for AEterna will triple from current levels. The longer the trial continues, the more likely it is that Perifosine will successfully meet the primary endpoints. Again, please read this link to learn more about the trial. Based on Keryx's CEO's comments, they expect this trial to end around the end of 1Q.

AEterna is a speculative play but it is looking more and more promising as the X-Pect trial progresses.

It has also been speculated that Roche (OTCQX:RHHBY) could be a suitor for AEterna since the company owns Perifosine and the treatment arm of the X-Pect trial is a combination of Perifosine and Xeloda (Capecitabine), which is a Roche-owned drug.

AEterna is a little biotech with a stuffed pipeline and a huge near-term catalyst. I think it definitely deserves a look for the speculative portion of your portfolio.

My Opinion: Speculative Buy

Avanir Pharmaceuticals (NASDAQ:AVNR)

Avanir Pharmaceuticals is a small biotech that successfully developed and brought the drug Nuedexta to market in February 2011. Nuedexta is a combination of two generic drugs, used to treat PBA, that have been in use separately for years. You can read more about Avanir and Nuedexta here and here.

Avanir also developed Abreva, a cream for cold sores, has licensed it out to GlaxoSmithKline (NYSE:GSK), and receives small royalty payments each quarter. The vast majority of Avanir's revenue is derived from the sales of Nuedexta, its flagship drug, so that is where I will focus.

Below are the quarterly revenues for Nuedexta and the total operating expenses for Avanir since Nuedexta launched in February 2011:

  • 2Q 2011 - Net Nuedexta Revenues - $462,000 (partial Q of revenues due to mid-term launch)

  • 2Q 2011 - Total Operating Expenses - $15.8M

  • 3Q 2011 - Net Nuedexta Revenues - $1.9M

  • 3Q 2011 - Total Operating Expenses - $18.4M

  • 4Q 2011 - Net Nuedexta Revenues - $3.7M

  • 4Q 2011 - Total Operating Expenses - $22.5M

  • 1Q 2012 - Net Nuedexta Revenues - $5.5M

  • 1Q 2012 - Total Operating Expenses - $22.8M

As you can see, the sale of Nuedexta is increasing quarter over quarter, but these are small numbers increasing on a relatively linear trajectory. Unless that trajectory changes, profitability looks to be a goal for 2013 or later. The company is burning quite a bit of cash to get Nuedexta off the ground. The 2011 net loss was approximately $60M. Average analyst estimates for 2012 call for $35.9M of revenues against and expenses of just over $60M.

Avanir, like many a small biotech, has also seen its share count rise. In Avanir's case, from approximately 87.6M shares in September of 2010 (pre-FDA Approval) to approximately 137M shares as of this writing. This is through dilutive financing, warrants, and an equity incentive plan with an "evergreen" feature.

Until revenues begin to ramp at a higher pace than the current trend, I look at Avanir as more of a "high beta" trade that I would play with tight stops. The stock has seen fairly robust intraday pps movements at times, which can make for profitable trading.

In terms of long-term potential, Avanir is testing a variation of the same compound that comprises Nuedexta (DEX/Q) but in different dosages for Central Neuropathic Pain for MS. However, those revenues (on label) will be years off. In the shorter term, I will wait a few more quarters for clear signs that sales are increasing at a fast enough clip for Avanir to prove it can become profitable without more financing. I realize that I will pay a higher premium when it is "de-risked", if I decide to invest long-term in the stock.

My Opinion: Day Trade

Disclosure: I am long SPPI, AEZS.

Additional disclosure: I have no position in AVNR but may initiate a trading position at any time.

Disclaimer: As always do your own research and come to your own conclusions regarding your investments and investment strategies. My opinion is just that - my opinion.

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