"A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty." - Winston S. Churchill
The biotech sector continues to drift in listless trading. A nascent small rally was wiped out Monday on news of the Russian ambassador being shot dead in Turkey and yet another Islamic terrorist incident in Europe, this time in Berlin. Sentiment went immediately more negative on high beta parts of the market like biotech.
The main biotech indices are almost exactly where they were one week ago and the sector looks like it will remain unexciting as it looks to close a disappointing 2016. Individual companies, especially small and mid-caps continue to make sharp moves on trial results and collaboration deals (see below), but the main biotech indices seem range bound currently.
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The shares of Conatus Pharmaceuticals (NASDAQ:CNAT) were up some 150% Tuesday as this NASH play, which I have profiled before, finally rewarded its long-suffering shareholders. The small-cap biotech concern signed a transformational collaboration deal with drug giant Novartis (NYSE:NVS) around its compound emricasan.
Conatus will get $50 million in an upfront payment - which is kind of a big deal given the company started the day with a similar market capitalization. Novartis will also pay for half of Phase 2 development of the drug and 100% of the Phase 3 development costs.
The company will also receive $7 million following the exercise of the license option and may borrow up to $15 million from Novartis in the form of convertible promissory notes. It is also eligible for future milestone payments and tiered single- to double-digit royalties on net sales of combination products containing emricasan. I was way too early on my optimism on this small concern, but I am glad my patience on Conatus finally is paying off. Another SA contributor put out a great piece on the company in early December and definitely had better timing on this name than I did.
Akebia Therapeutics (NASDAQ:AKBA) also jumped some 20% in trading Tuesday after it announced that it has entered into a collaboration and license agreement in the United States for vadadustat with Otsuka Pharmaceutical (OTCPK:OTSKY). Vadadustat is an oral hypoxia-inducible factor stabilizer currently in development for the treatment of anemia associated with chronic kidney disease (CKD). Anemia related to CKD affects almost 2 million patients in the United States. This condition arises from the kidney's failure to produce adequate amounts of erythropoietin, a key hormone stimulating the production of red blood cells.
The collaboration deal will net Akebia $125 million in an upfront payment, another $35 million payout in 2017 and up to $150 million development costs in addition to other milestone payouts and royalties on any product sales arising from this transaction.
ACADIA Pharmaceuticals (NASDAQ:ACAD) also was a big winner in trading Tuesday as it rose over 25%. The company announced that its Phase 2 trials for its compound "Nuplazid" successfully met its primary endpoint as a treatment for the psychosis commonly found in Alzheimer's patients. Nuplazid was approved for the psychosis found in approximately 40% of the Parkinson's population in the second quarter. That alone is probably an eventual $1 billion indication.
Obviously, success in Alzheimer's will greatly expand Nuplazid's peak sale potential. The company also just started a late-stage trial testing Nuplazid for the treatment of psychosis found in Schizophrenia patients. The latest results just make the company a much more likely buyout target. I have had much better timing on this name as it was placed in the Biotech Forum portfolio earlier this year in the high teens, and I still see more upside ahead.
Despite the monstrous rally in Conatus on Tuesday, analysts still seem to think more upside lies ahead. Yesterday, Stifel Nicolaus reiterated its Buy rating and $7 price target on CNAT. This was very conservative given H.C. Wainwright placed an $18 price target on the shares and SunTrust Robinson topped that raising its price target to $26 from $17 previously. Its analyst believes this deal could eventually mean some $1 billion to Conatus.
Biotech stalwart Celgene (NASDAQ:CELG) continues to pick up increasingly positive commentary from analysts. Tuesday, Oppenheimer reiterated its Buy rating and $141 price target on the shares, Credit Suisse did same but with a $145 price target. This makes for half a dozen reiterated Buy ratings over just over the past two weeks for Celgene.
Ionis Pharmaceuticals (NASDAQ:IONS) saw its first analyst activity in over a month on Tuesday. BMO Capital reiterated its Buy rating on the firm while raising its price target from $48 to $61 on Ionis as it views the risk/reward profile of the company's upcoming Investor Day on January 5th positively. Last, the firm nabbed a $28 million milestone payment as a result of an existing collaboration deal with AstraZeneca (NYSE:AZN).
Allergan (NYSE:AGN) has received some love from analysts over the past 24 hours. The company announced an almost $3 billion purchase of privately held LifeCell earlier this week. That company's product portfolio consists of Acellular Dermal Matrices, which are used in breast reconstruction procedures and complex hernia surgeries to provide soft tissue support.
Since the deal was announced, Bernstein, Deutsche Bank and Credit Suisse have all reiterated Buy ratings. Price targets proffered have ranged from $247 to $275 a share. The CEO of the company also bought nearly $1 million in new shares on November 21st.
Note: New analyst ratings are a great place to begin your due diligence, but nothing substitutes for deeper individual research in this very volatile sector of the market. Many of the small-cap names highlighted in the "Analyst Insight" will eventually appear in the "Spotlight" section, where we do deeper dives on this type of promising but speculative small-cap concern.
Our Spotlight feature today will be on Anika Therapeutics (NASDAQ:ANIK). This company is a rare "Tier 2" stock in the industry - a small-cap concern with recurring revenues and earnings. Let's take a look at the request of a Seeking Alpha follower.
Anika Therapeutics is a small specialty pharmaceutical company based in Bedford, Massachusetts. The company provides therapeutic pain management solutions for patients with degenerative orthopedic diseases and traumatic conditions developed from its proprietary hyaluronic acid (HA) technology. The company was founded in 1983 and has been a public company for over 20 years. The stock currently has an approximate market capitalization of $700 million and trades just under $49 a share.
The company has several approved products on the global markets.
This compound is the first and only approved combination viscosupplement formulated to provide the benefit of a cross-linked HA and a fast-acting steroid to effectively treat the symptoms associated with osteoarthritis (OA). It is approved in Europe and other parts of the world and the company is working towards approval in the United States. The company believes the total market opportunity in this treatment area is some $2 billion annually. A Phase III study is commencing that hopefully will lead to approval in this country
This is a single-injection viscosupplement utilized to treat the joint pain caused by osteoarthritis. It is comprised of highly purified, partially cross-linked sodium hyaluronate (NaHA) in a phosphate buffered saline solution, and it is both biocompatible and resorbable. One injection can reduce pain for up to six months. Again, this compound is approved in Europe and other countries. A Phase 3 trial is underway to garner approval in the United States. The company believes the market opportunity here is $600 million annually.
This is a non-woven 2×2 cm or 5×5 cm biodegradable hyaluronic acid-based scaffold for hyaline-like cartilage regeneration. It is used for the entrapment of mesenchymal stem cells to arthroscopically treat both chondral and osteochondral lesions in the knee and ankle. Again, this product is approved in Europe and other countries and currently in Phase 3 trial in the United States. The company believes the total market to be $500 million.
On October 26th, the company delivered third quarter results. Earnings came in at 59 cents a share, 12 cents above expectations. Revenues rose 9 percent year over year to just under $26 million, about in line with the consensus. It was the fifth straight quarter that Anika has beaten earnings expectations by at least a dime a share. The company also completed a $25 million stock buyback authorization program during the quarter.
Analyst Commentary & Balance Sheet:
Despite the size and longevity of Anika, it has very little analyst coverage. The last analyst rating I could find was from Barrington some eight months ago. It has a Buy rating and $49 price target on Anika, where it is currently trading. The company has a solid balance sheet with some $120 million in cash and investments on the books at the end of the third quarter.
The company made $2 a share in FY2015 and should make approximately $2.15 this fiscal year. The current consensus has earnings pretty flat in FY2017 as the company focuses on pushing three key compounds through trials to garner U.S. approval. Revenues should grow in the low teens next year.
It is hard to find much analysis on this company at all given its market size. U.S. approvals should boost sales substantially in 2018. However, at just under 25 times earnings and seven times revenues; the stock seems at least fairly valued at these levels. Anika is an interesting company but I am going to have to pass on investing in it at the present time.
Thank You and Happy Hunting
Founder, Biotech Forum
Disclosure: I am/we are long ACAD, AGN, CELG, CNAT, IONS.
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.