2 Attractive Biotech Stocks Under $10 For Spring

Includes: DVAX, REPH
by: Bret Jensen


Yesterday was the first official day of spring. Hopefully biotech continues to sprout in 2017 and can break through stubborn resistance levels in the next month or so.

There are a couple of small biotech stocks that go into the next quarter with high hopes, as they have potential catalysts coming up in summer.

Both have favorable risk/reward profiles, even as their futures are uncertain pending the outcome of these milestones. We look at both under $10 biotech stocks below for a full assessment.

Every man should lose a battle in his youth, so he does not lose a war when he is old. ―George R.R. Martin, A Feast for Crows

George R.R. Martin

Biotech has been an interesting place to be so far in 2017 after being a huge underperformer to the overall market for a year and a half through yearend 2016. M&A across the sector picked up markedly in January of this year. The main biotech indices gained some 10% in February.

So far in March, the sector has been lackluster. M&A activity has dried up for now, the sector has been unable to break through upward resistance levels that have been in place since the end of 2015, and the industry has had to navigate the occasional tweet or sound bite from the POTUS around doing something about "drug pricing". Given the major free-market advocates he has put up to head the FDA and HHS, not to mention resistance to such measures in his own party; I would take these pronouncements with a huge grain of salt. The dips caused by these incidents have been buying opportunities so far in 2017 and I expect them to continue to be so.

I believe the path will continue to be bumpy for this high beta sector of equities. It almost always is. However, I do think the biotech sector will outperform the overall market when all is said and done in 2017. Given this optimistic outlook lets look at two small biotech concerns that have upcoming catalysts and whose stocks could do well in this spring leading up to these events. Both stocks currently are under $10.00 a share in the market right now.

Stock No. 1: Dynavax Technologies (NASDAQ:DVAX)

Current Price: $5.75 a share

52-Week High: ~$22.50 a share

Market Cap: ~$265 million

Median Analyst Price Target: $24.50 a share. It should be noted there is a huge disparity in analyst views on this stock. Cowen & Co. reiterated a Buy and $45 price target on DVAX in January. RBC Capital reissued a Hold rating and $4 price target in February. They are the only analysts I can find that have issued ratings so far in 2017 on this company via TipRanks

Key Asset: Heplisav-B. A hepatitis B vaccine that is on its third go around with the FDA trying to garner approval. In a 14,000-person Phase III trial this biologic showed clear protection superiority (~95% vs. 81%) to the current standard in the market. It also can be administered effectively in two dosages over a month instead of the current regime of three doses over six months. This is should dramatically improve current compliance rates (~55%), if approved.

In the fourth quarter of last year, the company received a complete response letter from the FDA asking for additional data from this trial even as the agency had not processed the current data submitted. Dynavax has since supplied that requested data and resubmitted the Biologic License Application {BLA} for Heplisav-B. If approved, the vaccine could easily garner $500 million or more in peak sales. William Blair assigned a 70% probability of eventual approval. I am slightly less optimistic giving the company's pass travails with the FDA but still think it is better than 50/50 this vaccine gets approved this year.

Next Significant Catalyst: PDUFA date of August 10th for Heplisav - B

Other Assets: SD-101, a promising & wholly owned oncology compound is heading towards Phase II development and one that should have more trial visibility in 2017. AZD1419, an asthma candidate the company is currently designing a Phase 2 study for the treatment of moderate to severe asthmatics in partnership with AstraZeneca (NYSE:AZN) which will run the Phase II trial. Dynavax is eligible to receive additional development milestones as well as royalties on worldwide sales of any approved products and has the option to co-promote the product in the United States through its collaboration deal with the European drug giant.

Caveats: The company will need to raise funding at some point before 2017 is out. My guess is they will wait for the August 10th FDA decision. Obviously if vaccine candidate is green lighted, financing options should be able to be attained on favorable terms. A high risk/very high reward play.

Stock No. 2: Recro Pharma (NASDAQ:REPH)

Current Price: $7.75 a share

52-Week High: ~$10.00 a share

Market Cap: ~$150 million

Median Analyst Price Target: $20.00 a share. As one might expect given the company's market size, this concern does not receive a ton of analyst coverage. Roth Capital is the only analyst firm I can find that has chimed in on Recro so far in 2017. It reissued a Buy rating and $20 price target on March 7th. Piper Jaffray was the last analyst firm to comment prior to that as it reiterated its Buy rating and $12 price target in December.

Key Asset: An IV version of Meloxicam. This compound has been around for some two decades. This drug is a long-acting NSAID with preferential COX-2 inhibition that possesses anti-inflammatory, analgesic, and antipyretic activities. The company has developed a proprietary injectable form of the drug. This modification is in late stage testing using an IV version and earlier stage testing for intramuscular delivery. This should result in much faster effectiveness in the drug as the oral version takes 5-6 hours to deliver full effect.

Next Significant Catalyst: Mid-summer NDA for IV version of Meloxicam

Other Assets: Dexmedetomidine, the IV version of another pain management compound called Precedex® that does approximately $275 million in annual sales. Currently in mid-stage development. A Contract Development and Manufacturing facility the company purchased in 2015 did just under $70 million in revenues in 2016 and produced just over $30 million in EBITDA.

Caveats: The company is focused on developing non-opioid products for the treatment of acute pain. Although this is a growing market as focus continues to increase on the addiction of opioid pain killers across the nation, it is a crowded field with myriad potential players. The company will also owe Alkermes (NASDAQ:ALKS) $45 million upon regulatory approval as well as ongoing royalties upon FDA approval and commercialization of its IV version of Meloxicam. The company ended 2016 with approximately $65 million in cash & marketable securities on hand.

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Thank you and happy hunting.

Disclosure: I am/we are long DVAX, REPH.

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.