Biotech Weekend Recap: Bears, Bears Everywhere

by: Bio Insights

To keep track of the big stories in the world of biotech, I like to write recaps of the prior trading week before Monday so that traders can step into a new week with a reminder of the sentiment that prevailed last week. Here is a recap of the trading week of October 15-19 for some of the more active biotech tickers. Here's the scoop:

Everyone has been watching Amarin Corporation (NASDAQ: AMRN) for quite some time. A relatively calm week of trading for the popular biotech name turned into a "volatility-fest" on Thursday, due to a pharmaceutical approval update written by Marvin Goldenberg. In it, he says that Vascepa (Amarin's flagship product) is indeed considered a New Chemical Entity (NCE) by the FDA. This will give the drug a 5-year window of exclusivity once it hits the market (as opposed to a 3-year window without an NCE).

The drama over Vascepa's NCE, in addition to some frustration over the M&A inactivity with Amarin has caused some analyst downgrades and selling. Wedbush downgraded its price target to $15/share just because of the reduced likelihood of an acquisition of Amarin. Thomson Reuters actually has a 1/10 on AMRN - the lowest possible rating on a stock that they can give. I think they're dead wrong myself, but the market agrees to some extent. Shares are down about 10% in the last two weeks due to all the negativity.

If Vascepa does end up with an NCE and some sort of deal with a larger pharmaceutical company like GlaxoSmithKline, the bears are in for a nasty surprise. NADSAQ last released short interest on September 28 which showed roughly 20 million shares short. Given the recent price action, it's very possible that short interest is even higher (which would bring short interest as a percentage of float above 14%), and any rallies based on NCE/M&A announcements could induce a major short rally. Nonetheless, Amarin remains very controversial and very risky for either side. Still, at least for now, the bears remain in control. My advice as a long-term bull, expressed in my personal motto, is to "stay long, stay strong." AMRN will reach its fair value eventually, even if the company has to release Vascepa alone.

Also making big news was Cyclacel Pharmaceuticals (NASDAQ: CYCC), which saw some great phase II results for its flagship product Sapacitabine in the treatment of MDS and also AML (Myelodysplastic Sydnrome / Acute Myeloid Leukemia). MDS and AML are linked (MDS is a precursor to MDS), and the clinical development program suggests that Cyclacel wants to open every door for sapacitabine in the treatment of these kinds of leukemias. We don't know whether or not the phase II trial for MDS met its primary endpoint (these were interim results after all), but we can see that the reaction to the news had been completely erased by the end of last week's trading. CYCC rallied about 45% on October to a new 52-week high of $7.93/share halfway through last Monday's trading, but actually pulled back below the original level to $5.22/share. Traders who believe that the phase II results were indeed worth it can view this as a value opportunity on the long side CYCC.

Also seeing some bearishness was Delcath Systems (NASDAQ: DCTH), which is developing a system for liver cancer treatment. It's actually quite interesting - Delcath has developed a system called CHEMOSAT that isolates the blood flow of the liver and administers the standard myeloma-fighting agent melphalan. I took a look at the stock last Wednesday and noted that the company actually was denied a priority review for its CHEMOSAT NDA (meaning that the drug is will have a standard 10-month review). This seemed to disappoint many shareholders who thought that CHEMOSAT was important enough to liver cancer patients to warrant priority review. Liver cancer is indeed difficult to treat, and it seems that there is a big emphasis on improvements of existing treatments rather than the creation of new compounds.

Another biotech name that is looking to enter the liver cancer treatment market with its own improvement is Celsion (NASDAQ: CLSN), with the system known as 'Thermodox' which I covered fairly recently too on Bio-Wire. Celsion was also staging a major rally in anticipation of phase III results in HCC (Hepatocellular Carcinoma) due in December 2012, but seems to have taken a step back due to bearishness. Shares are down 19% in the last month. This can be explained, in part, by profit-taking from long-term CLSN investors who are looking to capture gains. It can also be explained by short positions who are looking to be against Thermodox's phase III results. We'll see if more bears are actively betting against the stock when NASDAQ reveals an updated look at total number of shares short.

Another massacre is occurring in AEterna Zentaris (NASDAQ: AEZS), which I covered back on October 8th. According to analysts (like Roth, with its price target of $10.50/share), the stock is severely undervalued. Despite this, the market seems particularly upset about the company's recent 1:6 stock split and share dilution, which allowed the company to raise capital while avoiding a NASDAQ delisting.

A note about the delisting: AEZS was trading below $1/share for quite some time, and NASDAQ informed the company in May that delisting was imminent in November 2012 unless AEZS could trade above $1/share for 10 consecutive trading sessions. AEZS was only able to avoid a delisting from a reverse stock split, which rubbed many shareholders the wrong way.

We've also seen major selling in Sarepta Therapeutics (NASDAQ: SRPT) since the company released phase II results on October 3rd, which demonstrated that its product etiplirsen was a solid treatment to slow the progression of Duchenne Muscular Dystrophy. I took a look at Sarepta right after the data release, and noticed in subsequent trading sessions that SRPT shareholders were not very interested in waiting around for phase III trials (or an early FDA approval of etiplirsen) and decided to sell heavily. This basically overwhelmed any bullish short-squeeze that may (or may not) have occurred, and cut share value in half ever since. I did tell investors to be patient if they missed out, since profit-taking is a huge factor. As quoted in my October 4th article:

As large as the short squeeze is, SRPT needs to correct. If you're going long, I'd allow shareholders to take profits in the next few trading sessions. There is plenty of time to buy the stock later -- phase III trials for etepliersen haven't even started yet.

Last but not least is ISIS Pharmaceuticals (NADSAQ: ISIS), which is seeing some safety concern according to FDA briefing documents with regards to its drug Kynamro that treats high levels of cholesterol. There is data that suggests that the drug can increase the likelihood of tumor development, based on animal studies. This could get in the way of its progression towards an FDA approval, and cause the company quite a headache in negotiations. The equity ratings firm Summer Street downgraded the stock from "Buy" to "Neutral" too, exacerbating the stock's anxiety-induced selloff.

As you can see, the bears claimed victory on many tickers last week. We'll see whether or not the trend changes in the upcoming week, and whether or not action in the broader market will contribute to weakness in the biotech sector.

Disclosure: I am long AMRN and occasionally sell (and buy to close) call options based on "overbought" technical indicators. I am inherently bullish on AMRN at low share prices like $11.26/share given the potential for Vascepa, and readers should factor this into my viewpoint on the company/stock in my articles. 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.