Biotech Weekend Recap: Tug Of War

by: Bio Insights

It's been another interesting trading week in the biotech sector, although not quite as bearish as the previous week. Bulls are fighting back in many of the tickers on the heels of fresh news. There's been a lot of big updates in some of the more obscure biotech names too, some of which will be included in this article. So, without further ado, here is a recap of the trading week of October 22-25:

Probably the most popular speculative trade in the biotech sector right now is Amarin (NASDAQ: AMRN), so I won't skimp on the details. Amarin is still waiting on NCE designation for its flagship product Vascepa (formerly known as AMR101). There is also a huge amount of M&A speculation over the company right now. Bulls are citing a number of reasons for AMRN's undervaluation, but this is largely based on the belief that the company will be bought by a larger pharmaceutical company in the near future. Many bulls also believe that Vascepa will get an NCE status, which will guarantee the company 5 years (instead of 3) of exclusivity once it does hit the market.

Bears argue that the fact that AMRN has not announced any official deals three months after FDA approval for Vascepa (which was July 27, 2012) means that there's something wrong. If AMRN doesn't get bought, or doesn't take on a partner for Vascepa before it hits the market, the company will have to market the drug itself. Even if the drug is expected to become very successful in the triglyceride lowering drug market, bulls generally don't want to see Amarin enter the market by itself. Still, the market got pretty excited last week (specifically after October 23rd, 2012) on news that Vascepa was officially granted the patents that give it intellectual property exclusivity until 2030. No news on a deal (still), but we are likely to see an NCE designation in the next release of the FDA's Orange Book (due mid-November.)

Regeneron Pharmaceuticals (NASDAQ: REGN) saw a paradoxical reaction to its Q3 2012 financial results, which were very decent. The real driver of the company's success was its marketed drug EYLEA, which is being approved in an increasing number of countries for the treatment of wet AMD. Regeneron also expects to see EYLEA approval in the EU by the end of 2012, which will accelerate the drug's rapid sales growth (which is currently an ultra-rapid 26% quarter-to-quarter) going into 2013.

Adding more to EYLEA's prospects is the company's success in bringing the drug to other treatment markets. In September, the FDA approved EYLEA as a treatment for macular edema after central retinal vein occlusion (CRVO), which means that the vein for macular edema patient's retinas is blocked. Regeneron is still in a strong uptrend (and has surged 170% since the start of the year), but post-earnings trading suggests that some shareholders were looking to sell the good news. Short interest is still low, but is growing steadily.

Also reacting to a fresh quarterly report was Cynosure (NASDAQ: CYNO), which caught my attention on October 23rd due to a huge spike in trading activity, which caused a huge round of profit-taking after the release of its own stellar Q3 2012 report. This was followed with a rally into the end of the week - shares are up over 18% in the last five trading sessions. Why?

Cynosure's Cellulaze is a really neat little device that treats cellulite tissue with a high-powered laser (with a wavelength of 1440 nanometers). It makes the awkward bumpy tissue look a lot better, and improves the elasticity and thickness of the skin as well. The product was approved in January of this year, and is driving Cynosure's revenue growth deep into the double digits. The company's overall revenue growth is now 31% year-over-year, and already-high profit margins continue to improve (last measured at an impressive 58.2%). Still, the recent rally in CYNO only erases losses from the first half of October. The stock has only moved up about 3.4% in the last month.

The market's tug o' war in the world of prescription obesity drugs saw a big effort from the bears this week (more about it here), which basically erased the gains from earlier in the month that resulted from a Vivus (NASDAQ: VVUS) press release. Going back to October 8th, we see that the progress of Vivus' flagship drug Qsymia was affirmed with news that Express Scripts, the giant pharmacy benefit manager, would join in on Qsymia's mail-order business. I was very skeptical on this rally, which ended up being a smart move.

The other two companies involved - Arena (NASDAQ: ARNA) and Orexigen (NASDAQ: OREX), only dropped half as much as Vivus this week but still showed that the bears are stubbornly holding on to the notion that these companies are overvalued. Vivus, Arena, and Orexigen dropped 15%, 8%, and 7% respectively. As mentioned in my recent article on these three tickers, short interest is staying there for Arena but increasing for Vivus, and especially Orexigen.

Expect some more tugging before Vivus releases its next quarterly report (in November), which will clarify Qsymia's progress. Since there is so little basis for the valuation of Arena's Belviq and Orexigen's Contrave, I expect VVUS to continue some degree of positive correlation to ARNA and OREX until the competition between these companies and their drugs begins to factor in.

Disclosure: I am long AMRN. 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.

Additional disclosure: I am long AMRN, and also actively trade options on the ticker