Small biotech stocks are often considered "binary" lottery-ticket
type events, with either a small chance of big upside, or a much
greater probability of nothing at all. I call them "bipolar"
because around FDA clinical trials and approval events, these
stocks can soar to heights of euphoria and crash to depths of
depression -- sometimes all in the same week.
Intermune (ITMN) is an example from last
year that stands out. The stock soared from $15 to nearly $50 last
spring on positive expectations from FDA trials for its drug
pirfenidone to treat idiopathic pulmonary fibrosis (IPF). IPF is a
rare and fatal lung disease affecting more than 200,000 patients in
Europe and the United States combined, with a survival rate of only
20 percent after five years.
But then subsequent findings of an FDA advisory
panel were not as rosy and the stock plummeted back down to the
teens within two months. Investors were taken for a while ride in a
very short time and many probably swore they would never touch
another small cap biotech with unproven medicine again. A few
months later in December, ITMN launched back up to $40 on progress
at meeting FDA hurdles for the drug.
Small Cap Biotechs to Watch: Raptor and
Transcept
To give you an idea of how early and wrong you can
be in these names sometimes, I bought Raptor Pharmaceutical
Corp (RPTP) in 2007 (before I became a Zacks Rank student) when
it fell from $8 to $3. As its patented human receptor-associated
protein (RAP) therapies designed to target cancer,
neurodegenerative disorders and infectious diseases were still
proving their science, the stock subsequently fell below 50 cents
for most of 2009.
Then the fourth quarter of 2009 brought some good
news and an instant spike back up to $4. Great, we're off to the
races for riches, right? Not so fast. Over the next six months
Raptor drifted back below $2 and I think I finally threw in the
towel, selling my 500 shares at a loss when I consolidated some
trading accounts last year.
I really wish I had held on for the measly $1,000 I
had a risk. The past year has been steadily good to Raptor shares,
and the past two months have seen a big move from below $4 up to
nearly $6.50 on positive reactions from analysts about the
company's strategy to focus on so-called "orphan" disease
treatments.
Orphan diseases are generally defined as those
afflicting less than 200,000 patients and both the US and EU grant
special incentives for orphan drug development, often lessening
time to market, development costs, and risks. Raptor's lead orphan
drug is DR Cysteamine for the treatment of nephropathic cystinosis,
a genetic disease marked by abnormal buildup of cysteine in the
cells which can result in organ and brain damage.
As David Miller and Alan Leong of Biotech Stock
Research suggest, investors don't pay enough attention to companies
focused on orphan diseases because they tend to seek the "grand
slam" block buster drug successes. Orphan diseases may offer less
reward, but they also carry less risk and may lead to a steadier,
more-predictable stream of sales.
Early on in the 80% move higher in Raptor shares in
the past month was a boost in the Zacks Rank to a #2 position (buy)
on May 17. The stock has received this #2 Rank only one other time
since January 2009, when #3 Rank (hold) and #4 Rank (sell) ratings
have dominated.
Though analysts still don't see the company being
profitable in 2012, the outlook is for increased revenues coming
from its drug pipeline and business strategies. Some larger
investors must like the news too as the stock was on the receiving
end of three 2-million share upside trading days during this
time.
Currently, the Zacks target price for RPTP shares
is only $6.50 as the revenue and earnings picture doesn't hold
significant upside from what has already been quickly priced into
the stock. The company is currently in Phase 3 clinical trials for
DR Cysteamine and expects to report the data from this trial by the
end of July 2011. Keep an eye on this name around late July to see
how analysts react to the research outcomes and what corresponding
shifts take place in the Zacks Rank.
Getting Back to Sleep Could Be Big
Business
Transcept Pharmaceuticals, Inc. (TSPT) has
an insomnia drug that looks poised to wake up revenues pretty
quickly over the next few years if they pass muster with the FDA in
July. Intermezzo is a crucial alternative to drugs like Ambien and
Lunesta, which require at least seven hours for sleep, because it
is designed to treat middle-of-the-night (MOTN) waking.
Those two extremely popular prescriptions have been
found being used by patients at their doctors' recommendation
during the MOTN and this poses serious threats to safety in early
morning commutes. An FDA approval of Intermezzo could provide
physicians a safer alternative, especially as early testing in
actual highway driving studies is very encouraging.
Transcept shares became a Zacks #1 Rank on May 19
for the first time in our coverage as the two analysts on this name
raised their earnings estimates from consensus EPS of $0.49 for
this year to $0.95. They also boosted their consensus to $0.32 from
a loss of 2 cents for 2012.
As Bill Wilton reported for Zacks on May 23, "They
currently have $63.3 million left in cash and are averaging about
$1.6 million per month in spending. Transcept brought in $3.1
million in revenue for the period from a license fee. That 24-month
non-refundable fee has been coming in since August 2009 and will
total $25 million when completed."
The drop-off in 2012 earnings is due to the end of
that licensing fee. But analysts expect that FDA approval of
Intermezzo will give Transcept a new valuation level to fit with
strong growth into 2013 where full-year EPS estimates are as high
as $0.97.
Investors should stay tuned to July 14 for the FDA
announcement and watch the Zacks Rank as well. Expect new analysts
to initiate coverage as this company and its science gain more
attention.
Sifting and Sorting for the Winners
Raptor and Transcept belong to the Zacks
Medical-Biomedical/Genetics Industry classification, a large group
which currently has 170 companies in it. But they are two of only
21 names with a Zacks #2 Rank buy rating. And most of those top 21
stocks are small cap as you might expect.
Big biotech names like Amgen (AMGN) and
Gilead (GILD) find themselves further down the list, each
with a Zacks #3 Rank. Again, as your intuition might tell you, the
aggressive growth potential is in the smaller biotech companies
because they can ramp up earnings momentum quickly once they hit
the market with a successful drug.
Just be sure to use the Zacks Rank as a short-term
timing indicator and be ready to take advantage of the early
warning buying opportunities it signals, because it can get you in
before the institutions move into a given earnings star.
And then be ready to take profits when the market
hands them to you. In other words, don’t copy my example with
Raptor.
Kevin Cook is a Senior Stock Strategist for
Zacks.com
AMGEN INC (AMGN): Free Stock Analysis Report
GILEAD SCIENCES (GILD): Free Stock Analysis Report
INTERMUNE INC (ITMN): Free Stock Analysis Report
RAPTOR PHARMACT (RPTP): Free Stock Analysis Report
TRANSCEPT PHARM (TSPT): Free Stock Analysis Report
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