These 2 Biotechs Are Dangerous Investments

Investing in the stock market is a gamble. We can only use the facts we are given in the form of quarterly reports, hope that they're accurate, and use our collective knowledge to determine if an equity is worth our hard-earned money. If the stock market is like a casino, the biotechnology sector is, without question, the roulette table.

The deck is significantly stacked against investors since considerably more drugs will fail than will succeed. But success can mean huge returns. Take Human Genome Sciences (Nasdaq: HGSI  ) and Vanda Pharmaceuticals (Nasdaq: VNDA  ) , for example, which are up 285% and 105%, respectively, in the past three years, following FDA approval of their leading drug candidate. But not everything that soars in the biotech sector turns out to be a great investment.

More often than not, companies will crash and burn because investors' emotions take precedence over the real weakness exhibited in a company's pipeline. In just the past month, Transcept Pharmaceuticals and Nabi Biopharmaceuticals (Nasdaq: NABI  ) have plunged more than 50% following unfavorable FDA and clinical trial results. Keeping this in mind, consider yourself warned about investing in the following two potentially dangerous biotechs: Pharmasset (Nasdaq: VRUS  ) and Ariad Pharmaceuticals (Nasdaq: ARIA  ) .

Pharmasset
Buyout speculation has fueled Pharmasset shares to an all-time high and a stunning market value of $4.8 billion -- even though the company has no marketable drugs to date.

The company's focus is on finding cures for hepatitis C and HIV, but it does not yet have a single drug candidate past phase 2 clinical trials. Working in collaboration with Roche, Pharmasset is betting the house on success with RG7128, the lovable name assigned to its hepatitis C drug. Thanks to its partnerships, cash constraints aren't an issue, but results definitely are. At what point do investors take notice that Pharmasset doesn't have a drug past phase 2 trials regardless of the current lack of competition in the hepatitis C market?

The stock is up a staggering 429% over the past year on hopeful results from its early stage trials, but it all means nothing until it gets the FDA's stamp of approval. At these stratospheric levels, and no product revenue to speak of, I feel speculators are playing with fire.

Ariad Pharmaceuticals
Ariad Pharmaceuticals, like Pharmasset, has reached a lofty valuation of $1.7 billion without having a marketable drug as of yet.

The company's primary focus is on cancer solutions through its three primary drugs, ridaforolimus, ponatinib, and AP26113. Between Ariad's three main candidates and the 13 clinical and preclinical trials currently being explored, only one has made it to the phase 3 stage. In short, an FDA rejection of ridaforolimus at this point could do serious damage to shareholder value, especially considering that the stock has rallied 327% in the past year.

Ariad currently generates all of its revenue from partnerships, specifically with Merck (NYSE: MRK  ) . While Ariad does get the experience of having Merck on its side, it's unclear what percentage of royalties Ariad would receive if ridaforolimus were approved. In sum, there are still far too many unanswered questions to justify a $1.7 billion valuation.

The house always wins
Always remember when you're gambling in casinos that the house always wins. Investors have thus far been greatly rewarded with the returns in Pharmasset and Ariad, but realistically, without tangible evidence of a marketable drug in the very near future, these two could be in for a rough road ahead.

Would you take a gamble on either of these two biotech bottle rockets? Share your thoughts in the comments section below and consider adding Pharmasset and Ariad Pharmaceuticals to your watchlist to keep up to date on the companies.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that always has your best interests in mind.


Read/Post Comments (14) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 22, 2011, at 12:40 PM, bata1 wrote:

    RE:Ariad-

    I think you guys need to stop publishing Irritatingly ill-informed articles about successful companies(i.e.companies with indisputable scientific foundations) like Ariad, just to garner attention for your amateurish site.

    You, and many of your caps luminaries have been bashing Ariad since the 2s and 1 look at any chart will inform you how insightful that was.

    When you are incontrovertibly wrong it's best to acknowledge it. And in your (motley fool's case) the best way to do that would be to cease and desist regarding "assessments" in areas of knowledge which are obviously beyond your ken.

    Needless to say, you guys/gals/whatevers would have(and probably did) similarly discourage participation in such notables as Incy, Hgsi, and Dndn early on, on the basis of your inability to discriminate.

    Bottom LIne:Ariad's chart will tell the tale(the only one you will be able to discern)by achieving a conservative 18-20 price target over the next 6-12 months.

    One of the most important messages of this development will be how much attention your comparable articles deserve going forward.

    With all due respect,

    Bata1

  • Report this Comment On July 22, 2011, at 1:18 PM, Jeffbahr wrote:

    Specific to Ariad...... Who knows what will happen but your (motley fool's) focus on ridaforlimus would seem to demonstrate that you are ill informed as to what is the main value driver behind the stock. If you take a look at what analysts are focused on right now its ponatanib. Speaking off the cuff, recent analysts reports assign the value to ARIAD at a ratio of about 3 to 1 in favor of ponatanib over rida. If your concern is the fda not approving RIDA as the main concern you are seemingly misinformed. Additionally, There is no reason for the FDA not to approve RIDA being that the trial hit the specified end point of PFS that had been agreed to with the FDA.

  • Report this Comment On July 22, 2011, at 2:12 PM, rnicegoodguy wrote:

    I agree with the other two comments made by these two smart individuals. What does irk people about your articles is the lack of knowledge that you continue to hash out. Please , don't.

  • Report this Comment On July 22, 2011, at 2:23 PM, bata1 wrote:

    Jeffbahr,

    I think you're simply being too generous in your assessment of MFs analysis function.

    They are obviously taking a "conventional wisdom/play the averages" approach in an area where any meaningful analysis requires a highly individuated knowledge of both the company and the sub-sector.

    In an area(biotech) where analysts are often (if not generally) behind the curve, MF(and it's reviewers) have no business spewing this dreck.

    As you point out, Ponatinib is the overwhelming focus of most analysts currently, while AP26113(though just entering the clinic),is a combined ALK/EFGR Inhibitor, that gives every indication it will be as important(if not more so) than Ponatinib, and is not even part of analysts' valuation metrics to date.

    Rida, on the other hand is a relatively minor (though predictably positive) factor.

    In view of all the above, what business does MF have even commenting???

  • Report this Comment On July 22, 2011, at 3:17 PM, Milly47 wrote:

    Sean,

    I just checked your expertise.

    "My Area of Expertise:

    Jewelry, Metals, Technology, Retail, Micro Caps & Small Cap"

    "Stocks:

    I loosely follow 1500-2000 companies

    Industries:

    Really anything and everything"

    I think I will trust my opinion on Ariad.

  • Report this Comment On July 22, 2011, at 4:42 PM, Guest1234 wrote:

    Sean,

    I would appreciate some supporting analysis to go along with your ill-informed opinion. VRUS is one of the most undervalued stocks in the market today. In several years they have the best chance of any company to dominate the $10 billion+ HCV market. The only reason this stock isn't higher is that institutional investors are scared of the recent rise. They probably have the same preconceived (and wrong) notions about how to invest in biotech. They see a company with no profits and a big market cap and are afraid if they buy a stock with that profile and are wrong that they will look incredibly dumb and maybe lose their job. Unfortunately, that is causing the shares to trade below where they should and this company will likely be taken out at a price much lower than it would be several years from now.

    Any facts you can bring to the table would be appreciated.

  • Report this Comment On July 22, 2011, at 6:36 PM, figbar wrote:

    Gentleman and Lady’s

    Don’t answer this person seriously—it is evident he has got caught with his pants down—and needs to cover—don’t give him the pleasure of your serious considerations.

  • Report this Comment On July 22, 2011, at 7:06 PM, cleansweepgov wrote:

    The Yahbuts and Causeweregonnatellya ‘Who’s on First’ vaudeville act from the ihub and yahoo boards has made its appearance because you didn’t bow down and praise AllAriad.

    Not surprising given the fact that the ihub message board is for Ariad cheerleaders only that they would come to attack and bash the author who puts a negative spin on their nest eggs, the bunch of yahoo’s on both boards have always done that. No one in touch with reality is allowed to post on ihub without being banned.

    What the cheerleaders don’t want to understand is there is always a chance Rida may not be approved by the FDA for sarcoma and as a result Ariad would lose out on all those royalties and payments from Merck which would impact stock price and the value of the company in the short term as you described. The risk of non-approval or delayed approval because of the request for more testing is a valid risk, a low risk but valid and anyone in touch with reality would admit and accept that risk. Even once Rida is approved it still would have to go through approval for payment by insurance companies which that risk of that not being approved is even higher than it not being approved. There is also risk of lawsuit(s) for once the compound is approved because of the mechanisms used and we know how Ariad has fared in patent fights so far.

    However, as the cheerleaders noted, their focus is now not on Rida (they don’t hold much value in it any more since HB gave it away, another promise HB never kept) but on the Woulda; Coulda; Shoulda compounds that are years away from being submitted for approval and provide any solid revenue for Ariad. Two of compounds do look good, so far in the early phases and the cheerleaders are guaranteeing approval already. Much like they did with AP23464 and yet where is that compound? The other compound? Well shelve life is running out on that one.

    They also don’t want to admit there are competitors that will make it to market before those compounds are considered for approval and the exclusivity associated with those competitors’ compounds will limit the income potential of Ariad’s compounds in the near term. That is if Ariad still own those compounds by then, and hasn’t sold large chunks of the revenue yet again, or if Ariad isn’t absorbed by another pharma by then.

    The point that the stock has risen over the past few years reminds one of where the stock was in 2004 and how it quickly fell soon after ASCO, again where promises were made and never realized, HB has a tendency to do that.

    You didn’t mention the “4th compound” for stents that is really the 1st compound (AP1903) that has languished for years and may be approved just prior to the patent expiration. Maybe because that compound won’t generate really any true revenue.

    The investors of Ariad on those board always think they are in the big leagues but they still are in the minors...and act just like it. Ariad should make money someday, heck maybe even declare a dividend, but then these cheerleaders are making guarantees like Enron.

    “If the world was perfect, it wouldn't be.”

  • Report this Comment On July 24, 2011, at 1:26 PM, Toast2012 wrote:

    You Motley Fool guys have been incredibly incompetent fools with Ariad.

    You scared a alot of folks out of Ariad back in the 8's with a purely novice article. Now 5 points later you are back at it ---- BUT you STILL have no idea what Ariad has going.

    I can't name one person that owns Ariad for Rida. Infact - the money says institutions do not own Ariad for Rida. The stock broke out after the lung cancer data hit after ASCO.

    The Fool is consistent though --- struggling at making calls on Ariad for a very long time.

  • Report this Comment On July 25, 2011, at 1:34 AM, TMFUltraLong wrote:

    In the end it comes down to end results. Whether you want to focus on ridaforolimus or ponatinib seems irrelevant to me given that most of their pipeline is years away from an FDA review. Ariad is being priced as if 4 or 5 drugs have already been approved. In the meantime shareholders get to foot the bill for a running deficit. We see plenty of these ASCO boosts every year and then these companies trail off which is what I anticipate will happen with Ariad.

    Pharmasset is even further behind the competition. 5.4 billion in market cap now for a pipeline not past phase 2 while other Hep C drugs are already on the market. Trust me, it's great to be hopeful that these drugs succeed. I would like to see all drugs be successful. But the valuation here makes no sense. Call me when Pharmasset has an answer from the FDA.

    TMFUltraLong

  • Report this Comment On July 25, 2011, at 1:05 PM, biotechnique wrote:

    TMFUltraLong..

    TMFUltraLong...(he's real short n desperate)..sez..

    "Ariad is being priced as if 4 or 5 drugs have already been approved"

    This comment really shows your stupidity, or a real sophmoric try at manipulation.....it is obvious to anyone who invests in biotechs that 4 or 5 approved cancer therapies would result in market cap much higher than 1.7 Billion. There are some biotechs with only ONE approved drug with market caps well over 5 Billion...

    How does one get MF to ban bloggers like you who attempt to manipulate stock prices??

  • Report this Comment On July 25, 2011, at 2:03 PM, rarebubble wrote:

    Be careful those articles from this website. One of worst misleading one ever. I responded and questioned the article about AIB (Allied Irish Bank) before and I was told the AIB situation is stable....what a joke! how can they gave AIB stock a five star rank sometime ago??

  • Report this Comment On July 27, 2011, at 3:29 PM, giovane05 wrote:

    About author Sean Williams knowledge about ARIA and VRUS and his achievement in stocks industry: He own stock: AFOP--annual return DOWN almost 200%!!!!!, GSS- annual return DOWN almost 200%!!!!!, ALIF.OB- annual return DOWN 600%!!!!! JGBO- annual return DOWN 200%!!!!!! - Congratulations Sean.

    About ARIA- annual return UP around 300%!!!

    about VRUS- annual return around UP 600%!!!! If You need more info. why Aria and VRUS are very promising stock let me know. After filing out aplications for Rida, Merck will probably buy Aria, so that will be return...

    Sean If you wanna write article about stocks I recomend to You first due dilligent,a nd second dont misleading other people!!!

    My return on ARIA-320% Up, and HGSI 1100% on HGSI Up. Thank You.

  • Report this Comment On July 28, 2011, at 11:18 AM, atinm wrote:

    The thing that most people do not know about VRUS (Pharmasett) is that one of the the HCV drugs they are developing is a polymerase inhibitor rather than a protease inhibitor like the Vertex, Merck drugs and the Phase II results were great. Why is this important? Certain classes of patients are not able to take protease inhibitors - specifically transplant patients because protease inhibitors interact badly with the current anti-rejection medications like prograf and cyclosporine. Therefore, the first one to come out with an approved polymerase inhibitor that has a high SVR rate for HCV will own that market because the Vertex and Marck drugs cannot compete in this area. Pharmasett is ahead of everyone else developing polymerase inhibitors and is therefore very much work keeping track of.

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