5 Big Risk, Little Reward Biotech Stocks

It takes guts and risk tolerance to invest in the biotechnology sector. Big pharmaceutical pipelines are pretty straightforward in that they offer relatively stable cash flow backed by a huge research and development budgets. On the other hand, smaller biotech firms with limited product pipelines and R&D budgets offer the "all or nothing" euphoria that many speculators often look for. While investing in biotechs isn't a complete crapshoot as Foolish biotech guru Brian Orelli has opined, there are nonetheless an abundance of poor quality biotech stocks out there.

Today, I intend to highlight five of those biotech stocks that I feel have significantly more downside risk than upside potential.

VIVUS (Nasdaq: VVUS  )
Many investors have proclaimed fat-busting blockbuster drugs Qsymia from VIVUS and Belviq from Arena Pharmaceuticals as the greatest thing since sliced bread. It's true that no anti-obesity drug had been approved in 13 years prior to the FDA approval of Belviq and Qsymia, but only one of these drugs is truly set up for immediate success -- Belviq.

Arena has a marketing deal set up with the extremely experienced Eisai, which will carry the costs of additional safety testing on Belviq. VIVUS has no partner, meaning that any additional safety concerns and all marketing costs of the drug fall squarely on VIVUS. Launch risk is another concern. All too often, we've seen blockbuster drugs limp out of the gate -- it happened with Human Genome Sciences' Benlysta and Dendreon's Provenge treatment. Without a proven marketing team, a mediocre launch is a very real concern. Finally, a European approval of Qsymia appears far less likely. Although VIVUS' target patient resides in the U.S., a lack of EU approval likely takes any buyout potential off the table.

SynaGeva BioPharma (Nasdaq: GEVA  )
See if you can do the math with me on this one: $1.3 billion market value for one phase 2 clinical candidate and four preclinical candidates! For SynaGeva shareholders, 1 + 1 = 11!

SynaGeva's lead candidate, SBC-102, is being developed to treat lysosomal acid lipase deficiency and has received orphan drug status in both the U.S. and Europe. However, peak sales, according to Canaccord Genuity, would peak around $650 million... in 2020! The research firm doesn't even expect approval of SBC-102 until late 2015 or early 2016. The remaining pipeline is made up of other rare disease candidates that aren't beyond the preclinical stage as of yet. SynaGeva's outstanding share count has also ballooned as the company raises cash to support its lone clinical and four preclinical trials. Using the company's estimated loss projection of $40 million to $45 million in 2012, SynaGeva will be out of cash by mid-2015. Thanks, but no thanks!

Pharmacyclics (Nasdaq: PCYC  )
I'll bite the bullet and admit that I've been so dead wrong on Pharmacyclics that it's not even funny! But a mixture of stubbornness and common sense can't let me give it a free pass at a valuation of $4.3 billion.

Pharmacyclics' lead drug candidate, Ibrutinib, a BTK-inhibitor, is currently being tested on four types of cancers and has shown statistical efficacy and tolerability in treating chronic lymphocytic leukemia (CLL) and mantle cell lymphoma (MCL). It's also partnered with Johnson & Johnson subsidiary Janssen Pharmaceuticals in a $1 billion deal that gave Pharmacyclics an immediate upfront payment of $150 million.

However, Wall Street's consensus is that even with CLL and MCL approval, the company is still three years away from a drug launch. As my Foolish colleague David Williamson noted, one Wall Street analyst predicted peak sales of $2.7 billion for Ibrutinib... in 2024! Not even into phase 3 trials yet and predicting $2.7 billion in sales 12 years from now; that's a new one even for me! Pharmacyclics isn't worth the risk here if you ask me.

Infinity Pharmaceuticals (Nasdaq: INFI  )
The latest craze in cancer research is heat shock protein 90 (Hsp90) inhibitors. Hsp90 is critical for maintaining proteins that are vital for cancer cell growth, and inhibitors of this protein may be able to kill cancer cells. Infinity is attempting to combine IPI-504, its hsp90 inhibitor, with FDA-approved chemotherapy agent docetaxel to treat non-small cell lung cancer in a phase 2 clinical trial.

Hopes are high for the combination -- trust me, I'd love it to succeed -- but history doesn't favor small-cap biotechs working toward lung cancer treatments. In addition, Infinity shareholders have completely shrugged off the failure of Saridegib, its advanced stage pancreatic cancer drug, in January. With prostate cancer garnering such high interest, this failure is more than just a moot point to be brushed aside.

Infinity is still very early on in its hsp90 testing and has only one drug hopeful currently beyond phase 1 clinical trials. With that being said, I'd suggest taking my money and running with the stock at an eight-year high.

Alexion Pharmaceuticals (Nasdaq: ALXN  )
Here's another case of faulty math: one drug, $22 billion market cap!

Alexion's lone FDA-approved drug, and the only drug from which its development pipeline revolves around, is Soliris. It is currently the only approved treatment for paroxysmal nocturnal hemoglobinuria (a type of anemia), and atypical hemolytic uremic syndrome (a genetic, organ-attacking disorder). This year, Soliris is expected to bring in north of $1.1 billion in sales, however analysts estimate a peak sale midpoint of just $3.5 billion for the drug – and that's with additional indications being added, which aren't a guarantee!

Every single study being run at Alexion involves Soliris in one way or another, which leaves the company particularly undiversified and exposed to patent and safety concerns should they arise. Even at $3.5 billion in peak sales, Alexion would be valued at north of six times revenue, a lofty figure by for even the most imaginative investor.

Foolish roundup
These five biotechnology stocks appear to offer little in the way of reward and plenty of risk for remaining investors. If I didn't already hold an underperform rating on each company in my CAPS portfolio, they would most certainty have been added.

What's your pick for the biotech sector's riskiest stock? Share it with the community in the comments section below.

Curious who will win the anti-obesity battle between VIVUS and Arena Pharmaceuticals? Find out by getting your copy of our latest premium research report on Arena Pharmaceuticals. Crammed with in-depth and unbiased analysis detailing the opportunities and threats facing Arena, and complete with a year of regular updates, this report will give you the tools needed to make smart long-term investing decisions. Get your copy today and claim your investing edge.

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, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Johnson & Johnson and Dendreon. Motley Fool newsletter services have recommended buying shares of, and creating a diagonal call position in, Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.


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