3 Biotechs Investors Should Be Scared Of

No doubt, biotech can be scary. You've got binary events that can halve -- or more -- a stock overnight. But there are certain biotechs that have other issues that makes them even scarier than the average biotech. Here are three biotechs that are a little frightening for their own particular reasons.

Scary expectations
Amarin
's (Nasdaq: AMRN  ) Vascepa was approved back in July, but the lipid-lowering drug still hasn't been launched. The company is apparently still exploring its options that include selling the company outright, out-licensing the drug to a big pharma, or launching the drug by itself.

None of those options are really all that scary. Launching the drug on its own would be a big task, but it's doable especially if it outsourced the sales force to a contract sales organization.

The scary thing is investors' expectations of an immediate payout. The company has been a rumored takeover target since it first posted positive phase 3 data. If the company isn't sold, I expect the biotech will fall even further than it already has.

The closer we get to the launch early next year, the more likely it looks like Amarin won't find a partner. There's a market for the drug, but it isn't clear exactly how long Vascepa will be free of generic competition, which is likely playing into pharmas' reluctance to pull the trigger.

Scary sales
Spectrum Pharmaceuticals
(Nasdaq: SPPI  ) sales have skyrocketed from $74 million in 2010 to $233 million in just the trailing 12 months ending in the second quarter. And they could go down just as fast. Or not. Uncertainty is frightening.

The company is in a unique situation with its cancer drug Fusilev. The drug is related to leucovorin, which is available as a generic, but generic drug companies have had trouble making the drug. Without a choice, doctors switched to the more expensive Fusilev, rocketing Spectrum's sales.

The leucovorin shortage will end. I don't know when, but the generic-drug makers will get their manufacturing issues sorted out. If the current players -- including Teva Pharmaceuticals (NYSE: TEVA  ) , APP Pharmaceuticals, and Bedford Laboratories -- don't get it together, I expect some other generic-drug maker to come in and take its place. At that point, will doctors go back to leucovorin or stick with Fusilev? Only time will tell, but my suspicion is it'll be a little of both.

Scary valuation
Alexion Pharmaceuticals
' (Nasdaq: ALXN  ) orphan drug has found a home in the hearts of investors. The company only has one drug on the market, but sports a market cap of a whopping $18 billion. Based on the run rate from third-quarter revenue, the company trades at 15.6 times sales. Sure, sales are growing at a 44% clip, but how long can that last?

Investors are counting on expanded use of Soliris as well as development of asfotase alfa, but those haven't read out phase 3 results yet and are still a ways away from adding to the revenue line. As far as I can see, investors have baked a lot of sales into the price, which doesn't leave much upside and exposes Alexion to potentially disappoint investors. Dendreon's (Nasdaq: DNDN  ) 90% fall from around $40 to $4 shows what happens when investors don't get what they're expecting.

Guts to buy?
Of course, scary doesn't necessarily mean you shouldn't buy. In fact, if you have the guts to buy when things are looking uncertain, it can result in oversized gains.

Of the three highlighted here, I think Amarin is the best bet. There's plenty of upside if it's actually able to find an acquirer. If Amarin launches on its own, I think investors will likely flee, but it doesn't change the long-term value of Vascepa, which should be a blockbuster. Taking less than a full position seems prudent since there may be an opportunity to pick up shares cheaper.

To get a closer look at Amarin's future prospects, along with reasons to buy and sell, Fool.com analyst Max Macaluso has a premium research report with more information about Amarin and its potential. Click here now to keep reading.

Fool contributor Brian Orelli has no positions in the stocks mentioned above. The Motley Fool owns shares of Dendreon. 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.


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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 October 31, 2012, at 11:33 AM, yazzbro wrote:

    Wall Streets excitement over AMRN is clearly fading fast. Investors patience is wearing thin. We all know that AMRN management has been shopping this company around for the better part of a year and half and nothing. Another frustrating aspect is Managements lack of any type of real communication with investors. They have let rumors rule the day which has lead to massive volatility and manipulation. All they have for communication was the CEO saying in the last conference call saying "it is going to be an exciting 60-90 days for AMRN if we last that long." Well those 90 days are pretty much up. So I expect news very soon. But, I am not sure it is going to be the news everyone is hoping for. Everyday that passes it becomes a more and more likely scenario that they go it alone. However, I still feel more confident that the company is either partnered or is bought. I just don't think a buyout will be for more than $30. I really don't think management wants to go it alone. That was never their intent. Their goal from day one was to sell this company. So, I still think they hash out a deal with someone. And to me $26 is probably the price that will be agreed on. Look for a deal immediately after NCE is known. With NCE perhaps AMRN goes for $30. Fingers crossed. Long AMRN.

  • Report this Comment On October 31, 2012, at 9:39 PM, acur8 wrote:

    This "story" on Amarin is extemely wek and shows not onlythat no research was done but that the "fool" isn't really familiar with the stock.

    1- " Vascepa was approved back in July, but the lipid-lowering drug still hasn't been launched"

    This isn't news - AMRN mgmt. stated quite clearly all along the drug will be launched during 1st qtr 2013. HOWEVER they have already obtained payor (prescription plan) approval in a number of markets. Also AMRN wil be presenting at AHA 2012 starting Saturday along with Asrtra Zeneca and Pfizer and has one of the largest (1600 sq. ft. )booths at this event. Only 22,000 doctors and health care officalis will be attending this event.

    2 - "The scary thing is investors' expectations of an immediate payout"

    Really? 70% of the shares are owned by institutions who know exactly what they got into. Most analysts say the "go-it-alone" strategy has already largely been baked into the price by Wall Street, and that if it does fall it'll be only temporary. If they are indeed negotiating with a BO party, there's no need to "announce" a go-it-alone strategy so those looking for such news - i.e. to short the stock - may be disappointed

    3 - "The closer we get to the launch early next year, the more likely it looks like Amarin won't find a partner"

    Really? Most observers (London Daily Mail to name one) say the likelihood of buyout talks going on right now are quite high. In deals like this it takes months for the parties to agree on a price. In addition, many think a deal won't be anounced until after they get clarity on the NCE decision. Meanwhile, AMRN will still proceed with product launch.

    4 - "it isn't clear exactly how long Vascepa will be free of generic competition "

    Actually it's quite clear - Amarin has obtained 8 separate patents that give protection until 2030, and dozens more are pending, and the stock price reflects the existence of those patents.

    Even if no NCE is granted they still get 3 years of exclusivity by the FDA and that can be extended if their sNDA for Anchor inidcations (200-500 trg) is approved next year. The population for the 200-500 population is ten times that of patients with >500 trg, which is what Vascepa and Lovaza have been approved for, and Lovaza does $2.4 billion in sales worldwide every year.

    Next time have some facts to back up your "scary" headline.

  • Report this Comment On November 01, 2012, at 1:20 AM, lowmaple wrote:

    acur8 If your right money will be made but nothing is certain so don't bet the farm. I know Buffet talks about being greedy. However I don't know if e has bought.

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