Setbacks often have a much larger effect on share prices at developmental companies than more established ones. While the investment community has seen several lowly developing biotechs rise from the ashes, rushing into a position at a company that recently got whacked or is facing headwinds can be a dangerous venture. Here are a few such companies with concerns that should be major factors in any investing decisions. In other words, these are not the best biotech stocks on the market.
Arena Pharmaceuticals (NASDAQ: ARNA )
Despite sky-high potential for its weight-loss pill, Belviq, Arena has not had an electrifying start out of the gate. Total prescriptions total just 1,087 for the week of June 14 and 1,829 the next, according to TheStreet's Adam Feuerstein. Investors knew it would be difficult to gain traction with doctors, but perhaps underestimated just how difficult. While it is still early in the game for Arena, consider that Orexigen estimates that the total obesity market supported nearly 8 million prescriptions in 2012. This company is crawling toward disrupting the status quo, and shares have been punished as a result. Things may not get much better in the near future after Consumer Reports gave Belviq a dismal review earlier this month. I would steer clear of Arena until the attitude toward weight-loss therapies improves.
Dendreon (NASDAQ: DNDN )
Dendreon cannot catch a break lately with its prostate cancer vaccine Provenge. Sales slid further in the first quarter, but that should only get worse as another entrant jumps into the already crowded market. Xofigo from Bayer was recently approved and launched for patients with castration resistant prostate cancer who suffer from bone metastases. The specialized treatment will take patients away from other therapies, including Zytiga from Johnson & Johnson, Xtandi from Medivation, and of course Provenge. The quickness and severity of the new competition depends on the launch, but investors can expect it nonetheless. Will Dendreon's pipeline be enough to salvage its future?
Impax Laboratories (NASDAQ: IPXL )
To be fair, it isn't all that uncommon for a company new to manufacturing to miss a bullet point or two when submitting a Biologic License Application. Dynavax should be able to correct the issues well before safety data are resubmitted. It isn't always smooth sailing, though, and Impax is a prime example. The FDA raised three specific concerns at its Hayward, Calif., manufacturing facility last year. Not only did Impax not make the recommended improvements, but it managed to raise nine new concerns during the FDA's follow-up inspection earlier this year. How do you do that? I have no idea. That will certainly hold-up approval of the company's Parkinson's disease drug, Rytary. Luckily, Impax is more established than the other companies described in this article. It should still make you wonder how the company failed so miserably in responding to its manufacturing shortfalls.
Spectrum (NASDAQ: SPPI )
Spectrum got mowed down in March after sales of Fusilev, a drug used to prevent side effects of cancer drug methotrexate, were guided to a range of $80 million to $90 million for 2013. Sales in 2012 topped $200 million. Why the drop? Doctors are switching to generic drugs after a shortage gave them few alternatives to Fusilev. The company offers two other drugs, Folotyn and Zevalin, and has three more in late-stage trials. So all hope is not lost given this correction, but investors need to entertain the possibility that Fusilev sales continue to fall or perhaps even fail to reach the company's guidance.
Foolish bottom line
If you're looking for the best biotech stocks, you may want to look elsewhere. All of these companies have noteworthy problems to tackle before they should be considered for your portfolio. Companies may seem like steals after a big drop, but you have to remember to ask yourself if the drop was warranted. In each case outlined above, recent developments delayed a company's ability to return value to its shareholders. I would stay away from these companies until they successfully respond to the obstacles they face.
Instead, when it comes to biotech, I look for more established companies. It's no secret that biotech stocks have been soaring recently, but the best investment strategy is to pick great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" not only shares stocks that could help you build long-term wealth, but also winning strategies that every investor should know. Click here to grab your free copy today.