What's Moving These 3 Biotechs?

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The market may be crashing lower following a government shutdown, but biotech races on. In particular, three biotechs on Thursday posted very large intraday gains. However, what was moving these stocks -- and should you buy?

Another FDA approval
In the past year, shares of Ligand Pharmaceuticals (NASDAQ: LGND  ) have rallied 180%, and on Thursday, gains of 9% contributed to that performance.

With 85 fully funded partnership programs, Ligand has one of the largest portfolios of assets among all its biotech peers. Already, with a market cap of $1 billion and $41 million in sales over the last 12 months, Ligand (and its partners) have several products that are approved by the Food and Drug Administration.

On Thursday, Ligand gained yet another FDA-approved product with its partner Pfizer. The drug, Duavee, was approved to treat moderate to severe hot flashes related to menopause, and also to prevent post-menopausal osteoporosis.

While the upside for Ligand is not tied to this one product, the encouraging fact is that sales could be large. Eli Lilly's Evista treats the same condition and created $1 billion in sales last year. Hopefully, Duavee can experience similar performance. Ligand will enjoy an unknown (but small) royalty without the costs of marketing. Clearly, this is a big win for Ligand and shareholders.

After large gains, is this stock still cheap?
The big jump of the day came from Omeros Corporation (NASDAQ: OMER  ) , a stock that rallied 18% and has gained 155% in the last month alone.

On Thursday, it was a $12.5 million settlement paid to the company from insurer Carolina Casualty Insurance that sparked gains. The settlement came after a 2009 lawsuit where Omeros was forced to pay its previous CFO nearly $4 million. This $12.5 million payout to the company was related to that event.

This payout is significant because Omeros' lead candidate, an eye drug called OMS302, was recently accepted for review by the FDA and in Europe. However, Omeros' cash position is getting small, and many have feared that an offering is around the corner.

Hence, this new-found cash does provide a bit of security to shareholders as the company prepares for its date with regulators. With that said, Wedbush recently came out with a note, giving an 80% chance of an FDA approval next year and peak sales estimates on OMS302 of $479 million.

If accurate, then Omeros, with a market cap shy of $400 million, is presenting a favorable risk/reward opportunity. This is a company that does have a large pipeline, amid early stage, with one being a phase 2 Huntington's disease drug. In an industry that is rewarding preclinical companies with billion-dollar valuations via IPOs, Omeros looks to be worthy of this rally.

More of the same, or something new?
Lastly is VIVUS  (NASDAQ: VVUS  ) , stock that rallied more than 8% on an analyst upgrade.

Cowen stated that its survey of 100 physicians suggest that VIVUS' Qsymia is the most preferred weight loss drug due to its efficacy. Moreover, it approved of VIVUS hiring a former Johnson & Johnson executive, Seth Fischer, as its new CEO, implying better marketing and talks with a potential partner.

Clearly, Qsymia's launch has not gone as planned, with VIVUS' value declining almost 40% in the past year. Prior to launch, some analysts had floated around billion-dollar potential for Qsymia. But so far, sales have been just $5.53 million and $4.11 million in the last two quarters, respectively.

Sure, it's possible that sales explode with new leadership, but when it's all said and done, the product is what matters. With that said, it's hard not to think of Thorstein Heins and his "vision" with BlackBerry. In the end, BlackBerry was still BlackBerry, and the end result was just a continuation of a downtrend.

Thus, Cowen's $19 price target might have moved VIVUS' stock on Thursday, but I think its current market capitalization of $1.1 billion is more than generous for a company that has sales of less than $10 million after six months of launch. Unfortunately, Qsymia is not gaining traction with physicians, and investors can't assume that changes will occur till there is some fundamental reason.

Final thoughts
After assessing these three movers, it's tough to find a reason to buy VIVUS, but the other two are interesting.

Like I said, Omeros is cheap despite its recent gains, but only if OMS302 becomes FDA approved and reaches its full potential. These unknowns do create risk. However, there aren't too many scenarios in biotechnology where high risk is not present.

Ligand looks to be the best opportunity. The fact that it has 85 partnered programs in development and several FDA approvals is simply incredible for a billion-dollar biotech. Clearly, with partnerships, Ligand only receives a portion of total sales, but over time those royalties add up, meaning that Ligand could become a great long-term investment opportunity.

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Brian Nichols

Brian Nichols is the author of "5 Simple Steps to Find the Next Top-Performing Stock: How to Identify Investments that Can Double Quickly for Personal Success (2014)" and "Taking Charge With Value Investing (McGraw-Hill, 2013)". Brian is a value investor, but emphasizes psychology in his analysis. Brian studied psychology in undergrad, and uses his experience to find illogical value in the market. Brian covers technology and consumer goods for Motley Fool. Brian also updates all of his new and current positions in his Motley Fool CAPs page. Follow Brian on Twitter and like his page on Facebook for investment conversations and recent stories.

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5/24/2016 4:00 PM
LGND $120.75 Up +1.45 +1.22%
Ligand Pharmaceuti… CAPS Rating: **
OMER $11.22 Up +0.24 +2.19%
Omeros CAPS Rating: **
VVUS $1.23 Up +0.06 +5.13%
VIVUS, Inc. CAPS Rating: **