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A Fool’s Look Back at Lexicon, Peregrine, and Jazz

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The biotech industry has seen a growing number of specialty companies pop up in the last decade, aiming to develop novel platforms that they can then apply across a number of serious diseases that lack effective treatments. But since so many new drugs fail, this innovative approach to drug development is a risky business. Indeed, this is why many bigger companies are willing to pay a premium for drugs that are already approved, and subsequently focus on expanding those drugs' current label, rather than creating new ones.

With that in mind, here's a Foolish look at how three specialty biopharmas performed in 2013.

Better luck next year?
Lexicon Pharmaceuticals (NASDAQ: LXRX  ) has had a rough 2013, dropping more than 20% year to date. Since its inception, Lexicon has seen numerous clinical candidates go the way of the dinosaurs, and this year has been no different.

Earlier this year, the company's experimental drug for ulcerative colitis, LX 1032, failed to provide any benefit compared to placebo at the mid-stage level. And Tuesday, Lexicon announced that its midstage drug for diarrhea-prominent irritable bowel syndrome, LX 1033, failed to meet its primary endpoint. The company did throw a bone to investors in the form of a post-hoc analysis showing that the 500mg dosage, taken 3 times daily, provided some symptom relief. Even so, it remains unclear whether Lexicon will advance LX 1033 based on this analysis.

With most of its pipeline in doubt, Lexicon's diabetes drug LX 4211 may be the company's last remaining hope of turning things around. Although LX 4211 did meet its primary endpoint of reducing blood glucose levels after eating, you should be aware that this was a proof-of-concept study with a fairly low sample size. In other words, LX4211 is still a ways away from becoming a commercial product.

The bigger problem is that Lexicon has been putting off late-stage trials for the drug in hopes of finding a partner. To do so, Lexicon is presenting these midstage results at a number of conferences next year. I suspect its slate of clinical failures is hampering efforts to find a partner, however. You might want to look elsewhere in the sector for better bargains.

So-so, so far
Peregrine Pharmaceuticals (NASDAQ: PPHM  ) has traded sideways in 2013, down about 3% year to date. The company reported Wednesday that manufacturing revenue increased by 21% to $7 million last quarter compared to a year ago, but operating expenses rose to $15 million due to increasing costs of developing its cancer drug candidate bavituximab.

Peregrine is developing bavituximab as a potential treatment for a number of cancers, but its late-stage trial for non-small cell lung cancer is undoubtedly the main value driver in the near-term. Enrollment in this late-stage trial is expected to begin this month, and final results should roll in around December 2016.

What's my take? Although trial updates for bavituximab's other indications may be catalysts in 2014, I think the company will have little choice but to continue to dilute shareholders. With less than $40 million in cash and operating losses expected to increase to over $4 million a month, Foolish investors would be wise to sidestep Peregrine for the time being.

Sweet music to investors' ears?
Jazz Pharmaceuticals
(NASDAQ: JAZZ  ) has been one of the top performers in the sector this year, climbing more than 115%. The company's rise has been fueled by growing sales of its lead commercial product Xyrem. Xyrem is an FDA-approved drug for excessive sleepiness associated with narcolepsy, and sales of the drug have increased by 50% year over year. Jazz has also seen a nice increase in sales for its leukemia drug Erwinaze this year.

But the main driver behind Jazz's rise seems to be its share buyback program. Last May, Jazz initiated a $200 million stock buyback, with about half of the buyback now complete. Looking ahead, Jazz expects to launch its newly approved schizophrenia drug Versacloz in 2014, and is starting new clinical trials to expand the label for Ervinaze.

Despite these positive developments, the ongoing negotiations with the FDA to modify Xyrem's Risk Management Program are a dark cloud hanging over the company. Specifically, Jazz's management is concerned that the FDA will make the product harder to distribute. So with shares trading at about 10 times the company's cash position, and regulatory uncertainty surrounding Xyrem, Jazz appears to be fairly valued to me.

Foolish Takeaway
Investing in specialty biopharmas early in their life cycle can generate handsome returns, and Jazz is a prime example. By contrast, Lexicon and Peregrine show the inherent risk in these types of companies. Although it's still too early to label Lexicon and Peregrine as losers, it may take years before they reverse their fortunes. That's why I tend to shy away from investing in any biopharmas that lack an approved drug.

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