3 Biotechs Falling Like a Knife: Arrowhead, Celldex, Receptos

By all accounts, biotech has had a rough week. The iShares Nasdaq Biotechnology Index (NASDAQ: IBB  ) is down more than 8%, and concerns over a bubble abound. Yet some companies are falling much faster than the broader sector. Are these companies becoming value buys or are they so-called "falling knives"? To answer this question, let's look at the sector's worst-performing stocks this week: Arrowhead Research  (NASDAQ: ARWR  ) , Celldex Therapeutics (NASDAQ: CLDX  ) , and Receptos  (NASDAQ: RCPT  ) .

Why is Arrowhead crashing?
Shares of the developmental stage RNAi therapeutics company are down over 20% this week, leading the sector's list of worst performers. Perhaps this nosedive isn't surprising given that the stock had risen more than 700% in the last year. Nevertheless, this dramatic move lower notably lacks a catalyst, and came even after Arrowhead announced that a midstage trial for its lead RNAi clinical candidate, ARC-520 for hepatitis B, began this week.

I think this is the underlying problem with Arrowhead shares. The company sports a near-$700 million market cap, yet its lead clinical candidate is only now beginning a midstage trial. Arrowhead benefited handsomely from the sector's overall rise, and now the stock is simply following it lower. During times of weakness, you should keep value at the forefront of any investing decisions, and it's difficult to argue that Arrowhead is a bargain at these levels, especially in light of the early stage of its RNAi clinical program.

Celldex continues to head south
Celldex Therapeutics' decline accelerated in the last few days, with shares falling almost 25% on the week and down over 40% over the past month. Ouch! Like Arrowhead, Celldex benefited from biotech's bull run, but now is heading lower in conjunction with the overall sector. Although Celldex lacks a commercial product, it does have two late-stage clinical candidates nearing developmental milestones. The rindopepimut vaccine for EGFRvIII-positive glioblastoma is close to an interim analysis. And Celldex's antibody drug conjugate, Glembatumumab vedotin for triple negative breast cancer, based on Seattle Genetic's technology, should be nearing enrollment milestones.

Even so, the stock is fplunging. My view is that Celldex's recent fall is symptomatic of the frothiness among some biotechs, especially immunotherapy companies. As such, you may want to take a conservative approach to this subpopulation within the sector -- at least until this group shows clear and evident signs that it has found a bottom.

Receptos reverses course
Driving this point home about valuation among immunotherapy companies, Receptos had doubled in the past six months heading into the initiation of a late-stage trial for its lead clinical candidate RPC1063 for relapsing multiple sclerosis, or RMS.  However, Receptos shares have dropped about 20% this week alone as the sector continues to show weakness. What's particularly interesting here is that Receptos' decline comes after a recent capital raise that shored up the company's finances, as well as after positive news on the clinical front.  Simply put, the market appears to be placing less stock in "potential" revenue from developmental-stage biotechs. 

Foolish wrap-up
The common thread running through the sector's three biggest losers so far this week is that they are all developmental-stage companies that have had eye-popping run-ups. Looking ahead, you have to consider if this revaluation among such biotechs will be a temporary bump in the road, or perhaps a return to previous norms. Prior to the sector's incredible run that started in 2011, developmental biotechs struggled mightily with low market caps, and hence, they had difficulty raising the funds necessary to advance their clinical programs. While I won't pretend to know the answer to this question, it shouldn't be far from your mind given the magnitude of the recent downturn.  

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