1 of These 3 Cratering Biotechs Is a Buy

At the start of the year, the theme seemed to be that biotech was in for another banner year, propelled by a suite of newly launch drugs that would go on to become blockbusters. These rosy prognostications were made despite broad-based biotech funds like the SPDR S&P Biotech ETF  (NYSEMKT: XBI  )  rising more than 30% year over year in 2013. This same fund is now down over 5% this year, and the downturn only seems to be accelerating in recent trading. In short, the former halcyon days of biotech have faded into memory, leaving us to wonder what happened.

Dramatic sell-offs, in the past, have nonetheless created some of the most compelling buying opportunities in history. With that in mind, let's consider if the three worst-performing biotech stocks so far this year are now bargains, namely Halozyme Therapeutics (NASDAQ: HALO  ) , Exelixis (NASDAQ: EXEL  ) , and VIVUS (NASDAQ: VVUS  ) .    

Halozyme drops after clinical hold on pancreatic cancer drug
Shares of Halozyme are down over 50% this year after the company announced that a clinical hold had been placed on its lead experimental pancreatic cancer drug PEGPH20 earlier this month. Although the details of the hold are still unknown, the company said it is related to an increase in blood clotting in patients receiving PEGPH20 compared to standard therapy in the drug's ongoing mid-stage trial. Prior to the hold, PEGPH20 was being studied as a possible frontline treatment for stage IV metastatic pancreatic cancer, either as a stand-alone therapy or in combination with other drugs.

What's key to understand is that most of Halozyme's valuation appears to be tied to a successful mid-stage trial for PEGPH20, especially in light of the fact that the company only had revenues of $54 million last year. Put simply, Halozyme's revenues are probably not high enough to justify a market cap that's still close to $1 billion. While the clinical hold could be lifted allowing the trial to proceed, I don't think Halozyme qualifies as a bargain, even after its sector-leading decline year to date. 

Exelixis has been battling for the top (worst) spot among biotechs
Exelixis has been Halozyme's main competitor for the worst-performing biotech this year, falling 47.5% year to date. Exelixis shares were in fact the worst performing until Piper Jaffray upgraded the stock recently to a buy. The plight of Exelixis is somewhat odd in that it centers around the company's prostate cancer drug cabozantinib that is in an ongoing late-stage study. Specifically, shares have fallen hard and fast ever since an independent data monitoring committee said the trial should proceed to its final analysis. What the market wanted to hear, by contrast, is that the study was being halted early because the drug's efficacy was no longer in question. When that failed to happen, the market punished Exelixis shares in a big way.

The issue is that the market believes that cabozantinib will have trouble competing against more established prostate cancer drugs like Johnson & Johnson's Zytiga without strong evidence that the drug has a stellar efficacy profile. Indeed, the prostate cancer drug market has seen a number of newcomers of late, some of whom have struggled in this crowded space. That said, I believe Exelixis is now a bargain following this dramatic sell-off and is set to rebound. My thinking is simple: Some of the worst-selling prostate cancer drugs still see sales in the hundreds of millions and Exelixis' market cap has fallen to a mere $600 million. Although there are other reasons to like this stock, I believe Exelixis offers a compelling value proposition based on this reason alone.

VIVUS has fallen on hard times
Once a darling of Wall Street, VIVUS shares have now dropped 45% year to date. And the reasons behind VIVUS' fall are no secret. Namely, the company's two approved drugs Qsymia and Stendra are seeing anemic sales and the proxy war among board members has left investors in the dark about how VIVUS plans on righting the ship. The good news is the proxy war appears to have ended, with three directors not standing for re-election. Even so, we still don't have much insight into management's thinking going forward and I've never met a market that liked uncertainty. Theoretically, VIVUS could turn around if either one of its drugs gained traction on the commercial front, but that's yet to happen, quite frankly. As such, you might want to stay on the sidelines with this struggling biotech for the time being.

Foolish wrap-up
Bargain hunting can produce some real gems for patient investors with a long-term outlook. At the same time, there needs to be a good reason to believe a company is being undervalued by the market. Among biotech's worst performers, I believe Exelixis is the only stock that offers a compelling value proposition going forward. By contrast, Halozyme and VIVUS may have even farther to fall, in my opinion.

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Read/Post Comments (12) | Recommend This Article (14)

Comments from our Foolish Readers

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 April 19, 2014, at 9:15 PM, baloneyspotter wrote:

    Valuation is 'not' tied to the phase II drug PegPH20 ~ maybe do more due diligence that just the comic strips? If you check with BMO Capital or Piper Jaffray well, then, valuation of the this drug is closer to $1 of the stock price. In fact, HALO has several drugs approved along with Roche (Herceptin SC and Mabthera SC), that are multi-billion dollar drugs, and will bring in soon, millions in large royalties for HALO in the not so distant future. They also have a Pdufa date coming up in June on one drug with Baxter, Hyqvia. And the pipeline does not stop there....but I will let you try and figure it out for yourself....if you have time(?)

  • Report this Comment On April 20, 2014, at 12:48 AM, gazoo99 wrote:

    VVUS IS GOING BROKE......

  • Report this Comment On April 20, 2014, at 9:25 AM, TimKnows wrote:

    Back off a bit there, these articles are merely for entertainment and not to be taken seriously. Anyone can write an article and none of it is approved as "correct or complete" in anyway. The fact that you fully understand the company in question is not material to the entertainment valuable of these comments made by the author. Just enjoy their articles knowing they aren't necessarily factual of current in nature.

  • Report this Comment On April 20, 2014, at 11:15 AM, assisgnmeaname wrote:

    I agree w baloney...the logic is, as usual from MF, impaired.

  • Report this Comment On April 20, 2014, at 12:31 PM, peregrine wrote:

    I agree completely, EXEL is a very compelling buy, HALO a sell, and VVUS one where you should run away -- run away.

  • Report this Comment On April 21, 2014, at 12:13 AM, iongreen wrote:

    Vivus is a screamin buy between 5.00 and 6.00. Sales of Stendra are smokin in the US and Europe. When commercial advertising begins (60 days), this stock will fly to 20.00 per share. I have a price target of 40.00 in 2 years.

  • Report this Comment On April 21, 2014, at 12:31 AM, iongreen wrote:

    Future catalysts for Vivus:

    1 - Marketing partnership for Qsymia.

    2 - Commercial advertising for Qsymia.

    3 - Commercial advertising for Stendra.

    4 - FDA approval for Qsymia as a treatment for Sleep Apnea.

    5 - Future marketing deals for Stendra in Asia and South America.

    Get on board before it breaks out.

  • Report this Comment On April 21, 2014, at 4:46 AM, marp11 wrote:

    arna shorts......hahahha

    BELVIQ GOING VIRAL

  • Report this Comment On April 22, 2014, at 12:21 PM, iongreen wrote:

    VIVUS is setting up for a tremendous short squeeze. This yo-yo action always precedes a strong breakout to the upside.

  • Report this Comment On April 25, 2014, at 11:39 PM, DukeMontrose wrote:

    This fool submits Galena Biopharma as a candidate for your not so foolish attention.

    GALE earlier this year had a problem with a problematic PR firm foolishly hired to promote GALE =

    which it did= with too much fervor. The scandal did not impinge on GALE's genuine core business.

    This lapse had severe consequences in so far as GALE swooned from 8 down to 2 =

    Is this a good time for a second look?

    My non-profit invested in both classes of GALE warrants, early on = still showing a profit.

    The leverage in the warrants IMO overcomes the negatives of its thin markets.

  • Report this Comment On April 26, 2014, at 11:20 AM, theeseer wrote:

    The drug companies move on two issues only. FDA approval and potential market share. I'm long MNKD because the ADCOM convened by the FDA voted approval14-0 for type 2 and 13 -1 for approval of their Afrezza diabetes drug and that Market is huge and growing. Its a win or lose situation on July 15th, so do your own due diligence. The you tube video of the ADCOM is available and its stunning. All the experts and trial users are pleading for approval. At the current price its a potential 2-4 bagger easily.

  • Report this Comment On April 26, 2014, at 12:16 PM, gregschmitt wrote:

    I think HALO has potential upside unrelated to its pancreatic cancer drug. I bought it sometime back because of their hyalouronidase drugs, which I believe is the true value of the company. These drugs break up the soft tissue matrix holding subcutaneous tissue cells together.

    Dermatologists have found use for this as an anti-wrinkle agent they inject subcutaneously. Clinical trials have been promising. More importantly, these hyalourondiase agents can be added to anti-cancer drugs (and potentially to most other drugs currently given via IV) allowing them to be injected subcutaneously rather than by an IV. Currently, several of Roche's breast cancer drugs are being administered this way in Europe. This method is much more cost effective and also more convenient for both patient and provider.

    Fortunately, I sold my shares before HALO took its nosedive, but now I getting back into it because of the above.

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