1 of These 3 Cratering Biotechs Is a Buy

Biotech stocks have been performing poorly in general this year. However, some biotechs have been having a truly terrible year. Here's a look at the three worst-performing biotechs and their respective chances at making a comeback.

Apr 18, 2014 at 6:30PM

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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George Budwell has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Exelixis and Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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