Biotech 101: Valuing Binary Events

Binary events are the lifeblood of investing in biotech companies. A clinical trial result or Food and Drug Administration decision can send the company's value up or down considerably. And not necessarily the same amount in either direction; the magnitude of the move is ultimately based on the expected outcome. If it goes against consensus, you'll see a bigger movement.

Recently we saw a couple of big moves. Sarepta Therapeutics (NASDAQ: SRPT  ) moved up dramatically after announcing that the FDA was willing to assess Sarepta's Duchenne muscular dystrophy drug, eteplirsen, for an accelerated approval. Revance Therapeutics (NASDAQ: RVNC  ) also went up on positive results from a phase 1/2 study for RT002 as a treatment for moderate-to-severe frown lines. Investors were impressed with the duration of response -- more than seven months -- for Revance Therapeutics cosmetic drug. Finally, Cytokinetics  (NASDAQ: CYTK  ) was the loser of the group when tirasemtiv failed a phase 2b clinical trial in ALS. Part of Cytokinetics' steep decline in might be because the company doesn't have much else in its pipeline. Cytokinetics does have another phase 2b drug in development, but it's partnered with Amgen.

In the video below, senior biotech specialist Brian Orelli and health-care analyst David Williamson discuss how investors should value binary events and preview MannKind (NASDAQ: MNKD  ) and Orexigen (NASDAQ: OREX  ) , which are facing FDA decisions for their drugs in the coming months. MannKind is developing an inhaled insulin called Afrezza, while Orexigen is looking for approval of its obesity drug Contrave.

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  • Report this Comment On May 05, 2014, at 9:04 PM, WCoastGuynCA wrote:

    You failed to mention that Cytokinectics has about $100M in cash on hand with the possibility of receiving over $1B in milestone payments plus royalties from Amgen and Astellas Pharma for two drugs in its pipeline.

    The company's current market cap is only $160M.

    It also may make sense for Amgen to make a buyout offer in the $9.00 range.

  • Report this Comment On May 05, 2014, at 9:25 PM, WCoastGuynCA wrote:

    Amgen is working with Cytokinetics on omecamtiv mecarbil, a drug for the treatment of heart failure, a chronic condition responsible for the hospitalization of more than 1 million people in the U.S. every year.

    Omecamtiv mecarbil is currently in phase 2 trials seeking to demonstrate that the drug can boost heart muscle function and reduce hospital readmission.

    Amgen initially signed on for an option to work with Cytokinetics on the drug in 2006 when it paid the company $75 million upfront. Amgen executed that option in 2009, handing over another $50 million and taking on responsibility for development and commercialization in exchange for global rights to omecamtiv.

    Overall, Cytokinetics may receive up to $600 million in milestones from Amgen and double digit royalties.

  • Report this Comment On July 22, 2014, at 12:08 AM, Corsair3117 wrote:

    Yellen is a committed Keynesian whose Philips Curve was embarrassingly blown out of the water by Stagflation. But much as facts trump politicized theory, just change a name and "tweak" things i.e. the NEW Philips curve (see Climate Change replacing Global Warming etc). Don't get me wrong, in the short term, running the dollar printing presses 24/7 at hyper speed, helps my portfolio by applying defib to the faintly beating heart of the economy. Not economically sound but putting off the reckoning. It may help the '14 mid terms for her boss as the unstated goal,as well. What I object to here as the previous poster proves with specific knowledge of biotech is that the gall of the bureaucrat in picking winners and losers and how the market "should" value a stock or sector is terrible. Yellen has no particular bio tech background, and should simply butt out

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