Shares in biotechnology companies can make breathtaking moves higher and lower on whims and whispers, and June was no exception. Following the sector's rollicking ride higher last year and dramatic sell-off in the first quarter, investors are right to be cautious.
Yet investor interest in bargain biotechs continued in June, with the industry ETF (NASDAQ:IBB) returning more than 7%, over 5% more than the S&P 500. Leading that move higher were a slate of emerging biotech companies, including Achillion Pharmaceuticals (NASDAQ:ACHN), Vital Therapies (NASDAQ:VTL), and Alder Biopharmaceuticals (NASDAQ:ALDR).
Rushing for a next-generation hepatitis C cure
Achillion's dramatic 186% jump came on the heels of Merck announcing that it would acquire Achillion competitor Idenix on June 9. Even though Idenix's most advanced drug is only in midstage clinical trials, Merck paid $3.8 billion to get its hands on the company's promising hepatitis C pipeline.
That valuation was more than three times Idenix's previous closing price.
Merck's willingness to ante up in order to bulk up its hepatitis C research and development drove investors to question whether Achillion, one of the few remaining major emerging independent hepatitis C pure plays, is undervalued, especially given that Gilead Science's newly launched hepatitis C drug Sovaldi notched more than $2 billion in sales during the first quarter -- which was also its first quarter on the market.
Whether Achillion could find also find a buyout suitor remains to be seen. Achillion has four compounds in clinical trials, including two in phase 2. One is ACH-3102, an NS5A inhibitor that has been awarded FDA fast-track designation. Achillion is studying ACH-3102 as an adjunct to Sovaldi to see if the two can effectively cure the disease in just six or eight weeks.
The other is phase 2 drug is sovaprevir, an NS3/4A protease inhibitor that also has fast-track status and that Achillion is studying alongside ACH-3102 as part of combination therapy. In a small phase 2 study, 100% of genotype 1b patients treated with sovaprevir, ACH-3102, and ribavirin achieved sustained viral response at 12 weeks, the benchmark for an effective cure. Additionally, the FDA recently removed a clinical hold on sovaprevir, allowing development to continue.
Restoring liver function
Vital Therapies IPO'd in April. While it boasts a market cap north of $500 million, it trades fewer than 200,000 shares a day on average over the past three months, which means it can make big moves quickly -- so investors should be cautious.
That said, Vital shares surged more than 100% this month as investors became increasingly hopeful that its liver assist technology will post positive results in phase 3 trials when they're released next year.
Vital is working on a process that would use human cells to simulate liver function in people with acute liver failure, or ALF. Although ALF isn't common -- there are just 2,000 cases annually in the U.S. -- there are few treatment options other than liver transplant.
Vital hopes that its therapy can help bridge the gap for these patients, but it may face a tough hurdle in phase 3. That's because the company's phase 2 trials, while showing an improving trend in survival, didn't achieve statistical significance. As a result, Vital reworked its phase 3 patient enrollment criteria to better reflect the patient population most likely to benefit from its approach, a move which may -- or may not -- allow it to reach that significant survival readout when it reports data next year.
Tackling big markets
Alder is another recent IPO notching an impressive gain this month. Shares have rallied more than 70% in June, but unlike Vital, Alder comes with a well-heeled collaborator in Bristol-Myers, which reported in May that it owns a 5% stake in Alder.
Alder is working on antibody therapies: Its two most advanced drugs are ALD403 for migraine and clazakizumab for psoriatic arthritis and rheumatoid arthritis.
Both of those markets are large and potentially lucrative, but clazakizumab intrigued Bristol most. In order to partner on clazakizumab, Bristol paid Alder $85 million up front in 2009 and agreed to potential milestones and royalties that could be worth hundreds of millions more if the drug ever reaches market.
However, despite the Bristol deal, Alder has been going through cash quickly; prior to the IPO the company's auditors warned that Alder would need to raise money by the end of this year if it hoped to remain in business.
That worry is likely one reason Bristol agreed to lend credibility to Alder's IPO by taking an equity stake -- a move that was quite profitable given the move this month. Following the IPO, auditors should be more comfortable given that the company raised $80 million when it went public.
Fool-worthy final thoughts
All three of these biotech winners are clinical stage companies that currently don't have any products on the market. Each has promising therapies in trials; however, trials often fail. As many as nine out of 10 drugs entering clinic never making it to market.
That suggests investors should remain careful on these three. Personally, I'll be staying on the sidelines, but watching each closely for updates on their clinical trials.
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Todd Campbell owns shares of Gilead Sciences. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned. The Motley Fool owns and recommends shares of Gilead Sciences. 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.