3 Crashing Biotechs: Is 1 a Buy?

Healthcare has been on a run this year, but not all of the companies in the sector have gone higher. These three have all dropped by more than a third this year. Given their dramatic sell-off, let's take a closer look at what's behind the drop in Aegerion (NASDAQ: AEGR  ) , Vivus  (NASDAQ: VVUS  ) , and Exelixis (NASDAQ: EXEL  ) , and see whether any of them offer an opportunity.

Source: Aegerion

Not fast enough
After peaking at nearly $100 per share last fall, shares in Aegerion have tumbled more than 50% this year. Expectations were high when Aegerion won approval for Juxtapid in December 2012. The drug, used to treat homozygous familial hypercholesterolemia, or HoFH, carries a sky high price tag of roughly $235,000 per year, making it one of the most expensive treatments on the planet.

A high price and widespread enthusiasm for orphan drugs overall drove shares to lofty levels that have proven tough to justify. Sales of Juxtapid, which competes with Sanofi and Isis Pharmaceuticals' Kynamro, totaled $48.5 million last year and $27 million in the first quarter.

Although its first-quarter sales growth was solid, results were shy of expectations, and that forced Aegerion to lower its full-year sales outlook to between $180 million and $200 million. As a result, investors headed for the exits.

However, now that shares have been cut in half, valuation is starting to get more intriguing. With a market cap of just $850 million, shares are trading at between four and five times sales and, while that's not cheap, it's not out-of-control expensive either. The company isn't expected to turn a profit until 2015, but analysts continue to think that Aegerion could generate more than $5 per share in EPS by 2017. If it can deliver on that lofty earnings outlook, shares would be undeniably cheap at these levels, but that's a big if.

AEGR EPS Estimates for Current and Next 3 Fiscal Years Chart

AEGR EPS Estimates for Current and Next 3 Fiscal Years data by YCharts.

Thinning patience
Lackluster sales for Vivus' highly anticipated obesity drug Qsymia are to blame for Vivus' ongoing slide from its peak near $30 per share back in 2012. So far this year, shares have fallen 45% to less than $5.

VVUS Chart

VVUS data by YCharts.

Expectations were high leading up to Qsymia's approval in 2012. Thanks to estimates that pegged as many as a third of Americans as obese, analysts had attached billion dollar blockbuster potential to Qsymia.

But, despite those bullish predictions, demand has been slow to develop. That lack of demand could stem from the reluctance of doctors to prescribe the drug given that one of Qysimia's two active ingredients is phentermine, a drug responsible for Wyeth's $13 billion fen-phen settlement.

Regardless of the reason, the reality is that sales remain anemic at just $9 million in the first quarter. That gives the company a $36 million annualized sales run rate that still makes the company look expensive, even with a market cap of just $500 million.

Source: Exelixis

Waiting, waiting, waiting
Exelixis shares are down 45% this year; however, that entire drop is tied to just one month: March. It was in March that independent monitors of Exelixis phase 3 prostate cancer trial said the trial should continue rather than be halted early. Investors hoping for an early end to the trial, similar to Medivation and Astellas' phase 3 trial for Xtandi, took that as a sign that Exelixis wasn't the breakthrough drug they had previously anticipated.

That could prove true... or not. Investors won't know for months. Because the trial is continuing, we can assume the drug's safety isn't in question; but whether its efficacy is good enough to win away share from Johnson & Johnson's $2 billion a year Zytiga, or Medivation and Astellas' fast-growing Xtandi, remains to be seen.

Investors should get top-line data from the trial later this year; but in the meantime, Exelixis is burning through cash. Sales of Cometriq in medullary thyroid cancer, or MTC, totaled just $5 million in Q1, yet the company spent more than $54 million on R&D, and nearly $15 million on SG&A in the quarter.

Fool-worthy final thoughts
Risk-tolerant investors may find that Aegerion is the most intriguing of the three. Even though the company has cut its guidance, Juxtapid remains on pace to post robust sales growth this year. However, that growth is vital given that Aegerion's pipeline is nonexistent.

While hope springs eternal for weight-control drugs, the market has yet to embrace Vivus' drug and, until it does, I'm staying away. Meanwhile, Exelixis' Cometriq may be intriguing, and may have legs in other indications beyond prostate cancer; but buyer beware until I can feel confident that sales are going to offset its massive appetite for spending.

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  • Report this Comment On July 11, 2014, at 6:54 PM, MattBerry01 wrote:

    "With a market cap of just $850 million, shares are trading at between four and five times sales and, while that's not cheap, it's not out-of-control expensive either."

    AEGR's price to sales is 11.4, not "4 or 5."

    See http://caps.fool.com/Ticker/AEGR/Stats.aspx?source=icasittab...

    You haven't mentioned

    … The patient population contradictions between the CEO and the scientists that work on AEGR's drug, which is key to understanding the price drop. The CEO says there can be 3,000 HoFH patients in the US, while Dr. Sumeray of AEGR just left testimony in Germany that there are only 300. Dr. Rader and Dr. Cuchel -- both worked on AEGR's drug -- also use the number 300. With AEGR reporting +450 patients, there is a risk that many of these patients are off-label, despite a very strict REMS ETASU in place that was specifically designed to prevent off-label prescriptions.

    … Indeed, the DOJ is conducting an investigation into AEGR's marketing practices.

    … Another omission from this article: AMGN's antiPCSK9 drug threatens to upset AEGR's narrative later this year.

    Matt Berry 3footcrowbar Short: AEGR

  • Report this Comment On July 12, 2014, at 12:12 AM, TMFEBCapital wrote:

    Thanks for taking the time to comment. For clarification, the price to sales ratio I reference in the above article is on 2014 (forward) full year sales, which works out to a ratio of 4.66, not on trailing 12 month sales, which is 11.8. I've found it more useful historically to evaluate P/S on a forward basis, rather than historical; however, an argument can be made for both. Thanks!

  • Report this Comment On July 12, 2014, at 5:50 PM, tnajarianmd wrote:

    Phentermine, an ingredient in Qsymia, was not the medication that was responsible for Wyeth's 13 billion dollar settlement in the fen-phen case. The drugs responsible were dexfenfluramine and fenfluramine, both of which were taken off the US market. Phentermine has been FDA approved for treating obesity in much higher doses than that found in Qsymia for more than 50 years.

  • Report this Comment On July 12, 2014, at 8:51 PM, MattBerry01 wrote:

    TMFEBCapital:

    That's not what was written in the article. You wrote: "With a market cap of just $850 million, shares are trading at between four and five times sales and, while that's not cheap, it's not out-of-control expensive either."

    This is not correct. PS is 11 -- and that is a very important number here: AEGR IS expensive.

    "I've found it more useful historically to evaluate P/S on a forward basis, rather than historical;"

    If you meant "forward" and "2014," that needed to be written as such. As it is written now, speculation about the future appears to be a present fact.

  • Report this Comment On July 14, 2014, at 2:48 PM, MayTepper wrote:

    $AEGR Janney Capital Maintains Buy On Aegerion Ahead Of 2Q14 Earnings Report

    http://www.smarteranalyst.com/2014/07/14/janney-capital-main...

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