Is There Life After 600% Returns?

Did you miss the more than 970% run that Dendreon (Nasdaq: DNDN  ) has made off its March lows since announcing positive results for its prostate cancer treatment, Provenge? Or what about the 626% overnight gain that Vanda Pharmaceuticals (Nasdaq: VNDA  ) pulled off earlier this month after the Food and Drug Administration approved its antipsychotic, Fanapt?

Yeah, me too. But that doesn't mean that there's not still multi-bagger potential left in the drug companies. Maybe.

Some historical examples
Just because a drug company gets a massive increase in the stock price after a positive clinical trial or an FDA approval, that doesn't mean all the growth is completely factored into the stock price.

Company

Event

One-Day Gain

1-Year Return After Run-Up

Onyx Pharmaceuticals (Nasdaq: ONXX  )

Positive phase 3 trial for Nexavar, treating liver cancer

97%

93%

Amylin Pharmaceuticals

Positive phase 2 results for once-weekly Byetta

28%

59%

Source: Capital IQ.

But a large run-up isn't necessarily a signal to buy, either. Even after large run-ups, companies often have additional risks associated with their stocks.

Company

Event

One-Day Gain

1-Year (decrease) After Run-Up

United Therapeutics

Positive phase 3 trial of Viveta for pulmonary arterial hypertension

38%

(7%)

Source: Capital IQ.

You'd think that the decline from United Therapeutics' former highs could be attributed to the bear market, and that accounts for some, but not all of it. A little over a year after releasing Viveta's positive data (last November in fact), another one of United Therapeutics' late-stage drugs failed a phase 3 trial, sending shares down 35% in one day. Prices have recovered slightly since then.

With potential reward comes real risk
Today, both Dendreon's and Vanda's stock have potential for future growth, but because investors are uncertain about the companies' futures, they require extra compensation to take on that risk. Let me explain what I see going on.

For Dendreon, the next major event will be a potential FDA approval of Provenge, which is likely to come down this time next year. The company believes the new study is enough to satisfy the FDA, which gave it an approvable letter in 2007. But investors aren't privy to the private conversations between the agency and the company. Dendreon does have a Special Protocol Assessment (SPA) agreement with the FDA, which increases the likelihood that the most recent trial will be enough, but it's not a guarantee for an approval. Investors are likely to discount for the risk of non-approval until the FDA actually gives Provenge the green light.

Vanda has already gotten past the FDA approval risk, but the growth risk is still present because sales of Fanapt are far from a sure thing. The drug performed better than placebo, but apparently no better than other schizophrenia treatments such as Johnson & Johnson's (NYSE: JNJ  ) Risperdal and Pfizer's (NYSE: PFE  ) Geodon, putting potential sales growth in danger.

It's easy to imagine that most doctors won't prescribe the drug, favoring well established drugs like those that Fanapt failed to beat, as well as AstraZeneca's (NYSE: AZN  ) Seroquel and Eli Lilly's (NYSE: LLY  ) Zyprexa. Some doctors may be willing to try it out on mild patients or those who have failed other drugs, but figuring out how many doctors that might be is next to impossible. It seems wise for most investors to stay away until the potential market is a little more defined.

Taking it all in
With so many small drug developers out there, many don't hit investors' radar screens until they make the "today's top performers" list. The huge run-ups should be neither a signal to buy nor a signal to ignore them. Instead, take your time, find out why everyone else is excited, and then proceed with caution. There's often plenty of time to get in and still catch a nice wave of growth.

Rule Breakers is always on the hunt for multi-bagger growth. Click here to see all of our latest discoveries with a free 30-day trial subscription.

Fool contributor Brian Orelli, Ph.D., doesn't own shares of any company mentioned in this article. Pfizer is an Inside Value pick. Johnson & Johnson is a Income Investor selection. The Fool has a disclosure policy.


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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 May 19, 2009, at 9:57 PM, planethowells wrote:

    Whilst it's impressive to think about the market that Dendreon can achieve and the success it brings them, but has anyone paid any attention to a little tiny biocap in Australia called Prima Biomed who are going into their phase III trials for Ovarian immunotherapy drug CVac ?

    PRR.AX (or PRR.ASX) are the closest behind Dendreon and massively undervalued and with CVac will have a bigger market cap than Dendreon based on the demand for ovarian treatments compared to prostate. CVac will likely be given Orphan Drug status since there's no other effective drug on the market. Go PRR!

  • Report this Comment On May 19, 2009, at 9:57 PM, planethowells wrote:

    Whilst it's impressive to think about the market that Dendreon can achieve and the success it brings them, but has anyone paid any attention to a little tiny biocap in Australia called Prima Biomed who are going into their phase III trials for Ovarian immunotherapy drug CVac ?

    PRR.AX (or PRR.ASX) are the closest behind Dendreon and massively undervalued and with CVac will have a bigger market cap than Dendreon based on the demand for ovarian treatments compared to prostate. CVac will likely be given Orphan Drug status since there's no other effective drug on the market. Go PRR!

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