Roundtable: The Biggest Risks in Biotech

On the last day of May, we convened a roundtable of Fools to determine The World's Best Biotechs. But we were left asking ourselves: What about the other side of the coin? What are some biotech names potentially not worth the value investors are putting on them? Our assembled experts aren't pulling any punches, no matter how well liked some of these stocks are.

Fool contributor Rich Smith: My nomination for the biggest risk in biotech? No question: It's MannKind (Nasdaq: MNKD  ) .

Oh, I know it's a popular stock. And I admit to some admiration for the company's efforts to make diabetes treatment easier and more user-friendly with its Afrezza inhalable insulin product. I just don't think the stock is a particularly good investment.

Why not? Let me count the ways. To begin with, MannKind is a company without a product -- or at least not one it's currently selling. Over the past 12 months, MannKind has recorded all of $143,000 in revenues -- not a lot for a $500 million company. Lacking revenues, MannKind also has no profits, and analysts see no hope that profits will appear either this year or the next.

Meanwhile, the company continues to burn cash that it doesn't have. Negative free cash flow for the past year topped $150 million. The $16 million penalty MannKind agreed to pay Merck (NYSE: MRK  ) last month won't help matters, either. As MannKind continues shoveling cash into its perpetual cash furnace, I expect that it will either dilute existing shareholders with new share issuances or add to its already crushing burden of $386 million in net debt.

Fool contributor Sean Williams: There is no bigger risk in biotech than betting the boat on a nonexistent pipeline -- and that's exactly what you get by investing your hard-earned money in Cell Therapeutics (Nasdaq: CTIC  ) .

Cell Therapeutics holds the distinction of burning through $1.5 billion worth of shareholder money since its inception and has very little to show for it. Its primary drug candidate, pixantrone, which it hopes can be used to treat various types of cancer, recently failed to impress the FDA, leaving its prospects in limbo. Although the drug wasn't fully rejected, its prospects look bleak, considering that Cell Therapeutics wasn't able to meet its own clinical enrollment guidelines.

The company also has Opaxio, an experimental drug aimed at treating ovarian cancer, in phase 3 trials, but let's remember that Opaxio didn't get past the FDA when it was brought before the agency to treat non-small-cell lung cancer. Bearing a history of failure, it comes as a slap in the face that the company sold another 17.6 million shares just two weeks ago, diluting shareholders even further. With a Swiss-cheese pipeline and a ballooning shareholder deficit, this is a risk you can't afford to take

Fool contributor Brian Orelli: There are plenty of bad biotechs out there that investors should avoid, but the ones with solid data can be just as dangerous. Consider Pharmasset (Nasdaq: VRUS  ) , which has a market cap of $4.6 billion despite not having any drugs in phase 3 development. Sure, the drugs -- two phase 2 compounds and one phase 1 molecule -- treat hepatitis C, a very large market, and the data that has been presented looks good. The company even convinced Johnson & Johnson (NYSE: JNJ  ) to team up.

But it's hard to recommend buying at these levels; the risk just doesn't seem to justify the upside from here. By comparison, Vertex Pharmaceuticals (Nasdaq: VRTX  ) , valued at $10.5 billion, has a hepatitis C drug already on the market, a cystic fibrosis drug that's on the verge of approval, and four other phase 2 drugs. Pharmasset could get there, and investors would be rewarded with a solid double from here, but it'll take years, and there's a risk that one or more of its drugs will fail along the way. This is biotech, after all.

David Williamson: Well, there you have it, Fools. You've heard from our experts, but now we want to hear from you. Sound off in the comments section below and let us know why we're either brilliant or idiots. And be sure to add Mannkind, Pharmasset, and Cell Therapeutics to Your Watchlist and never miss out on our latest coverage.

David Williamson owns shares of Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of Vertex Pharmaceuticals and Johnson & Johnson and creating a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insightsmakes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (9)

Comments from our Foolish Readers

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 July 13, 2011, at 10:28 PM, oracleatdelphi66 wrote:

    Here is my comment on your "Fool Contributor's" earlier presented view on CTI which you reference in this piece:

    Report this Comment On July 13, 2011, at 5:22 PM, oracleatdelphi66 wrote:

    There are many defintions of a Fool or Foolish, but with a spirit of light-heartedness let's just call this piece one which was written with little regard for accuracy. Regarding CTI, the facts are that the Company has had two marketed drugs. Trisonex and Zevalin during its history. CTI got Trisonex approved in what was then record time . Both products are still helping cancer patients today.

    To say that pixantrone failed at the FDA is not quite a complete statement either. A recent appeal decision from the FDA concluded that the pixantrone 301 trial may not have failed and that the NDA can and will be re-submitted. Acccelerated approval is still possible without the company having to do another trial. EU approval of pixantrone is also possible this year. Failure? Not so fast.

    The large Opaxio ovarian cancer trial is still recruting patients. An interim analysis is expected next year. How can that be a failure? The Company did release encouraging Opaxio data for treatment of brain cancer at the recent ASCO meeting. Failure?

    Finally you say the company is scrambling for funding. The company recently rasied sufficient funding to provide a runway to carry it through these pixantrone milestones. Dan Eramian CTI

    .

    Report this Comment

  • Report this Comment On July 14, 2011, at 3:52 PM, DeadaimSr wrote:

    Mnkd may have no product yet but the state where Afrezza is right now is the envy of the competitors. Mnkd has been offered a buyout a few times already from big pharmas but declined. The lates findings that patients with type 1 diabetes who received the insulin, Afrezza (Inhalation Powder combined with basal insulin) came to view insulin therapy more positively compared to the study with patients using standard therapy insulin. Presentation at the American Diabetes Association and the findings of two separate studies confirmed that treatment with Afrezza does not result in excess cardiovascular events in type 1 or type 2 diabetes patients. This company will be sought by a lot of big competitors before the FDA approval of Afrezza and hopefully won't be tempted to sell.

  • Report this Comment On July 14, 2011, at 5:00 PM, WCoastGuynCA wrote:

    "Rich, I suggest you cover your short position in Mannkind before the partnership is announced and the share price is in the $12.00-$15.00 range."

  • Report this Comment On July 14, 2011, at 5:41 PM, WCoastGuynCA wrote:

    It must be really frustrating for the Motley Fool crowd to keep publishing negative articles about Mannkind and not be able to get the share price below $3.70.

    Doesn't anyone at Motley Fool own a few shares?

    It's really somewhat humorous.

  • Report this Comment On July 22, 2011, at 5:24 PM, steven107 wrote:

    VRTX wasn't in terrible good shape when it was first recommended by the fools. Had it not been for some good luck with a phase I drug, could have been ended differently. One of your Fool author's here recommended it around this time in it's history:

    http://www.bizjournals.com/boston/stories/2004/06/14/story1....

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