Are These 3 Biotechs a Healthy Choice for Your Portfolio?

Biotechs Idenix Pharmaceuticals (Nasdaq: IDIX  ) ,Rockwell Medical Technologies, (Nasdaq: RMTI  ) , and Spectrum Pharmaceuticals (Nasdaq: SPPI  ) have all made news this week. Drugs in their pipelines and in various stages of clinical trials are producing results that investors either fear or cheer and that could move their stock prices up or down in a big way. Let's take a closer look at each one and see whether they deserve a spot in your portfolio.

Idenix develops treatments for hepatitis C, HIV type-1, and AIDS. The stock recently jumped 14.3% on news that the company reported positive trial data for its hep-C drug. The potential market for hep-C is huge, and Idenix could take center stage with a drug approval.

Idenix has no earnings, so we need to look at other metrics and trend data. For the past 12 months, the company, with no product to sell yet, had a meager $560,000 in revenue. Cost of goods sold was $54.798 million, administrative costs were $17.554 million, net income was a negative $32.294 million, and earnings per share for the quarter ended March 31 were $0.32 in the red. While cash from operations over the past 12 months was a negative $56.97 million, investors have had enough faith in the company to buy $131.61 million in stock. The difference of approximately $73 million is the amount of cash that Idenix has to continue its drug development efforts. The negative net income figure has been inching upward over the past few years, so that's a bit of good news -- but Idenix still needs a product to market. In short, the fundamentals don't support Idenix's stock price, so owning this company would depend on whether you think its hep-C drug will get final approval. For now, I'd say it's a "pass."

Michigan-based Rockwell markets hemodialysis concentrate solutions and dialysis kits that duplicate kidney function in patients with failing kidneys, known as end stage renal disease, or ESRD. The company also has a license to manufacture and sell soluble ferric pyrophosphate, or SFP, a phase 3 clinical trial product to improve the treatment of dialysis patients with iron deficiency. Once approved, ESRD patients will be able to use the SFP iron replacement drug.

On June 11, the company announced that the independent board overseeing the phase 3 SFP program reviewed the safety data and, identifying no concerns, recommended that the studies continue with no modifications. Rockwell's stock climbed from $9.45 to $10.46 the following week, although it has since fallen more than 10% in the absence of any new news releases.

Rockwell has enough data to form an opinion regarding its worthiness as an investment, so let's look at its past three Q1 financials.

Metric

3/31/2012

3/31/2011

3/31/2010

Revenue (Millions) $12.03 $13.29 $14.98
Net Profit Margin (88%) (22%) (3%)
Free Cash Flow (Millions) ($4.77) ($0.98) $1.74
Earnings Per Share ($0.54) ($0.17) ($0.02)

Rockwell's year-over-year revenue is trending down, and margins are deteriorating. The time needed to collect its receivables has grown from 18 to 32 days, and receivables as a percentage of revenue has grown from 20% to 35%. Negative operating cash of $8.3 million has put pressure on Rockwell to stretch its payables out to 41 days -- not terribly long, but longer than it takes to collect cash. On the bright side, the company carries no debt, but like Idenix, it's been funding its operations with the issuance of stock. Shares outstanding have increased by 3 million over the past year as a result. As with Idenix, the fundamentals don't support the stock price, and I'd wait and watch until we get positive news on a drug approval -- or at least until the metrics reverse course.

The third stock on our list, Spectrum, develops drugs primarily in the areas of hematology and oncology. Its Zevalin is a prescribed form of cancer therapy that combines radiation with an antibody. Another drug, Fusilev, specifically treats colorectal cancer. And those are just two of its offerings: This Nevada company has a massive pipeline, and its trend data is impressive.

Metric

3/31/2012

3/31/2011

3/31/2010

Revenue (Millions) $59.9 $43.6 $11.1
Cost of Goods Sold (% Revenue) 14% 15% 29%
Net Profit Margin 78% 29% NM
Free Cash Flow (Millions) $11.19 ($10.29) ($21.54)
Earnings Per Share $0.71 $0.23 ($0.80)

Spectrum's financial metrics are on the opposite side of the, well, spectrum from Rockwell's. Operating and profit margins are greatly improving, and operating cash flow has been positive the past 12 months. However, Spectrum could improve its cash collections, as the days sales outstanding figure is high at 84 days, and receivables are also up there, at 93% of revenue. Days in inventory is high as well, at 93 days, but inventory as a percentage of revenue is at least low, at 15%. It does still take Spectrum 105 days to pay its bills, which is way too long, but the figure is down from last year's 158.  

Foolish bottom line
Idenix and Rockwell are clearly speculative stocks, and the most you should consider giving them is a small fraction of your portoflio. Meanwhile, based on fundamentals, Spectrum is moving in the right direction and represents the best opportunity among these three stocks.

Could one of these companies go on to become a multibagger? With small and growing companies, it's possible. On the other hand, it's hard to imagine Microsoft delivering multibagger returns because of its massive size. Luckily, you can still Discover the Next Rule-Breaking Multibagger that's a small company poised for astronomical growth. It has all six signs of a Rule Breaker, and I own a stake in it. Get the free report, available for a limited time only.

Fool contributor John Del Vecchio is the co-advisor to Motley Fool Alpha and co-manager of the Active Bear ETF. You may follow him on Twitter, @johnfdelvecchio. He owns no shares in the companies mentioned in this article. The Motley Fool owns shares of Microsoft. Motley Fool newsletter services have recommended buying shares of and creating a bull call spread position in Microsoft. The Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (0) | Recommend This Article (0)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1926787, ~/Articles/ArticleHandler.aspx, 11/26/2014 8:03:41 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement