Partnerships drive big stock gains for small biotechs

As growth slows in shares of large-cap biotechs and economic woes weigh on the broader markets, investors can find dramatic growth opportunities in many small and midcap biotechs who have secured lucrative research and development partnerships.

Since January, shares of drug developers Curis Inc. and Adolor Corp. have experienced double-digit gains in stock value. By contrast, the AMEX biotechnology index, which tracks several sector bellwethers, has fallen 5.8 percent during the same period and the Dow Jones Industrials has lost 3.7 percent.

For a young biotech company, attracting an industry heavyweight as a research and development partner is essential from both a funding standpoint and as a vote of confidence in its R&D pipeline. Milestone payments made upon reaching certain drug development goals inject much needed cash into companies who often don't have drugs on the market yet to sell and are not yet profitable. Successful partnerships can also lead to lucrative takeovers by the larger partner.

Shares of Exton, Pa.-based Adolor Corp. are up 16.5 percent since January, and hit a new 52-week high of $6.09 Thursday on nearly 10 times average trading volume. The company said late Tuesday the Food and Drug Administration approved its constipation treatment Entereg, which was developed with U.K.-based drug developer GlaxoSmithKline PLC. Sales are expected to start next month, and have been forecast by Cowen and Co. analyst Leland Gershell to reach $150 million in the U.S. in 2012.

GlaxoSmithKline will provide the bulk of sales representatives for the drug, cutting costs for Adolor. Gershell said the companies' deal makes Adolor an attractive buyout target for Glaxo. Adolor also partners with Pfizer Inc. on two pain treatments.

Cambridge, Mass.-based Curis Inc. has a long-standing partnership with Genentech Inc. to develop cancer treatments and recently moved a potential colon cancer drug, GDC-0449, into Phase II clinical trials _ sparking a $3 million cash milestone payment. RBC Capital Markets analyst Jason Kantor rates the stock at "Outperform" based in part on that relationship.

"The move directly to a large randomized first-line colorectal (colon) cancer trial demonstrates Genentech's commitment to this program," Kantor said in a note to investors May 13.

Curis' shares have gained 25 percent year-to-date, reaching $1.23 Wednesday.

But investors attracted to the potential for hefty gains do need to remain aware of the volatility associated with buying into companies so heavily reliant on single R&D deals. When Eli Lilly & Co. cancelled development of an inhaled insulin diabetes treatment, Alkermes Inc. lost its partner _ sending shares reeling. And shares of Nektar Therapeutics were hurt when 13-year partner Pfizer unexpectedly terminated its inhaled insulin drug Exubera in October, and then warned last month that the drug was linked to lung cancer in some patients.