If you take on high risk, you should be able to profit from a high reward -- that's a bedrock concept in investing. And we regularly see how this works in the biotech world. Investors willing to buy small-cap biotech stocks often lose. When they win, however, they win big.
That's exactly what happened this week with three small biotech stocks. Galmed Pharmaceuticals (NASDAQ:GLMD), Galectin Therapeutics (NASDAQ:GALT), and Eloxx Pharmaceuticals (NASDAQ:ELOX) soared on news that excited investors. Here's what drove these stocks higher -- and whether or not they're smart picks for investors now.
1. Galmed Pharmaceuticals: A NASH splash
Galmed Pharmaceuticals stock was the biggest biotech winner of the week, with shares skyrocketing more than 140%. The biotech reported positive results from a phase 2 clinical study evaluating experimental drug Aramchol in treating non-alcoholic steatohepatitis (NASH).
The Israel-based company announced on Tuesday that patients receiving Aramchol experienced a statistically significant reduction in liver fat compared to patients on placebo after 52 weeks of treatment. In addition, Galmed stated that patients taking its experimental drug experienced statistically significant reductions in live enzymes alanine transaminase (ALT) and aspartate transaminase (AST).
Based on these results, Galmed plans to meet with regulators to discuss the design of a pivotal phase 3 study for Aramchol. If the drug succeeds in phase 3, Galmed could be sitting pretty. The annual market size for NASH treatments is projected to be as high as $35 billion. There are currently no Food and Drug Administration (FDA)-approved drugs for the disease.
2. Galectin Therapeutics: Musical chairs and more
Galectin Therapeutics' share price jumped more than 30% this week. The biotech announced on Tuesday that Harold Shlevin would be taking over as CEO from outgoing CEO Peter Traber. But it was probably another bit of news buried in the press release about the CEO change that was the primary reason why Galectin stock shot higher.
The company's board chairman, Richard Uihlein, stated: "In conjunction with this transition [i.e., the change in CEO], the Company has also engaged Back Bay Life Science Advisors, a Boston-based, internationally focused integrated strategy and transaction advisory organization, to support the Company and the management team in its exploration of strategic alternatives." Companies frequently use the phrase "strategic alternatives" as code words to hint that they're looking for a potential buyer.
Like Galmed, Galectin has an experimental NASH drug, GR-MD-02, which is headed for a pivotal phase 3 study. The biotech also is evaluating the drug in a phase 2 study targeting treatment of plaque psoriasis and in phase 1 studies in combination with immunotherapies for treating melanoma.
3. Eloxx Pharmaceuticals: Old news is still good news
Eloxx Pharmaceuticals stock also vaulted more than 30% higher in recent days. Unlike the other two biotech winners, though, Eloxx didn't report any new developments this week. It didn't have to.
Investors continue to be enthused about Eloxx's presentation at the European Cystic Fibrosis Conference last week. At the conference, the company announced positive data from a phase 1 study of RNA modulator ELX-02 in treating cystic fibrosis patients with at least one nonsense mutation (a genetic mutation in DNA that results in a shorter, incomplete protein being produced) of the CFTR gene.
Based on the encouraging early-stage results, Eloxx hopes to begin a phase 2 study of ELX-02 later this year. The company must first receive FDA approval to advance to the next phase, though. Eloxx also plans to start a phase 2 study of ELX-02 in Belgium later in 2018 targeting treatment of cystinosis, a rare genetic disease where a protein called cystine builds up in various organs.
Are they buys?
There still is a long way to go for each of these companies before they have a product that generates revenue. There also is the potential that any or all of the biotechs could use their recent stock-price jumps to issue new shares to raise cash, which could cause their stock prices to drop due to the dilution in the value of existing shares.
I suspect that Galectin would be most likely to take this approach. The company's cash stockpile at the end of Q1 was only enough to fund operations through early 2019. Galmed and Eloxx have said that they have enough cash to stretch into 2020.
My colleague Cory Renauer thinks that Galmed and Galectin stocks could keep the momentum going in the second half of 2018. NASH is a hot space to be in right now. It's possible that we could see acquisitions activity pick up considerably -- Madrigal Pharmaceuticals is another biotech with a promising NASH candidate and Galectin potentially is looking to sell.
I wouldn't discount the possibility that Eloxx could be a buyout target, either. Vertex Pharmaceuticals is the big gorilla in the cystic fibrosis market right now. Vertex has a lot of cash built up and has indicated the willingness to make deals to pick up assets that aren't too far advanced in development.
My view for now, though, is that it still is a little too early for most investors to buy Galmed, Galectin, or Eloxx. There's no guarantee that any of them will be acquired, and drug candidates that seem very promising in phase 1 and phase 2 studies often flop in phase 3. I'm not saying that will happen for these biotechs, but it could. High-risk, high-reward stocks don't always pan out.