Biotech stocks can sometimes soar on news that you'd expect would cause them to fall. Most of the time, though, they jump due to catalysts that are perfectly logical.
Both scenarios happened this week for three soaring biotech stocks. Innovative Biopharmaceuticals (NASDAQ:INNT), Zafgen (NASDAQ:ZFGN), and Acceleron Pharma (NASDAQ:XLRN). Here's what lit a fire beneath these stocks -- and whether they're smart picks for investors now.
1. Innovate Biopharmaceuticals
Innovate Biopharmaceuticals stock skyrocketed 75% this week. Even before this big move, Innovate was already the best-performing biotech stock of the first half of 2018. Its recent gains cemented its spot at the top.
The company had a couple of developments this week that helped boost its share price. On Monday, Innovate announced that it was being added to the Russell 3000, Russell 2000, and Russell Microcap indexes. The biotech also announced on Thursday that it had entered into a research and development collaboration with O. Colin Stine at the University of Maryland School of Medicine. Stine plans to study Innovate's lead candidate, larazotide acetate, in correcting the dysfunctional intestinal barrier and the dysfunctional microbiome.
Innovate hopes to advance larazotide acetate to a phase 3 clinical study targeting treatment of celiac disease. The drug has also attracted considerable interest due to its potential in treating other inflammatory diseases, especially nonalcoholic steatohepatitis (NASH).
Zafgen's share price jumped 45% this week. There were three notable stories for the biotech this week -- two of them that expectedly boosted the stock but one that surprisingly seemed to help.
On Monday, Zafgen held a conference call to discuss positive results from a phase 2 clinical study evaluating ZGN-1061 in treating type 2 diabetes. The company also reported encouraging nonclinical data for the drug in potentially treating NASH. In addition, Zafgen announced on Monday that it was being added to the Russell 3000 index.
The biotech decided to take advantage of its climbing share price that resulted from those announcements. On Wednesday, Zafgen stated that it would conduct a secondary stock offering. The next day, the company announced the price of that stock offering and that the gross proceeds were expected to total $60 million. Most stocks would fall on news of a stock offering since the issuance of new shares dilutes the value of existing shares. Zafgen, however, saw its stock price continue to rise -- a good sign of investors' bullishness about the company's prospects.
3. Acceleron Pharma
Acceleron Pharma stock increased 30% this week. The big catalyst for the biotech came from the release of positive results Thursday evening from a phase 3 study of luspatercept in treating myelodysplastic syndromes (MDS), a group of rare blood disorders.
Luspatercept achieved the study's primary endpoint of statistically significant improvement in "red blood cell (RBC) transfusion independence of at least 8 consecutive weeks during the first 24 weeks compared to placebo." The drug also met a key secondary endpoint of the study by improving RBC transfusion independence of at least 12 consecutive weeks during the first 24 weeks by a statistically significant level.
This good news for Acceleron was also good for its partner, Celgene (NASDAQ:CELG). The two companies plan to submit luspatercept for regulatory approvals in the U.S. and in Europe in the first half of 2019. Celgene thinks the drug could generate peak annual sales of more than $2 billion.
Are they buys?
Innovate Biopharmaceuticals and Zafgen have promising drugs. And the potential for the drugs to be effective in treating NASH is especially intriguing. However, I'd rather wait to see how larazotide acetate and ZGN-1061 fare in late-stage clinical studies before considering buying Innovate or Zafgen stocks.
What about Acceleron? I think the chances are pretty good that luspatercept will also be successful in a phase 3 clinical study targeting beta-thalassemia, another rare blood disease. But with Acceleron's market cap now greater than $2.2 billion, the stock price already reflects expectations that the drug will be a winner. Celgene stands to make the most amount of money from luspatercept thanks to its licensing deal.
My view is that none of these three small biotech stocks are great picks for investors right now. Acceleron's partner, Celgene, on the other hand, could be a better choice for generating long-term returns.