When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether it's possible upside outweighs its risks. Let's take a look at Keryx Biopharmaceuticals (NASDAQ:KERX) today and see why you might want to buy, sell, or hold it.
Founded in 1997 and based in New York, the company recently sported a market capitalization around $350 million. It has averaged annual gains of more than 10% over the past decade, though it has been a bumpy ride.
A key reason to consider Keryx is the business it's in: health care. With our planet's population growing, getting older, and living longer, demand should only grow for medical products and services.
Keryx bulls have been eager for results of phase 3 trials for the company's Zerenex drug that treats kidney disease. As I was preparing this article, the results were released. And they were strong results! The stock is suddenly trading at more than twice the value it had been just a few days ago, and some are now viewing it in a new light.
Keryx is also looking to fight other conditions with Zerenex, with trials in the works. The company has already partnered with Japan Tobacco and Torii Pharmaceutical and is looking to sell Zerenex in Japan.
Some Keryx bulls are simply waiting for the company to be acquired by a bigger company, as often happens with small biotechs. Big pharmaceutical companies have the capital with which to simply buy promising technologies, instead of or in addition to developing them on their own. They also sometimes just partner with the smaller biotechs, providing financing, for example, in exchange for a cut of the proceeds.
One reason to stay away from Keryx and other biotech companies is that most of us know very little about biotechnology and related fields. Thus, it can be especially hard for us to discern which companies are best poised for success, and what the risks are for each. It can make a lot of sense to just steer clear, or to invest in a bunch of biotech companies at once, via an ETF. SPDR Biotech (NYSEMKT:XBI), for example, can instantly have you invested in more than 40 companies, such as Spectrum Pharmaceuticals (NASDAQ:SPPI), which actually has products on the market, such as its colorectal cancer drug, Fusilev. It's also sporting an attractive valuation, despite some concerns, such as competition. Its pipeline also features other promising contenders, and the company expects to buy back lots of shares in the near future.
Then there's this: Keryx's stock price, has recently spent a long time below $5 per share, firmly in penny-stock territory. Penny stocks are often tied to extra-risky companies and have led to many lost fortunes. A very low stock price is not a definite portent of doom, but it's a red flag to consider. Notably, though, Keryx just burst out of that territory, with its strong Zerenex results.
Another possible consideration is the Feuerstein-Ratain Rule, which suggests that small companies with cancer drugs in phase 3 trials will likely reap poor results, while large companies with such drugs will tend to be successful. Why? Well, in many cases, the larger companies have had the opportunity to invest in the smaller ones' drugs, but have passed, probably due to apparent low likelihoods of success. My colleague Maxx Chatsko has waxed bearish about upcoming results of Celsion's (NASDAQ:CLSN) ThermoDox trials. (Results are due any day and may even be out by now – look them up and see if the rule held.) Celsion did offer good news this month, in the form of a partnership with a Chinese drugmaker.
Finally, while the Zerenex results are promising, there's more work to be done before gobs of it are flying out of pharmacies. Given relatively low cash levels, negative free cash flow, and recent net losses, it might be a challenge for the company to bring the drug to market. It might issue more shares, of course, to raise funds, but that will dilute the value of existing shares. It's far from doomed, but if you're interested in Keryx, be sure to satisfy yourself that it's in sufficiently good health.
Given the reasons to buy or sell Keryx, it's not unreasonable to decide to just hold off on it. You might want to wait for it to post one or more quarters of net gains instead of losses, or for its stock price to pull back some.
You might also check out some other interesting biotech companies, to see if they seem like better bargains than Keryx. Perhaps take a look at Ireland-based Alkermes (NASDAQ:ALKS), which is hopeful about its once-a-month schizophrenia-treating injection aripiprazole lauroxil, among other drugs. A painkiller that uses its technology seems to have fewer people hopeful about it, though, and my colleague Brian Orelli has wondered whether Alkermes might be a bit too conservative, based on its having canceled a constipation treatment.
I'm holding off on Keryx for now, but it's intriguing. Everyone's investment calculations are different, though. Do your own digging and see what you think. The company may perform spectacularly in the coming years, but remember that there are plenty of compelling stocks out there.
Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.