There are three types of biotech stocks to buy that generally fall into one of these typically non-overlapping groups:
The latter two are covered in companion articles that can be found by clicking on their characteristic. This article will focus on binary events, the reason most people want to buy stocks in the biotech sector.
If you can tolerate the risk, the stocks to buy are biotechs with upcoming binary events, simply because they can produce the largest change in stock price. The latter two categories just can't do that; sales don't double overnight, and investors usually don't wake up one day and realize that undervalued stocks are suddenly a buy. Binary events, on the other hand, can produce overnight doubles, triples, and sometimes more.
Historical examples with more to come
Two types of binary events that can send shares soaring: clinical trial results and approvals by regulatory agencies.
Sarepta Therapeutics (NASDAQ:SRPT) tripled last year after releasing phase 2 data showing that its Duchenne muscular dystrophy drug, eteplirsen, could help boys walk further. Shares subsequently came back to life when investors realized that an approval with phase 2 data wasn't a sure thing. This month, shares have been climbing back in anticipation of an FDA decision regarding the pathway for approval. That decision is essentially another binary event, which will likely send shares in one direction or another because the FDA's guidance is widely seen as foretelling whether eteplirsen will eventually be approved.
InterMune (UNKNOWN:ITMN.DL) scored a double a few years ago after gaining a positive recommendation for its idiopathic pulmonary fibrosis treatment, Esbriet, in Europe. For the EU approval system, a positive recommendation by the Committee for Medicinal Products for Human Use (CHMP) is essentially an approval. The decision was especially surprising because the U.S. FDA had rejected the drug a few months earlier. InterMune is now selling Esbriet in Europe, but sales haven't exactly lived up to expectations.
To turn things around, InterMune needs an approval in the U.S., which will require data from a new trial set to read out in the second quarter of next year. That binary event could make InterMune a stock to buy since it has a good chance of turning out positive given the previous clinical trial data for Esbriet.
Stocks with upcoming binary events
DepoMed (NASDAQ:DEPO) expects to hear today about the approval of Sefelsa, which treats hot flashes and other menopause symptoms, but I wouldn't buy ahead of the FDA decision. The drug's fate was settled back in March when a FDA advisory committee voted 12-2 that the drug's risks outweighed the benefits. For advisory committee meetings, no means no, and yes means maybe. The FDA, which has the final say, will sometimes go against the advisory committee and reject a drug that got a positive recommendation from the committee of outside advisors, but the agency almost never overturns a negative recommendation. It would be job suicide if the FDA reviewers did, and side effects were proven to be a problem once the drug was approved.
Later this summer, we'll see phase 3 data on MannKind's (NASDAQ:56400P706) inhaled insulin Afrezza. While this is a necessary step toward approval of its drug/device combination, it may not be the stock-moving event that investors would enjoy. Shares have run up substantially recently, which will mute any pop we see after the data is released. And while the device is new, the underlying drug has produced solid data to date, so the expectations are more likely for a positive result than a negative one.
Finally, toward the end of the year, Amarin (NASDAQ:AMRN) will hear about whether the FDA will expand the label of its lipid-lowering drug Vascepa. The dug is currently only approved for patients with very high triglyceride levels, but Amarin wants to expand the label to include patients with moderately high triglyceride levels. Vascepa has been shown to lower triglycerides in that group, but data from an outcomes study to prove it also decreases heart attacks and strokes is still in progress.
The FDA agreed to accept the laboratory tests as surrogate endpoints as long as the company had substantially enrolled the outcomes trial. Some analysts think there's a good chance the FDA will change its mind and require the data from the outcomes study before approving the expanded indication. While the possibility shouldn't be discounted, as I discussed here, I'd still put the chance of approval at greater than 50%.
Best stock to buy?
Of the three, I like Amarin at its current beaten-down level the best. The stock certainly isn't without risks, but stocks with upcoming binary events never are. DepoMed has about as much chance of getting Sefelsa approved as a lottery ticket hitting all its numbers. And one share of DepoMed isn't going to make you a millionaire like the lottery can. While I think MannKind gets Afrezza approved eventually, its risk-reward looks a little wacked after the huge run up it's had.
Fool contributor Brian Orelli 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.