A never-ending stream of new drugs making their way to market makes biotech stocks especially prone to jaw-dropping pops and drops, and the industry's all-or-nothing nature could become especially apparent to investors in Ironwood Pharmaceuticals (NASDAQ:IRWD), Aegerion Pharmaceuticals (NASDAQ:AEGR), and MannKind Corporation (NASDAQ:56400P706). All three of these companies faces upcoming risks that are outside of their control, and for that reason shares in each could be too risky for investors to consider owning.
No. 1: Ironwood Pharmaceuticals
On the surface, rising sales and declining losses would suggest that Ironwood is becoming less risky, rather than more. Thanks to ongoing prescription growth for Linzess, Ironwood's therapy for the treatment of chronic constipation, second quarter sales surged 79% in the U.S. to $112.1 million, leading to a decline in the company's net loss to $48 million from a loss of $60.4 million a year ago.
However, Linzess' sales growth could slow if a competing drug from Synergy Pharmaceuticals (NASDAQ: SGYP) continues to excel in its clinical trials. In June, Synergy Pharmaceuticals reported that plecanatide, its drug for chronic constipation, met its primary endpoint of reducing constipation versus a placebo in phase 3 trials. Importantly, Synergy's phase 3 data suggest that plecanatide may offer a lower incidence rate of diarrhea relative to a placebo than Ironwood's Linzess.
If plecanatide's advantage is backed up by a second phase 3 trial -- results from which are expected soon -- then Synergy could file for FDA approval this year and plecanatide could hit the market as early as late next year. Given the potential risk to the company's market share, Ironwood investors ought to watch Synergy's press releases closely over the coming months.
No. 2: Aegerion Pharmaceuticals
Aegerion Pharmaceuticals markets Juxtapid, a lipid lowering medicine that is used by doctors to reduce the risk of heart attacks and stroke in heart disease patients.
Juxtapid is currently approved for use in patients with homozygous familial hypercholesterolemia, or HoFH, a rare genetic disease that makes it more difficult for patients to clear cholesterol from their bloodstream.
HoFH affects thousands of Americans, and demand for Juxtapid, which carries an eye-popping $295,000 annual price tag, has been increasing. In the second quarter, Aegerion reports Juxtapid sales jumped 59% to $57.1 million.
However, Juxtapid's sales could be derailed by the recent FDA approval of Regeneron and Sanofi's Praluent and the potential upcoming approval of Amgen's Repatha later this month.
Praluent and Repatha inhibit the PCSK9 inhibitor responsible for breaking down bad cholesterol receptors in the liver, allowing patients to clear more cholesterol from their bodies. The FDA approval for Praluent is for use in patients who have already had a stroke or heart attack, as well as HoFH patients.
Because Praluent has been very successful in clinical trials at reducing cholesterol in these patients, and its $14,600 annual price is far south of Juxtapid's, Praluent, and conceivably Repatha, could cut significantly into Aegerion's revenue next year. That makes the company's shares too risky for me.
No. 3: MannKind Corp
MannKind has had its fair share of hard knocks over the past few years, including a circuitous route to FDA approval last year for its inhaled insulin Afrezza.
Because MannKind lined up a highly-connected marketing partner in Sanofi, the maker of the top selling long-lasting insulin Lantus, it wouldn't be crazy to think that MannKind's toughest challenges are behind it. However, it could be bad news if sales don't pick up for Afrezza over the upcoming couple quarters.
So far, sales have been more of a trickle than a flood, as headwinds tied to lung screening requirements have proven to be stronger than feared. As a result, Afrezza sales totaled just 1 million euros in the first quarter and 2 million euros in the second quarter.
That anemic sales rate doesn't justify Sanofi's investment, which includes $150 million up front and another $775 million in milestones to get the rights to 65% of Afrezza profit (or in this case, its loss).
If sales don't pick up, Sanofi could decide to exit its agreement with MannKind as early as the first quarter of next year -- and if it does execute that exit clause, it would cast a lot of doubt on Afrezza that could imperil MannKind's entire business.
Tying it together
All three of these companies have launched FDA-approved medicines, a major feat in and of itself, but obtaining regulatory approval matters most when a drug has a long-standing competitive advantage that leads to sales success. So far, Ironwood and Aegerion have shown that their drugs have nine figure potential, but it's uncertain whether or not their drugs' advantages are good enough to withstand competitive challenges. In the case of MannKind, the jury is still out on Afrezza, but a verdict could be coming -- and for that reason, all three of these companies could face risks that make them worth avoiding.
Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies 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.