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Biotech investing isn't for the faint of heart. It takes more than a decade of research and development efforts costing an average of $2.6 billion to bring just a single drug to market. Even then, if all goes well, the odds of making a profit are still not all that great -- only about 20% of new drugs that are launched end up recouping their initial investment. With odds like that stacked against them, many biotech stocks are destined to become losers.
Knowing that, here is a list of three stocks that I think are facing long odds of success and should be avoided in 2016.
1. Arena Pharmaceuticals (ARNA +0.00%)
Arena Pharmaceuticals was once a high-flying stock. Its share price skyrocketed in 2012, after the FDA approved its weight-loss pill, Belviq. But it's had a tough time selling the drug. Despite being on the market for three years now, net product sales were only $4.9 million last quarter.
This disappointing sales performance weighed heavily on the company's share price, which has been in free-fall ever since Beviq was first approved. In the past year alone, shares shed nearly half of their value.
It's been so bad that the company laid off 35% of its work force earlier this year to cut costs.
Not all is lost yet, as the company still boasts a handful of products in mid-stage clinical development, and it's also submitted an extended-release formulation of Belviq to the FDA for approval that could help to spur sales. I'm skeptical, though, that anything will help Belviq, and the company's mid-stage products still need a lot of time and money to work their way toward regulatory approval. Until we get a clear sign that Belviq is the real deal, this is one stock I'll be avoiding in the year ahead.
2. PDL BioPharma (PDLI +0.00%)
PDL BioPharma isn't like other biotech companies. It doesn't even attempt to research and develop new drugs. Instead, its business model is to purchase the patents to pharmaceutical products and then monetize them to generate a profit. This royalty-focused business model allows the company to keep its overhead costs extremely low, and the company generously passes along its net income back to its shareholders in the form of huge dividend payments.
Income-focused investors might be licking their chops at the stock's current dividend yield of more than 16%, but I'd urge them to temper their enthusiasm.
PDL BioPharma's profits are highly dependent on revenue derived from its antibody humanization technology, which was protected by its Queen patents. However, those patents expired in December 2014, and the company's revenue is expected to nosedive over the coming years as the last remaining warehoused products sell down.
PDL BioPharma's revenue is expected to drop by nearly 60% in 2016 to only $226 million, and it could fall all the way to $76 million by 2017. If that happens then its profits will evaporate, making it highly likely that its dividend payments will be cut or stopped.
Making up for that revenue shortfall will be a huge challenge for PDL BioPharma, which is why I'll be steering clear of its stock in 2016.
3. MannKind Corporation (MNKD 0.37%)
This was supposed to be the year MannKind bulls would finally be rewarded for their patience, as the company's first product -- Afrezza, an inhaled insulin -- finally become available for sale.
Instead, the last year has turned out to be a nightmare year for the company. MannKind's share price has plunged nearly 70% since the start of the year, and shares now trade for under $2 each.
What happened?
MannKind faced a huge number of obstacles in trying to get Afrezza into patients' hands. First, the drug's FDA approval came with a black-box warning that required patients to perform a lung capacity test before they could start treatment. That barrier greatly slowed initial sales adoption, and although it appears the company has cleared that hurdle, management has struggled with other issues, especially getting insurance plans to cover Afrezza.
Since February, when Afrezza launched for sale, MannKind's marketing partner, Sanofi, has only managed to sell about $5.5 million worth of product, which is an awful number for a drug that many thought held billion-dollar blockbuster potential. The disappointing sales have caused investors to flee in droves.
MannKind desperately needs Afrezza sales to take off to keep the company going, but given the drug's awful start, I have a hard time seeing that happening, especially with the potential for new competition on the horizon.
MannKind is currently in Hail Mary mode, and I think the odds of Afrezza becoming the blockbuster hit that the company needs it to be are quite long. This is a stock that I'll be staying far away from in 2016.
