I look at biggest-percentage losers every day to see if Wall Street is discounting any pearls. This morning, profitable specialty pharmaceutical company Connetics'
Back in August, Connetics, which focuses on dermatology, was getting recognition for rising when other biotechs were eating the market's dust. But as this one-decade stock chart shows, shareholders have been on a roller-coaster ride.
News that the U.S. Food and Drug Administration issued a non-approvable letter for the company's Velac acne treatment rocked the stock today. According to the company press release, the only issue was a positive "carcinogenicity signal" in a mouse study. Instead of being red-faced, acne and all, the company labeled the FDA decision disappointing, saying it remains committed to bringing the medication to market.
There is logic to the company's action. In December, Connetics launched Evoclin, an acne treatment that used Connetics' VersaFoam technology to deliver 1% clindamycin to a patient's skin. Velac looked like a shoo-in (if there is such a thing in the drug world) because the gel, like Evoclin, used 1% clindamycin and .025% tretinoin, another commonly prescribed acne drug.
Speaking of FDA non-approvable letters, the company's stock cratered last November when Extina, a VersaFoam-based treatment for seborrheic dermatitis -- which affects the head, neck, and chest -- was reported no more effective than a placebo. Last week, though, the company reported that it would put Extina back into a phase 3 clinical trial to try to get enough data to submit another new drug application late next year.
The FDA letters should not be overlooked. But Connetics has a number of products on the market, including a cost-effective treatment for severe psoriasis.
As part of today's announcement, the company lowered its revenue guidance for 2005. But consider this: Connetics, using revised guidance, still expects revenue to rise about 28% (to $182 million to $188 million) and earnings to soar 33% (representing diluted EPS of $0.66 to $0.70). That prices the stock, at the low end of guidance, at a reasonable 24 times forward earnings.
Connetics has a number of drugs on the market that are experiencing strong growth. New drug applications for two candidates could be submitted by the end of this year, and Velac or Extina, or both, could be resubmitted for approval.
At current valuations, Connetics is a pearl on Wall Street's trash heap. Let the buyer beware, however: The company relies on just three major products for revenues.
For more Foolish Takes on biotech, see:
- Is biotech worth the risk?
- Help in avoiding biotech land mines.
- If biotechs are too rich and risky for your blood, how about reviewing the 10 Commandments of Value Investing?
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