Is the Risk Worth the Reward for Biotech’s Most Volatile?

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

An investment in a biotechnology stock can sometimes feel like a game of poker. It’s volatile, uncertain, and even when you think you have a winning hand, sometimes you’re disappointed. After several bad hands with both Peregrine Pharmaceuticals (NASDAQ: PPHM) and Acura Pharmaceuticals (NASDAQ: ACUR) both stocks have finally begun to trend higher. However, you must now ask yourself if the rally is just another eventual fold, and if the risk is worth the reward?

Acura Pharmaceuticals Rallies on Rumors of Nexafed, But is it Just Another Oxecta?

In the last week, Acura Pharmaceuticals has returned a gain of 60%! The gains followed a report from EMPR.com that its new meth-deterring nasal decongestant “Nexafed” will be available soon, possibly before the end of the year. Nexafed, includes the company’s IMPEDE technology, which disrupts the conversion of pseudoephedrine into methamphetamine. Investors expect this product to be a blockbuster due to the meth epidemic and the use of cold medicine to create meth.

I don’t know about you, but to me this feels like deja vu. Haven’t we been through this before, with the company’s AVERSION technology? Am I the only one who remembers when Pfizer (NYSE: PFE) basically abandoned the project between the two companies? Well, if you don’t know, Acura had partnered with Pfizer and the two earned an FDA approval for Oxecta, which was the narcotic pain medication oxycodone and Acura’s AVERSION technology. The drug worked by disrupting the common methods of abuse. In addition, Pfizer had three other products being tested with the AVERSION technology, but returned those products back to Acura earlier this year.

Back when Pfizer earned an approval for Oxecta I was very bullish for the sales potential. Hydrocodone is the most prescribed medication in the U.S., and prescription drug abuse is yet another epidemic without a solution. I had thought that when given the choice between a drug such as Percocet or Oxecta that physicians would choose the drug that is non-addictive. However, Pfizer never seemed concerned about marketing the product, it never showed on any of the major pharmacy’s list of drugs, and it failed due to what appears to be a lack of marketing interest.

The situation with Acura and Nexafed seems very similar to that of Oxecta. The only difference is that the potential for Oxecta was far greater. The manufacturing and abuse of meth is a major problem, however I fear that Nexafed will be less effective as meth addicts will avoid purchasing the product. The only way I see Nexafed being effective is if the FDA outlaws all other pseudoephedrine products, and makes it exclusive to Acura. However, I don’t see it happening, and until proven otherwise, I will continue to view Nexafed just like Oxecta, an overhyped product.

Peregrine Investors Ready for Round 2?

From the time period between September 21 and November 21, Peregrine Pharmaceuticals lost nearly 85% of its value. The company had been one of the best performing stocks for most of the year after demonstrating unprecedented results in a late stage trial for first-line-non-small cell lung cancer. However, the company’s loss began after it announced “major discrepancies” in the coding of treatment groups -- this included results that may or may not be accurate -- the company was then forced to repay a $16 million loan.

After a very eventful year, from the largest of gains to the most devastating of loss, Peregrine is higher by 75% over the last week. Now here’s where it gets really weird…… There has been no news! It almost looks like short-covering. But my initial impressions are that investors realize how cheap the stock is and are now buying back before the company announced further data, but like I said, there is no news to know for sure what’s driving the stock.

Peregrine is a tricky stock, because when it announced data for its lung cancer drug we’d never seen results so good. In the previously reported (unreliable) study, the control group saw a 5.6 month overall survival, but those treated with its drug saw 12.1 months. This is far above standard-of-care, but the only problem is that we don’t know the level of significance for the “major discrepancies.” Supposedly, the company’s third party reporter mixed up results from the control and vaccinated group so therefore the drug might be totally ineffective. Therefore, despite the stock being cheap, compared to its $550 million market cap earlier this year, I’d still wait until after data. Because if effective, then it will be worth the premium, but at this point, it’s not worth the risk.

Conclusion

When investing in biotechnology you have to be prepared for volatility and the unexpected. However, both of these companies have a long history of volatility, inefficient management, and no proof of operational excellence. The “discrepancies” at Peregrine are unacceptable and the failure of Oxecta is inexcusable.  With that being said, both stocks are high risk, high reward; therefore you must perform your own due diligence to determine whether that risk is worth the reward. 


BrianNichols has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure