Are these Biotech Stocks a Buy After Thursday's News?

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Thursday was a big day for two biotechnology companies: Rigel Pharmaceuticals and Oncolytics Biotech (NASDAQ: ONCY). It was a day that investors have awaited, a day when both companies presented top-line results for each respective late-stage study. However, on this day, only one group of investors would be happy. With that being said, is there upside following the market leading movement for either of these two companies?

Fostamatinib Might be Good, Just Not Good Enough

There was a lot riding on Rigel Pharmaceuticals and AstraZeneca’s (NYSE: AZN) Phase IIb product Fostamatinib. According to analysts the product had sales potential of more than $2 billion annually if proven to be effective. In the past, investors and analysts had felt confident about the prospects of the drug after showing far superior results compared to placebo for the treatment of rheumatoid arthritis. However, when compared with Abbott Laboratories’ Humira in a six month 280 patient study, the product proved to be “disappointing.”

The results from this study sent shares of Rigel crashing nearly 35% and took $1.8 billion off pharmaceutical supergiant AstraZeneca’s market cap (AstraZeneca had licensed the drug). Now, investors are wondering if the product stands a chance at approval or if it could compete with Pfizer’s recently approved Xeljanz if approved.

Looking ahead into next year and further into the future, there are a lot of questions seeing as how the product was inferior to Humira. Therefore, we can most likely scratch its chances of being approved off the list. In fact, I’d say the only chance of approval lies in its second trial; which is a more comprehensive study that assesses the benefit/risk profile of the drug in combination with another clinical product. These results are expected in the first six months of 2013. However, given today’s news, I would not buy and see no reason to believe that it would be successful in a combination study, until proven otherwise.

Oncolytics Proves Its Doubters to be Wrong

Prior to Thursday, shares of Oncolytics had traded in a steep downtrend for the majority of 2012, losing nearly 50% of its value. The company had been developing a product, Reolysin, for the treatment of head and neck cancers, and investors had been less than enthusiastic regarding its likelihood of success. However, when the company announced positive top-line data for the first endpoint in a randomized Phase 3 study its stock shot higher by nearly 40%.

The market potential for head and neck cancers is quite large, as is the potential of this drug. According to analysts, it has the potential to reach peak sales of $900 million. However, the company is also developing the product for 12 different indications, with the possibility to reach sales of $3 billion if proven to be successful as a multi-purpose drug.

Aside from the company’s potential sales and indications, we should focus on what really moved the stock on Thursday, because it could have company changing meaning. Oncolytics’ treatment Reolysin, in combination with carboplatin and paclitaxel, performed well in the Phase 3 study. There were 105 total patients split into two groups, and of those who were treated with Reolysin 86% exhibited stabilization or tumor shrinkage versus 67% in the control group. Furthermore, Reolysin showed better results at shrinking the tumor than the other two treatments alone.

After considering the potential sales, the data, and the company’s valuation, I believe that Oncolytics is worth the risk and presents the potential for large gains. There is however one factor to note: Oncolytics has just $26 million in cash on its balance sheet and is burning through cash at a rate of about $10 million per quarter. Therefore, I would watch for an offering or some measure of financing in the next few weeks. At that point, I believe this is a definite buy that is well worth the risk. 

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!

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