Biopharma Stocks: Investment Strategies for 2013

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

During this year, investors in biotech, pharma and biopharma stocks have seen how several companies have multiplied their value. Some of these companies are Arena Pharmaceuticals (NASDAQ: ARNA) , Celsion Corporation (NASDAQ: CLSN) or Sarepta Therapeutics (NASDAQ: SRPT). Their strong volatility makes their prices fluctuate in excess. This sector usually provides a possible high gain, but this implies having to take a high risk. Finding biopharmaceutical companies that are undervalued can be a good investment strategy if you're willing to assume the higher risk.

Silence mode theory

This theory defines a market inactivity in companies' shares. Companies are trading low for months. This situation is caused by the little interest from investors. In addition, the media descends its coverage on these companies. In the following charts, readers can verify this theory.

<img src="/media/images/user_14326/charts-mix-silence-mode_large.JPG" />

However, the readers will have to bear in mind two very important variables if they want to detect silence mode companies. This theory could not be applied without these fundamental variables. The two fundamental variables are the following:

  • Companies with studies in phase II having a market estimated up to $1 billion, at least.
  • Companies with enough cash to complete phase II/III of their ongoing studies.

These two fundamental variables are important to identify opportunities for investment in biotechnology, pharmaceutical and biopharmaceutical stocks. The detection of a stock in silence mode does not work if we do not take into account these two variables. Following the previously stated in the article, I am going to illustrate the theory with two companies that meet the previous criteria. These companies are in silence mode and fulfill the two variables described and offer a investment strategic for long-term.

CytRx Corporation (NASDAQ: CYTR) is a biopharmaceutical research and development company, specialized in oncology. Its pipeline includes INNO-206 that is in Phase Ib clinical trial and is completing Phase Ib/II clinical trial for the treatment of soft tissue sarcomas. Another study is tamibarotene that is in Phase IIb clinical trial for the treatment of non-small-cell lung cancer.

In accordance with the criteria described above, we are going to see if CytRx complies with the first fundamental variable.

<table> <tbody> <tr> <td> </td> <td><strong>Study and Phase</strong></td> <td><strong>Market Estimated</strong></td> </tr> <tr> <td>Variable 1 (Companies with studies in phase II having a market estimated up to $1 billion, at least)</td> <td>CytRx is conducting a global Phase 2b clinical trial with<br />tamibarotene in late-stage non-small cell lung cancer</td> <td> <p>NSCLC:</p> <ul> <li>$13.3 billion market by 2015</li> <li>60% of patients have Stage IIIb or IV at diagnosis</li> <li>In 2012, 135,696 estimated new cases in the US</li> </ul> </td> </tr> </tbody> </table>

This company meets the first requirement of our search as readers have been able to verify. We are going to see if CytRx complies with the second fundamental variable.

<table> <tbody> <tr> <td> </td> <td><strong>Cash (Q3 2012)</strong></td> <td><strong>Burn cash rate (Q3 2012)</strong></td> </tr> <tr> <td>Variable 2 (Companies with enough cash to complete phase II/III of their ongoing studies)</td> <td>$23.76 Million</td> <td>($4.88 Million)</td> </tr> </tbody> </table>

Fundamental Analysis Review

The company would have enough cash for the next five financial quarters. CytRx has a market cap of $68.74 million and an enterprise value of $46.29 million. This stock trades at an expensive valuation without considering its clinical developments. Its trailing P/E and its forward P/E are incalculable. CytRx's estimated growth rate for this year is -3234.33%. It has a total cash position on its balance sheet of just $22.45 million, and its total debt is at zero. CytRx is trading at $2.26 per share (as of Jan. 17, 2013) and the basic share count is 30.42 million.

 

<img src="/media/images/user_14326/cytrx-chart_1_large.JPG" />

This stock is currently trading above both its 50-day and below 200-day moving averages. This stock plunged from its July high of $5.50 to a recent low in November of $1.59. If you are bullish on this stock, I would look to be a buyer on the next high-volume move above some near-term overhead resistance at $2.39 a share. Look for volume that's tracking in close to or above its three-month average action of 254,890 shares.

Zalicus Inc (NASDAQ: ZLCS) is a biopharmaceutical company that discovers and develops drug candidates focusing on the treatment of pain and inflammation. Its pipeline includes Z160, which is in Phase II clinical trial and Z944 which is in Phase I clinical trial. Z160 and Z944 N type and T type calcium channel blockers have the possibility to create the first pain management drug that is orally administered without the abuse and addictive side effects that come with the use of opioids.

In accordance with the criteria described above, we are going to see if Zalicus complies with the first fundamental variable.

<table> <tbody> <tr> <td> </td> <td><strong>Study and Phase</strong></td> <td><strong>Market Estimated</strong></td> </tr> <tr> <td>Variable 1 (Companies with studies in phase II having a market estimated up to $1 billion, at least)</td> <td>Zalicus is conducting a two Phase 2 clinical trial with<br />Z160 in neurophatic pain.</td> <td> <p>The market estimated for Z160 is $2 billion minimum.</p> </td> </tr> </tbody> </table>

This company meets the first requirement of our search as readers have been able to verify. We are going to see if Zalicus complies with the second fundamental variable.

<table> <tbody> <tr> <td> </td> <td><strong>Cash (Q3 2012)</strong></td> <td><strong>Burn cash rate (Q3 2012)</strong></td> </tr> <tr> <td>Variable 2 (Companies with enough cash to complete phase II/III of their ongoing studies)</td> <td>$46 Million</td> <td>($7 Million)</td> </tr> </tbody> </table>

Fundamental Analysis Review

The company would have enough cash for the next six financial quarters. Zalicus has a market cap of $86.06 million and an enterprise value of $59.39 million. This stock trades at an expensive valuation without considering its clinical developments. Its trailing P/E and its forward P/E are incalculable. Zalicus' estimated growth rate for this year is -1.87%. It has a total cash position on its balance sheet of just $46 million, and its total debt is at $16.56 million. Zalicus is trading at $0.68 per share (as of Jan. 17, 2013) and the basic share count is 126.56 million.

<img src="/media/images/user_14326/zlcs-chart_large.JPG" />

Fundamental Analysis Review

This stock is currently trading above both its 50-day and below 200-day moving averages. This stock plunged from its June high of $1.62 to a recent low in November of $0.43. If you are bullish on this stock, I would look to be a buyer on the next high-volume move above some near-term overhead resistance at $0.7 a share. Look for volume that's tracking in close to or above its three-month average action of 1,238,625 shares.


Jorge Aura owns shares of Zalicus. 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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