|Significant Upcoming Catalysts For These Biotechs Should Provide Opportunity|
|By Scott Matusow|
|Friday, 14 February 2014 08:48|
This week we want to highlight several biotechs with catalysts coming up in the near future. These price driving catalysts may include FDA approval decisions, FDA Advisory Committee (ADCOM) recommendations, product launches, and clinical data releases. These catalysts usually gain a lot of investor and trader attention as each company's binary event draws closer, normally resulting in strong stock price movement in one direction or the other.
Below, we list several companies with upcoming volatility expected related to catalysts. Furthermore, we offer our opinion and commentary about each catalyst along with longer term views on some of the companies mentioned.
AcelRx Pharmaceuticals (ACRX): Drug Approval Decision.
AcelRx Pharmaceuticals is a biopharmaceutical company that focuses on developing treatments for acute and breakthrough pain. AcelRx's lead product is Zalviso for post-operative pain following open abdominal surgery and hip or knee replacement surgery.
Zalviso is a patient-controlled analgesia (PCA) system designed to be safer and more efficient than the current standard of care, Intravenous (IV) PCA treatment. IV PCA treatment typically utilizes morphine or hydromorphone.
Zalviso's PCA system can potentially eliminate drug-related side effects and complications associated with IV delivery and medication delivery errors. Many of these errors are associated with complex IV PCA pumps, which often results in inadequate pain relief.
These IV PCA pump errors can lead to such complications as deep vein thrombosis and partial lung collapse, which in turn lead to extended hospital stays. Obviously, extended stays create higher health care costs -- something The Affordable Healthcare Act aims to improve.
AcelRx also has three other products in development which have successfully completed Phase II trials and we feel provides additional speculation value in the company.
2014 looks to be a pivotal year for the company, since Zalviso will be up for approval mid-year. We predict the FDA will approve Zalviso for marketing and sales in America, and also believe it will be a strong revenue and profit producer for the company over time.
Management seems to believe as strongly as we do that Zalviso will be approved. In a February 10, 2014, the company released an 8-K about the compensation for directors. The 8-K states:
Target bonuses for named executive officers of AcelRx Pharmaceuticals, Inc. (the "Company") under the 2014 Cash Bonus Plan (the "Plan") will range from 35% to 50% of such executive's 2014 base salary. The amount of cash bonus, if any, for each named executive officer will be based on both the named executive officer achieving his or her individual performance goals and on the Company meeting the 2014 corporate objectives approved by the Board. The 2014 corporate objectives are primarily related to product development, including regulatory approval of Zalviso and related commercial preparation and financial objectives. The target bonuses for the Company's named executive officers for 2014 are as follows:
Mr. King's cash bonus under the Plan shall be based 100% on the achievement of the 2014 corporate objectives. The cash bonus for all other named executive officers shall be based 40% on the achievement of his or her individual performance goals, as determined by the Board, and 60% on the achievement of the 2014 corporate objectives. The named executive officers' actual bonuses may exceed 100% of target in the event performance exceeds the predetermined goals.
We can see from above that the CEO's bonus is based on achieving 100% of this year's corporate objectives, and represents half of his pay. Additionally, other top company executives stand to gain substantially from meeting corporate objectives.
Basically stated, the CEO and other executives will receive no cash bonus whatsoever unless all of the company's set objectives are met, which includes the FDA approval of Zalviso.
We like when management believes in their products and "puts their money where their mouths are." Their collective self-interest lines up with stockholder's self-interest, something we love but don't see a lot of in developmental biotechs.
Insiders and institutions hold a large portion of AcelRx stock, indicating that they are bullish on Zalviso approval -- so are we.
We believe AcelRx is currently undervalued and could appreciate in price to a range of $15-$17 before the PDUFA date in July.
MannKind Corporation (MNKD): FDA Advisory Committee (ADCOM)
Mannkind Corporation is a biopharmaceutical company that focuses on the development of Afrezza. Afrezza is an inhaled powder used to treat type one and type two diabetes. The diabetes market is quite large and growing at a fast pace. On August 14, 2013 MannKind presented positive Phase III data in patients with type one diabetes. According to the highlighted results, Afrezza showed non-inferior decreases in A1c levels, significantly less hypoglycemia, significant decreases in fasting blood glucose levels, and significant weight advantage.
On January 10, 2014 the company announced:
The Endocrinologic and Metabolic Drugs Advisory Committee of the U.S. Food and Drug Administration (FDA) is tentatively scheduled on April 1, 2014 to review MannKind's New Drug Application (NDA) for AFREZZA® (insulin human [rDNA origin]) Inhalation Powder. The date and details of the meeting are subject to confirmation by the FDA in a Federal Register notice. MannKind resubmitted the NDA on October 13, 2013 seeking approval to market AFREZZA in the United States with an indication to improve glycemic control in adults with type 1 or type 2 diabetes. The target date for the FDA to complete its review of the AFREZZA NDA is April 15, 2014.
From above we can see that MannKind has an Advisory Committee meeting on April 1, 2014 and a PDUFA on April 15, 2014. We believe these two dates will serve as a great trading opportunity. As we get closer to the dates, we believe the stock will again test the highs it saw before its prior Phase III data release. However, we do view holding through this catalyst event as very risky based on two prior complete response letters (CRL) from the FDA, and the continued questionable guidance offered by CEO Alfred Mann over the last few years.
One such example of failed guidance is his constant talk of the company gaining a major pharma as a partner for AFREZZA. From a 2011 10Q:
We have held extensive discussions with a number of pharmaceutical companies concerning a potential strategic business collaboration for AFREZZA.
As of February 1st, 2014, the ever continuing talk of AFREZZA gaining a marketing partner continues with still no partnership secured. Big pharma was not interested in AFREZZA back in 2011, and none have shown any real interest in partnering to date. What we mean by "real interest" is a deal that involves something more than a standard 5% to 10% royalty deal for a lower tiered drug.
We believe this is because big pharma doubts AFREZZA's ability to have any real commercial success. Better said, big pharma can't justify giving Mannkind a substantial upfront payment and high royalty percentage.
With two prior CRL's and the clear current lack of legitimate big pharma interest, we think that Mr. Mann and Mannkind shareholders are over estimating AFREZZA's market potential.
Regardless, we see MannKind as a company that presents a great trading opportunity as many traders are likely to bet up the stock believing AFREZZA will be a huge success. If by some chance the drug is approved (we do not think it will be), we think this will provide an excellent opportunity to sell shares short at the likely inflated prices an FDA approval will temporarily cause.
Organovo Holdings (ONVO): Product Launch
Organovo Holdings is a three-dimensional bio-printing company that focuses on creating human tissues. The company was in the spotlight last year as 3D technology began to catch on as a trend. Organovo has caught particular media attention because of the announcements the company made concerning its liver tissue program.
Amazingly enough, the company has been able to generate a liver that is able to survive for about 40 days -- a significant improvement over its last effort. In a recent article it was stated:
As the liver is an organ that naturally regenerates itself, it makes it perfect for this project and Organovo's latest printed liver was fully functioning for 40 days, which was a 700 percent increase on the company's previous effort last April that lasted five days.
The company CEO also stated:
Our first product launch is slated for 2014, for a 3D Liver product to be used in toxicology by pharma customers. We have disclosed a number of partnerships, but that will be the first time we have customers in the traditional sense.
If 3D printed tissues are proven to be functional for longer term use in the human body, Organovo would definitely be a huge winner, but this is a big "if." However, the potential of this occurrence is very cutting edge and sure to continue attracting both media and speculation investor attention.
In the first half of the 20th century, people imagined mankind visiting and walking on the moon while others ridiculed at the idea. We know that in the second half of the same century, man did in fact both visit and walk on the moon. When mankind imagines the possibility, on occasion it becomes a reality no matter how unlikely it seems.
Organovo is expecting its first product launch this year and we see this event as a significant milestone. 3D tissue generation is extremely speculative and is in its infancy, but past the imagination phase.
Holding stock here long term is not for the faint of heart and carries a ton of risk, but would be a huge winner if imagination eventually becomes reality. With a "prototype" showing limited success, Organovo's 3D human tissue creation could end up becoming biotech's Neil Armstrong in due time.
Arena Pharmaceuticals (ARNA): Earnings Call
Arena Pharmaceuticals is a biopharmaceutical company that develops drugs targeting G protein-coupled receptors for cardiovascular, central nervous system, inflammatory, and metabolic diseases. Arena's FDA approved product Belviq is used for adult weight management and has been on the market since June 2013 with various levels of commercial success.
Recently, Arena has gained positive sales momentum that we feel will create speculation in the near term. On February 10, 2014 a press release stated:
Arena Pharmaceuticals, Inc. today reported that Eisai has secured improved patient access of BELVIQ® (lorcaserin HCl) with two leading healthcare benefit companies, and that the estimated number of insured commercial lives in the United States that have coverage for BELVIQ now exceeds 50 percent. CVS Caremark (CVS) customers (employers and health plans) have broadened the coverage of BELVIQ, and eligible CVS Caremark members may have access to BELVIQ in either a preferred or non-preferred brand position depending on the design of the employer benefit or health plan. In addition, Aetna recently announced that it would offer BELVIQ as a preferred brand to eligible patients as part of its pilot program to self-insured plan sponsors nationwide. The Aetna program, which offers access to lifestyle management programs and surgical options, will also measure improvements in health outcomes, productivity and medical costs.
Preliminary sales of Belviq since approval in June 2013 have been lower than expected. However, the company seems to be gaining some steam. Initiating partnerships that allow for better coverage of Belviq is very beneficial for the company. Over 50% of commercial line insurance cover Belviq, compared to 30% when it was initially approved in June. Additionally, by December, 2013, Eisai doubled its sales force for Belviq compared to in June 2013.
We are not as bearish as Adam is on Belviq, but we are not extremely bullish on Belviq either. However, we lean bullish on the company's longer term prospects, mainly because of its deep, but still early clinical pipeline. Even if Belviq does not meet investor expectations on sales and profit, we feel sales revenue from the drug will provide enough liquidity for the company to further advance its proprietary pipeline This will provide good leverage in negotiating partnership deals for the drugs in its pipeline, if and when the time arises.
We believe the next earning's call will serve as a solid catalyst for Arena. Given the increased sales force and coverage, we think many traders will bet the stock up on speculation of better earnings than previous quarters, notwithstanding the factors mentioned above.
Zogenix, Inc. (ZGNX): Product Launch
Zogenix engages in the development and commercialization of products for the treatment of central nervous system disorders and pain. It's lead product, Zohydro Extended Release (ER), a single-entity extended-release hydrocodone indicated for the treatment of moderate to severe chronic pain requiring around-the-clock opioid therapy.
Zohydro ER is the first FDA-approved single-entity (not combined with an analgesic such as acetaminophen) and extended-release hydrocodone product.
In December 2012, an ADCOM voted against recommending Zohydro ER to the FDA for approval. However, in a rare move by the FDA, the organization went against the ADCOM'S recommendation and approved the drug for commercial marketing.
Zohydro ER is not approved for as-needed pain relief, but is otherwise approved for patients in which alternative treatment options are ineffective, not tolerated, or would be otherwise inadequate to provide sufficient management of pain.
In other words, Zohydro ER will not be used as a "first line" treatment for pain, but only when a patient's pain is not tolerated when being treated with "less addictive" pain medications. Regardless of this label restriction, we feel there will be large physician demand for the product, mainly because many patients complain of the side-effects from the standard opiod-acetaminophen combo drugs, such as Vicodin. The most serious side effect of acetaminophen is liver damage due to large doses.
However, there is concern that a pure hydrocodone such as Zohydro will make it easier for patients to become addicted to the drug, because the dangerous side-effect of liver damage is not present. This presents a tough issue for physicians and regulatory bodies because we believe that Zohydro will end up being the "drug of choice" to treat pain, regardless of the intended label use.
However, although a clear moral issue is present here, if we are right about Zohydro becoming the drug of choice causing addiction issues (what ADCOM was concerned about), it will end up potentially making tons of money. Biotech is a business first and foremost, and no matter how we personally feel about a product, big pharma's main concern along with most of the stock market, is making money. As stated, we think this is what will happen with Zohydro.
We feel that Zogenix can generate $500M or more a year in sales. If we are correct and margins are in line, the company should see a market cap approaching $2B in time. This would represent a stock price approaching $20.
Additionally, we think Zogenix has a good chance to be acquired for Zohydro's monetary potential.
Other biotech companies with upcoming catalysts to watch for are:
Synergy Pharma (SGYP) plans to release important data in Q2 of this year, plus more biotechs to come, stay tuned!
Disclaimer: This article is intended for informational and entertainment use only, and should not be construed as professional investment advice. They are my opinions only. Trading stocks is risky -- always be sure to know and understand your risk tolerance. You can incur substantial financial losses in any trade or investment. Always do your own due diligence before buying and selling any stock, and/or consult with a licensed financial adviser.