BST Position Update: May 1, 2014

May 1, 2014

It’s been a rough couple of months for the Biotech sector.  Look no further than a chart of the iShares Nasdaq Biotechnology ETF (NASDAQ: IBB) to see what I mean.

 

Since hitting a high of 275.40 on February 25th, IBB has lost nearly 16% of its value.  And at the low of 207.48 in mid-April, the sector ETF was down 25% from the February high.

That’s a big drop in a short period of time.

The downturn is the result of traders moving out of higher risk shares like biotech stocks, growth stocks, and momentum stocks in favor of stocks that offer less risk.  And the rotation has been fast and furious.

It’s hard to tell if this is just a short-term correction or the beginning of longer term downtrend.  But the sector was clearly due for a correction following the sharp two-year uptrend biotech stocks had enjoyed until recently.

Unfortunately, the sharp, across-the-board drop in biotech stocks has had a substantial negative impact on the portfolio.  All of our positions have moved lower since the decline began.  And several stocks that had large gains prior to the drop have now moved into negative territory.

Despite the broader trend affecting the sector, we will continue with our strategy.  We believe that our current positions and new ones will provide opportunities for profit around the catalysts noted in our trade alerts.  And we will continue to try to limit losses on those trades that don’t work out as planned.

With that said, the current volatility is a timely reminder that trading biotech stocks is a high risk strategy.

While these stocks can provide huge gains, they can also produce steep losses.  That’s why we recommend you only dedicate a small portion of your investable assets to this type of aggressive trading strategy.

Let’s now take a look at a few positions…

. . . . Synergy Pharmaceuticals (NASDAQ: SGYP) – Hold

Great news from Synergy.  The biotech announced yesterday that the phase 3 trial of plecanatide in irritable bowel syndrome with constipation (IBS-C) was a complete success.

The primary objective of the trial was to determine an effective, safe, and well tolerated dose of plecanatide for phase 3 trials with IBS-C patients.  And that objective was achieved.

Preliminary analysis indicates that plecanatide demonstrated statistically significant improvement in complete spontaneous bowel movement frequency – the study’s primary endpoint. And the drug was safe and well tolerated.

Synergy’s next step is to complete a full analysis of the data.  Once that review is finished, the company will present results at an appropriate scientific conference.

What’s more, Synergy plans to initiate a pivotal phase 3 trial in IBS-C patients in the second half of 2014.

While the stock didn’t jump on the news as we expected, we still feel SGYP offers significant upside potential.  The positive trial results provide further evidence that plecanatide will ultimately prove to be a safe and effective treatment for IBS-C.

Furthermore, we believe the results are likely to make Synergy an attractive acquisition target for larger pharmaceutical firms.

And don’t forget that Synergy is also developing plecanatide as a treatment for chronic idiopathic constipation (CIC).

Two pivotal phase 3 trials to confirm the safety and efficacy of plecanatide as a treatment for CIC are underway.  The two trials will enroll a total of 2,700 patients.  And both trials have as their primary endpoint the proportion of patients who are overall responders for the 12-week treatment period.

No question about it, SGYP has several meaningful catalysts ahead.

With multiple paths to regulatory approval, a history of safety and efficacy, and blockbuster sales potential, plecanatide is certainly the kind of drug that larger drug companies covet.  As such, we recommend you continue holding SGYP.

. . . . Nymox Pharmaceutical (NASDAQ: NYMX) – Sell

Nymox reported results from its phase 2 trial of NX-1207 in patients with localized prostate cancer yesterday.  While the results showed reduced progression of the disease, the primary endpoint could not be assessed due to a high percentage of false negative repeat biopsies.

In other words, a mistake was made that renders the entire trial a complete waste of time and money.

Management now intends to find a partner to continue its development of NX-1207.  But given the massive screw up on the last trial, we believe it’s best to exit the stock at this time.

Go ahead and sell your shares of NYMX as soon as possible.  Let’s conserve capital for better opportunities in the biotech space.

. . . . Conatus Pharmaceuticals (NASDAQ: CNAT) – Buy up to $7.00

CNAT is one of the bigger casualties of the biotech selloff that we have in the portfolio. After posting a huge gain right after we recommended it, the stock has dropped to just below our buy price.

In addition to the sector-wide downturn, the company also announced discouraging news recently.  Data from the phase 2 trial of emricasan in acute-on-chronic liver failure (ACLF) that were initially expected mid-year will now be available by year’s end at the earliest.

The delay of this important catalyst is certain to have driven some short-term biotech traders out of the stock.

But despite these short-term negatives, we still believe CNAT offers huge upside. 

Emricasan has shown potential in early-stage studies to be a safe and effective treatment for not only ACLF but several other types of liver disease.  The market for liver disease drugs is expected to grow from $6.5 billion to nearly $11 billion over the next four years. And with a market cap of just $96 million, Conatus is significantly undervalued relative to emricasan’s future revenue potential.

With CNAT once again trading in our buy range, we’re moving the stock from Hold to Buy.  If you don’t own these shares, you should feel comfortable buying them up to a maximum price of $7.00 per share.

. . . . Acasti Pharma (NASDAQ: ACST) – Buy up to $1.40

ACST has declined in lock step with the downturn sweeping the biotech sector.  However, it may not stay down at these levels much longer.  Remember, the company is expected to release results from the second of two phase 2 trials of CaPre in the third quarter of 2014.

We fully expect ACST to trend higher going into the announcement.

As such, the stock offers tremendous value at its recent price of $1.00 per share.  If you don’t own ACST, you may want to take advantage of the current weakness to establish your position.  ACST is a good buy up to $1.40 per share.

. . . . Merrimack Pharmaceuticals (NASDAQ: MACK) – Hold

MACK’s soaring today on terrific news!

The biotech announced positive results from the phase 3 trial of MM-398 in metastatic pancreatic cancer.  The trial achieved the primary endpoint with the data showing that a combination of MM-398, 5-fluorouracil (5-FU), and leucovorin provided a statistically significant advantage over a treatment of just 5-FU and leucovorin.

According to the data, patients treated with the combination of MM-398, 5-FU, and leucovorin achieved overall survival of 6.1 months.  That’s a 1.9 month improvementover the 4.2 month survival demonstrated by the control arm.

As a result, MACK is up more than 54% intra-day as I write.  And earlier in the day, the stock hit an 18-month high of $7.65.

We recommend you continue holding MACK for greater gains.

. . . . Array BioPharma (NASDAQ: ARRY) – Buy up to $4.80

Shares of ARRY have been moving higher in recent days thanks to good news from one of its Big Pharma partners.  In late April, Novartis (NYSE: NVS) confirmed that it will continue to support ongoing clinical trials for the development of binimetinib (MEK162).

Array and Novartis have been working together to develop binimetinib since April 2010.

MEK is a key protein kinase in the RAS/RAF/MEK/ERK pathway, which signals cancer cell proliferation and survival.  MEK has been shown to be activated in several tumor types such as non-small cell lung cancer, melanoma, thyroid cancer, ovarian cancer, and in particular, tumors with BRAF and NRAS mutations.

Binimetinib is a small molecule MEK inhibitor that targets a key position in this pathway. The drug is currently being studied in three phase 3 trials as a treatment for a range of tumor types.

Since the news came out, Array’s stock price has increased by nearly 12%.  And it’s now just below our initial buy price.

With ARRY on the rise, we’re changing our recommendation from Hold to Buy.  Go ahead and buy ARRY up to $4.80 per share.

. . . . Halozyme Therapeutics (NASDAQ: HALO) – Hold

April was a challenging month for HALO.

The stock dropped significantly after Halozyme voluntarily suspended its phase 2 study of PEGPH20 at the recommendation of an independent data monitoring committee (DMC).  And to make matters worse, the FDA later placed a clinical hold on the trial which temporarily halts patient enrollment.

The purpose of the phase 2 study is to determine if PEGPH20 is a safe and effective first-line treatment for patients with late-stage pancreatic cancer.

The DMC recommended halting the trial after it noticed a difference in the rate of thromboembolism between the patient groups treated with a combination of abraxane and gemzar, with or without PEGPH20.  Halozyme is now gathering data on these events to supply to the FDA.

We believe this issue will be resolved quickly and in favor of continuing the trial.  As such, we recommend hanging on to your shares of HALO.

Action To Take

• Sell Nymox Pharmaceutical (NASDAQ: NYMX).
• Move Conatus Pharmaceuticals (NASDAQ: CNAT) from Hold to Buy.
• Move Array BioPharma (NASDAQ: ARRY) from Hold to Buy.

 

Category: BST Update