3 Biotechs Investors Should Be Scared Of

No doubt, biotech can be scary. You've got binary events that can halve -- or more -- a stock overnight. But there are certain biotechs that have other issues that makes them even scarier than the average biotech. Here are three biotechs that are a little frightening for their own particular reasons.

Scary expectations
's (NAS: AMRN) Vascepa was approved back in July, but the lipid-lowering drug still hasn't been launched. The company is apparently still exploring its options that include selling the company outright, out-licensing the drug to a big pharma, or launching the drug by itself.

None of those options are really all that scary. Launching the drug on its own would be a big task, but it's doable especially if it outsourced the sales force to a contract sales organization.

The scary thing is investors' expectations of an immediate payout. The company has been a rumored takeover target since it first posted positive phase 3 data. If the company isn't sold, I expect the biotech will fall even further than it already has.

The closer we get to the launch early next year, the more likely it looks like Amarin won't find a partner. There's a market for the drug, but it isn't clear exactly how long Vascepa will be free of generic competition, which is likely playing into pharmas' reluctance to pull the trigger.

Scary sales
Spectrum Pharmaceuticals
(NAS: SPPI) sales have skyrocketed from $74 million in 2010 to $233 million in just the trailing 12 months ending in the second quarter. And they could go down just as fast. Or not. Uncertainty is frightening.

The company is in a unique situation with its cancer drug Fusilev. The drug is related to leucovorin, which is available as a generic, but generic drug companies have had trouble making the drug. Without a choice, doctors switched to the more expensive Fusilev, rocketing Spectrum's sales.

The leucovorin shortage will end. I don't know when, but the generic-drug makers will get their manufacturing issues sorted out. If the current players -- including Teva Pharmaceuticals (NYS: TEVA) , APP Pharmaceuticals, and Bedford Laboratories -- don't get it together, I expect some other generic-drug maker to come in and take its place. At that point, will doctors go back to leucovorin or stick with Fusilev? Only time will tell, but my suspicion is it'll be a little of both.

Scary valuation
Alexion Pharmaceuticals
' (NAS: ALXN) orphan drug has found a home in the hearts of investors. The company only has one drug on the market, but sports a market cap of a whopping $18 billion. Based on the run rate from third-quarter revenue, the company trades at 15.6 times sales. Sure, sales are growing at a 44% clip, but how long can that last?

Investors are counting on expanded use of Soliris as well as development of asfotase alfa, but those haven't read out phase 3 results yet and are still a ways away from adding to the revenue line. As far as I can see, investors have baked a lot of sales into the price, which doesn't leave much upside and exposes Alexion to potentially disappoint investors. Dendreon's (NAS: DNDN) 90% fall from around $40 to $4 shows what happens when investors don't get what they're expecting.

Guts to buy?
Of course, scary doesn't necessarily mean you shouldn't buy. In fact, if you have the guts to buy when things are looking uncertain, it can result in oversized gains.

Of the three highlighted here, I think Amarin is the best bet. There's plenty of upside if it's actually able to find an acquirer. If Amarin launches on its own, I think investors will likely flee, but it doesn't change the long-term value of Vascepa, which should be a blockbuster. Taking less than a full position seems prudent since there may be an opportunity to pick up shares cheaper.

To get a closer look at Amarin's future prospects, along with reasons to buy and sell, Fool.com analyst Max Macaluso has a premium research report with more information about Amarin and its potential. Click here now to keep reading.

The article 3 Biotechs Investors Should Be Scared Of originally appeared on Fool.com.

Fool contributor Brian Orelli has no positions in the stocks mentioned above. The Motley Fool owns shares of Dendreon. 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.

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