Are These 2 High-Flying Biotech Stocks a Buy?

The market was not pretty on Monday, but two biotech stocks in particular jumped with impressive intraday gains. While these companies are very different, both might have limited upside from this point forward.

I wouldn't get too excited
Cell Therapeutics saw the largest gains on Monday, rising 22% after coming to an agreement with the Food and Drug Administration on a phase 3 trial for its bone-barrow drug pacritinib. For those who have not followed Cell Therapeutics over the last five years, this news might be encouraging. But for those familiar, any news from Cell Therapeutics must be viewed with as glass half empty.

At the surface, pacritinib looks good. It has shown strong anti-tumor activity in small patient populations with relapsed or refractory lymphoma. However, the company's blood cancer drug tosedostat also looked good in a phase 2 trial, achieving a disease-control rate of 51%, but was then placed on a partial clinical hold earlier this year.

Moreover, pixantrone or "Pixuvri" has looked good for many years, but has never materialized with anything except FDA rejections. Now, a company's history is not necessarily a reflection of its future, but in the case of Cell Therapeutics, management has diluted shares to such an obscene level and has overhyped for so long that investors must be cautious.

In particular, Cell Therapeutics' total shares outstanding has increased from 20 million to nearly 115 million in less than four years! Like I said, investors have seen nothing in return for this dilution, only a $28.5 million cash position and an accumulated deficit of $1.87 billion. Hence, I wouldn't get too optimistic about this phase 3 trial until the company gives you a real reason to buy.

Great stock, but new competition looms
Insys Therapeutics added to its 520% in year-to-date gains with a 11% pop on Monday -- as the stock has already rallied 40% in the last week alone. Insys has been an absolute machine in 2013, and it's really hard to find a reason why.

In search of a reason for the company's large gains, I've identified three reasons: (1) Investors really like that Insys generates revenue, (2) Insys has posted two consecutive quarters of net income, and (3) Insys' fentanyl spray Subsys is growing remarkably fast. Subsys is a spray used for breakthrough cancer pain, and in Insys' last quarter, it generated sales of $18.5 million, a 90% rise over the previous quarter.

Therefore, Subsys is the backbone to these massive gains, as investors believe that sales can continue to grow and support its $1 billion market capitalization. However, it's possible that investors missed the boat on this one. Instead, I'd redirect investors to a company called Galena Biopharma , which has a newly launched product that treats the same indication.

Galena's product, Abstral, is also a fentanyl-based drug but dissolves under the tongue versus being a spray. In Europe, Abstral has already launched and controls a whopping 30% market share with $54 million in annual sales and year-over-year growth of 40%. While these drugs are very similar, Abstral has the fastest absorption and relief of pain in the industry, with just five to 10 minutes.

Now, there are no guarantees that Abstral will replicate the success of Subsys. However, with proven success in Europe and a market cap of just $200 million, Galena presents a far greater risk/reward ratio versus Insys at $1 billion. If Abstral is successful, Galena could be the second coming of Insys. And as a consequence of success, Abstral might eat away at Subsys' sales, disappointing investors seeking rapid growth. Hence, I'd take profits in shares of Insys.

Final thoughts
Just because a stock has large intraday gains doesn't mean that it is a long-term buy. In the case of Cell Therapeutics, this fact is well established, a stock that has lost more than 90% of its valuation in the last six years.

In regards to Insys, it has been a great investment, but has possibly priced in all of its future success. It is a company that came from nowhere, with a product that no one knew, and really took the market by storm. In this particular case, investors should want to see proof of longevity for Subsys, and it'll be interesting to see if Abstral becomes a serious long-term competitor, which could lead to a rotation of capital.

With that said, always look at both sides of the investment before buying stock; don't chase gains on an intraday rally, as such behavior could cost you in the long term.

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The article Are These 2 High-Flying Biotech Stocks a Buy? originally appeared on Fool.com.

Brian Nichols owns shares of Galena. The Motley Fool has no position in any of the stocks mentioned. 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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