Are These 2 Massive Biotech Losses Worth Chasing?

The losses in shares of Ariad Pharmaceuticals and Amarin are simply horrendous. Both companies received some bad news that will affect short-term revenue, but does this bad news mean that both stocks are a sell, or is either a buy?

What happened to Ariad?
Ariad has lost 85% of its value in the month of October and now trades with a market cap of $515 million.

The massive loss came after Ariad announced the suspension of new enrollment in trials of it its leukemia drug Iclusig. Then, additional losses came on Friday once Ariad announced that its latest stage study was being canceled. Iclusig was approved by the Food and Drug Administration last year, began marketing this year, and much of its future lied in the company's ability to expand its use.

However, a "black box warning" for cardiovascular problems exists, and many have feared that these problems would increase with additional testing and/or higher doses. Now, there is concern as to when trials will continue and if Iclusig will ever be approved for any of its eight additional indications.

The FDA has already responded to this news, saying "FDA is investigating an increasing frequency of reports of serious and life-threatening blood clots and severe narrowing of blood vessels of patients taking ponatinib ... including heart attacks resulting in death, worsening coronary artery disease, stroke, narrowing of large arteries of the brain, severe narrowing of blood vessels in the extremities, and the need for urgent surgical procedures to restore blood flow."

This response doesn't look good for Ariad.

What happened to Amarin?
Amarin fell more than 60% on Thursday, giving it a market cap of $330 million.

The loss came after an FDA panel voted 9-2 against the expansion of Amarin's fish oil drug Vascepa to a larger patient population. The drug is used to lower high triglycerides, but Amarin was hoping to expand to patients with heart disease and high triglycerides who are receiving statin.

What's encouraging is that Amarin's REDUCE-IT trial is not complete, and this was simply an attempt for early approval; The final data is not expected until 2017. However, much of Vascepa's blockbuster potential relied on this indication, one that is 10 times larger than Vascepa's current patient population.

Is either a buy?
While both stocks have clearly collapsed on news, sometimes the reaction presents a good opportunity.

Last year, shares of Questcor Pharmaceuticals fell from $52 to under $20 after a company investigation was announced, and news emerged of tightened coverage by Aetna on its drug Acthar. Yet, one year later, sales continue to soar 60% while shares sit near all-time highs and have rallied 250% since those lows. Therefore, massive losses became a great buying opportunity.

The question is whether a Questcor-like performance applies to either Ariad or Amarin.

In the case of Ariad, its drug might not be effective at a less toxic dose. Iclusig is used at 45 mg and its results are only moderately better than Novartis' Tasigna. Therefore, what happens if the dose is lowered, the results are less effective, and the side effects are still worse than with Tasigna? Also, now that one of its studies has been stopped, does this mean that all future clinical testing will halt? Hence, it is a delicate scenario, one that is very risky.

With everything that's happened, we must assume now that Iclusig will not be expanded, and then pray that current sales are not affected by the clinical hold on current studies. William Blair has been one of the more bullish firms, guiding for peak worldwide revenue of $2 billion while others have estimated only $1 billion. Already, Blair has issued a note saying it expects peak worldwide sales of $700 million with its current treatment of CML on patients who are resistant to other treatments. Once more, this is likely aggressive, but has Ariad trading at about one times peak sales potential.

With Amarin, we are simply in a waiting game, as investors are more so selling on the added time until approval versus the likelihood of no product expansion. In addition, investors assume that Amarin will have to raise money to finish the trial and to continue marketing Vascepa.

Still, Leerink Swann estimates that peak Vascepa sales (by 2030) are $1.2 billion if never approved for the added indication. Therefore, Vascepa already has peak sales potential over $1 billion, and with a market cap of $330 million, it is trading at just 0.3 times peak sales.

Final thoughts
Clearly, Amarin is presenting the best investment opportunity, and even if Leerink is off by a mile with its estimates, Amarin is still presenting value. The reason is its peak sales potential relative to market capitalization. Vascepa is already an FDA-approved product and does not have health risks associated with its use. In the case of Iclusig, we don't know what actions the FDA may take. If people are facing severe health risks, then Iclusig's trials may never complete.

With all things considered, Amarin at $2 looks to be a pretty sound investment opportunity. Prior to Thursday's massive loss, the stock had already fallen from $15 to $5 since 2012 on poor sales performance. Therefore, expectations are actually quite low considering the size of its market. Amarin has no doubt gotten off to a sloppy start, but at $2 there might be green days ahead.

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