Promising but Unpredictable Biotechs

 | Jul 03, 2012 | 12:04 PM EDT  | Comments
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Stock quotes in this article:

amln

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alks

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pcyc

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mdvn

Last week, I wrote about a couple of small biotechs on the upswing.

The upside trends in the sector were continuing Monday, following Bristol-Myers' (BMY) acquisition of Amylin Pharmaceuticals (AMLN), maker of diabetes treatments. The companies agreed on the $7 billion deal late Friday.

Amylin is an example of one of the research-and-development-driven biotechs that frequently show no earnings. In Amylin's case, there is not much revenue to speak of, either. Of course, what got Bristol-Myers' attention was the potential in the diabetes market, not the numbers on the income statement.

The biotech space is ripe for speculation about merger-and-acquisition activity. But for investors, that can be a risky way to buy a stock, since a deal could be a long time in coming.

Amylin's chart has reflected growing optimism all year, since the company got FDA approval for its diabetes drug Bydureon, co-developed with Alkermes (ALKS).

For its part, Alkermes' stock has struggled more than other biotechs in recent months. The company specializes in meds for chronic conditions. Shares have been consolidating for the past year, unable to surpass resistance just below $20.

Unlike many biotechs, Alkermes is expected to finish the year in the black, with income of $0.68 per share. In 2013, it is expected to earn $1.02 a share.

One mid-cap biotech price leader is Pharmacyclics (PCYC), which makes treatments for various cancers. The stock rallied to an intraday high of $59.29 Monday, its best level since October 2000.

At this lofty level, the stock is far extended from a buy point. A moving-average pullback could offer a new entry opportunity, as could an area of tight trading for three or more weeks.

On the fundamental side, Pharmacyclics presents a familiar story. The company has reported losses in each of the past seven years, and revenue has barely moved the needle. In other words, the company has yet to commercialize its products.

This company, too, is viewed as an acquisition target. Frequently, after a small biotech reports successful phase III clinical data on a new drug, the bigger pharmas and biotechs swoop in. Phase III trials for the company's lymphoma and leukemia treatment are expected to begin this year.

Another mid-cap biotech rallying to new highs is Medivation (MDVN), which makes Enzalutamide, a treatment for advanced-stage prostate cancer undergoing clinical trials. The drug was previously called MDV3100.

This is a volatile stock. As is typical with many biotechs, it can make huge price swings in either direction depending on the outcome of clinical trials.

A look on a longer-term chart shows a decline of 74%, to $10.49 in March 2010, on disappointing clinical results for an Alzheimer's treatment. In December 2011, it vaulted 295.2%, to $48.80, following positive phase III test results for its prostate cancer treatment.

Medivation closed Monday at $94.61, just pennies off its all-time high, reached earlier in the session. Like Pharmacyclics, this is a stock that's extended out of its buy range. While the technicals are promising, be aware of the potential for sudden downdrafts on poor clinical trial results.

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