Here's a Handful of Ways to Navigate Biotech's Choppy Seas

Last week was another down week for equities. The markets continued to be volatile but improved a touch toward the end of the week. Unfortunately, it was not enough to save the S&P 500 from dropping 1.6% on the week. The Nasdaq posted a 2.2% loss as Apple Inc. crossed into bear market territory. Biotech got a bid late in the week. The SPDR S&P Biotech ETF managed an almost 6% gain on Thursday and Friday. However, sentiment on the sector has been so dismal of late that even that rebound was not enough for XBI to avoid a weekly loss as it still was down more than 1% on the week. Even with last week's late surge, the XBI is trading down more than 20% from its levels in early September. Oncology concern Tesaro Inc. rose more than 30% on Friday due to buyout speculation. I hope this turns out to be more than a rumor. The industry needs a pickup on the merger-and-acquisition front to boost investor sentiment on the sector. In addition, Tesaro's primary drug Zejula would do better within a large, established sales force. I continue to add to the recent dip in the biotech sector in an incremental and cautious way. I mostly am doing at-the-money buy-write orders on biotech ETFs such as XBI as well as the iShares Nasdaq Biotechnology ETF . I also am doing same for large biotech stalwarts such as Celgene Corp. and Gilead Sciences Inc. . The spike in volatility has made this a lucrative risk-mitigation strategy. Small-cap biotech stocks with growing revenues that already have achieved profitability, or what I called Tier 2 stocks, have started to hold up well recently. These include names such as Exelixis Inc. and ANI Pharmaceuticals Inc. that we have profiled on these pages before. Developmental names or companies just starting to roll out recently approved products and that are burning cash are still very dicey. Small-cap biotech and biopharma stocks that need to raise capital in the foreseeable future have been absolutely hammered in the recent downturn as the availability of financing has lessened and terms of financing have become more onerous. I am avoiding adding funds to this part of the sector despite some great bargains until volatility lessens. For those who want to move out on the risk curve, I suggest those small-caps that may not be profitable now but have a clear path to profitability without the need to do additional raising of capital. One such name is Progenics Pharmaceuticals Inc. , which I believe could reach profitability late next year as it rolls out recently approved Azedra, a drug that targets two rare adrenal cancers. Most of the individuals suffering from these afflictions are known and treated at a relatively few facilities. Therefore, Azedra's rollout should be swift and Progenics should see at least $100 million in annual sales in the foreseeable future. The thing that is helping Progenics' cash flow prospects is what is happening with Relistor. This compound is marketed and distributed by Bausch Health Companies , which is the new name of what was Valeant Pharmaceuticals. Under new management, Relistor sales have taken off. From slightly more than $20 million in gross sales in the first quarter, Relistor posted sales of more than $34 million in the third quarter. Progenics receives royalties in the mid to high teens on Relistor sales. It also should receive a $10 million milestone payment in the first quarter of 2019 for 2018 calendar sales of $100 million or more, which looks like a slam dunk at this point. If sales continue their recent trajectory, a $15 million payment for $150 million of Relistor sales in fiscal 2019 seems very likely, and a $20 million payment for $200 million in calendar-year sales is not out of the realm of possibilities for next year. That would mean over the next five quarters Relistor should provide $35 million to $45 million in royalties and milestone payouts of $35 million to $55 million. Progenics currently is burning approximately $15 million a quarter. Add in some sales from Azedra and it is easy to see the company being cash flow positive before year-end 2019. That's something the market is not pricing into the stock at current trading levels.

Here's a Handful of Ways to Navigate Biotech's Choppy Seas

Biotech ETFs could mitigate risk amid the sector's volatility, and names such as Exelixis, ANI Pharmaceuticals and Progenics hold promise.

Columnist Conversation

Banks, Banks, Banks

Here Is Your Pullback in ORCL

Rolled Up Google, Morgan Stanley

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.