Pharmas and Biotechs Dominated in 2015
Will They Do It Again in 2016?
In my January 9 Cabot Wealth Advisory, I wrote about the three top performers of 2015. Today, I take a look at the next nine top performers of 2015.
NeoPhotonics (NPTN) 3.37 to 10.9, +223% — NeoPhotonics is a San Jose tech company specializing in (and I quote) “hybrid photonic integrated optoelectronic modules and subsystems for bandwidth-intensive, high-speed communications networks.” Simplified, that means that the company’s products help fiber-optic networks move more data. And with global networks being asked to handle bigger files (movies, videos, photos and games), NeoPhotonics’ products are in demand, especially in China, which contributes more than half of the company’s revenue. The company made its big moves for the year in March (beating estimates on revenue and earnings) and May through mid-June (another nice earnings beat). The stock weathered a steep correction on August 7, when the effect of good earnings was undercut by disappointing guidance for the following quarter. The stock fought its way back to new highs in December, but faded a bit as the year ended.
Intra-Cellular Therapies (ITCI) 17.91 to 53.79, +205% — The story with Intra-Cellular Therapies is familiar. The company has almost no revenue and no forecasts of earnings in 2016. What it does have is a drug for the treatment of schizophrenia that achieved positive results in a Phase III clinical study. You can see the reaction right there in September, when ITCI popped up over 80% in a day, producing the stock’s high price for the year. And again you can see the volatile, but positive action in the stock as investors inched their way into the stock in anticipation of the trials results, and the correction when they took profits after the event itself.
Natural Health Trends (NHTC) 11.65 to 33.53, +193% — Natural Health Trends is a scorpion story (one with the sting in the tail). The company sells personal care, wellness and beauty products through a network of third-party sales distributors, who then recruit more sales people. It’s the model that Mary Kay, Avon and Tupperware use, but it has run Natural Health Trends into some problems. The company gets almost 90% of its revenue from sales in China, and when Chinese authorities announced in late December that the company was being investigated as a pyramid scheme, NHTC took a dive and is still diving. (You can see the beginning of the stock’s correction at the right of the chart.) NHTC was flatlined through Q2 2013, but began to rally in 2014 and went ballistic in March 2015. After the July–August correction, the stock powered out to new highs in November. But January has brought plummeting prices on monster volume.
Energy Focus (EFOI) 4.8 to 13.75, +179% — Energy Focus makes energy efficient lighting products that sell into residential and industrial locations. The company gets almost 90% of its revenue from sales of LED tubes and fixtures, but also does a healthy business in design solutions. The company turned its first profit in Q3 2014, and if you find a longer-term chart, you can see the stock started trading on serious volume at that point. The stock started to accelerate out of a long base in June, and ran all the way to 29 in September. That’s when the company decided on a secondary stock offering as a way to raise cash for expansion, causing the stock to correct sharply and trade sideways in a tightening range through the end of the year. The story is a good one, and rival Acuity Brands (AYI) also had a good year, although its higher price kept its percentage gains much lower.
Dyax (DYAX) 14.27 to 37.62, +168% — Dyax is a very specialized biopharmaceutical company that focuses on treatments for hereditary angioedema (HAE) and other plasma-kallikrein-mediated disorders. The company has one marketed product, a drug called Kalbitor that treats acute HAE, but hasn’t turned a profit yet. Investors’ interest during 2015 was focused on DX-2930, another HAE drug in clinical trials, but there are a few surprises reflected in the stock’s chart for the year. The monster advance on big volume in April came after DX-2930 achieved positive results in clinical trials. But the volume spike in the middle of October came courtesy of Dyax being selected for inclusion in the NYSE Arca Biotechnology Index, which keyed some buying from index buyers. Then there’s the big-volume blastoff in early November when Dyax announced that it would be acquired by Shire Pharmaceuticals. And the December jump came after the expiration of the period when objections could be offered. And then there’s the tell-tale flat line that indicates a stock trading at its takeover price until the deal is done.
Sarepta Therapeutics (SRPT) 14.58 to 38.58, +166% — Sarepta (yes, yet another pharmaceutical stock) has a chart that tells a familiar tale. That blastoff on very high volume in May followed an announcement that the company had received permission from the FDA to file a new drug approval (NDA) application for its Duchenne muscular dystrophy treatment eteplirsen. This news was strong enough to keep powering SRPT higher even during the August–September market meltdown. But October brought an FDA request for another meeting, and SRPT dropped steeply on the news, only to recover again in November.
Heron Therapeutics (HRTX) 10.18 to 26.7, +165% — Until near the end of May, Heron Therapeutics was just another biomedical stock with no revenue, losing a constant stream of money while it worked to develop its drug platform that could reduce the dosing schedule for injectables from once or twice daily to every one or two weeks. In late May, the company announced that Sustol, a treatment for chemotherapy-induced nausea, was shown to maintain its anti-nausea effects for up to five days, much longer than rival treatments. That high-volume blastoff was the beginning of a months-long rally that kept HRTX rising. The correction in September came after a clinical trial result that didn’t quite come up to investors’ expectations, but the stock traded sideways for the rest of the year, waiting for the next good news.
Ultragenyx Pharmaceuticals (RARE) 44.42 to 112.18, 156% — Ultragenyx is a clinical-stage (no marketed products) pharmaceutical company that focuses on rare and ultra-rare diseases with special attention to debilitating genetic diseases. The company was founded just in 2010, and has acquired an impressive array of candidate drugs that have no approved therapies. The chart for RARE is unusual for small-cap biopharmas in that it doesn’t show any price spikes on huge volume based on good clinical trial results. That may be because the company’s diversified stable of candidate drugs—three are now in Phase III trials—kept a steady stream of good news on tap. Note that RARE powered higher through July, made another run toward that old high in September and then held its own in volatile trading through the end of the year. That July high probably reached a valuation level that investors weren’t comfortable with, although they didn’t abandon the stock completely.
Neurocrine Biosciences (NBIX) 22.59 to 56.57, +153% — California-based Neurocrine Biosciences didn’t waste any time in 2015, blasting off in January after a Phase II clinical trial for a candidate drug called NBI-98854 showed a huge improvement in subjects’ tardive dyskinesia. A drug that Neurocrine was being developed in partnership with AbbVie to reduce endometriosis in premenopausal women also showed excellent results in January. Those positive results kept NBIX heading higher until March, and a steady stream of good news pushed the stock higher all year, despite periodic corrections from market movements and valuation concerns. NBIX finished the year strong.
What About 2016?
The problem with tiny pharmaceutical companies, of course, is that their success is always balanced on a knife-edge. Tiny ones can stay in business for years as long as their major pharmaceutical supporters continue to provide research funding and milestone payments, but their unpredictability will drive you nuts.
Note: it’s always good to check on the bank account of a pharmaceutical stock. The easiest way is to look at a company’s actual quarterly report and search out the “cash and cash equivalents” section. As an example, Neurocrine Biosciences now has around $377 million in total cash, which is pretty healthy.
The people who do significant investing in pharmas, biopharmas and biotechs turn themselves into experts in analysis and tracking, actually reading the results of clinical trials, digging into company’s intellectual capital, research history and capabilities and estimating the size of the addressable market for candidate drugs.
For those of us who cast a wider net in the ocean of growth stocks, any stock that blasts off on high volume is interesting, because it lets us know what the market is thinking. Sudden gains of big volume often lead to further advances, but that’s not always the case.
My personal preference is for stocks that have a strong combination of story (the company’s business proposition, its product line, the size of the market it addresses, its protection against competitors, etc.), numbers (revenue and earnings growth, margins, debt, cash on hand, P/E ratios, etc) and chart (rising price and supportive volume, technical patterns, etc.). I call it the SNaC approach. When all three factors are positive and the market is providing a supportive environment—definitely not the case right now—your chances of success are much better.
Good luck! And remember that Cabot’s growth advisories—Cabot Growth Investor, Cabot Top Ten Trader and Cabot Emerging Markets Investor (which I write)—are great guides to finding strong growth stocks and investing in them profitably.
Chief Analyst, Cabot Emerging Markets Investor