2 Breakthrough Biotech Stocks Are Now On Sale

StreetAuthority Network

As an investor, there are two things you need to know about the field of biotechnology.

First, a number of established and newly public companies are making remarkable progress on various research fronts.

Second, almost all of these stocks have been placed in the bargain bin, as investors pull their money out of this once-hot sector. With those two factors in place, it's time to double up on your biotech research efforts, which is why I've been giving these stocks more ink than usual in recent weeks. 

One of the most interesting things about this group is how various companies are clustering their research efforts around particular medical breakthroughs. Just last week, I took note of the group of companies looking to alter DNA mutations through the process of gene therapy

There is also a cluster of companies working with RNA, which has a slightly different role in the human body. As is the case with DNA, companies working on RNA fixes also seek ways to block the impact of rogue genes, in a process known as RNA interference (RNAi).

The basic idea is to cause the body to stop making bad proteins that can cause diseases. Though this idea has intrigued biotechnologies for years, it really came into its own in 2006 when a pair of RNAi researchers won the Nobel Prize

To be sure, RNAi isn't a universally loved approach. Drugs aimed at RNA tend to be broken down in the bloodstream before they can take effect. Novartis (NYSE: NVS) recently closed down its research efforts in RNAi, citing those drug delivery challenges. The move follows similar exits by Roche Holdings (Nasdaq: RHHBY) and Merck (NYSE: MRK).  

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Now the focus is shifting toward more traditional biotech firms that are more willing to shoulder near-term losses for the sake of long-term potential gains. 

Biotech firm Alnylam (Nasdaq: ALNY) is seen as one of the best RNAi pure plays for investors, as seen by its $3.5 billion market value. Novartis had been a major investor in Alnylam, and raised eyebrows when it decided to reduce its interest in Alnylam and its technology in 2010. Yet the biotech firm got a shot in the arm in January when Sanofi (NYSE: SNY) announced a $700 million investment in Alnylam. 

Clearly, this biotechnological approach has major supporters and detractors. However, the euphoria from Sanofi's investment has already worn off, thanks in part to Novartis' tacit rejection of RNAi. (Alnylam, along with other RNAi supporters, were quick to note that Novartis was focusing on treatments that were most relevant to its key disease franchises, and not in the areas where Alnylam was making the most clinical progress.)

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Alnylam is currently pursuing nine different RNAi drugs spread over 15 clinical trials. With $500 million in cash in the bank, and an annual burn rate of less than $100 million, Alnylam has the resources to stay the course.

With roughly $150 million in annual sales (thanks to its recently approved Kynamaro drug) and nearly three dozen drugs in development, Isis Pharmaceuticals (Nasdaq: ISIS) is another strong option for investors. The company's market value approached $7 billion back in February, but the broad biotech sell-off, coupled with the aforementioned exit by Novartis, has caused the market value to shed $3 billion since then. 

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RNAi researcher Tekmira Pharma (Nasdaq: TKMR) has also become much cheaper, losing half of its value in the past six weeks. Tekmira has partnered with Alnylam to pursue RNAi-based treatments for liver cancer, cholesterol and amyloidosis while also pursuing treatments for a wide range of viruses on its own such as hepatitis B and the Ebola virus. 

Prosensa Holding (NYSE: RNA) shows what happens to firms when its RNAi research stumbles. The company came public last summer at $20 a share, surged above $30 a few months later, and now sits below $6. The key culprit: Poor test data for its muscular dystrophy drug. Further review of that data has shown the drug to be more effective, and shares are starting to attract interest again

Novartis' decision to reduce its research into RNAi has had an especially profound impact on newly public firms. Dicerna Pharmaceuticals (Nasdaq: DRNA), which is targeting a range of cancers through RNAi, pulled off a well-subscribed IPO in late January, only to be trampled by the biotech exodus and then the Novartis backlash.

How quickly has sentiment changed toward such stocks? Just two months ago, Jeffries launched coverage of Dicerna with a "buy" rating and a $50 price target.

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Risks to Consider: A wide range of RNAi drugs have already petered out in early-stage clinical trials. It's a tricky technology with a lot to prove, so investors should never place more invest more than a small portion of their portfolios in any of these stocks. And as is the case with any biotech stocks, you need to closely monitor cash burn rates and exit any investment in companies once cash on hand falls below the annual burn rate.

Action to Take --> The fact that Big Pharma has failed with RNAi shouldn't be used as a reason to avoid these young biotechs. Big Pharma has a long history of losing patience with emerging technologies, only to pony up big dough to get licensing rights once drugs prove their success. Will RNAi drugs deliver on their potential? It's hard to tell, but clinical trials have shown a great deal of promise. The investor exodus from these stocks gives investors a fresh chance to do a deep dive on the best names in this group.

Among the big players, Isis has the most broad-based approach, while among the earlier-stage biotechs, Dicerna is a name to watch. Note that shares have plunged so sharply in a matter of weeks, even though nothing has fundamentally in regard to the drug development program.

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