More Biotech Bets for the Fearless

Five for the Money's latest look at one of the riskiest sectors of the market identifies a handful of promising drug development companies

by Alex Halperin

Maybe the only thing more nerve-racking than being a biotech investor is actually running one of the risk-laden outfits. Those who brave the category, especially the smaller companies, need to brace themselves for spikes—and precipitous drops—in their share prices based on clinical data results.

The dramatic divergences were illustrated by the trading action in two stocks in recent days. On Mar. 26, investors saw shares in Alexza Pharmaceuticals (ALXA) soar more than 50% after the company released data on successful mid-stage trials for its migraine and schizophrenia drug candidates. The stock fell more than 11% over the next two days.

On the other hand, Atherogenics (AGIX) plummeted 13.6% to close at $2.80 on Mar. 28 after poor late-stage data for a cardiac drug. That's down from more than $38 in November, 2004.

Rife with Risk

So it goes in biotech; the typical trajectory for privately funded concerns is to go public or get acquired to fund the drug development process. For these companies, quarterly earnings reports—basically a tally of their latest losses—are incidental compared with clinical data. As drugs advance through the development pipeline, clinical trials test for safety and then efficacy. Later they evaluate how an experimental drug compares to approved treatments. The entire process can consume more than a decade and cost $1 billion.

Outfits in the sector are testing products that are years away from hitting the shelves. Plenty will never make it. But hope springs eternal for biotech investors. Back in December, 2005, we assembled a list of promising, but risky, biotechs (see BusinessWeek.com, 12/13/05, "Biotech Bets for the Fearless"). For those at home keeping score, four have done a very volatile version of treading water and one, Gilead Sciences (GILD), has performed very well. But it already had a major product on the market.

This week, Five for the Money has gathered another batch of small drug-development outfits with promising products. Each has some attractive characteristics, but these are some of the riskiest stocks on the market.

1. Alnylam Pharmaceuticals (ALNY)

In October, pharma giant Merck (MRK) agreed to buy Sirna for $1.1 billion, a staggering sum for a company very early in the drug development process (see BusinessWeek.com, 10/31/06, "Merck's Big Play in RNA"). The reason? Sirna is one of only a few companies developing drugs based on RNA interference, a technology for which scientists won the Nobel Prize, that involves blocking gene expression.

Alnylam is another. The company has only initiated an early-stage safety trial for its lead product candidate, a treatment for respiratory syncytial virus, but RNAi could be the bigger asset. Douglas Chow, an analyst with investment bank Caris, says, "I would compare it to the early stages of monoclonal antibodies technology in the early 1980s before people could figure out how to use monoclonal antibodies." He refers to another development, for which researchers also won a Nobel, that has provided the base of many approved treatments for cancers and other diseases, among them Genentech's (DNA) Avastin cancer therapy.

2. Affymax (AFFY)

During the past few months, investors have seen more than a few biotech companies stumble during their public offerings. Not Affymax (see BusinessWeek.com, 12/15/06, "Affymax IPO Gets Investors' Blood Racing").