Under the Radar
For the Birds
By Lawrence Carrel Published: March 24, 2006
Here's a weekly look at some small-capitalization stocks that are making big moves on Wall Street.
AS FEARS RISE THAT avian influenza will erupt into a world-wide pandemic, so too have risen shares of tiny biotechs that purport to be developing treatments for the disease. All are unproven, yet that doesn't seem to be deterring investors from loading up on the stocks every time the words "bird flu" appear in a headline or show up in a press release.
"There are some stocks that go up because the smart money realizes that the dumb money will buy when certain news events happen," says Peter Cohan, president of Peter S. Cohan & Associates, a management-consulting and venture-capital firm in Marlborough, Mass., "and this looks like one of those times."
There's no denying that the H5N1 strain of avian flu is highly contagious among poultry. Its presence can decimate entire flocks. According to the World Health Organization, 186 people have come down with avian flu over the past three years; 105 of those died from it. The disease, which can spread from birds to people, hasn't been shown to be transmittable from human to human. Scientists fear that could change as the virus mutates; thus, the worry of a global outbreak. Until recently limited to Asia, avian flu has now been detected in Africa and Europe.
Several small-capitalization biotechnology companies have jumped on the avian-flu bandwagon, much to the delight of shareholders. The likes of Novavax (NVAX: 7.51, +0.23, +3.2%), BioCryst Pharmaceuticals (BCRX: 18.74, +0.04, +0.2%), AVI Biopharma (AVII: 6.65, -0.15, -2.2%), Hemispherx Biopharma (HEB: 3.78, +0.24, +6.8%) and Generex Biotechnology (GNBT: 3.72, +0.23, +6.6%) have seen their stock prices double, triple or more over the past year. None has an avian-flu treatment that's even close to Food and Drug Administration approval.
Among them, Novavax is perhaps closest to delivering a viable product. The Malvern, Pa., company received a grant from the U.S. National Institutes of Health in 2001 to develop an avian-flu vaccine. In September 2005, Novavax's experimental vaccine created an immune response in mice during a preclinical trial. On Tuesday, it presented more preclinical data at the World Vaccine Congress in Washington, D.C.
"Our vaccine dose response experiment was shown to elicit a robust protective immune response at a low dose, single-innoculation and no adjuvant," says Rick Bright, Novavax's vice president of vaccine research. The biotech is currently conducting its final preclinical trial and plans to start clinical trials this fall.
In a rarity among avian-flu plays, Novavax is profitable thanks to its two estrogen replacement therapies on the market, Estrasorb and Gynodiol.
At the other end of the spectrum is Generex. It has no approved products on the market. For the six months ended Jan. 31, the Canadian company brought in revenue of $87,500. Its loss for the period nearly doubled year-over-year to $23.4 million. And for the past year, Generex hasn't been able to pay off its debt.
Despite the financial struggles, Generex saw its shares surge 320% year-to-date (through Thursday) and 546% over the past 12 months. Not bad for a stock that faces the threat of delisting. In July, its auditors also expressed "substantial doubt" about the company's ability to continue as a going concern given its losses, negative cash flow from operations and dearth of working capital.
"An investor should say, even though Generex is losing money now in a few years it will make so much money it's worth [seven times] more now than a year ago," says Cohan, the venture capitalist. "I can't see any basis for that forecast. The reason it's going up is because there is a class of investor that will buy it whenever bird flu is mentioned in the news."
Generex's Antigen subsidiary is developing an avian-flu vaccine, which wasn't even mentioned in the company's annual report for fiscal 2005 (ended July 31). But according to a Securities and Exchange Commission filing related to its fiscal second-quarter ended Jan. 31, the vaccine is in preclinical development. Trials in humans aren't expected for at least six months.
Antigen, which Generex acquired in August 2003, is no stranger to diseases du jour. It claims to be working on treatments for breast cancer, prostate cancer, HIV, smallpox, melanoma and severe acute respiratory syndrome, better known as SARS, in addition to avian flu. Antigen's most advanced indication, a breast-cancer vaccine, is currently in a Phase I trial.
Despite a decline in R&D spending, Generex continues to fund an aggressive public-relations campaign. Just about every other week for the past six months it has posted a press release related to its avian-flu vaccine. Some announcements were consequential; most weren't. On Nov. 2, Generex issued a press release saying it would make a presentation at a scientific conference. On Nov. 4 another press release relayed that the company had, in fact, made the presentation.
Percent increase for Novavax, BioCryst Pharmaceutical, AVI Biopharma, Hemispherx Biopharma and Generex Biotechnology over the last year.
Under the Radar
For the Birds
By Lawrence Carrel Published: March 24, 2006
Click here for more stories by Lawrence Carrel.
See how the stocks on this page stack up.
yahoo.smartmoney.com
Price Check Calculator
What's this stock really worth? Try our new valuation
calculator.
Archive
(Page 2 of 2)
Birds of a Feather
Other beneficiaries of avian-flu hysteria face equally formidable uphill climbs. BioCryst, up 295% over the past year, has nine drug candidates, with its most advanced, a leukemia treatment, in Phase II trials. Peramivir, its influenza inhibitor that's being tested on avian flu, recently won fast-track approval from the FDA. It just entered a Phase I trial. AVI Biopharma saw a 155% surge these past 52 weeks. It deals in what are called antisense drugs that have shown effectiveness in binding to genetic material to prevent viruses from propagating. AVI's experimental treatment, NeuGene, has been shown in preclinical testing to be effective against all strains of influenza A, including seasonal flus. AVI spokesman Michael Hubbard says NeuGene is moving into Phase I safety trials on humans later this year.
Hemispherx makes Alferon N, an FDA-approved treatment for genital warts. But it's the biotech's interferon inducer, Ampligen, that makes it a candidate against avian flu. For the past 10 years, Ampligen, which reproduces the body's natural antivirus mechanism, has been in trials for chronic fatigue syndrome. David Strayer, Hemispherx's medical director, says the chronic fatigue indication just completed Phase III testing. The company is preparing to submit if for FDA approval. Hemispherx's stock price has soared 137% from where it was a year ago.
This isn't the first time a health scare has driven demand for tiny biotechs. SARS, a highly contagious and potentially fatal form of pneumonia, left streets in Hong Kong deserted in 2003 and decimated the travel industry for a time. Small caps promising to find a cure for SARS soared. Some of the very same companies are now working on avian flu.
Even biotechs with seemingly legitimate drugs failed to prosper long term from the SARS scare. In April 2003, GenVec (GNVC: 2.19, -0.04, -1.8%) surged 75% to close at $2.68 after it received a $420,000 government grant to create a vaccine. Three years later, the company still doesn't have one. The stock closed at $2.23 Thursday. SciClone Pharmaceuticals (SCLN: 3.27, +0.06, +1.9%) looked like a pure play on SARS. Over the first six months of 2003, the stock tripled to $9.50 as sales for its lead drug, Zadaxin, surged in China. An immune booster, Zadaxin wasn't specifically designed for SARS, and it never gained approval in the U.S. Phase III trial results released in December failed to show statistical significance. SciClone closed at $3.21 on Thursday.
There's no question that some short-term momentum players profited on SARS — and are making a mint on avian flu. The same can't be said for long-term investors. Bottom line: Don't buy and hold avian-flu stocks if you're seeking investments for the long haul. The risks are too great, and the fundamentals are out of sync with share prices. Consider that even if a biotech has a viable product, the typical path from early development to FDA approval can take up to 10 years. And while the FDA could expedite the process for an immediate threat, Joe Pantginis, an analyst at Canadian brokerage Canaccord Adams, points to VaxGen (VXGN: 9.55, -0.10, -1.0%) as a cautionary example.
"Vaxgen got an order to stockpile anthrax vaccine in 2004," says Pantginis. "It's 2006 and they are still a year-plus off from filing for approval from the FDA."
Generex's Insulin Shock
Generex, one of the biggest beneficiaries of the avian-flu scare, deserves a closer look because the frenzy over its stock appears to be compounded by high hopes for its experimental diabetes product, an oral insulin spray called Oral-lyn. With diabetes growing at epidemic rates, Wall Street loves the idea of a safe and effective form of insulin that doesn't involve needles. Pfizer's (PFE: 26.02, -0.14, -0.5%) Exubera, an inhalable insulin treatment, won FDA approval in January.
David Kliff, publisher of the online newsletter The Diabetic Investor, says Exubera may not turn into a blockbuster. The inhaled insulin needs to reach the lungs to work properly, but Kliff says some patients are having difficulty administering the drug properly. Other large pharmaceutical companies including Eli Lilly (LLY: 58.86, +0.82, +1.4%) and Alkermes (ALKS: 24.15, +0.09, +0.4%) are working on deep-lung insulin delivery systems, but so far only Oral-lyn makes the claim that it can be absorbed in the mouth.
Kliff says the company hasn't begun any of the clinical trials needed to gain approval in the U.S. Oral-lyn did win regulatory approval last year in Ecuador. Sales are expected to start there by August. But the results of the Ecuadorian clinical trial that were released March 8 left much to be desired. The study consisted of just 24 teenagers and five adults and didn't have a control group against which to compare the effectiveness of Oral-lyn, according to Kliff.
Anna Gluskin, Generex's chief executive and chairman, disagrees. "We've done a lot of clinical trials, and every single trial we've done has had a control group. Every single one," she says.
According to Generex's own press release, patients in the trial had blood-sugar levels normalized with traditional therapies prior to the administration of Oral-lyn: "Because the study participants were referred to [the Institute of Endocrinology in Quito, Ecuador] in varying states of diabetic control, it was necessary to metabolically stabilize them using standardized therapy prior to the commencement of the study."
"In other words, before study participants used Oral-lyn, they used conventional injection therapy to get their diabetes under control," says Kliff. "Using Oral-lyn had nothing to do with getting the participants under control. The strange design of this study makes any data gathered irrelevant. There is no way to conclusively prove that Oral-lyn was beneficial at all or to what extent Oral-lyn contributed to the patient's control.... Quite frankly, the Ecuador trial is a joke."
Generex has published abstracts of studies testing Oral-lyn on small groups, including this one on six people in Ecuador.
The largest study published on Generex's web site consisted of just 26 subjects. There are no results available to the public from the types of large-scale trials required for FDA approval.
Yet Generex rarely passes up an opportunity to issue a press release. Its PR machine appears to be helping the stock. Last May, the Nasdaq Stock Market warned Generex its shares would be delisted if it didn't get the bid price above $1 for 10 straight days by Nov. 21. It managed to move above a buck for 14 days in early November before falling back to 83 cents by Jan. 1.
Generex counts on its stock to stay up and running. According to SEC filings, on Sept. 20 the company failed to pay the outstanding principal on two promissory notes totaling $600,000. As a result the noteholders were allowed to convert the debt into nearly 800,000 shares of common stock. Generex also agreed to such terms with other lenders. Shares outstanding soared to 64 million as of Jan. 31 from 35 million a year earlier. On Feb. 27, in a prospectus offering to sell another 24 million shares, it reported outstanding shares had risen to 70 million. This figure didn't include the 29 million shares that are issuable upon the exercise of outstanding options and warrants.
"I like the concept of Oral-lyn," says Diabetic Investor's Kliff, "but this is all sizzle and no steak. This is a very dangerous stock."
--------------------------------------------------------------------------------
Page 1 | 2
yahoo.smartmoney.com |
