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2 Biotech Companies to Spread the Risk of Investing in a New Therapy

By: Martin Tillier
Posted: 3/17/2014 10:47:00 AM
Referenced Stocks: NYMX;SPHS;IBB;XBI

It should go without saying that biotech investing is a risky business. Finding winners in the plethora of small companies that lose money on a daily basis, but have a pipeline of promising drugs, is a bit like trying to find a needle in a haystack. Success, however, usually brings rewards greater than the recovery of a lost needle. In such a scenario, spreading risk is not just smart, it is essential.

If a company in the biotech field catches my attention one of the first things I will look at is who the potential competitors are. If two or more companies are in late stage trials for similar drugs it makes sense to invest in both or all of them, rather than putting all of your eggs in one basket. (After “needle in a haystack” and “all of your eggs in one basket,” maybe I should be looking for a cure for clichés, but I digress.)

In one area of research and development that is very dear to my heart as a 50-something male, there is just such a scenario right now. Both Nymox Pharmaceutical (NYMX) and Sophiris Bio Inc. (SPHS) are running stage three trials for new drugs to treat benign prostatic hyperplasia (BPH, or an enlarged prostate).

What is different from existing treatments is that both Nymox’s drug NX-1207 and Sophiris’ PRX302 are injected once directly into the prostate. Early trial results indicate that this method is more effective than oral medication, while less invasive than surgical options.

NYMX reported earnings (or rather, losses) on Friday of -$0.03 per share for the fourth quarter, bringing total losses for the year to $0.13 per share, while SPHS reported a loss of $0.37 per share for Q4 earlier in the week. Earnings, or the lack thereof, are, of course, irrelevant at this stage. What counts is the potential for future earnings, should their BPH drugs pass stage three trials and receive final approval.

I have seen estimates of around $1.5 Billion for the global market for injected BPH treatments, so the potential is there for both companies.

 

As you can see, neither stock is particularly roaring right now and it is likely that little will happen without news as the trials progress or maybe some speculative interest as they draw to a close. Both are reasonably close to levels that can be watched; the all time low for SPHS, which went public in August of last year, is $3.50 (Friday close $3.87), while NYMX has a 1 year low of $4.39 and closed Friday at $5.83.

As I have said before when discussing this kind of stock, however, these are really just levels to monitor. This type of trade is one of the rare instances where I believe stop-losses aren’t appropriate. Both stocks are thinly traded and likely to be extremely volatile in the coming months, so any money that is invested must be money that won’t change your life if you lose it.

Because of that risk, some may prefer even more diversification with much better liquidity, and simply invest in an ETF such as the iShares Nasdaq Biotech Index Fund (IBB) or the SPDR S&P Biotech ETF (XBI). It is hard to fault that approach as both have performed exceptionally well in the last year or so, but that in itself may be reason to take more targeted, specific bets on individual therapies this year.

I am not of the mind that biotech is in a bubble, but there is increasing chatter about it, so the sector as a whole may be vulnerable. If there is a major correction later this year, good news about either NX-1207 or PRX302 could already be out; Nymox are expected to release Phase 3 trial results in the first half of this year. If those are positive it will likely give a boost to both stocks.

Neither NYMX nor SPHS are completely dependent upon the BPH drugs in development; both have a pipeline of other things, but in the immediate future NX-1207 and PRX302 give them the best opportunity of moving to profitable operations. I cannot say enough that investing in any new therapy is inherently extremely risky, but if that is a risk you are prepared to take, investing in both companies researching that treatment makes much more sense than trying to pick a winner.