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Biotech Stock Mailbag: Research Backs Shorting Micro-Cap Cancer Drug Stocks

Doctors currently use antipsychotics like Abilify or Seroquel for depression augmentation therapy, but these drugs carry relatively high side effects. If all goes well in the phase III clinical trials, '5214 will be approved with a label that demonstrates equal or better efficacy and a more tolerable side effect profile than the antipsychotics.

It's interesting to note that AstraZeneca (AZN), the marketer of Seroquel, chose to license '5214 from Targacept. Bristol-Myers Squibb's (BMY) Abilify is used more often than Seroquel for depression augmentation therapy today, so AstraZeneca clearly sees '5214 as a big opportunity to switch out Seroquel for '5214 and go after Abilify market share.

With relatively modest assumptions, '5214 could be a $1.5 billion to more than $2 billion drug five to six years after launch. At a 25% royalty, that's worth $400 million to $500 million to Targacept, expense-free.

Sticking with Targacept, Pelion2001 writes, "Hey Adam, I think you're overstating the make-or-break nature of the first Targacept phase III read out. What are required for registration are 2 of 4 positive trial results, so it does not all hinge on the first phase III study. This was emphasized at a recent Morgan Stanley presentation."

Understood, and point well made. I didn't mean to imply that the first phase III study of '5214 -- with results due in the fourth quarter -- is the penultimate clinical catalyst for the drug. AstraZeneca is running three other studies with results expected next year, all are important.

I do think it's fair to say that the first study will have a significant impact on Targacept's stock price because 1) It's the first phase III clinical trial, so it will receive a lot of attention; and 2) The design of the first phase III study mirrors the phase II study, which was so positive.

I remain a Targacept bull.


Let's talk about two biotech stocks causing frayed investor nerves and many anguished emails and Tweets: Amarin (AMRN) and Cyclacel Pharmaceuticals (CYCC).

Crappy Septembers aren't just for the Boston Red Sox. Amarin shares are slumping too, down 17% compared with a 1% decline in the biotech sector overall during the same time period. Amarin is down 50% from the high reached in late May.

On Monday, as expected, Amarin filed the AMR101 drug application with the FDA, seeking approval for treatment of patients with very high triglycerides. On Wednesday, Amarin shares fell 8% to $9.56 on no apparent news. The stock hasn't been this low since April before the company announced positive results from the AMR101 phase III "Anchor" study.

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