3 Biotech Stocks I Don't Want for Christmas

By Markets Fool.com

With 2014 drawing to a close, biotech investors are probably wondering which stocks to stuff in their stockings for next year. While there are plenty of promising biotech stocks to choose from, we should also take note of three high-risk, low-growth biotech stocks that investors might consider avoiding:Inovio Pharmaceuticals , VIVUS , and Zogenix .

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Inovio Pharmaceuticals
At first glance, Inovio Pharmaceuticals' business looks impressive. It delivers synthetic DNA vaccines (which don't replicate or spread in host cells) through electric pulses to boost cellular intake. According to Inovio, that technology could be used in the development of preventive and therapeutic vaccines for cancer, influenza, HIV, hepatitis C, and malaria. But Inovio, which has no marketed products, has made that same promise for three decades.

In September 2013, Roche made an up-front payment of $10 million to Inovio, along with agreeing to milestone payments up to $412.5 million, for exclusive licenses on two vaccines -- INO-5150 for prostate cancer and INO-1800 for hepatitis B. The deal also entitled Inovio to double-digit tiered royalties on future sales of the products. But Roche ended the licensing agreement for INO-5150 in November, eliminating a large portion of those potential milestone and royalty payments. Roche will stick with INO-1800 and launch a phase 1/2a study in early 2015, but it could also walk away there if the results disappoint.

Looking ahead, Inovio does not have many catalysts on the horizon. VGX-3100, the company's most advanced vaccine, won't start phase 3 trial enrollment until 2016. Although Inovio said it had enough cashto meet its capital requirements through 2017, that forecast excludes funding for the VGX-3100 trial, which means a share-diluting secondary offering might be in the cards.

VIVUS
Another stock to avoid is obesity drug maker VIVUS, which plunged 66% in 2014. In 2012, VIVUS' Qsymia and Arena's Belviq were the first obesity drugs approved bythe FDA in 13 years, after Wyeth's popular combination drug fen-phen was pulled from the market in 1997 due to cardiac risks.

Peak sales estimates for Qysmia originally topped $1 billion, yet the drug generated just $23.7 million in revenuein 2013. In the first nine months of 2014, Qsymia only posted sales of $32.6 million. On the bright side, Qsymia sales only accounted for 35% of VIVUS' top line during that period. Forty-two percent came from licensing and commercialization agreements for the erectile dysfunction drug Stendra, which is marketed by Auxilium Pharmaceuticals.

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Stendra, though, is not a dependable long-term source of revenue for VIVUS. Rodman & Renshaw analyst Michael King believes U.S. sales of Stendra will likely peak at $483 million in 2016 when generic erectile dysfunction drugs reach the market, which translates to a maximum of $100 million for VIVUS. Looking ahead, analysts only expect VIVUS to post 1.3% year-over-year revenue growth in fiscal 2015 as its bottom line remains deep in the red.

Zogenix
The maker of the painkiller Zohydro ER lost about two-thirds of its market value in 2014 due a storm of controversy regarding the drug's approval.

Many state governments requested that the FDA reconsider its approval of Zohydro, an extended-release version of the potent painkiller hydrocodone, citing its potential for abuse. Zohydro isn't tamper-resistant, meaning it can be crushed or dissolved for recreational drug use. A similar opioid painkiller, oxycodone, was abused in the same manner in the past and implicated in thousands of deaths. Zohydro is estimated to be five to 10 times as potent as Vicodin, which contains a smaller dose of hydrocodone mixed with acetaminophen.

Zogenix initially expected Zohydro to generate peak annual sales of $300 million, on the assumption that it would be sold to 1% of all hydrocodone users. That would have been a big boost for Zogenix, which only generated $33 million in revenue in 2013 (mostly from sales of Sumavel DosePro, a migraine drug it sold to Endo International this year). The problem is that Purdue Pharma, Teva, and Pfizer all have tamper-resistant painkillers on the way. Market approval for any of these drugs could render Zohydro obsolete.

Zogenix isn't a complete lost cause yet -- a tamper-resistant version of Zohydro could be approved by the FDA in the first quarter of 2015 and replace Zohydro ER. But even if approved, the drug would face intense competitive pressure from larger rivals with deeper pockets.

The article 3 Biotech Stocks I Don't Want for Christmas originally appeared on Fool.com.

Leo Sun owns shares of Pfizer. The Motley Fool recommends Teva Pharmaceutical Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.