3 Clinical-Stage Biotechs to Buy Ahead of FDA Decisions

By Markets Fool.com

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Roughly 90% of drugs in clinical trials never make it to the Food and Drug Administration for review, so it's not surprising that a green light can be a market-moving event, especially when it's granted to drugs targeting billion-dollar blockbuster markets. Although there's no guarantee of approval, investors might want to consider stashing away some shares in Aerie Pharmaceuticals (NASDAQ: AERI), Flexion Therapeutics (NASDAQ: FLXN), and Puma Biotechnology (NYSE: PBYI). In the next 12 months, all three expect FDA decisions on drugs that could be top sellers.

Seeing more clearly

Aerie Pharmaceuticals has reported late-stage, phase 3 trial results on two drugs targeting the $2.5 billion glaumcoma market, and it could have its first glaucoma drug, Rhopressa, on the market next year.

Rhopressa is being positioned for use instead of beta blockers as an adjunct therapy to drugs like latanoprost.

In trials, Rhopressa delivered similar efficacy to Timolol, a common beta blocker, but it did so via a single daily dose rather than two daily doses. Historically, glaucoma patient compliance to multidose daily regimens has been less than perfect and that's got me thinking that Rhopressa could displace the use of beta blockers, which currently account for 14% of glaucoma prescriptions.

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The second of Aerie Pharmaceutical's glaucoma drugs is Roclatan, a combination of Rhopressa and latanoprost. In one phase 3 trial, Roclatan outperformed Rhopressa and latanoprost monotherapy, and if a second phase 3 trial pans out similarly, then an FDA filing for approval could occur in the first half of 2017.

A decision from the FDA on Rhopressa should happen in the next 10 months or so, and if the remaining Roclatan trial is positive, then an FDA decision on that drug could happen in 2018. Conceivably, that timeline positions this company to have drugs on the market that could be used in most glaucoma patients. Since thiscompany's market cap is less than $1 billion and peak sales of latanoprost prior to losing patent protection were $1.6 billion, I think this stock could move up meaningfully on approvals.

Conquering osteoarthritis pain

Following word from the FDA that results from one phase 3 trial can support an FDA application for approval of Zilretta, a non-opioid therapy for knee pain in osteoarthritis patients,Flexion Therapeutics shares have jumped more than 80% since the end of March.

FLXN data by YCharts.

The surge in shares stems from the potential market opportunity to reshape how knee pain is treated in osteoarthritis patients. Today, about5 million patients are treated with corticosteroid shots every quarter. However, corticosteroids benefit often wears off prior to the next quarterly dose and that means patients are eagerly awaiting better alternatives.

In phase 3 trials, Zilretta delivered a median 50% improvement from baseline in knee pain over a three-month period and, importantly, the pain relief persisted throughout the period.

An ability to provide better and more consistent pain relief to millions of patients could be a big needle mover for Flexion Therapeutics. Management hasn't settled on an exact price for Zilretta, but they've said in the past that the market would seem to support a cost of $2,000 per year.

The company plans to commercialize Zilretta on its own, so it's been stockpiling cash. Exiting June, there was $119 million in short-term cash, $44 million in short-term investments, and less than $16 million in debt on the balance sheet.Management believes it's got enough financial firepower to launch Zilretta and get Flexion Therapeutics a few months into 2018, but any delays to Zilretta's timeline could force the company to tap equity investors again.

As it stands,Flexion Therapeutics plans to file for Zilretta's approvalbefore the end of 2016 and depending on when the agency accepts its application, an approval could be on deck before the end of 2017.Since Zilretta's market opportunity could be north of $1 billion and its market cap is less than $500 million, I think the reward is worth the risk of an FDA red light.

Delaying cancer

After a long journey during which investors saw shares skyrocket above $250 and collapse to $25, Puma Biotechnology appears to be closing in on the finish line. In August, European regulators agreed to review the company's breast cancer drug, neratinib, and yesterday,the FDA followed suit.

PBYI data by YCharts.

Regulators will be reviewing neratinib ability to delay cancer when used as a follow-on therapy in early-stage HER2+ breast cancer patients who have received treatment and one-year of follow on therapy with Herceptin.In trials, patients taking neratinib had a 33% reduction in risk of invasive disease recurrence or death versus placebo.

Improvingtreatment for this patient population is significant because breast cancer is incredibly common. Roughly one in eight women will develop breast cancer over their lifetime and an estimated 246,660 new cases of breast cancer will be diagnosed in the U.S. this year. Overall, more than 1.7 million new cases of breast are diagnosed worldwide every year.

However, despite the need for additional therapies, a regulatory OK for this drug isn't a lock.In trials, 39.9% of neratinib patients reported grade 3 or higher diarrhea. That rate is high enough to sound alarms, so Puma Biotechnology has been evaluating the benefit of dosing anti-diarrhea medicine alongside it. Fortunately, interim results suggest that adding an anti-diarrhea medicine lowers the incidence rate of severe diarrhea to between 13% and 18.5%.

Overall, ifneratinib's safety profile doesn't derail approval, then green lights here and in Europe could propel this drug into nine-figure territory, and if so, then shares in Puma Biotechnology could have more room to run, too.

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Todd Campbell owns shares of Flexion Therapeutics.Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may have positions in the companies mentioned.Like this article? Follow him onTwitter where he goes by the handle@ebcapitalto see more articles like this.

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