With just a quick look from a distance, NPS Pharmaceuticals, Inc. (NASDAQ:NPSP) looks like great stock. NPSP shares are up more than 200% year-to-date, even with the lull since the end of September. And, it looks like the media (as well as the market) has completely fallen in love with the company's flagship drug. As they say though, nothing lasts forever, and there are too many of the telltale signs that say this story-driven biotech runup has run its course and is ready to reverse.
For those not familiar with NPS Pharmaceuticals, it's the company developing Natpara - a treatment for a rare endocrine disorder called hypoparathyroidism. The drug is in Phase 3 trials right now. In fact, it's close to the end of that trial, which means an FDA approval is in site.... before the end of 2014, according to the company's timeline. That's the driver of the big rally from NPSP this year; investors are working to get positioned before any news is released. It's not necessarily a bad bet, either. The efficacy data from the trials thus far looks quite compelling.
For veteran biotech traders, however, the NPS Pharmaceuticals story/pattern is one they've seen all too often. A stock runs up solely on the premise of a drug (albeit deserved respect) with nobody asking questions about the potential market size for the product. Simultaneously, in a modern trading environment - where by the time a drug even gets close to an NDA submission most traders are already in a trade - there's nobody else left to buy into the stock once the good news becomes official... the old "buy the rumor, sell the news" routine [which is a reliable reality, by the way]. Both of those forces are likely to bite into NPSP starting soon. Indeed, they may already be digging in.
For starters, now that the dust is settling, at least some investors are starting to realize that even the company's view of the drug is limited compared to the size of the company itself. In a recent CNBC interview, NPS Pharmaceuticals, Inc. CEO Francois Nader suggested that Natpara's sales potential was even greater than that of another NPSP drug, Gattex, for the treatment of short bowel syndrome. That's a big deal, especially knowing the company believes Gattex sales could eventually reach annual peak sales $250 million. There's just one problem - Gattex sales are only on pace to reach $21.6 million this year, its first year of sales. Neither figure is all that great, especially compared to the company's market size of $2.85 billion. In other words, if Gattex is the best yardstick NPS Pharmaceuticals has to use, there may not be a lot to be encouraged about.
With all of that being said, it looks like investors are starting to realize the risk doesn't jive with the reward. NPSP has peeled back rather sharply from the highs of the runup. They're putting a ton of pressure on the 50-day moving average line (purple, at $28.47) too, and if we see a couple of closes under that mark this week, that should pretty much push the selling avalanche past the point of no return.
Welcome to the world of biotech-trading. It's more of a psychological chess match than a value-finding proposition.
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