Biotechnology stocks are usually valued on the potential of their pipelines, especially if there is no drug already in the market. The ‘patent-cliff’ has increased the investor interest in promising pipelines, improving the valuations of small biotechnology companies. The increase in FDA approvals has also positively impacted the entire healthcare sector by encouraging investors to invest more heavily in pipeline stories.
A number of biotechnology companies have benefited from this investor goodwill, but are only few which truly deserve it. An effective method of singling out over-valued investments and exploring strong pipelines is to follow insider and institutional trades.
Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) is a biotechnology company involved in the discovery, development, and commercialization of small molecule drugs for serious human ailments. The company has two approved drugs and 6 compounds in various stages of clinical trials. Telaprevir is approved for patients infected with HCV (genotype 1) and ivacaflor is approved for treating cystic fibrosis. Pipeline has compounds for treatment of Cystic Fibrosis, Hepatitis C, Autoimmune Disease and Influenza.
The company posted revenues of $1.5 billion last year, but the street expected $1.2 billion in 2013 revenues. The primary reason behind this revenue decline is the lower sales of Incivek. The drugs revenues declined a mammoth 42% year over year to $205 million for the first quarter of 2013. Despite this steady revenue decline, the stock is up 65% YTD on pipeline expectations.
The market valuations of Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) depend on the potential/expectations from its pipeline. For small biotechnology companies, insider transactions give an insight into the true potential of a pipeline. In the last six months, Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) insiders have sold approximately 990,000 shares, reducing total insider holdings by a massive 36%. During the same period, institutions have also sold approximately 8.9 million shares, reducing institutional holdings by 4.6%. Heavy selling by insiders and institutional investors is an indication that investors should not rely too heavily on the pipeline. Falling sales and lack of insider confidences makes Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) a decent short target.
Accelerate Diagnostics Inc (NASDAQ:AXDX) is involved in the development and commercialization of bio-analytical measurement instruments and proprietary surface chemistry formulation. The company is working towards eradicating drug resistant organisms and hospital acquired infections. It offers the BACEEL and OTICHEM platforms for detection and coating technologies respectively.
It is currently trading near its 52-weeks high and has already appreciated 90% YTD. Insiders are also showing interest in company with Director Larry Fienberg adding almost 45,000 shares to his holding for the net amount of $379,151. During the last 6 months, institutional investors have also been showing a lot of interest in Accelerate Diagnostics Inc (NASDAQ:AXDX). They have added almost 2.9 million shares to their portfolios, increasing institutional holdings by 34%.