Why Epizyme, Neurocrine Biosciences, and Peregrine Soared

The new year is off to a rocky start in the health care sector, with some stocks blasting off into orbit and others sinking like a stone. With that in mind, here is my take on why Epizyme , Neurocrine Biosciences , and Peregrine Pharmaceuticals  soared.

Royalty payments launch Epizyme into orbit
Shares of the developmental stage cancer company Epizyme went ballistic in afterhours trading yesterday, rising over 34% on heavy volume, and shares are up almost 80% today. Epizyme's lift off is due to the company earning $29 million from two different milestone payments, thus increasing year-end guidance to $145 million from $115 million.

Specifically, Epizyme earned a $25 million payday from Celgene after its experimental acute leukemia drug EPZ-5676 achieved a proof of concept milestone in an early stage study. The company also announced that it earned a $4 million payment from GlaxoSmithKline after one of its novel small molecule histone methyltransferase, or HMT, inhibitors met a key development milestone.

So, what now? Epizyme is partnered with an impressive list of major pharmas to develop their HMT inhibitor platform, and this has helped them to build a nice cushion of cash, despite being a very early stage company. With $145 million in cash, shares are only trading at roughly five times cash on hand. So while I personally am not an advocate of investing in companies at this stage in their evolution, Epizyme might be an exception to the rule. As such, you should keep this specialist Oncology company on your radar.

Neurocrine soars on mid-stage results
Neurocrine Biosciences soared in afterhours trading yesterday after announcing that one of its experimental drugs for tardive dyskinesia, an often incurable illness that causes involuntary movements and spasms, showed promising results in a mid-stage trial. Shares are up almost 80% today, and Neurocine's management said they plan on discussing a late-stage trial design with the U.S. Food and Drug Administration, or FDA, which could lead to the drug's eventual approval.

So, is Neurocrine worth checking out? The short answer is that this appears to be an overreaction to mid-stage results. This jump brings Neurocrine's market cap close to $1 billion, yet the company doesn't have an approved product. Moreover, they have had to rely heavily upon dilutive measures to fund their clinical activities. So with less than $30 million  in cash and an expensive late-stage trial to fund, I think the writing is on the wall for more dilution. In short, my take is that chasing Neurocrine after such a big jump is not a good idea because a secondary offering appears imminent.

Fast-track designation causes Peregrine to take flight
Peregrine Pharmaceuticals jumped more than 30% at one point yesterday after announcing that the company's non-small cell lung cancer drug, bavituximab, received fast track status from the FDA, and that a late-stage trial was under way. Shares finished the day up 14% and have pulled back slightly today. 

Because bavituximab is a second-line treatment, I am somewhat surprised that the FDA granted fast track status, which could lead to a priority review of the drug, if the late-stage results are positive. And this is probably why shares surged so much, given that the market was already aware that the late-stage trial had begun.

That said, you should understand that Peregrine is going to have to raise funds via dilution to pay for this trial. With about $40 million in the bank and the company undertaking numerous clinical trials, I would expect management to take advantage of this rise in share price to raise funds. Even so, Peregrine's bavituximab appears to have a good chance of success based on its mid-stage results, offering investors an intriguing risk to reward ratio. Overall, my take is that Peregrine definitely warrants a closer look, especially after raising the funds necessary to carry out its clinical activities.