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Top 2 Trade Alert Ideas October 13: Mast Therapeutics' Potential, Johnson & Johnson's Results, Investor Relations

This week Zafgen's (NASDAQ:ZFGN) shares plunged following reports that the company was withdrawing from an investor roadshow. The stock tumbled on Monday and then fell further on Tuesday. I believe that Tuesday's slide could have been contained if the company had come out with a statement sooner.

Now, listed companies are not required to comment on market activity. But when the fall is as significant as the one seen in ZFGN on Monday, I believe that there is a case for a statement. To Zafgen's credit, it did release a statement on Wednesday. The company said that a patient died in the Phase III trial of its lead product candidate. The cause of death is not known yet. While there is still uncertainty surrounding ZFGN and the uncertainty will remain until the cause of death is not known, the statement did help calm nervous investors.

I remember a similar case earlier this year when ACADIA (NASDAQ:ACAD) surprisingly announced that it is delaying the submission of its NDA for Nuplazid. The announcement came just a few days after the company's ex-CEO said that it was ready to file an NDA. Now, I have a long position in ACAD and did not sell during the chaos that ensued after the NDA submission delay announcement. But, in my opinion, the top management could have handled the whole thing better. In the present environment, where sentiment on the biotech sector is negative, it is important that companies, especially those in the clinical stages, have a robust system in place for managing investor relations.

Mast Therapeutics' shares continue to remain range bound despite the potential of its lead product candidate vepoloxamer in sickle cell disease. The reason investors remain on the sidelines, as I have explained before, is the company's past. MSTX has failed to commercialize a drug on two previous occasions. However, as I have discussed before, the chances of success are higher this time because of the way the Phase III EPIC trial has been designed.

MSTX announced late last month that it has amended its existing Loan and Security Agreement with Hercules Technology Growth Capital. The agreement provides for a $15 million funding. MSTX received $5 million in August. For the second advance of $10 million, the original agreement required the company to achieve certain clinical development and financial milestones by December 31, 2015. One of these milestones was receiving $15 million in net cash proceeds from a strategic partnership and/or equity financing. The amendment has removed these funding conditions, and MSTX was allowed last month to draw the second advance.

As per the amendment, the company is now required to receive the $15 million net cash proceeds by April 30, 2016. By this time, MSTX would have reported top-line data from EPIC trial, and if the data is positive, the requirement would be eliminated entirely. Hercules' decision to agree an amendment indicates that it is confident about MSTX succeeding in the EPIC trial.

I believe that the company's shares are struggling due to the past failures. However, if the top-line data is positive, it will certainly change the sentiment on the stock.

Johnson & Johnson this week became the first major pharma company to release its third-quarter results. The results were mixed, with JNJ beating on earnings, thanks mainly to a low tax rate, but missing out revenue due to unfavorable exchange rate and weak sales of Remicade.

JNJ has also announced a $10 billion stock buyback program. I believe that from current levels, the company has some upside. The stock looks slightly undervalued based on 2016 sales estimates.

Dr. Kanak Kanti De's Real-Time Biotech Trade Alert Service Archive - October 13, 2015

Posted: Tue, 13 Oct. 2015 12:22:27 -0400
Ticker: MSTX
InPortfolio: Yes
Action: Buy

ConvictionBuy: Yes
Price: 0.50
Target: 1.40
Stop: 0.25
ProfitTaker: 1
RiskProfile: High
InvestmentType: Speculative
Thesis: I am reiterating my buy call on Mast Therapeutics in the wake of some recent positive developments. The stock remains significantly undervalued. MSTX's Phase III trial for its lead product candidate in sickle cell disease continues to progress well. In late September, the company amended a loan and security agreement with Hercules...