Weekly medical stock spotlight: Buy, wait or run? Leaders = Otonomy, Collegium & Sage; Laggards = Selecta & Tivity.

1.Otonomy Inc. (Nasdaq:OTIC) led advancing issues last week, rocketing 73% to $5.17. A Phase 3 clinical trial (AVERTS-2) assessing Otonomy’s Otividex in patients with Ménière’s disease, achieved its primary endpoint of the number of vertigo days compared to placebo.

Specifically, patients in the treatment group experienced an average reduction of 6.2 vertigo days from baseline to month 3 compared to an average reduction of 3.7 days for placebo. The San Diego, CA-based company plans to review the data with the FDA and the requirements for a marketing application for the indication.

An earlier Phase 3 trial (AVERTS-1) failed to achieve the primary endpoint and any of the secondary endpoints due, in large part, to a higher-than-expected placebo response. Otividex (formerly OTO-104), a sustained-exposure formulation of the steroid dexamethasone, is being developed to treat a range of balance and hearing disorders. It is administered directly into the middle ear via injection through the eardrum.

Steve’s Take:

With a market cap of just $156.82 million, Otonomy is a definite micro-cap, but with a respectable beta of 0.99, which assuages the volatility concern. Year-to-date, the share price has been slammed by 67.45%.

Of the four analysts that follow the company, 2 have issued a Buy rating and 2 a Hold, leading to an average recommendation of Overweight. Their average 12-month price forecast is $10, representing a stout doubling of its closing price last week.

The company’s focus is on dexamethasone, a hopeful treatment for a range of balance and hearing disorders. As I look around and witness the steady increase of these particular disabilities among more and more of my Boomer friends, the market for this potential medicine is growing by leaps and bounds.

My judgment is that Otonomy will need to raise cash to fund continuing operations, thus causing the usual dilution among existing shareholders. Although tempting with the stellar upside potential, I suggest holding back on this name until management sets forth a solid, rational financing plan for getting dexamethasone through the FDA morass successfully.

2. Elsewhere, Collegium Pharmaceutical Inc. (Nasdaq:COLL) soared 44% to $14.09 following a better-than-expected earnings announcement. The specialty pharmaceutical company reported ($0.45) EPS for the latest quarter, beating the Thomson Reuters’ consensus estimate of ($0.73) by $0.28.

The Canton, MA-based company had revenue of $11.95 million during the quarter, more than double analysts’ expectations of $5.31 million and up significantly from the $408,000 realized in the same period last year. During the same period last year, the firm earned ($1.13) EPS. Collegium is engaged in developing and commercializing abuse-deterrent products that incorporate its DETERx platform technology for the treatment of chronic pain and other diseases.

The company said this platform provides extended-release drug delivery, while safeguarding against common methods of abuse and tampering, including crushing, chewing, and heating and injecting.

Steve’s Take:

No question, Collegium’s latest quarter results crushed the same period in 2016 and absolutely walloped analysts’ estimates. Given the widely disseminated (and deserved) publicity about the opioid crisis in America, everyone loves a company like this one.

It’s a small-cap at $416.6 million and has an okay beta of 1.70. It shares are down 9.51% year-to-date. Among the 7 analysts who follow the company, their mean consensus is Outperform. Their average 12-month price target is $19.20, representing a good, but not great, upside potential of 36.3%.

Unlike the other companies mentioned in this piece, Collegium has products and is selling them at a faster clip, and generating considerably more revenue, than analysts expected. It’s 52-week price range is $7.37 to $18.02. This is a tough call because it’s a crowded space due to the notoriety of the entire pain-treatment dilemma, and the potential upside just isn’t that compelling yet.

I suggest waiting until the company gets another quarter like this latest one under its belt, and if there’s any resemblance to these exceptional results, perhaps jump in.

3. And Sage Therapeutics Inc. (Nasdaq:SAGE) surged 39% to a record high of $96.04 after its postpartum depression drug succeeded in two late-stage studies, paving the way for it to bring to market the first FDA-approved treatment for the disorder. The Cambridge, MA-based company plans to submit a marketing application for the injectable drug, brexanolone, to the US Food and Drug Administration in the first half of 2018.

Edward Nash, an analyst with SunTrust Robinson Humphrey, said brexanolone could be “a potential blockbuster” for the drug developer, with the intravenous version of the drug hitting peak sales of $400 million in 2026. He also said the success of a follow-on program testing an oral version could generate another $668 million. Brexanolone targets hormonal changes in new mothers, differentiating it as a drug for postpartum depression rather than “regular” depression, Nash said.

Steve’s Take:

Given its status of new-drug developer, Sage’s market cap of $3.61 billion places it in a more comforting mid-cap category. Its beta is a somewhat volatile 1.80, but not particularly wild and worrisome. Its year-to-date performance, though, is a stellar 88.09%. The mean consensus of the 15 analysts who follow the company is it deserves an Outperform rating.

The reservation I have is that at a record high of $96.04, and analysts with a median 12-month price target of $108, there’s only a 12% upside. I’d wait until the company submits its FDA application for brexanolone in 2018, and if further positive trial results are revealed in the interim, perhaps jump in then.

4. But microcap Selecta Biosciences Inc. (Nasdaq:SELB) cratered 58% to $9.03 in response to the Watertown, MA-based company’s announcement of Phase 2 data on lead candidate SEL-212 (SVP-Rapamycin plus pegsiticase) in patients with symptomatic gout. The results appear to undermine the sturdiness of its treatment effect.

The primary endpoints are safety and tolerability. Secondary endpoints include efficacy measures such as the reduction in serum uric acid levels. In the low-dose cohorts, clinical activity was lost by week 12. With mid-dose cohorts, most patients maintained clinical activity through week 12; half through week 20.

For higher dose cohorts, all patients achieved clinical activity through day 30. About 24% of the treatment group reported a gout flare during the first month of therapy. The rate of flares declined thereafter. About half of the pegsiticase alone cohort experienced a gout flare during the first month but treatment was stopped due to safety signals and loss of efficacy.

Steve’s Take:

This appears to be a knee-jerk overreaction to what looks fundamentally like a dosing issue that Selecta either will or won’t resolve successfully. The company has a market cap of $201.7 million, placing it in the micro-cap category. Its beta is a comforting 0.52, suggesting it’s less volatile than the overall market. Year-to-date, its share price is down 47.4%.

Of the 4 analysts who follow the company, 3 rate it a Buy, and one a Hold, leading to an average recommendation of Overweight. The average 12-month price target is $25.50, a potential upside of a whopping 282%.

Even though the dosing issue remains highly speculative, thus rendering the name extremely risky, the massive, potential upside could warrant a small investment. But a gamble is a gamble, and not necessarily a rational bet. Definitely not for the risk averse portfolio.

5. And thinly traded Tivity Health Inc. (Nasdaq:TVTY) plummeted 32% to $32.90 in apparent response to UnitedHealthcare Group Inc.’s announcement that it will provide a new fitness benefit to Medicare Advantage members beginning in January, 2018.

The new offering, called Optum Fitness Advantage, will be provided at no charge to qualified members in 11 states through a network of participating fitness centers, including 24 Hour Fitness, Gold’s Gym and LA Fitness. Franklin, TN-based Tivity offers a similar program to seniors called SilverSneakers and UnitedHealth is its largest customer.

In a note, Piper Jaffray says UnitedHealth’s action does not represent a change in its contract with Tivity, but does represent a risk to its pricing power.

Steve’s Take:

The selloff here upon calm reflection looks like a classic overreaction to what otherwise seems to be innocuous news.

Tivity has a market cap of $1.3 billion, which places it in the small-cap bracket. Its beta is 0.75, which means it’s less volatile than the overall market. Year-to-date, its share price is up 44.62%. Out of 8 analysts who follow the company, 7 rate it a Buy and 1 rates it a Hold. The average 12-month price target is $47–a 42.9% potential upside from its closing price Friday.

I recommend buying this name, but only for the highly risk-tolerant, aggressive portfolio.