Small cap biotech: The GOOD (part I)
Nothing exciting happening in biotech world so far this week so I can't put off this post any longer. If there is such a thing as BAD, then there must be GOOD otherwise we wouldn't be able to define BAD. Several factors establish a small cap biotech as one of the better investments in the sector. The most important is their track record of success. This differentiates true players from the numerous bogus outfits that exist solely to enrich their founders. Look for companies that have gained FDA approvals, acquired and successfully marketed drugs, sold developmental projects for significant sums, and achieved unequivocal success in phase III trials. At the same time they need to be undervalued. It is very important to make a database of similar companies to get a sense of which have been unfairly pushed down and have the greatest potential returns. Of course in the current market, virtually all baby biotechs with good track records are undervalued by historical metrics. Finally, do not fall in love with a stock. Seek out reasoned criticism and challenge your investment every time you review it. Be prepared to exit at a moment’s notice, even at a loss, if the risk/reward ratio has changed.
As with the BAD biotechs, my horizon on the GOOD picks extends for about a year. If I haven’t made a profit by then, I haven’t picked the right company. Of course, I reserve the right to declare myself a winner at any time prior to that. And I think I’ll drag these picks out a little longer since I haven’t figured out what I’ll do with my blog after this. So we’ll go with two per post, and start with the ones I’m least excited about and work upward.
Before reading onward, it is critical to remember Baby Biotech Rule #10 and the Baby Biotech Meta Rule.
Baby Biotech Rule #10: Do not buy a biotech stock on anyone's recommendation. No one has a track record in this sector that can be relied upon.
Baby Biotech Meta Rule: Do not invest in baby biotech stocks.
Onyx Pharmaceuticals (ONXX): With a market cap well under two billion dollars despite 2008 Nexavar revenues of about 150M, this profitable biotech has a lot of room for upward movement with a broad market recovery. The stub traded as high as 45 a few months ago before dropping to 22 with the meltdown in financials, all without any significant change in the company’s fundamentals. Nexavar is solidly positioned in the treatment of two solid organ cancers (hepatocellular and renal cell) and a push into the Chinese market is planned. The caveat on Onyx which prevents it from being a top tier investment is the over-reliance on Nexavar and lack of a significant pipeline, which elevates the level of risk significantly. Onyx Pharmaceuticals, GOOD at 30.
Medicines Company (MDCO): Gee, I wonder what they sell. I’ve had harsh words for Medicines on CAPS before, due to their colossal F-up on the Angiomax patent as well as my doubts about first pass Cleviprex approval. I promptly went fifty points down on that pick even before Cleviprex was approved. I barely escaped with a positive score after the stock took a 50% haircut in the last three months and I was happy to switch to an outperform. The only recent negative catalyst I can detect is a swing to a quarterly loss due to the company’s decision to refocus resources on their pipeline, which is what I thought baby biotechs were supposed to do. For now, Angiomax revenues continue to trend upward but this revenue stream could be severely damaged by generics as early as 2010. Cleviprex is still a wild card this soon after approval. Is Medicines frittering away their profits on dead ends in the pipeline, or are they securing their future against the loss of Angiomax? This is where track record comes in – a company with two major FDA approvals gets the benefit of the doubt, especially at a market cap under 700M. Medicines Company, GOOD at 13.
Good luck to all the PTIE longs out there although my thumb is red pending the Remoxy PDUFA tomorrow. I have no personal investment but I've modeled a few options straddles to see if it's possible to profit off the binary event regardless of the outcome.