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Small cap biotech: The GOOD (part I)

Recs

9

December 09, 2008 – Comments (8) | RELATED TICKERS: ONXX.DL , MDCO

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. 

8 Comments – Post Your Own

#1) On December 09, 2008 at 5:37 PM, goldminingXpert (29.80) wrote:

thanks, I was hoping the series wasn't just going to be "the bad and the worst" 

Always love reading your posts.

GMX 

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#2) On December 09, 2008 at 6:33 PM, DemonDoug (91.96) wrote:

btw, since you didn't like to respond on the last blog, if Dendreon's Provenge does get approval, generic won't be an option.  The treatment is custom made by a process based off the patient's blood, and is different for each patient.

Dendreon GOOD (but risky wholly dependent on FDA approval of provenge) at 4. :)

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#3) On December 09, 2008 at 9:29 PM, zzlangerhans (99.74) wrote:

Thanks GMX, hope you get #1.

Demon, I don't see any point in arguing merits of Dendreon or any other stock. Nothing we say will influence the share price or affect whether Provenge is approved. All I can say is that with your score, I'm surprised to see you so in love with a flyer like Dendreon. I'd think you could do much better with less risky stocks. I've made my call and I'm sticking with it. In a few months we'll know.

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#4) On January 10, 2009 at 5:32 PM, Alex1963 (28.87) wrote:

Hey ZZ,

Any thoughts on this? :

Reuters 1/9/09 "The first drug made using genetically engineered animals to near U.S. approval won key support on Friday from an advisory panel that judged it safe and effective despite concerns from groups worried about the genetic tinkering."

in summary: An 18 member FDA advisory panel approved GTC Biotherapeutics (GTCB)anticlotting product Atryn made from dna altered goats. Licensed to & Marketed by Ovation Pharmaceuticals"

Here's the link http://www.comcast.net/articles/news-science/20090109/SCIENCE-US-GTC-ATRYN/

I did a little digging but couldn't find much. GTCB was at $1.19 in 2/08 the steadily dropped to .11 until 12/08 then rocketed up to .64 thru yesterday (maybe on spec on this news?)

Ovation has been lobbing product at the FDA pretty steadily and do seem active with various applications on varied drugs. Here's some of what I found on them

http://www.hoovers.com/free/co/news/list.xhtml?ID=109409&Name=Ovation+Pharmaceuticals%2C+Inc.&source_type%5B%5D=

You seem pretty plugged in so your comments would be appreciated. If nothing else maybe this wasn't on your radar and might be worth your time. I didn't see it in your portfolio anyway. Anyone else out there who follow biopharm please, do comment if it's worth your time, of course. I know diddly about this sector beyond it's highly specualtive and requires tremendous focus to pick even a few winners. But a few winners can put you in the black (or the MF green :)

Thanks!

Alex

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#5) On January 11, 2009 at 3:09 PM, zzlangerhans (99.74) wrote:

Alex, anyone with a score like yours after just a few months gets my attention. I've profited on GTCB before (lucky to do so) and currently hold 20000 shares bought at 0.40. I've been following them over a year and thought they were undervalued in 11/07 at 1.04 based on prospects. Fortunately I was smarting from a shellacking on ADLS at the time and held my fire, but continued to follow the company closely and marveled at the steady decline in share price despite steady progress in ATryn development. I bought my shares at a false bottom back in the summer, then watched their value cut to as low as 0.13 as little as a month ago. I had very low expectations at that point, expecting some form of capitulation had been priced in.

Now I need to decide if I'm holding through the Atryn PDUFA on February 7. If the stock gaps up again tomorrow based on Friday's panel approval I may try to time a high and sell. If I sell at 1 I've made twelve grand, not bad. On the other hand, despite the limited commercial potential of Atryn, approval will garner the company enormous buyout interest. Oh, to have waited until 0.13.

Of course by the time I got interested in GTCB, it was too small for a CAPS rating, another limitation of the system. There are several other smashed up biotech penny stocks worth a look as well - NRGN, NEOL, MBRX.

Obviously your instincts are good. I'd be interested to hear your thoughts.   

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#6) On January 12, 2009 at 7:14 PM, Alex1963 (28.87) wrote:

ZZ,

Thanks for the vote of confidence on my CAPS. That means a lot to me from an obvious pro like yourself.

My thoughts are now that I've read your reply I'll probably buy. What do you make of the drop today to .62 from .64?

I'll check these others too. Thanks! Maybe thanks a bundle :)

Alex

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#7) On January 13, 2009 at 9:39 AM, zzlangerhans (99.74) wrote:

Ack! Don't buy a flyer like GTC on my account. I'd never buy this today. Now I'm only buying biotechs with a solid financial base and approved or near-certain-to-be-approved products. That means stay away from the under a buck crowd. GTC's share price struggles yesterday are typical of a penny biotech where the cold reality of numbers ultimately quenches bursts of optimism. Even with Atryn approval GTC may never become profitable. I think the best hope is a buyout which is why I stay in. I can't stand the idea of selling it then seeing it quintuple the next day when it gets swallowed by Genentech for breakfast. Not having bought it, you are not subject to those same regrets. Do not touch. Check out AMAG or LGND instead, great bargains at current prices.

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#8) On January 13, 2009 at 11:07 AM, Alex1963 (28.87) wrote:

ZZ,

Hmm OK. Thanks. I have been thinking a biotech sector fund or ETF over the last few days may be a better way to get in to this sector.  I believe this overall sector will be a winner over the next year but trying to identify individual stocks seems like a real crap shoot.

Thank you for your refrshingly candid comments

Alex

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