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Small cap biotech: the GOOD (part III)



May 11, 2009 – Comments (6) | RELATED TICKERS: MYGN , GHDX , SQNM

I’ve abandoned my attempts to pick GOOD baby biotechs over the last few months as the broad market has rebounded counterintuitively, and I believe that the vast majority of stocks are overpriced for short term performance. While there are still good bets for the long term, I refuse to take an immediate haircut in real life or in CAPS by getting suckered into what I believe is a bear rally of ridiculous proportions. However, two companies in one of my favorite biotech sectors have recently suffered vigorous thrashings which I believe position them to be successful investments in the short-term as well as the long-term. That sector is molecular diagnostics, in which the marketed products are genetic assays rather than pharmaceuticals. The beauty of these products is that they do not need to meet the rigorous safety and efficacy standards of pharmaceuticals and are therefore much more likely to attain FDA approval without the hundreds of millions in trial expenses. The companies that specialize in molecular diagnostics are using cutting edge technology to help physicians optimize the use of approved treatments, which renders those treatments much more effective and valuable.

Myriad Genetics (MYGN): Myriad markets numerous tests that predict a genetic predisposition to different forms of cancer, as well as the suitability of specific chemotherapies to individual patients with cancer. They have a strong track record of success in developing commercially viable products over the last few years. From a revenue perspective, their business model appears to be working. Their last six quarters have yielded 53, 59, 65, 70, 84, 87 million respectively. The last number, released just last week, seems to be what was has brought the share price down from the recent 45 range to the current level. A 30% haircut isn’t a bad opportunity, given that it’s based on just a slight drop in the rate of revenue growth in a horrendously down economy. Meanwhile, new assays continue to come online on a regular basis, although it is difficult to tell how successful they are as the company doesn’t break down their revenues. The company also develops biopharmaceuticals although they haven’t demonstrated much success on this front. In a few months, the molecular diagnostics business will spin off an independent corporation to develop the pharmaceutical pipeline. I would recommend selling the resulting stock dividend to maintain the investment as a pure molecular diagnostics play. Consistent profitability and a strong cash position with no debt on the books round out the positives of this stock. Myriad Genetics, GOOD at 31.

Genomic Health (GHDX): Unlike Myriad, GH doesn’t have a broad base of molecular diagnostic products to rely on, nor do they have the same long track record of success. But the product they do have is a real winner. The Oncotype DX assay is used to determine the optimal chemotherapy regimen for breast cancer as well as the likelihood of distant recurrence. Oncotype DX revenues for the last four quarters were 26, 28, 31 and 34 million respectively. The assay was also recently shown to be predictive of distant recurrence in colon cancer, although the market was apparently disappointed by its inability to predict the effectiveness of chemotherapy as it does in breast cancer. The company remains unprofitable as they aggressively pursue expanded indications for the Oncotype DX assay, but the burn rate is well controlled with a cash position that will carry them safely at least through the end of 2010 without dilution. Due to their reliance on a single product and lack of a clear pipeline, GH has an inherently weaker risk/reward profile when compared to Myriad. However, their current share price represents an attractive entry point given that they were at 27 a month ago without any change in fundamentals. Given the current downtrend I would allow the stock to drop to recent support below 18 before buying. Genomic Health, GOOD at 19.7.   

I’ll devote a brief note to the company that was supposed to be in this blog entry, but fortunately blew up before it made a complete fool out of me. Sequenom’s confession about unspecified employee misconduct regarding trial data resulted in a spectacular stock collapse. There are several shoes left to drop in this story, but it should serve as a reminder that there is nothing certain or safe in baby biotech. No matter how solid the company appears, this is not a buy and hold sector. Sequenom stockholders had over a year to dwell on their 400% or greater gains as one of the few success stories in this sector. I can only hope that a lot of the retail guys who rode it up had the sense to sell at the top.  

6 Comments – Post Your Own

#1) On May 11, 2009 at 4:26 PM, BravoBevo (99.97) wrote:

Thanks.   +1 rec.

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#2) On May 27, 2009 at 12:25 PM, mindmuse (30.22) wrote:

Appreciate the analysis and opinion.

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#3) On June 08, 2009 at 8:05 AM, Capsperson wrote:

Great commentary and very instructive.

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#4) On September 29, 2009 at 9:34 AM, BravoBevo (99.97) wrote:

Once upon a time long, long ago in a faraway land, you had liked KERX. But delays and disappointments followed the stock down to a point where you bit the bullet and took the loss. Now, two years later there is noise again at a much lower stock price:

09/29/2009 (MidnightTrader) -- Keryx Biopharmaceuticals announced updated clinical results from a Phase 2 study of KRX-0401 (perifosine), the company's PI3K/Akt pathway inhibitor for cancer, as a single-agent treatment for advanced metastatic renal cell carcinoma (RCC). The company said Perifosine continues to demonstrate impressive single agent activity and safety in an advanced group of RCC patients, with 50% of patients progression-free for a median of 8 months. Given the convenient oral schedule, with a manageable safety profile and demonstrated efficacy, future studies with perifosine in the 2nd or 3rd line setting (single agent or in combination with an mTOR inhibitor) should be considered.

zz, do you have any particular thoughts about this?  Or do you see this as wishful thinking that is unlikely to be economically productive? 

Inquiring minds want to know. By the way, I hope that you are doing well.  I haven't seen you in a long time.  Last I heard, you were traveling overseas, right?

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#5) On October 26, 2009 at 11:41 AM, BravoBevo (99.97) wrote:

zz:  welcome back ... i trust that your time away was productive and refreshing ... missed your insight, especially with health care in the newsmakers' limelight.

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#6) On December 06, 2009 at 10:44 AM, TigerPackFund (< 20) wrote:

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