Any of my readers that have followed any of my columns on speculative biotech plays for any length of time know my philosophy of taking a shotgun approach to this sector. Stocks in this sector are highly volatile and can move 50% either way on any news such as results of test trials or buyout rumors. I take positions 1/3 of the size I do in other sectors and I spread my bets over many more stocks within the sector. I also split my investments between buying the stock outright and just buying out of the money call options depending on the liquidity of the options market on any particular stock. I fully expect to lose money at least 60% of the time when holding stocks and 80% of the time buying options.
Given the huge upside when you get a call right, in the long run I expect to make a nice return although one with a huge amount of volatility. Here are two small cap biotech stocks, with huge amounts of cash on their balance sheets, interesting products targeting cancer and some recent positive comments from analysts.
Endocyte (ECYT) is a biopharmaceutical company that targets therapies for the treatment of cancer and inflammatory diseases. The company uses its proprietary technology to create novel small molecule drug conjugates and companion imaging diagnostics.
4 reasons ECYT is a solid speculative play at just over $9 a share:
- The company has over $180mm in net cash on its books. This accounts for just under 60% of its market capitalization at current prices.
- RBC Capital reiterated its "Outperform" rating on the stock this week. It also raised its price target from $12 to $15 a share. Summer Street Research initiated the shares as a "Buy" in late November with a price target of $18 a share.
- Revenues have gone from basically nothing in 2011 to over $30mm in 2012. Analysts expect $55mm in revenue currently for 2013.
- The median price target on the shares is $15 a share. Although Endocyte is projected to lose 20 cents a share in FY2013, at the current rate of improvement it should be cash flow positive by end of this year.
Geron Corporation (GERN) is a biopharmaceutical company that develops therapies for cancer. Its clinical development product candidates include Imetelstat, a telomerase inhibitor, which is in Phase II clinical trials for several different cancers.
4 reasons GERN is a good speculative play at just $1.70 a share:
- Piper Jaffray just initiated the shares with an "Outperform" rating with a $3 a share price target.
- Nearly 50% of the company's market capitalization is the net cash on its balance sheet. Given the company's reduced pipeline, cash burn should also slow.
- 2013 is projected to be a decent one for M&A activity in the biotech space as big Pharma tries to replenish their pipelines. Given GERN's small market cap and niche, it easily could attract attention.
- Early study results on Imetestat released in December were positive and the stock sold for north of $5 a share less than two years ago.
Disclosure: I am long GERN.