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As a retail investor, it can be difficult to find a suitable biotechnology stock with upside potential. If you are seeking an investment in the developmental space, it can be even more difficult, although the potential upside makes it enticing. Not only do you have to sort through data, but you also have to sort through the varied opinions and inherent volatility that comes with the investment. Gathering all the usual information such as catalysts, revenue potential, and cash on hand should be the norm when researching a biotech company. However, if you're looking to add a tool to your assessment analysis, then you might want to start gauging the ownership of institutions, as these might very well be the best measure of risk and development success. I will break down the following company, which I feel will be successful. But the deciding factor in my mind is the big increase of institutional ownership quarter over quarter.

Venaxis Inc.

Venaxis (NASDAQ:APPY) is a diagnostic company focused on developing and commercializing its unique multi-biomarker diagnostic test. The APPY1 test is designed to aid in the identification of patients at low risk for acute appendicitis. The APPY1 test is a simple, rapid blood test that may help physicians manage the large number of children and adolescents who enter hospital emergency departments with abdominal pain that's suspected to be acute appendicitis. Determining if a patient requires emergency surgery for appendicitis is critical and current practices have important limitations. While eliminating the expensive, long-term health hazards associated with exposure to ionizing radiation from CT scans.

European Commercial Partnerships

Venaxis received the CE Mark as a blood-based diagnostic test focused on children and adolescents suspected of having appendicitis to help identify low-risk subjects and avoid unnecessary testing to support a full European product launch next year. European market development agreements and completion of the first outcomes study are expected by the end of Q3 2013, with initial data to follow during Q4 2013. Memorandum of understanding (MOU) has been reached in several European countries, and some are still in negotiations. Company announcements on new partnerships are imminent. as illustrated in the graph below:

Catalyst: Top-Line Results Expected by Year-End

The first of two futility analyses -- which consisted of an independent review of the validity, integrity, and clinical and scientific relevance of the ongoing study -- was performed on the first 579 patients to complete the study. The study was a success. The Data and Safety Monitoring Board (DSMB) recommended continuation of the pivotal clinical trial. The study will enroll a total of 2,000 patients.

The second and last futility analysis (1,200 patients) is expected around the end of Q3/Q4 2013, and top-line results are expected around year-end 2013. If successful, a planned FDA 510(k) de novo medical device should be filed during Q1 2014.

Revenue Potential

As you can see in the above graph, revenues are expected to be between 33 million and 52.5 million (if 30% of market is achieved). This is based only on the indication of patients aged two to 20. Therefore, off-labeled use of APPY1 sales are not included in the above projections.

My Deciding Factor: Institution Ownership Increased More Than 100% Quarter Over Quarter

Venaxis has total outstanding shares of 21,454,380. At the end of Q1, institutional holders held 1,996,521 shares. This has increased to 4,065,949 shares held in total from the last 13-F filings last quarter. This represents a more than 100% increase.

2,484,429 Increased Total Shares Held

Owner NameDateShared HeldChange (Shares)Change(%)Value(in 1,000s)
PERKINS CAPITAL MANAGEMENT INC06/30/20131,267,170848,638202.771,812
DAFNA CAPITAL MANAGEMENT LLC06/30/2013697,000697,000New997
BARD ASSOCIATES INC06/30/2013476,584172,00056.47682
MORGAN STANLEY06/30/2013349,801349,801New500
COE CAPITAL MANAGEMENT, LLC06/30/2013225,000225,000New322
VANGUARD GROUP INC06/30/201384,69661,500265.13121
GEODE CAPITAL MANAGEMENT LLC06/30/201380,47880,478New115
UBS AG06/30/201327,82727,803115,845.8340
JANE STREET HOLDING, LLC06/30/201316,03116,031New23
ROTELLA CAPITAL MANAGEMENT, INC.06/30/201315,8001,99914.4823
BLACKROCK ADVISORS LLC06/30/20136,4793,679131.399
CITIGROUP INC06/30/2013500500New1

415,001 Shares Decreased

Owner NameDateShared HeldChange (Shares)Change(%)Value(in 1,000s)
SOPHROSYNE CAPITAL LLC06/30/2013464,919(397,563)(46.1)665
WELLS FARGO & COMPANY/MN06/30/2013168,890(11,110)(6.17)242
BANK OF AMERICA CORP /DE/06/30/2013151,252(3,327)(2.15)216
TOWER RESEARCH CAPITAL LLC06/30/20132,000(3,001)(60.01)3

Source.

Conclusion

Venaxis has a market cap of $30 million with a current price per share of $1.43. It has cash and equivalents of approximately $20 million as of June 30, 2013, along with an expected cash burn rate of about $1 million per month. Taking into consideration the above due diligence, my deciding factor is the huge increase in institutional holdings. Therefore, I consider Venaxis to be a very promising company with great potential for price appreciation. I believe it warrants a price per share of $3.50 based on successful data results (in Q4) and revenue projections.

Sometimes the large institutions are going to be wrong. However, for clinical stage biotechnology companies, ownership can be an indication of how institutions assess a product's chance for success. These institutions have more resources than you, and can see things that you might miss. Astute investors are urged to do further due diligence on Venaxis, as it will likely reward investors with substantial gains in the near future.

Disclosure: I am long APPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Increase In Institutional Ownership, Q4 Catalyst Make Venaxis Top Buy For Second Half Of 2013