2 Bold Speculative Plays In Biotech With Major Upside

Includes: CRIS, MSTX
by: Bret Jensen

My long time readers know I take a "shotgun" approach to biotech investing. This sector has more failures than any other area that I can think of in the market. It is only prudent to spread your bets around by taking smaller positions in more stocks that one would in other sectors. The upside is that one can have huge winners when one of those plays pans out like my position in Omeros Corporation (NASDAQ:OMER) which is up more than 150% since I profiled it in late August.

I tend to look for a few things when I select a biotech for a small position. It should have an interesting and potentially lucrative product (NYSE:S). The company should also have a solid cash position to allow it to develop successful compounds without going back to the markets to raise additional funding. Insider buying and increasingly positive analyst coverage are also things I look for on these stocks. Here are two solid speculative plays in the biotech sector with several of these elements.

Mast Therapeutics (NYSEMKT:MSTX) focuses on developing therapies for serious or life-threatening diseases. Its lead product candidate includes MST-188, a product candidate that has hemorheologic, cytoprotective, and anti-inflammatory properties, which is in phase 3 study for the treatment of sickle cell disease in patients. I rarely cover stocks that sell for less than $1 a share, but I will make an exception for this speculative biotech play.

One very interesting thing about Mast is that its entire market capitalization is represented by the net cash on its balance sheet after a recent secondary offering. The other thing that caught my eye on this stock was a report from Canaccord Genuity this week on this fifty cent a share stock. The analyst firm initiated the shares with a whopping $3 a share price target. Its analyst noted "We think MST-188 could gain significant market share given the unmet need in SCD and potential combo-Tx. Our $3.00 target is based on NPV analysis."

This is a speculative play for patient long term investors. Even Canaccord's analyst does not see a launch of MST-188 until 2017, although he also puts eventual peak sales at $400mm annually. Only three analysts cover this ~$50mm market capitalization concern. Their price targets range from $1 to $3 a share.

Curis (NASDAQ:CRIS) is a small (~$380mm market capitalization) biotech concern. The company has a capsule based treatment ("Erivedge") for basel cell carcinoma (NYSE:BCC) and another promising protein inhibitor in early trials. CRIS currently trades at ~4.30 a share. Roche is just starting a study to see if Erivedge could also be effective in MDS and AML patients as well.

Chardan Capital initiated the shares as a "Buy" last week and put an initial $6 price target on the stock. Chardan's analyst stated that the company could receive $230mm in royalties annually from its BCC treatment "Erivedge" based on peak worldwide sales once the product achieves global rollout. This obviously would be a huge amount of revenue for such a small company.

The 8 analysts that follow the stock have a $6.50 price target on the shares. The company is currently posting small losses but recently stated it should have ~$50mm at yearend which should get it through until a significant ramp up in revenues.

Disclosure: I am long CRIS. 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.