Editors' Note: This article discusses micro-cap stocks. Please be aware of the risks associated with these stocks.
There is something about potential that ignites excitement. It doesn't matter where the potential resides, nor does it matter how unlikely the potential coming to fruition truly is. What matters, in the moment, is simply that the potential exists. We've all been there. A blog catches our eye. An inside tip grabs our attention. A coincidence is thought instead to be serendipitous. In that moment, we step outside of reality, and we anticipate victory as though it has always been inevitable.
I first experienced this as the son of a gambler. You see, certain educations in life cannot be taught; they can only be learned. No place on earth teaches that lesson to greater effect than the track. The track is sort of a stock market for a different population. It is a place where the disenfranchised can mingle with thoroughbred owners. It is a place where everyone trades the same currency. That currency is hope. Whether one is rich or poor, old or young, a cynic or an optimist, the track, much like the market, is the great equalizer.
One man in tattered shoes stands along the rail next to another man in a hand cut jacket. They have never met. They share only a brief nod as mutual observers acknowledging one and other as momentary equals. My father was the man in tattered shoes; his last few dollars riding on a horse. His ability to provide for himself, and his son, would be dictated by something completely outside his control. He knew this. I knew this. Neither of us cared. We weren't there for the win. It would have been nice of course, but we knew that was unlikely. We were there for ninety seconds of hope; for the escape it provided. We were there because for the ninety seconds, which unraveled between the gates opening and the first horse finishing the race, we had a chance to lead a different life. For those ninety seconds anything was possible. My father dreamed of owning his own home somewhere tropical. He imagined wearing hand cut suits. He reveled in the thought of ordering a steak from a restaurant without worrying about the price. For those ninety seconds he was different, his life was different, his future was different.
Fast forward a few decades later and here I am. As a grown man who spends his hours speculating equities and opportunities, I find myself having a daily battle with my gamblers blood. I want to take that big chance. I want to be comfortable with that big risk. I want to lay it all out there, and just let the horses run. I want those ninety seconds of hope back. I want my horse to cross the line first. Except now my horses don't have jockeys, and can't be summarized simply in the daily racing form. My horses are equities; and in the equities market, there are no greater longshots than prospective biotechs.
Searching for the Next Big Thing
It wasn't that long ago, 2009 in fact, when Pharmacyclics, Inc. (NASDAQ:PCYC) was a mere penny stock (see below). Today however, Pharmacyclics trades in excess of 120 dollars per share. That type of absurd and wealth creating growth is nearly impossible to find outside of the biotech sector. It is for this reason why emerging biotech companies can ignite excitement and anticipation like no other tradable equity.
So the question then becomes as follows; who is the next Pharmacyclics?
If only we knew the answer to that question; wouldn't that be magnificent? In truth however, the story of Pharmacyclics is a rare one indeed. As prospective investors, the best we can do is research potential investments, strategize our entry points, and possess the courage to buy into a yet to be proven entity. After all, with prospective biotechs, one is investing in potential breakthrough therapies prior to FDA trials, sales forecasts, or distribution plans. In the biotech sector, anticipation is one of the industry's tent poles.
Investing in Uncertainty
It takes a certain type of investor to place a wager in the emerging biotech sector. Volatility is high. Anticipation is great. Courage is required. In many ways, the gambler and the biotech investor are one and the same. The one way in which they are very different however is this; the investor must possess commitment over time. A gambler's outcome is realized quickly. An investor's return often requires patience. So, assuming one has the attributes required to enter into a biotech investment, here are two emerging biotechs to keep an eye on.
The first company to consider is Omni Bio Pharmaceutical Incorporated (OTCPK:OMBP). At Omni, the focus is on an exciting treatment with an exemplary safety record; plasma-derived alpha-1-antitrypsin, known as P-AAT. Historically, P-AAT has been used to treat emphysema. In fact, four drug manufacturers currently produce P-AAT for that purpose. However, in recent years, speculation has been building that reconfigured versions of P-AAT could be used for treatment in an array of diseases beyond just emphysema. This speculation has led to multiple patent filings and licensing rights being pursued by various biotech companies.
As it pertains to Omni, they hold the licenses for P-AAT usage in diabetes, graft versus host disease, radioprotection, certain bacterial and viral infections, post myocardial infarction remodeling and inflammatory bowel disease. Furthermore, Omni has taken the current construction of P-AAT a step further. By reformulating the plasma based AAT molecule into a protein fusion molecule (what Omni has designated Fc-AAT) the new version becomes stronger, more versatile, and perhaps even less expensive to distribute.
Not only is the science exciting at Omni, but the company is also led by a highly competent CEO. Bruce Schneider, who has been Omni's CEO since the first of the year, is arguably the finest and most accomplished CEO any small biopharmaceutical company could employ. He spent 35 years at Wyeth Research prior to being the number two person in charge of new products at Pfizer. His pedigree is beyond compare.
Omni is likely three or four years away from any significant trial results that could translate into noteworthy returns for investors. However, for patient investors with substantial ambitions, Omni is well worth considering as a long-term investment. Given their licenses, progressive science, and infallible leadership, Omni could eventually see market capitalization numbers upwards of hundreds of millions of dollars. For a more detailed look at the science behind Omni consider reading this in-depth article.
The second company worthy of additional research is Atheronova Incorporated (OTCQB:AHRO). To refer to the potential in Atheronova's pipeline as "enormous" would be a laughable understatement. In addition to recently having filed a patent application for what they call a "potentially revolutionary obesity treatment," Atheronova has a drug in their pipeline that could transform the medical establishment.
This theoretically transformational drug compound in development is called AHRO-001. It is a proprietary compound, which could potentially become the gold standard for treating cardiovascular disease. What's most impressive about AHRO-001? It's a tablet taken orally; the delivery method largely preferred by manufacturers, distributors, doctors, pharmacists, and patients alike. In the event that a simple tablet could effectively treat the most prolific of adult diseases, it would represent a paradigm shift in medicine.
Naturally, the next question would of course be; how does AHRO-001 work? Utilizing a process called delipidization, by which lipids are physically or chemically reduced or eliminated, AHRO-001 functions similar to the way a drain cleaner unclogs a pipe. Once swallowed, AHRO-001 goes to work dissolving atherosclerotic plaque along the walls of arteries. Subsequently, that same dissolved plaque is then safely removed from the body through natural metabolic processes. Furthermore, AHRO-001 significantly improves lipid panel numbers, and has a positive effect on HDL efficiency. These assertions are not strictly speculative or hypothetical.
In pre-clinical studies completed at both UCLA and Cedars-Sinai Hospital, use of AHRO-001 led to a 95% reduction in innominate arterial plaque formation versus the control group. The same studies also showed no adverse side effects, even at high dosage. Most impressive however was the rate of regression in existing plaque. Current cardiovascular disease treatments, both in development and on the market, merely stabilize the disease, not promote healing, regression, and recovery. These results have led Atheronova to position AHRO-001 within the market as a breakthrough treatment for atherosclerotic plaque.
When one considers that the addressable markets for obesity and cardiovascular disease are well into the billions, it's certainly feasible that Atheronova could eventually become a significant presence in the biopharmaceutical world. Admittedly, noteworthy human trials are millions of dollars and multiple years away, but the end results for the early investor could be astronomical. Potentially, every dollar invested in Atheronova today could equate to 100 dollars in five to seven years. It's highly speculative, but it's possible.
The Risks of Emerging Biotech Investments
It stands to reason that any potential investment capable of delivering exceptional gains is also at risk for significant losses. No sector better substantiates that paradigm more effectively than emerging biotech. After all, on the journey from hypothesis to product, there are a number of potential pitfalls.
First and foremost, not every developmental treatment will be successful. While every small biotech company dreams of a breakthrough therapy to put them on the map, very few of them complete that task. As was previously stated, the Pharmacyclics story is a rare one. The truth is that not every idea has promise, and the cost of finding that out is often expensive. In the event that a treatment, therapy, or vaccine does prove to have potential, then the costs associated with bringing that potential to trial are exuberant. Furthermore, the process of completing trials is not an expedited one. Trials often cost millions of dollars and take upwards of 2-3 years.
In the event that a treatment does make its way to a stage three FDA trial, the scrutiny it will be put under at that point is mind boggling. It will not only be compared to all existing treatments in terms of safety, stability, effect, and cost, but it will also be independently evaluated. More often than one may think, treatments make it to stage three FDA trials only to see their hope for approval denied.
Of course, the risks don't end there. Along the way there are often competitors developing similar treatments. Those competitors are not only competing to earn better results, but also to get through the trial process faster in order to get their product into the market sooner. The biotech universe is a dog eat dog world and only the strongest, most capable, and best funded make it out successfully.
Emerging biotech investments are exciting and ripe with potential. They are, arguably, the equity investment most capable of delivering huge returns to shareholders. Moreover, emerging biotech investments are very much like the horse track; anyone can afford to go. Most emerging biotech companies are penny stocks (less than 5 dollars per share) and can be added to anyone's portfolio regardless of their capital position. For that fact, they are very much the great equalizer of the market. Both of the companies mentioned herein likely have shareholders from every tax bracket, demographic, and location. The only requirement of biotech investors is that they possess a tolerance for risk and optimism for the future. In biotech investing, hope is non-negotiable.
Biotech investments, especially in the early stages, are a gamble. I wouldn't advise a novice investor to put all their money into this sector alone. However, as former Las Vegas icon Benny Binion once said, "nobody outside a casino ever won a thing." He was right; you've got to be in it to win it.