Combine the complexity of genomic testing with the high risk inherent in micro-cap stocks, and you have investment opportunities that require exceptional diligence. The reward for understanding the value proposition of budding companies? The payoff can be enormous. In this interview with The Life Sciences Report, Senior Medical Device Analyst Brian Marckx of Zacks Investment Research has shared his insight on how investors willing to do their homework could receive returns of triples, quads and more.
The Life Sciences Report: You focus on the smallest of public companies, ranging from low double-digit market caps of about $10 million ($10M) to $70-80M. Clearly, that segment of the investing universe is where the most upside potential is, because it's easy to move these shares with capital. Of course, the risk is proportional to these potential gains. How does your due diligence begin on these stocks, where there is so little coverage and prior exposure?
Brian Marckx: There is enormous potential upside in the stocks of many of the companies that I cover but also tremendous risk, given that many of them have yet-to-be-proven technologies or products, and may be burning a significant amount of cash. Oftentimes, they are companies with somewhat shaky balance sheets, and the shares may be thinly traded. All of that makes these types of investments inherently risky.
My due diligence typically starts with a general overview of the company. I'll have a conversation with management, which can answer my initial questions and provide pretty good background on the company's products, strategy, industry, competition, etc.
After my initial conversation with management, I talk to people in the industry who typically offer information that mirrors what management provided, but with an outside perspective. I'll also look at publicly available information. I typically generate a number of questions and then have another conversation with management, which is one of the best sources for answers. The process can be lengthy and sometimes tedious, but it's always insightful and informative. Given that these companies are often working on novel products and are not household names, the process is necessary to understanding a company's place in the industry.
TLSR: Analysts, like scientists, have to be skeptical, but they shouldn't be cynical. Don't you have to begin due diligence with the question of how a company with just an idea, a small amount of intellectual property and a handful of employees will ultimately compete with big pharmas, big biopharmas or big medtechs?
BM: Skepticism is a necessity for analyzing and investing in stocks. That's particularly true in the small- and micro-cap space, where there is typically less information about the companies. Because the market caps are so small, there is also, unfortunately, more potential for price manipulation and even fraudulent behavior.
Often the first question I have to answer is, "How will this tiny company compete with the goliaths-or any other company in the industry?" Getting comfortable with the answer involves understanding the target market and the other companies and products competing in that market. Sometimes there aren't any other products on the market. In those cases, particularly for companies with novel products that may have wide-ranging applications or target markets that are relatively large, the upside of the stock can look particularly attractive.
Other times, competing products are already on the market. In those cases, determining how competitive a company or its product may be is about understanding the advantages one product may have over the others. The product may be more efficacious or have a lower incidence of safety issues. Maybe it has a lower cost or a less frequent treatment burden, among other possible advantages. If a small company with a novel product has to compete with an already dominant product on the market, it had better have some obvious advantages.
TLSR: If there's one thing you want to do in medicine - and especially in research - it's to standardize your formulations, and a branded product would be a great way to do this.
BM: That's right, absolutely.
TLSR: Thank you, Brian. I enjoyed it very much.
BM: Thank you too.
This interview was conducted by George S. Mack of The Life Sciences Report and can be read in its entirety here.
Brian Marckx is the senior medical device analyst with Zacks Investment Research, and has covered the medical device, pharmaceutical and biotechnology industries since joining Zacks in 2007. Prior to joining Zacks, Marckx worked as a high-yield bond analyst on Wachovia Securities' institutional trading desks, where he specialized in the healthcare and industrials industries. Before that he was an analyst in corporate finance at First Union National Bank. Markx has been quoted in numerous publications, including The Wall Street Journal, Barron's, Bloomberg-Businessweek and Kiplinger. His work has also been cited in various market studies and working papers, including those from Massachusetts Institute of Technology, Deloitte & Touche, and Pharmaceutical Manufacturing. He graduated with a bachelor's degree in finance from St. John Fisher College and received his master's degree in business administration from Wake Forest University. He is also holds a Chartered Financial Analyst designation.
1) George S. Mack conducted this interview for The Life Sciences Report and provides services to The Life Sciences Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Life Sciences Report: None. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Brian Marckx: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.