Investing in biotech is different than investing in other sectors in the market. Some hedge funds employ PhDs in biochemistry but still get it wrong as much as they get it right. Due to the complexities of new compounds, the intricacies of navigating regulatory processes, the vagaries of drug trials and the scant analyst coverage assigned to smaller plays within the biotech universe; the rate of failure is much higher than any other industry.
The biotech sector calls for a different investing strategy. My philosophy is to take much smaller positions in a larger amount of selections than in other sectors. I call this "Shotgun Investing". There will be many failures using this approach. However, this should be compensated for by the occasional five or ten bagger.
I look for companies with interesting products, some possible catalysts and balance sheets that should allow the firms to get their products to market provided they have good trial results and eventual FDA approval.
I have scored many successes over the past couple of years by buying using this approach to pick up tiny stakes in these small biotech plays. Among these were huge gains in Novavax (NVAX), Corcept Therapeutics (CORT) and Omeros Corporation (OMER). Here are two speculative but intriguing biotech plays I own in my own portfolio. Both are selling at ~$2 a share.
Cell Therapeutics (CTIC) focuses on treatments for cancer. It has a few products in the pipeline including PIXUVRI, an aza-anthracenedione derivative, which is in Phase III clinical trials for the treatment of multiply relapsed or refractory aggressive non-Hodgkin lymphoma. It is also developing Opaxio, a chemotherapeutic agent that is in Phase III clinical trials for the treatment of ovarian cancer.
The company recently entered into a partnership with Baxter International (BAX) for pacritinib which is an inhibitor that's currently in Phase III testing for myelofibrosis. Cell Therapeutics received a $60mm (including $30mm equity stake) upfront payment and should receive another $67mm in milestone payments by 2015. This should cover fully the $96mm the company estimates it will take to get the compound to launch with some funds leftover.
Before the partnership was announced, H.C. Wainwright (a small analyst firm) was prescient enough to issue a "Buy" on CTIC with a $4 a share price target. This is more than double the current price level. Janney Montgomery also upgraded CTIC to a "Buy" from "Neutral" in late October with a $3 a share price target. Cell Therapeutics was a highflyer four years ago when it traded at over $40 a share. Under $2 a share is a small price hoping that the company can recover some of its previous glory.
Dynavax Technologies (DVAX) is a clinical-stage biopharmaceutical company that discovers and develops novel products to prevent and treat infectious and inflammatory diseases. Its main product is Heplisav which is meant to treat Hepatitis B and is in Phase III trials. The stock is up some 80% since I last profiled it in early November but the shares are still significantly under the levels earlier in the year.
Several insiders bought over $300K worth of shares in late October. The median price target by the four analysts that cover the shares is $4.50 a share. Price targets range from $3 a share to $6 a share, all significantly above the current stock price.
The company has five candidates in its pipeline, with the lead candidate (Hepislav) in Phase III for Hepatitis B. The company has promising proprietary technology that helps the body's immune system, to fight against diseases and inflammations. The company has over $75mm in net cash to develop its pipeline and the company could attract acquisition interest due to its promising compounds and technology.