The biotech space has been in a deep decline since early March. Big biotech firms like Celgene (NASDAQ:CELG) have experienced significant sell-offs over the past month and a half. The small cap biotech sector has been utterly decimated. Most names in the space have sold off at least 25% with most down 30% to 50% on a huge rotation out of speculative stocks and sectors in the market recently.
Some of this is understandable as the small cap biotech sector was "en fuego" in 2013 with a myriad of names doubling and tripling during the year. Consolidation across the space was long overdue. Fortunately, for my portfolio, I sold just out of the money covered calls on my biotech positions throughout February.
Timing as they say is everything in life and the huge call premiums available at the time were just too lucrative to pass up. This strategy has substantially decreased the volatility in my biotech positions as well as lessened its negative impact on my overall portfolio performance.
Some of the bigger biotechs have started to behave much better over the past week or so. This could bode well for small cap biotech plays at some point in the near future. In the large cap space, my favorite position continues to be Gilead Sciences (NASDAQ:GILD). I added significantly to my stake during the recent sell-off in the sector.
Gilead's earnings should double this year to over $4 a share on the back of its new Hep C treatment "Sovaldi" and continued growth within its HIV franchise. Earnings are projected to post another 50% gain in FY2015 if the current consensus plays out. Despite impressive growth, the shares go for under 12x FY2015's projected EPS. This is way too cheap and Gilead is one of the cheapest large cap stocks regardless of sector in the market right now compared to its growth prospects.
The carnage in the small cap biotech space has been substantial and have left investors understandably gun shy. I am starting to slowly dip my toe back into the area as values are much better than they were just two months ago. I am confining my purchases right now to stocks where insiders have stepped up and bought more shares themselves. It is a "vote of confidence" I think is important in this sector.
Below are a couple of small speculative biotech stocks that insiders have been buying recently.
Synta Pharmaceuticals Corp (SNTA) is a small (less than $350mm market capitalization) biotech concern primarily focusing on developing its lead cancer drug "ganetespib" as a treatment for non-small-cell lung cancer, breast cancer and colorectal cancer.
SNTA declined from ~$7 a share at the beginning of the biotech correction to under $4 a share currently. A director bought some $5mm of new shares ten days ago. This same director bought almost $20mm in shares when the shares were under $4 a share in November as well. It was good timing then as the shares took off shortly thereafter. Hopefully his purchase will be as prescient this time around.
At under $4 a share, the stock is selling for less than third where most analysts see it eventually. The median price target by the six analysts that cover the shares is north of $14 a share. The company has some $70mm of net cash on the balance sheet, which should get it through trials of its core lead drug.
La Jolla Pharmaceutical Company (NASDAQ:LJPC) is developing treatments that significantly improve outcomes in patients with life-threatening diseases. Their current efforts focus on the clinical evaluation of GCS-100, a galectin antagonist, as a treatment for chronic organ disease and LJPC-501 an antagonist of the renin-angiotensin pathway, as a treatment for hepatorenal syndrome, a life-threatening form of progressive renal failure in patients with liver cirrhosis or fulminant liver failure.
The shares have fallen from ~$18 a share to just over $10 a share over the past month. This decline has triggered some insider buying. An insider bought some 8,000 shares in two transactions over the past ten days. Another insider bought 3,000 shares in February. There has been no insider selling over the past year.
Only three analysts cover the stock currently probably due to its small market capitalization (~$75mm). These analysts have price targets of $33, $34 and $54 a share respectfully on the shares. This is another biotech play that analysts believe could triple or more based on their price targets. The company recently posted results from a Phase II trial of GCS-100 in chronic kidney disease.
Disclosure: I am long GILD, SNTA. 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.
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