Small Cap Biotech Stocks: 7 Picks, 1 Big Concern

by: Peter Navarro

Why I Like Biotech Stocks

  • Biotech stocks are great to trade in a sideways market because they move mostly on science, not the economy.
  • Biotech stocks have high risk but high reward – my 15-bagger of the year was Prolor Biotech (NYSEMKT:PBTH), which went from 40 cents to 7 bucks and now trades on the Amex.

How to Find Biotech Stocks

  • Science is very complicated - so find a good biotech analyst with a Ph.D. in science. I like a former student of mine, Andrew Vaino of Roth Capital – he’s was rated #1 in pharma by the WSJ last year and #2 by the Financial Times.
  • Time your entry using technical analysis
  • Watch closely for the important science milestones, which provide momentum as well as good exit points.

Some Biotechs to Watch

Chelsea Therapeutics (NASDAQ:CHTP) has a diversified pipeline and is anticipating some important clinical trial news related to its drug Droxidopa at the end of this month. Last year, the company missed its primary endpoint with this drug but the FDA has agreed to a reconfiguration of the endpoint based on a composite of 10 different measures. Odds of success are about 75% -- which should drive the stock from about four bucks to close to seven dollars. Medium risk, high reward.

Clinical Data (NASDAQ:CLDA) has a good anti-depressant drug – Viladozone -- with no efficacy or safety issues --with odds of about a 75% approval in January. Bears say the anti-depressant market is crowded but this looks like a $15 buck stock that could reach close to $30. That said, it needs a Big Pharma partner like Lilly or Forest Labs. Medium risk, high reward.

Savient Pharmaceuticals (OTC:SVNT) is a classic “orphan drug” play. It’s expecting an FDA decision on its gout drug – Krystexxa -- in the next two weeks on a protocol that treats severe gout. There’s no safety or efficacy issues but only concerns over manufacturing. This is $14 stock that could go to near $20. Medium risk, medium reward.

Synta Pharmaceuticals (SNTA) is a highly speculative play at around three bucks now with a price target of four. It has a critical data report coming at the end of the year and is a good stock to buy on any dips. It's low price makes it more like an option than a stock. High risk, medium reward.

Dusa Pharmaceuticals (NASDAQ:DUSA) has an interesting dermatological treatment for precancerous skin lesions and a stellar balance sheet. This is a great valuation play. Low risk, high reward.

Neurologix (OTC:NRGX) is developing a gene therapy for Parkinson's disease. Interim data the company released in June was positive and more data is expected at the end of September a conference in Glasgow, Scotland. The problem here is that it lacks the financing to start of phase 3 trial and desperately needs a partner, would Medtronics being a possibility. This is a classic pink sheet stock at a buck and a quarter with very low volume. I'm playing this one like an option and buying the stock on any dips. Any stumble on the data front or the failure to find a partner will wipe this company out – but if all goes well, this is a potential 5 to 10 bagger. High risk, high reward.

Lpath, Inc. (LPTN.OB) is an even riskier version of Neurologix with an equally small float and very low volume. It's a 60 cent stock that I've been slowly adding to with limit orders designed to buy on the dips. As for the science, Lpath is pursuing several novel therapies, one for cancer and one for macular degeneration. It puzzles me why Big Pharma companies don't snap these little companies up. But if all goes well with this one, it's easily a 10- to 20-bagger. High risk, high reward.

My Big Concern

Historically, the FDA has had a tendency to be overly risk-averse with respect to approving new drugs. There is little reward in providing such approvals in very high political risk should anyone drug proved to be far more dangerous than the FDA claimed.

Under the Obama administration, it may simply be coincidental; but there seems to be a higher level of rejection by the FDA. I don't know whether it's a more liberal administration, more risk aversion at the FDA, or simply a spate of bad drugs being legitimately rejected.

My fear is that good drugs will lose out to bad politics – so if any FDA commissioners are reading this, please remember that there are lives at stake when you make your decisions.

Disclosure: Author is long all of the above-mentioned stocks