2 Speculative Biotech Stocks To Consider

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 |  Includes: MDGL, TTPH
by: Bret Jensen

Summary

The small cap biotech/biopharma sectors are starting to bounce back after a big two-month sell-off starting in early March.

I have added to my allocation to this space, while using option strategies to mitigate some risk in this inherently volatile area of the market.

Below are two attractive but speculative concerns in this area I have recently initiated stakes in.

After getting crushed for two months starting in early March, the small cap biotech/biopharma sector has started to come back in recent weeks as "risk on" investors have re-emerged in the market. I have added quite to existing positions and added some new stakes in some additional small cap biotech/biopharma stocks in June. Given my tepid outlook overall for the market over the next few months, I have also initiated a lot of just out of the money covered calls on these new additions to my portfolio. The call premiums available in the space make this a sound strategy to mitigate some risk in this inherently volatile sector.

In today's column, I will highlight a couple of speculative but attractive plays within the space. Both companies have some things I like to see before I imitate a stake in this type of concern. Both have a good degree of net cash on the balance sheet and interesting products in the pipeline, even as they have little in the way of current revenues, recent insider buying and possible near-term positive catalysts.

Tetraphase Pharmaceuticals (NASDAQ:TTPH) is in the news today and up in early trading. The company announced it has completed enrollment in the lead-in portion of its IGNITE (eravacycline) clinical trial. This two-part Phase III clinical trial is studying the safety and efficacy of intravenous and oral formulations of eravacycline for the treatment of complicated urinary tract infections.

The stock is currently selling at ~$13.50 a share, after being close to $18 a share prior to the big biotech sell-off earlier in the year. The shares bottomed at around $8.50 a share. In addition, the stock just crossed over its 200-day moving average (See Chart).

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The stock has a market capitalization of approximately $350 million, and has some $80 million in net cash on the balance sheet. Insiders have made some small purchases recently, and the stock could have upside, going by analyst reports. The median price target by the 8 analysts that cover the stock is $18 a share. Price targets range from $16 to $25 a share on TTPH.

I added to an existing stake in Synta Pharmaceuticals (SNTA) during the March downturn. Synta is a small 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.

The stock hit lows of just under $4 a share in the recent biotech pullback, but has started to bounce off long-term technical support levels (See Chart).

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The company also was profiled recently as a possible takeover target at Forbes due to the increase M&A activity within the space. Billionaire investor Bruce Kovner owns ~30% of the shares, and has been adding to his stake recently as well. In addition, several other insiders added to their stakes late last year.

SNTA sells for $4.35 a share currently. This is light years from where analysts think it should be. The median price target held on the shares by the six analysts that cover the stock is $14.50 a share. The company has a market capitalization of ~$380 million, with almost $60 million in net cash.

NOTE: When it comes to the small biotech/biopharma space, I believe it is prudent to practice what I call "Shotgun Investing." This area has more volatility than just about any other sector in the market. Therefore, I buy much smaller stakes across a greater amount of stocks to mitigate some of the risk and volatility from allocating funds to this space. The fact is, there are going to be "blowups" within your small biotech portfolio more than any other sector. This will be made up for, hopefully, by the occasional five or ten-bagger these investments can return when things go right.

Disclosure: The author is long SNTA, TTPH. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.