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Summary

  • Nearly 20% of biotech stocks remain more than 50% off 18-month highs. Most of these companies have a market cap below $1B - some might be bargains.
  • To make the cut as a potential bargain, I required the company to have TTM revenue growth, market cap-to-revenue less than 15, and R&D budget at least 50% of revenue.
  • Eleven candidates are presented and briefly discussed.

The recent selloff of biotech and small cap stocks was so rapid that I could not decide fast enough which individual stocks to buy with one exception: Gilead (NASDAQ:GILD). So when it looked like the stampede out of biotech might be over, I parked my cash in iShares NASDAQ Biotechnology ETF (NASDAQ:IBB) and Fidelity Select Biotechnology Portfolio (FBIOX). Now that these repositories have recovered to their pre-selloff prices, I am looking to trade them for small cap biotech stocks that still lay seriously wounded, and that meet my criteria for a good investment. I have previously made the case that a good biotech company for investment has the following characteristics: 1) one product on the market, 2) rising revenue, 3) deep pipelines, 4) healthy R&D budget, and 5) lots of assets on the balance sheet.

For this particular screen, I required only rising revenue and a healthy R&D budget defined as an amount >50% of yearly revenue. The term bargain is highly subjective in the biotech industry - I chose a market cap-to-revenue or P/S ratio of 15. The short interest is high on almost all of these companies, so if that puts you off, you may want to read no further.

Among 170 biotech stocks that I track, I found that 70 were >25% off their highs of the past 18 months since January 2013, and 32 were at least 50% lower. Of these, 11 met each of the criteria above and are listed in the following table.

Biotech Company

Ticker

Return

Market Cap ($M)

Revenue TTM ($M)

P/S

Revenue Growth

R&D of Revenue

Amarin Corp

AMRN

-82%

$292

$35

8.3

1394%

276%

OncoGenex Pharma

OGXI

-74%

$52

$37

1.4

53%

185%

Vical Incorporated

VICL

-72%

$102

$9

11.9

13%

189%

Aegerion Pharma

AEGR

-66%

$964

$74

13.0

5935%

61%

AEterna Zentaris

AEZS

-66%

$63

$36

1.8

301%

345%

Endocyte, Inc.

ECYT

-65%

$272

$68

4.0

37%

89%

Cytokinetics, Inc.

CYTK

-65%

$178

$38

4.7

476%

161%

Curis, Inc.

CRIS

-64%

$144

$15

9.6

106%

86%

Ambit Biosciences

AMBI

-62%

$124

$21

5.9

8%

97%

Prosensa Holding

RNA

-62%

$456

$31

14.7

184%

194%

Nanosphere

NSPH

-61%

$127

$11

11.5

78%

186%

Amarin (NASDAQ:AMRN) looked very unattractive when I posted this on SA in March, but since then there is renewed interest in the treatment of high triglyceride levels. Revenues have increased for four successive quarters, and two articles about APOC3 in New England Journal of Medicine are already helping the stock.

OncoGenex (NASDAQ:OGXI) sold off sharply after custirsen failed to improve survival Phase 3 cancer trial partnered with Teva, but it has another cancer drug in Phase 2 that is "un-partnered," and another still in pre-clinical phase. The stock is cheap enough now to be worth watching. I am not a chartist, but it looks like the stock is still falling. There are several analyst Buy ratings.

Vical (NASDAQ:VICL) is asset heavy, has cash over half its market cap, rising revenues from Astellas Pharma, narrowing losses, and is working on important vaccines. The biggest hit to the stock price was in August after Allovectin failed, but it fell further during the biotech selloff and while it has not yet recovered, the price has leveled off.

Aegerion (NASDAQ:AEGR) has one drug for lowering cholesterol and nothing in the pipeline which is part of the reason the stock price keeps falling despite the hefty increase in revenue.

AEterna Zentaris (NASDAQ:AEZS) is the single company on the above list which I own - I do not know of another biotech you can buy for $60M that has an NDA, another drug in Phase 3, and multiple drugs in earlier phases based on a platform that could produce more.

Endocyte (NASDAQ:ECYT) crashed after its lead cancer drug - and partnership with Merck - failed in a trial against ovarian cancer. The drug is still being tested in lung cancer, and it has others in the pipeline. Revenue was growing, but it's not clear how that will continue.

Cytokinetics' (NASDAQ:CYTK) stock price plummeted after its drug for neuromuscular disease ALS failed in Phase 2. It still has a drug for wasting muscle disease partnered with Astellas, and another to improve cardiac contractility in patients with heart failure in collaboration with Amgen.

Curis (NASDAQ:CRIS) was an interesting find for me although there were 3 articles in SA about this drug discovery company a year ago. Collaborator Roche/Genentech got vismodegib to market for basal cell skin cancer, and has recently filed to start Phase 2 testing of this drug for idiopathic pulmonary fibrosis. CRIS has several other small molecules in development, and has a partner for one of them.

Ambit's (NASDAQ:AMBI) stock is about $1 above its 52-week low and analysts' ratings are disparate. AMBI has four small molecule inhibitors for cancer and inflammatory diseases in Phases 3, 2, 1 and pre-clinical development. It has Teva for a partner in its Phase 1 trial of a BRAF inhibitor for cancers. It has about half its market cap in cash.

Prosensa (NASDAQ:RNA) was recently featured in SA. After falling 90% from $33 to $3.56, RNA has more than tripled to over $12. This company that specializes in exon-skipping in genes is focused on Duchenne muscular dystrophy, but if their RNA-based therapy works for that disorder, it will work in others they are currently developing or choose to. However, Prosensa will start to look a lot more expensive without recurring revenue from GSK.

Nanosphere (NASDAQ:NSPH) has developed a molecular diagnostics platform that can be used to diagnose infection and determine variations in an individual's metabolism of different drugs. Revenue is derived from product sales.

Opinion. The company with the most secure revenue is NSPH, but I believe there are cheaper molecular diagnostics companies out there, and I have discussed some in previous articles. I won't buy NSPH. The company with the most exciting platform is RNA. I won't be surprised if there are more failures along its path to great success. I may allocate a small amount of capital to this one. AMBI currently offers a good entry point, the lowest short interest, I think its financial future is not dire, and it is certainly not a "One-Trick Pony With A Broken Leg." I will likely add this one to a basket of small cap biotechs to replace the biotech fund. Small allocations will probably also go to CRIS and VICL. I'll wait on OGXI and even though I think AMRN will do well, its drug doesn't interest me. I already own AEZS for reasons cited.

At the end of the day, I think the biotech selloff - which highlights the risk of investing in this industry - was good because it corrected some mispricing and gave me a chance to "grin and bear it" while some of my recent purchases went through a fiery ordeal before rebounding. It also created some relative bargains.

Editor's Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Source: Basket Of Biotech Bargains To Buy And Hold