Seeking Alpha
Profile| Send Message| ()  

I had a friend whose father lost both of his legs in a work-related accident. In an ironic twist of fate, his mother lost both of her legs due to diabetes in the years that followed and passed away shortly after. I fondly remember them joking that between the both of them, they didn’t have a leg to stand on.

I’m going to step outside of my comfort zone today and present Aastrom Biosciences (ASTM) as a speculative investment idea that I find rather appealing. Let me begin by saying that this company has no products, no earnings and is accumulating losses regularly. In fact, the company is operating on money received primarily through grants and equity/debt offerings. Still, there was a time that companies like Microsoft (MSFT) were in the same position.

Although I’m extremely bearish on the markets in general, not to mention the economy going into 2011, there are several reasons that I like this particular symbol. From a cyclical sector analysis, the biomed sector presents the least downside risk and greatest upside potential, with the exception of savings and loans. Who in their right mind however would touch a lending institution given the mess in the housing market right now and lack of available credit?

(Click to enlarge)

In the event of a market correction, this sector provides the greatest upside potential and least downside risk. The sector as a whole has not moved since February of this year on the bullish percent charts, sitting near 42%. Even the market meltdown earlier this year had little effect on this sector. Both the trend and relative strength of ASTM are signaling buy.

The stock has shown extremely high volatility recently. The reason for that is the company is about to begin Phase III trials of what seems to be a promising treatment of Critical Limb Ischemia (CLI). The problem was that the company had no money to fund the trials and even warned of potential dilution. The stock got hit hard on this news the past few weeks, however the company filed to offer preferred stock with the SEC rather than common stock, and shares once again began to rally the last few sessions as a result.

CLI is the most serious and advanced stage of peripheral arterial disease (PAD). PAD is a chronic disease that progressively restricts blood flow in the limbs and can lead to serious medical complications. This disease is often associated with other clinical conditions including hypertension, cardiovascular disease, hyperlipidemia, diabetes, obesity and stroke. CLI is used to describe patients with the most severe forms of PAD: those with chronic ischemia-induced pain (even at rest), ulcers, tissue loss or gangrene in the limbs, often leading to amputation and death. CLI leads to more than 160,000 amputations per year. The one-year and four-year mortality rates for no-option CLI patients that progress to amputation are approximately 25% and 80%, respectively. Our technology has shown promise in the treatment of CLI.

Even though the company has just 28 million shares outstanding and has a market cap of just $68M, the effort to protect its shareholders from common stock dilution is a very good sign. With Phase III funding requirements fulfilled, this stock has the potential of rewarding shareholders in a very big way over the next 12-18 months

ASTM has a second drug treatment therapy in the pipeline for Dilated Cardiomyopathy. Already in Phase II trials, this treatment has fast track approval written all over it. The company is still enrolling patients in the trial and expects that process to be completed by the end of this month.

My friend Anthony alerted me to this particular stock. He is much more involved in these types of investing opportunities than I have been. He relayed to me that a typical company in Phase III carries a typical market cap of 500 million. In truth, I have neither the time nor inclination to follow up on that statement, as his education and PhD are good enough for me. However, I invite who can validate this to post a link in the comment section of this article.

ASTM may be speculative, but its certainly worth putting on the radar. In 2000, the stock, after bottoming at $3.50, rose to $45.75. In 2004 it rose from $8.00 to $32.00. Could lightning strike a third time? The potential is there, but it may require a lot of patience and an iron stomach. I’m in!

Disclosure: Long ASTM, SIRI

Source: Aastrom Biosciences a Biomed With Big Potential