Reaching a little higher in the biotech food-chain from my usual interest in the less than $3 per share biotech stocks (see my recent articles here), my recent interest has guided me to the creme de la creme biotechs that have been rising to the surface thanks to the bear market correction.
Now, whether the market will fall any further no one knows except maybe rock-star Federal Reserve chairman Ben Bernanke, but I've been following a group of biotechs in the $6-10/share range. These are biotech stocks that have already emerged from penny-land speculation and offer enticing promise. Which are these?
Well, working from my original list of favorites, my narrowing focus began with a list of seven, but five did not make my final cut:
- Amarin Pharma Inc. (AMRN)
- ImmunoGen Inc. (IMGN)
- Pharmacyclics Inc. (PCYC)
- ARIAD Pharmaceuticals (ARIA)
- NPS Pharmaceuticals (NPSP)
Why they were eliminated was because their revenue streams minus expenses have not resulted in steady net positive income, which in turn suggests to me that the current economic climate may make these stocks vulnerable. Plus, my aim was to discover the creme de la creme.
Meaning, these stocks, though I've eliminated them, may have excellent potential for other reasons (e.g. a new drug coming to market, etc.), but they just don't defend against my near-term market concerns. Nevertheless, investors may want to keep a watch on them as I might refer to them as 'second tier' very good biotech investments.
As a result, I ended up with only two biotechs in the range of my study. And whether I would end up with one, two, three or five, I had no previous inclination, since due-diligence in this price range of biotechs is rather new for me.
So I was rather curious when my process of elimination led me to these two biotechs: Spectrum Pharmaceuticals (SPPI) and Akorn Inc. (AKRX) because neither is unknown to investors. But that's what truly excited me because finding the very best stocks shouldn't be original or extraordinary, but mundanely confirmed what the market already knows. Or as some would say, 'Following the money.'
Unlike their price-per-share peers, Spectrum and Akorn are both generating revenue in excess to expenses. In my opinion, both these companies are the creme de la creme and offer explosive upside should this market ever get its act together. Their cash flow is a great hedge against this topsy-turvy market.
Akorn reported a 59% increase over the previous quarter last year and the company continues to make smart acquisitions such as Advance Vision Research that added $3.7 million to the company's recent quarter's revenue. Akorn is not sitting still as the company reported:
Akorn said it now expects $124 million to $126 million in revenue in 2011, up from its previous estimate of $106 million to $110 million. Analysts are projecting $114.3 million, on average.
Likewise Spectrum reported:
Net income of $20.0 million, or $0.39 per basic and $0.35 per diluted share, compared to a net loss of $48.7 million, or ($1.00) per basic and diluted share, in the six-month period ended June 30, 2010. Consolidated revenue of $89.0 million was comprised of product sales of $82.8 million ($68.6 million from Fusilev, $14.3 million from Zevalin) and $6.2 million from licensing fees.
This represents a 280% increase from $23.4 million in consolidated revenue recorded in the first six months of 2010, comprised of product sales of $16.4 million ($3.0 million from Fusilev, $13.4 million from Zevalin) and $7.0 million from licensing fees.
Finding a great stock or stocks is not supposed to be reinventing the wheel. That's why looking for the creme de la creme is essential. Spectrum and Akorn aren't going to collapse or suffer the depleted agonies of R&D cash-burn, nor is either net negative red. But were I to choose only one, my nod here goes to Spectrum for its robust pipeline.
Spectrum is on pace to add value (Apaziquone and Belinostat) to value (Zevalin and Fusilev), including other trials under development. Should this market ever recover, I see no reason why Spectrum shouldn't be worth 2-3x as much as its close at $8.08/share on Wednesday.