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I am always searching for small bio-pharmas with a chance at huge gains that I can buy for a cheap price. In fact, I look for small companies in every sector I can buy for a cheap price, and sell for at least a double in the mid to longer term. These stocks are very risky however, and can depreciate in price just as fast as they can appreciate in price. Many of these smaller companies are nothing more than "pump and dump" shell corporations designed to dupe unsuspecting investors into making an investment into them, only to see their money go down the drain. The criteria I look for include, but are not limited to;

  1. Company does not excessively engage in constant press releases: A company that constantly issues press releases could be a pump and dump scam and/or desperate for money so they pr excessively hoping to attract investors to buy the company shares, thus raising money faster.
  2. Company does not have excessive debt and warrants exercisable too close to the current price per share of the stock: Excessive debt can also mean a company could engage in toxic financing, issue an excessive amount of warrants that are executable near the current price of the stock, thus dumping those shares on investors:
  3. Past history and competency of the company CEO: A CEO'S past can be a good gauge in his/her actions in the future, if they have a checkered past, it is a good bet the small cap company they are currently running is a scam. Furthermore, a CEO with a long record of high responsibility positions and success is optimal.
  4. Viable products to offer the market that would justify a much higher stock price than currently reflected: A small cap company that sells plastic spoons to Bulgaria has no shot at generating future revenues. Part of successful stock speculation involves an investor speculating on the value of a product a company has. If a company has a drug in development that could help millions of people, that company has a larger market and a chance at generating a lot of share holder value

After scanning through a decent amount of companies, I believe I have found 4 companies that match the above criteria. Please be advised, these companies carry significant forward risks.

Galena Biopharma (GALE) 3/1/12 price per share: $1.28

Galena engages in discovering, developing, and commercializing innovative therapies addressing unmet medical needs using targeted biotherapeutics.

Key Pipeline Drug:

  • NeuVax (E75) Galena is developing NeuVax for the adjuvant treatment of low to intermediate HER2 expressing breast cancer. NeuVax consists of the E75 peptide derived from HER2 combined with the immune adjuvant granulocyte macrophage colony stimulating factor. Treatment with NeuVax stimulates cytotoxic T cells in a highly specific manner to target cells expressing any level of HER2. NeuVax is given as an intradermal injection once a month for six months, followed by a booster injection once every six months. Based on a successful Phase II trial, which achieved its primary endpoint of disease free survival, the FDA granted NeuVax a Special Protocol Assessment (NYSE:SPA).) for a Phase III clinical trial.

On June 6, 2011, Galena Biopharma announced updated data from its Phase II clinical trial of NeuVax™ at the American Society of Clinical Oncology (OTC:ASCO) annual meeting.

The NeuVax Phase II trials enrolled 182 patients, including node positive and node negative, HER2 1+, 2+ and 3+ patients. All patients received standard of care (SoC) therapy and were confirmed to be disease-free prior to enrollment. Following enrollment, eligible patients were administered the NeuVax vaccine once a month for six months, followed by booster shots one every 6 months thereafter. The efficacy endpoint for the trial was disease free survival (DFS.)

On September 12, 2011, RXi Pharmaceuticals (RXII) provided a positive NeuVax phase 3 clinical trial update.

In the report, it was stated that RXi satisfied all requirements specified by the FDA and subsequently initiated a clinical trial material manufacturing plan to remain on schedule to meet the planned trial start date. NeuVax is expected to initiate its Phase III PRESENT (Prevention of Recurrence in Early-Stage, Node-Positive Breast Cancer with Low to Intermediate HER2 Expression with NeuVax Treatment) study in the first half of 2012 under a Special Protocol Assessment .

RXi claims it has made other significant developments in preparation for the Phase 3 trial initiation:

  • Dr. Beth Mittendorf, Assistant Professor, Department of Surgical Oncology, University of Texas M. D. Anderson Cancer Center has been selected as a principal investigator for the trial. Dr. Mittendorf has been involved in cancer vaccine research for over 10 years, has lead numerous investigator sponsored studies, and has published extensively in the area of breast cancer immunotherapy.
  • Conditional Institutional Review Board (IRB) approval from two key trial sites has been received to allow for initiation of the trial, with additional worldwide sites expected to open shortly. It is anticipated that the trial will encompass approximately 100 trial sites in the U.S., Canada, and Europe.
  • RXi has engaged the Clinical Research Organization (CRO) Aptiv Solutions to manage the trial and clinical operations are on track for PRESENT to commence in the first half of next year.

The Galena CEO is Mark J. Ahn, Ph.D. Mark has had a long and successful career to date which you can read about in part by clicking on his name above. When considering an investment in a high risk bio-pharma like Galena, always be sure to check the record of the CEO. Make sure the CEO has not been implicated in any financial scam and has a clean record. This is normally a very important factor in determining if a company might be a scam intending to defraud investors.

On February 27th, 2012, The Galena Board of Directors declared a conditional spin-off stock dividend on Galena common stock of one share of common stock of RXi Pharmaceuticals Corporation, a subsidiary of Galena, for each outstanding share of Galena common stock. The dividend of RXi shares will be made pursuant to the registration statement filed by RXi with the Securities and Exchange Commission and declared effective on February 14, 2012.

The dividend will be payable, subject to certain conditions, to Galena stockholders as of close of business (Eastern time) on March 8, 2012, the record date for the distribution, in the ratio of one RXi share for each share of Galena common stock held as of the record date. The Galena Board of Directors has not set a payment date for the distribution, but Galena anticipates that the payment date for the distribution of the shares will occur as soon as possible, and no later than 60 days, following the record date.

Please refer to the company's recent 8k in this matter for the exact details of this spin-off dividend offer.

An excerpt from the above linked 8K tells us that this planned stock dividend issuance is contingent upon;

The parties have agreed in the amendment that, if stockholder approval is obtained, the number of milestone will be subject to increase to the extent that the $0.76 price used to determine the initial milestone shares exceeds the closing price of our common stock as of the most recent trading day prior to the receipt of stockholder approval, and that the actual number of milestone shares will equal the quotient determined by dividing $1 million by the lesser of $0.76 and such closing price of our common stock.

If our stockholders fail to approve of the proposal relating to the milestone shares, or if stockholder approval is not otherwise obtained for any reason on or before July 15, 2012, the milestone shares will be cancelled, and we will be obliged to pay milestone #1, in cash, to the holders within three business days.

Investors need to be advised here that the dividend is conditional, subject to stock holder approval.

Rxi sells for $0.76 a share and is currently not being traded as it appears it will be merged with Galena. It appears to me that the company has done this to meet The Nasdaq requirement to ensure the Galena stock trades above $1 a share for at least 10 trading days, and stay trading above the dollar range indefinitely. The company released an 8K on 11/18/2011 which acknowledges that it was in violation of The Nasdaq rule of trading for at least one dollar a share. (All data sourced from Yahoo!)

Financial Highlights
Fiscal Year
Fiscal Year Ends:Dec 31
Most Recent Quarter (mrq):Sep 30, 2011
Profitability
Profit Margin :N/A
Operating Margin :N/A
Management Effectiveness
Return on Assets :-58.45%
Return on Equity :-372.77%
Income Statement
Revenue :N/A
Revenue Per Share :N/A
Qtrly Revenue Growth (yoy):N/A
Gross Profit :N/A
EBITDA 6:-18.50M
Net Income Avl to Common :-14.90M
Diluted EPS :-0.50
Qtrly Earnings Growth (yoy):N/A
Balance Sheet
Total Cash (mrq):15.69M
Total Cash Per Share (mrq):0.37
Total Debt (mrq):579.00K
Total Debt/Equity (mrq):12.30
Current Ratio (mrq):0.75
Book Value Per Share (mrq):0.11
Cash Flow Statement
Operating Cash Flow :-12.37M
Levered Free Cash Flow :6.82M

As to be expected, a speculative bio-pharma like Galena does not have a pretty balance sheet. Its current debt is not terrible, and they are not burning gobs of cash, albeit burning a decent amount.

Options to purchase common stock, 20116,451,569
Warrants to purchase common stock, 201120,050,642
Total26,502,211

The following excerpt is from the 11/12/11 10Q:

Warrants Potentially Settleable in Cash
Certain warrants issued in connection with a registered direct stock offering on August 3, 2009 (the "2009 Offering") were determined not to be indexed to the Company's common stock as they are potentially settleable in cash. The fair value of the warrants at the dates of issuance totaling $2,863,000 was recorded as a liability and a cost of equity and was determined by the Black-Scholes option pricing model. Due to the fact that the Company has limited trading history, the Company's expected stock volatility assumption is based on a combination of implied volatilities of similar entities whose shares or options are publicly traded. The Company used a weighted average expected stock volatility of 122.69%. The expected life assumption is based on the contract term of five years. The dividend yield of zero is based on the fact that the Company has no present intention to pay cash dividends.

The risk free rate of 1.72% used for the warrants is equal to the zero coupon rate in effect at the time of the grant. The decrease in the fair value of the warrants from the date of issuance to September 30, 2011 is $2,576,000, of which $1,656,000 has been included in other income and expense in the accompanying condensed statements of expenses for the nine months ended September 30, 2011. The fair value of the warrants at September 30, 2011 of $286,000 is included as a current liability in the accompanying balance sheets and was determined by the Black-Scholes option pricing model. Due to the fact that the Company has limited trading history, the Company's expected stock volatility assumption is based on a combination of implied volatilities of similar entities whose shares or options are publicly traded. The Company used a weighted average expected stock volatility of 98.93%. The expected life assumption is based on the remaining contract term of 2.8 years. The dividend yield of zero is based on the fact that we have no present intention to pay

Insider Transactions Reported

DateInsiderSharesTypeTransactionValue*
Dec 31, 2011SCHWARTZ MARK W.Officer12,924DirectAcquisition (Non Open Market) at $0.40 per share.5,169
Dec 31, 2011AHN MARK JOfficer31,289DirectAcquisition (Non Open Market) at $0.40 per share.12,515
Dec 7, 2011LEE KWANGOfficer5,000DirectPurchase at $0.60 per share.3,000
Dec 7, 2011AHN MARK JOfficer10,000DirectPurchase at $0.66 per share.6,600
Sep 24, 2011KHVOROVA ANASTASIAOther76,923DirectAcquisition (Non Open Market) at $0 per share.N/A

Not a ton of insider buying, but there has not been any sells either, and so far, the insiders have a nice profit with their investments at the current pps of $1.28, basically doubling their investment.

There as been some buzz lately with this company and for good reason. Neuvax shows some promise here, but still considerably more clinical data needed for an FDA approval. Nonetheless, I feel Galena is a strong longer term speculative buy. Please be advised; I think the current price per share may see a small pull back soon, so look for an entry point between $1.05 and the current level, if you are solvent enough to average down your cost basis. My year end target for Galena is $2.50.

OncoVista Innovative Therapies (OTCQB:OVIT) 3/1/12 pps: $0.40

OncoVista develops targeted anticancer therapies by utilizing tumor-associated biomarkers. Its product pipeline includes Cordycepin (OVI-123), which is in Phase I/II clinical development for the treatment of refractory TdT positive leukemias; and L-Nucleoside Conjugates (OVI-117) that is in pre-clinical development for the treatment of colon cancer.

Cordycepin (3'-deoxyadenosine) is a nucleoside analog that has been shown in preclinical studies to have activity against TdT-positive cells. Expression of TdT is one of the hallmarks of acute lymphoblastic leukemia. In addition to ALL patients, subsets of patients with acute myelogenous leukemia (AML) and chronic myelogenous leukemia also express the TdT enzyme. Patients who have TdT-positive leukemia that have failed at least one standard treatment regimen and for which no standard therapies are expected to result in durable remission are eligible for enrollment in this trial.

Pipeline Drugs:

  • OVI-117 is still in pre-clinical, so I will not talk about it until when and if it reaches the clinical trial stage.
  • Cordycepin (OVI-118)

In Nov. 2011, OVIT entered into an agreement with Oncology Therapeutic Development, a consulting and early Clinical Development focused CRO, to initiate a Phase Ib clinical trial of Cordycepin associated to Pentostatin for the treatment of patients with terminal deoxynucleotidyl transferase (TdT)-positive refractory leukemia.

The Phase IB clinical trial is being headed by Prof. Esteban Cvitkovic and his team, who have been instrumental in the development of several successfully registered anticancer agents such as Cisplatin, Oxaliplatin, (Oxaliplatin was originally licensed to Sanofi-Aventis (SNY),

Amifostine, Irinotecan, Docetaxel (also originally licensed to Sanofi-Aventis), and ET-743, marketed and sold by Zeltia and Johnson & Johnson (JNJ) under the brand name Yondelis. Yondelis is approved for use in Europe, Russia and South Korea for the treatment of advanced soft tissue sarcoma.

OncoVista has received Orphan Drug Designation from the FDA for Cordycepin, which affords the company seven years of market exclusivity if the drug is eventually approved by The FDA.

Any kind of successful treatment for late stage Leukemia is significant and time will tell whether Cordycepin proves to be successful and eventually gain FDA approval.

Financial Highlights
Fiscal Year
Fiscal Year Ends:Dec 31
Most Recent Quarter (mrq):Sep 30, 2011
Profitability
Profit Margin (TTM):N/A
Operating Margin :N/A
Management Effectiveness
Return on Assets :-98.30%
Return on Equity :N/A
Income Statement
Revenue :N/A
Revenue Per Share :N/A
Qtrly Revenue Growth (yoy):N/A
Gross Profit :N/A
EBITDA 6:-2.24M
Net Income Avl to Common :-2.42M
Diluted EPS :0.48
Qtrly Earnings Growth (yoy):N/A
Balance Sheet
Total Cash (mrq):2.46M
Total Cash Per Share (mrq):0.12
Total Debt (mrq):100.00K
Total Debt/Equity (mrq):34.88
Current Ratio (mrq):1.12
Book Value Per Share (mrq):0.01
Cash Flow Statement
Operating Cash Flow :-1.47M
Levered Free Cash Flow :-2.74M

The numbers above are certainly not good, but for stock price of $0.40, they begin to look better. Debt is not high, and the company has about $2.5 million in cash.

The CEO of OVIT is Alexander L. Weis, PhD, who also co-founded Ilex Oncology, which was purchased by Genzyme (a Sanofi company) for a billion dollars in 2004. OVIT also has up to $65 million in milestones coming in from the sale of their diagnostic business.

I found a rather in depth video interview with Alexander Weis where he pretty much explains what OVIT'S business model and long terms goals are. The company model reminds me a bit of Spectrum Pharma (SPPI) as it looks to acquire drugs that are already created like Spectrum does.

I was impressed with Weis after watching the interview because he seemed more concerned with talking about the actual goals the company is seeking to accomplish rather than focusing too much on the stock of the company. However, he does talk a little bit about the company stock and feels its stock should be trading between 2 and 3 dollars a share. I cannot say I agree with him on that one, although I do feel the stock is undervalued, and should be trading around $1.20 a share.

On November 12, 2010, OncoVista Innovative Therapies divested its majority holding of its German subsidiary AdnaGen AG. As a result, the company will receive as much as $65 million in cash, enabling it to develop additional non-toxic and more efficacious treatments for cancer.

Alexander Weis, president and CEO of OncoVista remarked;

The importance of this transaction should not be underestimated by our shareholders. The proceeds will allow the Company to not only develop the current anticancer drugs in our portfolio more quickly, but to continue to build and enhance our drug portfolio to the benefit of shareholders and more importantly, patients. I would also like to acknowledge HealthPro Bioventures LLC, which was instrumental in working with OncoVista to structure and negotiate this meaningful transaction for our company.

Let's take a look at the insider activity;

Insider Transactions Reported - Last Two Years

DateInsiderSharesTypeTransactionValue*
Jun 30, 2011WEIS ALEXANDER LOfficer22,000DirectPurchase at $0.54 - $0.65 per share.13,0002
Jun 29, 2011WEIS ALEXANDER LOfficer200DirectPurchase at $0.55 per share.110
Jun 28, 2011WEIS ALEXANDER LOfficer15,000DirectPurchase at $0.56 - $0.58 per share.8,5502
Mar 8, 2011WEIS ALEXANDER LOfficer34,000DirectPurchase at $0.43 - $0.45 per share.15,0002
Jan 3, 2011WEIS ALEXANDER LOfficer75,000DirectPurchase at $0.30 - $0.31 per share.23,0002
Dec 29, 2010WEIS ALEXANDER LOfficer50,000DirectPurchase at $0.30 - $0.31 per share.15,0002
Dec 20, 2010WEIS ALEXANDER LOfficer10,000DirectPurchase at $0.33 per share.3,300

Data provided by EDGAR Online

Weis has been buying a decent amount of the stock at and above the current stock price, so this is a positive. I would like to see Weis buy more shares at the current price of the stock, which would indicate even more confidence in the company and send a stronger signal to the market of his confidence in his company. The insiders own approximately 25% of the stock, and a number closer to 40% would be optimal in my opinion.

For a price of $0.40 a share, OVIT is very cheap considering the high spec value of this one drug in early development. Obviously, this is a very risky investment, but a huge reward would be in order if this drug sees any success. In contrast, a company like Biosante (BPAX), trades for $0.77, and has a market cap of $85 million with over 100 million shares outstanding, has over $21 million in debt and is a huge negative levered cash burner at $2.5 million a month, with very questionable management in my strong opinion.

As mentioned, OVIT has 21 million shares outstanding for a market cap of 8 million dollars with a better CEO, making it in my opinion, a far better value than Biosante.

Bristol-Myers Squibb Co. (BMY) Recently paid $2.5 billion in cash for Inhibitex for their Hep C drug. Inhibitex hit an all time low on December 8th, 2008 of $0.18, and traded under $0.50 up to August 25th, 2009. Final price per share of Inhibitex before the deal closed was $26 a share.

This does not mean OVIT will ever see $26 a share let alone $2 a share. I am demonstrating with Inhibitex that low priced unheard of bio-pharmas that have an important drug in its pipeline have a shot at big gains. Please do not even consider buying OVIT if you have the idea in your head that you will sell it one day for $26 a share, as the odds of this happening are about the same as winning the lottery.

Spectrum Pharma is one company I cover that engages in acquiring small pharmas like OVIT in order to add new drugs to their pipeline. OVIT might be a company Spectrum would be interested in, as Spectrum has engaged in acquiring small bios like OVIT in the past for the main purpose to gain the rights to their drugs. Spectrum might want to take a look at OVIT if they have not already, as it might fit their bill on what they look for in a company to acquire for its drug(s).

With a tiny market cap of roughly $8.20M, any buy-out would likely be for at least triple this price for around 24m, or $1.20 a share roughly. The accounts receivable alone are worth more than double the $24 million price, however, this is not counted as an assest, only what the company actually receives is counted as an asset.

Balance Sheet
Total Cash (mrq):2.46M
Total Cash Per Share (mrq):0.12
Total Debt (mrq):100.00K
Total Debt/Equity (mrq):34.88
Current Ratio (mrq):1.12
Book Value Per Share (mrq):0.01
Cash Flow Statement
Operating Cash Flow :-1.47M
Levered Free Cash Flow :-2.74M

Outstanding Warrants as of January 1, 2011: 4,306,712 $ 1.72
Granted 25,000 $0.35
Exercised − −
Forfeited − −
Outstanding at September 30, 2011 4,331,712 $ 1.72
Exercisable at September 30, 2011 4,331,712 $ 1.72

The over 4 million warrants have expired, so unless the company is not reporting additional warrants, there will not be any conversion into the stock which would cause a dumping of the stock price.

One warrant does appear to have been granted at $0.35 a share, 25,000 shares.

All OVIT might need is a bit of market exposure and an institutional investor with very deep pockets to make a large investment in it. If I had the money to do this, I would at least talk to the company about this possibility. There has been one press release with the company in the last 2 years, so pump and dump has not been occurring.

Shares Outstanding:21.37M
Float:12.47M

As you can see from above, the stock has a very low float, roughly 12.5 million shares. With any kind of decent volume, the stock could see volatile price movement. Keep this in mind if considering an investment/trade in OVIT.

The Negatives:

  • Research and development expenses increased by approximately $329,000, or 257%, to approximately $457,000 for the three months ended September 30, 2011, as compared to approximately $128,000 for the three months ended September 30, 2010. The increase in 2011 is primarily due to the conduct of the additional animal toxicity and safety trial for OVI-117 and for the determination on how and where to reinitialize patient enrollment in Phase I/II clinical trials for Cordycepin.
  • As mentioned prior, I would like to see more insider buying at the current stock price level.
  • Company would greatly benefit from a large investment via private placement for a substantial percentage of ownership in the company.
  • Better communication with the market place.

Needless to say, the company needs a score from its clinical trial, and I feel OVIT has a decent shot of this happening in the next 16 months. I would love to see this company gain some serious financing to become a real player in the small cap bio-phama sector.

At this time, I do not see huge down side potential risk, as the company has stated they have enough cash to operate thru 2013. However, failure of Cordycepin in phase 1b could tank the pps, but final results from the clinical trials are not expected this year. Downside risk is still substantial, but since the stock is so undervalued in my opinion, the downside risk is not huge, but still there.

At the current price, the stock is attractive to me so I bought some yesterday after doing a little more research.

OVIT is extremely high risk, but so was Inhibitex at $0.18 a share less than 3 years ago. As I mentioned in a prior article, I have heard some rumors about OVIT being acquired by a larger pharma. As with any rumor, I have no way to confirm the validity of it, unless an insider was to talk about it, but that would be illegal, and I want no part of that.

Barring an acquisition within the next 6 months, OVIT might be a longer term buy and hold. If the company announces any preliminary success with Cordycepin, the stock price should see north of $1.00 a share.

In my opinion, Ovit is worth a look just on their drug Cordycepin, notwithstanding that Alexander Weis has been involved with selling a former company, and being involved with companies that have had success.

OVIT is a highly speculative buy at its current cheap price level. I feel the stock is undervalued based on several factors I listed above. My year target for OVIT is between $0.95 and $1.20. The longer term prospects will become more clear as the company addresses the negative bullet points I listed above.

Discovery Labs (DSCO) 3/1/12 pps: $3.68

Discovery Labs is a biotechnology company that engages in developing surfactant and aerosol drug delivery technologies for the treatment of respiratory disorders and other diseases based on KL4 surfactant and capillary aerosol-generating technologies. DSCO'S pipeline is impressive as demonstrated below;

Key Pipeline Drug: Surfaxin

Surfaxin is going to be the lead stock driver for DSCO in the short to midterm, so I will primarily focus on this drug.

As I remarked in a recent article, DSCO has an excellent chance of its lead drug Surfaxin gaining FDA approval.

Surfaxin is a liquid instillate formulation based on KL4 Surfactant technology, that targets Respiratory Distress Syndrome (RDL). In April 2009, Discovery Labs received from the FDA a Complete Response Letter (NYSE:CRL) which contained the requirements that must be addressed to gain U.S. marketing approval for the drug. This marks the 4th time since 2004 the company has received a CRL from The FDA in regards to Surfaxin.

On September 2, 2011, Discovery Labs submitted its Complete Response to the 2009 CRL.

Sufaxin has an upcoming PDUFA date for Surfaxin on March 6, 2012.

Aerosolized KL4 Surfactant is said to Improve Gas Exchange and Survival in patients with RDL. Discovery Labs' novel KL4 surfactant is a synthetic, peptide-containing surfactant that is structurally similar to pulmonary surfactant, a substance produced naturally in the lung and essential for survival and normal respiratory function.

There is no question, Surfaxin is a very important drug that can greatly benefit patients with RDL.

As I have remarked before, DSCO's management has messed up a bit with Surfaxin as the drug is on its fifth attempt at gaining FDA approval. The last CRL the company received on Sufaxin raised questions about certain aspects of a quality control stability and release test. This appears to be a very fixable issue, and I believe the company has finally got it right and the drug will be approved.

This bodes well for investors holding the stock and prospective investors considering a purchase of the stock. The stock's current price range is around $3.50 - $3.60, with an 89 million dollar market cap, and a lower float of around 24 million shares. FDA approval of Surfaxin should cause a nice spike upwards in the stock.

Financial Highlights
Fiscal Year
Fiscal Year Ends:Dec 31
Most Recent Quarter (mrq):Sep 30, 2011
Profitability
Profit Margin :N/A
Operating Margin :-4,165.12%
Management Effectiveness
Return on Assets :-79.70%
Return on Equity :-302.21%
Income Statement
Revenue :582.00K
Revenue Per Share :0.03
Qtrly Revenue Growth (yoy):N/A
Gross Profit 3:N/A
EBITDA 6:-22.95M
Net Income Avl to Common :-22.40M
Diluted EPS :-1.12
Qtrly Earnings Growth (yoy):N/A
Balance Sheet
Total Cash (mrq):15.41M
Total Cash Per Share (mrq):0.63
Total Debt (mrq):316.00K
Total Debt/Equity (mrq):6.68
Current Ratio (mrq):1.21
Book Value Per Share (mrq):0.20
Cash Flow Statement
Operating Cash Flow :-22.78M
Levered Free Cash Flow :-7.78M

As we can see with the numbers above, DSCO needs FDA approval for Surfaxin so the company can take the next step in becoming a profitable cap bio-pharma. A rejection of Surfaxin is likely to tank the stock near the $1.75 range, which would represent about a 50% haircut in the pps. Again, I strongly believe this drug will gain approval, but investors need to understand the risks with DSCO fully.

I know many will not agree with my assessment of the stock with an FDA rejection of Surfaxin, but a potential rejection would reflect a 5th time this drug would fail to gain approval, which could signal to the street that management might have a competency issue.

Insider Transactions Reported

DateInsiderSharesTypeTransactionValue*
Sep 30, 2011TEMPLETON MARY B ESQOfficer2,105IndirectAcquisition (Non Open Market) at $1.96 per share.4,125
Sep 30, 2011HOY THOMASOfficer2,104IndirectAcquisition (Non Open Market) at $1.96 per share.4,123
Sep 30, 2011TATTORY JOHN AOfficer1,837IndirectAcquisition (Non Open Market) at $1.96 per share.3,600
Sep 30, 2011MILLER THOMAS FOfficer2,105IndirectAcquisition (Non Open Market) at $1.96 per share.4,125
Sep 30, 2011COLE KATHYOfficer2,105IndirectAcquisition (Non Open Market) at $1.96 per share.4,125
Sep 30, 2011AMICK W THOMASOfficer2,105IndirectAcquisition (Non Open Market) at $1.96 per share.4,125
Sep 30, 2011COOPER JOHN GOfficer2,104IndirectAcquisition (Non Open Market) at $1.96 per share.4,123

Insiders have not been buying lately, and perhaps they should have considering the strong stock appreciation in the last few months.

DSCO'S CEO is W. Thomas Amick; Amick is a respected industry veteran with more than 30 years of pharmaceutical and biotechnology experience as a senior executive with Johnson & Johnson .

For a small cap bio-pharma in development such as DSCO, top management is very important. With Amick as the company CEO, DSCO and it's investors money seem to be in good hands. As Vice President of the Ortho Biotech Oncology Franchise, he was instrumental in the launch of Procrit and building the oncology franchise into a multi-billion dollar operation.

Registered Public Offering: From the company's last 10Q summary from November 2011, we read the following;

On February 22, 2011, we completed a registered public offering of 10 million shares of our common stock, 15-month warrants to purchase five million shares of our common stock, and five-year warrants to purchase five million shares of our common stock. The securities were sold as units, with each unit consisting of one share of common stock, a 15-month warrant to purchase one half share of common stock, and a five-year warrant to purchase one half share of common stock, at a public offering price of $2.35 per unit, resulting in gross proceeds to us of $23.5 million ($21.6 million net). The 15-month warrants expire in May 2012 and are exercisable at a price per share of $2.94. The five-year warrants expire in February 2016 and are exercisable at a price per share of $3.20. The warrants are excisable for cash only, except that if the related registration statement or an exemption from registration is not otherwise available for the resale of the warrant shares, the holder may exercise on a cashless basis. The exercise price and number of shares or type of property issuable upon exercise of the warrants are subject to customary adjustments in the event of a Fundamental Transaction (as such term is defined in the warrants). In addition, the exercise price of the five-year warrants is subject to adjustment if we issue or sell common stock or securities convertible into common stock (in each case, subject to certain exceptions) at a price (determined as set forth in the warrant) that is less than the exercise price of the warrant.

The current pps is above the warrant exercisable price, which is a positive as I expect the pps of DSCO to increase substantially on FDA approval of Surfaxin, therefore the warrants being held is this case is mostly irrelevant. It certainly appears the warrant holders feel confident about FDA approval this time around for Surfaxin, and even if they exercised some of them it has not effected the stock price in a negative way.

As I mentioned before, DSCO is a risky investment, but in my opinion, well worth the reward. DSCO has other drugs in late stage development such as Aerosurf currently in Phase IIb clinical, with trial data possibly being in 2014 Aerosoft is a clinically-relevant dose of surfactant to RDS patients in aerosol form, without the need for either intubation or mechanical ventilation. This could be a very big money maker for DSCO, with peak sales possibly reaching 1 billion dollars by 2020, if this drug is ever approved. My year end target price for DSCO is $5.75

Astex Pharma (ASTX) 3/1/12 pps: $1.83

Astex is a pharmaceutical company that engages in the discovery, development, and commercialization of novel therapeutics with a focus on oncology and hematology.

Key pipeline drug: Dacogen, which is a DNA Injectable hypomethylating agent currently FDA approved for the treatment of myelodysplastic syndromes (MDS).

However, in early February of this year, The Oncologic Drugs Advisory Committee voted 10-to-3 against recommending Dacogen as a treatment for acute myeloid leukemia (AML) for patients over the age of 65. It is not likely The FDA will approve the drug for AML.

Dacogen is already approved for MDS, and with several other drugs in its pipeline and strong partnerships, Astex may still be worth the risk to invest in, as the stock is trading near its 52 week low of $1.51 which could indicate traders have already priced that Dacogen will not be approved by The FDA.

Shares Outstanding:92.88M
Float:83.39M
% Held by Insiders:7.33%
% Held by Institutions:38.80%
Shares Short (as of Feb 15, 2012):3.66M
Short Ratio (as of Feb 15, 2012):4.10
Short % of Float (as of Feb 15, 2012):6.10%
Shares Short (prior month):3.41M

The short interest is very light, coming in at 3.66 million shares. This somewhat confirms the speculation that Dacogen failure is baked into the stock price. I would think if it was not, we would be seeing far greater short interest.

Financial Highlights
Fiscal Year
Fiscal Year Ends:Dec 31
Most Recent Quarter (mrq):Sep 30, 2011
Profitability
Profit Margin :19.79%
Operating Margin :21.66%
Management Effectiveness
Return on Assets :4.14%
Return on Equity :7.20%
Income Statement
Revenue :60.99M
Revenue Per Share :0.91
Qtrly Revenue Growth (yoy):26.70%
Gross Profit :52.97M
EBITDA :15.54M
Net Income Avl to Common :12.07M
Diluted EPS :0.18
Qtrly Earnings Growth (yoy):N/A
Balance Sheet
Total Cash (mrq):125.69M
Total Cash Per Share (mrq):1.35
Total Debt (mrq):0.00
Total Debt/Equity (mrq):N/A
Current Ratio (mrq):4.04
Book Value Per Share (mrq):2.38
Cash Flow Statement
Operating Cash Flow :18.81M
Levered Free Cash Flow :36.76M

The above numbers look rather impressive for such a small bio-pharma. However, these numbers are from Q3, 2011, and Q4 earnings are due out on March 5th. Astex had 26.7% quarterly revenue growth in Q3,11 which is an impressive number.

The low short interest comes into play here as well, as it appears shorts are not betting against the company missing on estimates. Today's short volume was light as shown here: 3/1/12|ASTX|77931

The Astex CEO is James S.J. Manuso, PhD, MBA, who also serves as chairman of the board. Manuso has been Chairman and Chief Executive Officer of Astex Pharmaceuticals, Inc (formerly SuperGen Inc) since January 1, 2004. Dr. Manuso serves as the Chief Business Officer of Symbiontics, Inc. and ZyStor Therapeutics, Inc. He served as the President of Astex Pharmaceuticals, Inc. since January 1, 2004. He served as the Chief Executive Officer of Astex Pharmaceuticals, Inc. from September 2003 to December 2003. He served as Consultant of Astex Pharmaceuticals, Inc. since September 5, 2003. Dr. Manuso Co-founded Regalen Inc. (formerly known as Galenica Pharmaceuticals, Inc) and served as its President and Chief Executive Officer until September 5, 2003. He co-founded Manuso, Alexander & Associates, Inc. and served as its President since 1992. He co-founded PrimeTech Partners in 1998 and served as its General Partner from 1998 to 2002.

As we can see above, it is evident Manuso is a solid and competent CEO.

The following information from the company's Q3 2011 10Q might indicate why the stock price in part, has been trending downwards;

NOTE 2. STOCK-BASED COMPENSATION

Stock Option Plans. We have authorized 20,500,976 shares of common stock for issuance following the grant of incentive stock options or nonstatutory stock options to employees, directors, and consultants under our stock option plans. The number of shares authorized for issuance increased by 2,237,976 on July 20, 2011, upon the issuance of replacement options in the acquisition of ATL (see Note 12). Except for the replacement options, the number of shares to be purchased, their price, and the terms of payment are determined by our Board of Directors, provided that the exercise price for incentive stock options cannot be less than the fair market value on the date of grant. The options granted generally expire ten years after the date of grant and become exercisable at such times and under such conditions as determined by the Board of Directors (generally over a four or five year period). Options that have performance-based vesting criteria become exercisable in accordance with the milestones determined by the Board of Directors.

We recognized $858,000 and $514,000, respectively, in stock-based compensation expense for the three months ended September 30, 2011 and 2010. We recognized $2,313,000 and $1,249,000, in stock-based compensation expense for the nine months ended September 30, 2011 and 2010, respectively. These amounts have been recorded in research and development expenses or general and administrative expenses, based on the home department of our employees.

From the above, we can see quite a bit of money has been paid out in the form of stock option grants. Astex has roughly 93 million shares outstanding which is not excessive, but the company is going to need to curtail further share holder dilution in the future to help see steady gains in its stock price.

Insider Transactions Reported

DateInsiderSharesTypeTransactionValue*
Dec 15, 2011JHOTI HARRENOfficer36,300DirectOption Exercise at $0.78 per share.28,314

We can see insiders have not been buying any stock, and it's likely this is because of the all the stock option grants being shelled out as explained above.

As I stated before, I do not think Dacogen will be approved by the FDA this time around. However, I could certainly be wrong about this. If Dacogen does manage to get approved, the stock will be off the races. As I mentioned before, I still think it bodes well for the stock that the short interest is very low approaching the company's 10k and FDA approval decision coming up FDA on March 6th, 2012.

The stock should be trading higher, and I believe it will trade higher in the months ahead. If you feel like taking a gamble, you can purchase some stock now, but be advised, shorts might pile on if Dacogen fails to gain approval. The safer play is to wait until after earnings and the approval date to buy the stock. My year end target price of Astex is $2.75, which figures in Dacogen failing to gain approval. If it does gain approval, then the year end target price would be $5.00.

I have offered these 4 companies for traders and investors to take a look at and decide if they wish to do further due diligence on these companies.

With small caps as these, always be sure to know the risks involved. These types of companies can be very rewarding financially, but also carry huge risk, so be smart about trading them. One or more of these companies could also be targeted for acquisition by a larger pharma, so consider this factor as well.

Source: 4 Small-Cap, High-Risk, High-Reward Bio-Pharmas

Additional disclosure: This article is intended for informational and entertainment use only and should not be construed as professional investment advice. Always do you own complete due diligence before buying and selling any stock.