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Some of my best investments of the past were small companies that received FDA approval on a drug, a test, or some sort of procedure. The reaction to the excitement of this approval usually caused the stock to rocket to all time highs, but as the excitement waned and the revenues from the initial product introduction were disappointing, the stock usually traded down closer to all time lows. The momentum investors throw in the towel and the small retail clients grow impatient. It is in this transition period-- when a company is bringing a new product to market that has yet to gain broad traction in the marketplace-- that I find an excellent investment opportunity to build a position for the long term. One of the most important criteria I look at to determine what size position I will take in a stock is the financial health of the company's balance sheet. You need to make sure the company will be in business long enough for the product to gain traction in the marketplace it is pursuing. Once a company begins to gain real traction in its marketplace, the stock price usually returns to near all time highs.

Vermillion Inc (NASDAQ:VRML) may be a perfect example of this type of investment. In September of 2009 this company was actually in bankruptcy protection with the stock trading at .05 when it received FDA approval for its OVA1 diagnostic test used for the diagnosis of ovarian cancer. By year end, the stock was trading around $25 and peaked at $34 in March of 2010. The company took full advantage of the move in the stock price and issued stock which strengthened its balance sheet and allowed it to emerge from bankruptcy.

By September of that year, as excitement for the stock waned and momentum investors moved on, the stock price was back down to $6. In 2011, as Vermillion struggled to gain traction for its OVA1 test, the stock started the year at $10, but by year's end was trading at just above $1 a share.

In early March of this year the stock had a very sharp one day possible short covering rally to $3 a share as the company received category 1 CPT code approval for OVA1. This approval will definitely help OVA1 gain traction. The stock has since traded back down below $2 and closed Tuesday at $1.77.

The good news, as seen in its latest earnings report, is that OVA1 seems to be gaining traction. If this is the case, the share price should begin responding with a longer term uptrend.

Vermillion also has a very strong pipeline of other diagnostic tests that it is working on, including a test for peripheral artery disease (PAD) that is in the clinical study phase of development. FDA approval of any of these new tests would certainly be a catalyst for an upward move in the stock.

Vermillion currently has $22 million in cash which comes out to $1.83 per share with no long term debt. This will give Vermillion at minimum another full year without having to pursue additional financing options. Quest Diagnostics (NYSE:DGX) also owns over 30% of Vermillion, so an outright takeover of Vermillion is not out of the question.

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Source: Is Vermillion's OVA1 Test Finally Gaining Traction?