2 Promising Small-Cap Pharma Plays Trading Under $5/Share

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 |  Includes: GALE, PIP
by: Matt Schilling

As we begin the third quarter there are a few small-cap pharmaceutical companies I'd like to examine a bit closer. After screening a good number of these companies, I wanted to highlight three that met the following criteria. First, each stock is trading under $5/share. Second, each company must have a market cap of under $400 million dollars. Finally, each company must have at least one drug participating in Phase II clinical trials. That being said both of these companies meet that criteria.

PharmAthene, Inc. (NYSEMKT:PIP), which trades in a 52-week range of $1.07 (52-week low) to $3.35 (52-week high), closed at $1.39/share during Friday's session. On June 14th, the company announced the additional developmental progress of its next generation anthrax vaccine, SparVax. Dr. Thomas Fuerst, Executive Vice President and Chief Scientific Officer had noted, "Following on the successful cGMP manufacturing of SparVax at full commercial scale, the Company has now completed final analytical testing and release of the final drug product in pre-filled syringes for future clinical evaluation. This latest achievement represents another major step forward for our SparVax program. We now know that SparVax manufactured in the United States meets all of the specifications and potency metrics necessary to begin clinical studies. SparVax has previously been evaluated in two separate Phase II clinical trials involving approximately 770 subjects."

There are several things that stand out regarding Dr. Fuerst's comments. First, the company used a total of 770 subjects in two separate clinical trials. In my opinion, that number is a great starting point for such trials because it can provide a wide-range of possible variables depending on the biological characteristics of each test subject. Second, analysts are anticipating very positive earnings growth for both the June quarter and full year for 2012. For the June quarter, PIP is expected to post a loss of -$0.04/share on revenue of $6.15 million dollars and for the year analysts are expecting the company to post a loss of -$0.17/share on revenue of $24.68 million dollars. Analysts are also expecting PIP's EPS to grow at an estimated 20% for the quarter and -112.5% for the year. In my opinion, if the company can gain enough momentum based on the clinical trials of its SparVax solution, potential investors could see EPS growth estimates exceeded. For those looking to establish a position in the company, I'd begin with a small position and add additional shares as earnings announcements approach.

Galena Biopharmaceuticals (NASDAQ:GALE), which trades in a 52-week range of $0.36(52-week low) to $3.54 (52-week high), closed at $1.65/share during Friday's session. As a result of the company's presentation at the annual ASCO conference, Cantor Fitzgerald initiated coverage on the company with a buy rating and a $4/share price target and Capital Partners reiterated its $5/share target. GALE also presented data on June 8th, with regard to its immunotherapy drug, NeuVax (currently in Phase III trials), noting that the succession rate when applied is 94.4% over 60 months. In other words, 94.4% of patients who received the booster-shot were disease free, when compared to the 74.1% of patients who part of a select control group that were disease free during the same period.

There are several things that stand out regarding GALE's Phase III trials. First, the company is anticipating a total of 700-1000 test subjects will be used during the trials. In my opinion, that number is a great starting point for such trials because it can provide a wide-range of possible variables depending on the biological characteristics of each test subject. Second, analysts are anticipating very positive earnings growth for both the June quarter and full year for 2012. For the June quarter, GALE is expected to post a loss of -$0.16/share and for the year analysts are expecting the company to post a loss of -$0.96/share on revenue of $2.50 million dollars. Analysts are also expecting GALES's EPS to retract at an estimated 300% for the quarter and -200% for the year. In my opinion, if the company can gain enough momentum based on the clinical trials of its NeuVax solution, potential investors could see EPS growth estimates exceeded. For those looking to establish a position in the company, I'd begin with a small position and add additional shares as earnings announcements approach.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.