As a group, the biotechnology and drug sector has had an impressive YTD run, well outperforming the S&P 500. The NASDAQ Biotech Index (BMI) is up over 25% YTD, while the S&P 500 has seen gains of just under 9% YTD. When one researches the smaller upstart biotech companies that are not included in the BMI, there are considerable risks that deter many investors. Yet, if one chooses the right company, there are truly great rewards. Unfortunately, most investors miss out on such opportunities, whether it was because the company flew under the radar until a positive announcement sent the stock upward, or the investors were unable to effectively utilize their standard stock evaluations that they would normally use in evaluating a more established company. Below are three companies in which looking at the book value does little good, but they might just be hidden gems waiting to be discovered.
Advanced Medical Isotope Corporation (ADMD.OB), a nano company with a market cap of $21.6 million, may be one of those companies that is a gem waiting to be discovered. The company recently signed a licensing agreement with Batelle to develop a high-dose radiation therapy technology known as radiogel. Battelle is the world's largest independent research and development organization. It licensed the technology to Advanced Medical Isotope Corporation (hereafter AMIC) which included eight patents comprising the injectable radiogel technology, a water-based biodegradable polymer that delivers yttrium-90 microspheres directly into cancer tumors. Yttrium-90 is a well established medical isotope with numerous applications in the treatment of cancer.
Radiogel is a new technology that injects the radioactive isotope product into the body and delivers a high dose of radiation, killing the cancer cells. What makes radiogel stand out from other treatments is that the polymer, when first injected into the targeted cancer site, is in liquid form - but the liquid warms quickly to the body temperature and polymerizes at the injection site. The polymer lattice formed traps the yttrium-90 microspheres in place as the high energy beta particles irradiate cancer cells in the target mass. This targeted radiation approach maximizes the radiation dose of the cancer cells while minimizing exposure to nearby normal tissues. Effectiveness of the treatment is thus maximized as is the safety profile.
Because it can be administered through the skin or during surgery, the procedure has the ability to be delivered to solid tumors that cannot be removed safely. Radiogel appears to have numerous applications including cancers of the liver, brain, head and neck, kidney, and pancreas, plus it is showing promise for eye tumors. "We expect the radiogel to become a therapeutic agent that provides physicians with the ability to effectively treat tumors that cannot be removed surgically or that cannot be treated by any other means," said Robert Schenter, chief scientific officer for AMIC.
Since early June, AMIC's common stock has risen from $0.09 to just under $0.30 a share, roughly a 200% increase. The rise clearly coincided with the announcement of the licensing agreement with Battelle, but that might not be the only reason for the boost in the stock price. The demand for medical isotopes is on the rise. In the US alone, 18 million medical procedures use medical isotopes, with a growth rate estimated to increase at 10% annually. Consider this: 90% of all the non PET radioisotopes used in the United States are imported, and the remaining 10% that are produced in the United States are manufactured in a fragmented, piecemeal manner with companies producing a single isotope instead of a wide variety. Hence, there is plenty of room for an American isotope company that can produce a wide array of products to make a major dent in the market. AMIC might just be that company with a wide range of medical isotope products available and being developed.
AMIC is projecting that if they can get their radiogel to market in 2013, annual sales could reach $5-$15 million, with a growth of future sales reaching upwards of $75-$100 million in the US alone. Given that the global isotope market continues to grow and is expected to reach $4.7 billion by 2015, if AMIC can produce the numbers they are projecting, this little company may just be the next big mover for speculative investors. However, use caution as there are landmines in this field. The stock is moved at this time not by its slim earnings, but by future possible revenue as seen by the stock's price increase after announcing their licensing deal with Battelle.
Ziopharm Oncology Inc. (ZIOP) is a biopharmaceutical company developing small molecule and synthetic biological approaches to new cancer therapies that treat tumors of the bone, cartilage and muscle by targeting cellular pathways to halt the development of cancer cells. Due to positive developments for the company, it has traded up as much as 43% YTD. However, it has had a rocky 30 days for investors, giving back most of its gains it had attained. There was some positive news coming out of this New York based company that may make investors interested in taking a closer look. Earlier this month, Ziopharm's cancer drug, Palifosfamide, which is in phase 3 clinical trials for first-line metastatic soft tissue sarcoma and first-line metastatic small cell lung cancer, was granted a patent by the US Patent and Trademark office. Ceaser J. Belbel, Ziopharm's Executive Vice President and Chief Legal Officer, commented on the patent: "The issuance of this patent further strengthens our U.S. patent position for our lead candidate, Palifosfamide, which already has composition of matter exclusivity through 2029… further strengthening of our robust patent portfolio, specifically for this compound, is important to Ziopharm as we move forward with pivotal and other studies in soft tissue sarcoma, small cell lung cancer, and other potential indications." Success in either of the two phase 3 trials, combined with this patent protection, not only shields the company somewhat from competition during the protection period, but it also makes the company a valuable acquisition target for big pharma looking to increase or start their own oncological programs.
Ziopharm Oncology released its earnings data on Thursday Aug 6th, reporting earnings of $0.29 per share (EPS) for the second quarter, though the company's revenue was 0% on a year-over-year basis. However, one should look at other variables in evaluating most biopharmaceutical companies involved in R&D including this one. For example, operational cash spent for the second quarter was $16.8 million, an increase of $11 million for the same period of 2011. The increased spending, driving this small cap company's cash flow from operations below the healthcare and biotechnology sector's, was due to R&D for Palifosfamide's pivotal phase 3 studies and their DNA-based therapeutics AD-IL-12 and DC-IL-12 that are in phase 1 clinicals. The company also has Orphan Drug Designation for Palifosfamide in the treatment of soft tissue sarcoma in both the United States and the European Union. Orphan Drug Designation qualifies the sponsor of the product for tax credits and marketing incentives through the Orphan Drug Act. In its phase 3 trials, Palifosfamide appears to be very encouraging. With R&D Biopharmaceutical companies, sometimes all it takes is positive news, whether in clinical trials or new patents being granted, to send the stock soaring higher. Although Ziopharm is hovering around $5.26, 15% below its 52 week high of $6.33, Jefferies and JP Morgan earlier this year raised its target price to $7.00 a share. With this biopharmaceutical company perhaps on the edge of more positive news, and if they can continue to make positive strides with Palifosfamide and their DNA based therapeutics, this stock could meet or exceed the analyst target price.
Halozyme Therapeutics, Inc. (HALO), a small cap biotechnology company based in San Diego CA, has rebounded nicely after last week's stock plunge of over 50% of its value. The stock fell from $8.56 to a low of $3.89 per share on heavy volume when the company announced that the FDA issued a complete response letter regarding their co-developed drug, HyQ, for treatment of primary immunodeficiency disease. Volume continued to be very heavy over the next couple of trading sessions, averaging well over 2 million shares as the bears and bulls slugged it out over this company's stock.
HyQ is a combination of Baxter International's (BAX) plasma-derived Immune Globulin and Halozyme's recombinant human hyaluronidase, which allows the drug to be delivered under the skin rather than being infused intravenously. The problem wasn't with Baxter's Immune Globulin, but with Halozyme's technology. Some patients in the clinical trial developed non-neutralizing antibodies generated against recombinant human hyaluronidase. Although there weren't any adverse events associated with the formation of the antibodies, the FDA was concerned about their potential effects on reproduction, development, and fertility. Both Halozyme and Baxter will have to use pre-clinical data to convince the FDA that HyQ doesn't pose any undue risk.
With hope that the worst of the news was behind them and that the selloff was overdone, Halozyme stock has rebounded 60% from its lows in the last three trading sessions to a high of $6.13 before pulling back slightly. Halozyme appears to be an example of how one piece of news, whether positive or negative, can affect a nano, micro, or small cap biotechnology company. HyQ is just one drug in Halozyme's pipeline. The company is also partnered with Roche Holdings (ROG) and Interxon Corporation on other drugs as well as developing its own product. With other products in its pipeline and HyQ's fate still unknown, it should be interesting to see if Halozyme can continue to rebound from its fall.
Investing in any company that has little or no earnings can be like a stroll through a field of investment landmines. However, tremendous profits can be attained investing in one of the nano, micro or small cap biotechnology companies that appear to have a great upside on future developments. As the examples above show, the biotech sector is laden with a number of small research and development companies that appear to be on the edge of breaking out and becoming the next big winner, only to be batted down by less than exorbitant news - be it that the FDA did not approve their latest trial, the chatter of a buyout never materialized, or the high SG&A expenses came into question. This is just a small sample of companies with great potential in the short term or longer term. There are many others with comparable potential that are trading at varied levels. Potential investors should ascertain their risk tolerance and perform their own risk/reward analysis to determine if either of these, or another in the sector, merits their investment of money, time and stress in the coming days, weeks, months and years ahead.