Two $5 Biotech Stocks Insiders Are Scooping Up

Includes: MDGL, NVAX
by: Bret Jensen

Regular readers of these columns know by now my philosophy on buying small biotech stocks, which I call "Shotgun Investing". This involves purchasing small positions in a myriad of promising companies realizing most of my investments will come to naught. However, the strategy will be nicely profitable overall as I should hit enough five to ten baggers over time to be solidly in the black.

I have also found quite often that insider buying precedes improving prospects for this type of company as a premium is put on insider expertise knowledge due to the complexity of the sector. Combining these strategies recently provided a 'home run' for my portfolio with Furiex Pharmaceuticals (NASDAQ:FURX). The stock is up more than 400% since I spotted it in July 2012 due to significant insider buying back then.

Recently 24/7 WallStreet offered up 8 small biotech stocks it considers to have great upside potential. The two profiles below are from stocks on that list that also have had recent insider buying. Both are priced at just over $5 a share.

Synta Pharmaceuticals Corp (SNTA) is a small (less than $400mm market capitalization) biotech concern primarily focusing on developing its lead cancer drug "ganetespib" as a treatment for non-small-cell lung cancer, breast cancer and colorectal cancer. The stock currently trades a bit above $5 a share.

Jefferies has a $19 a share price and believes "ganetespib" could eventually rack up $425mm to $600mm in annual sales if approved. Roth Capital put a $27 a share price target on Synta after the company announced it launched three randomized Phase II/III studies of "ganetespib" in combination with chemotherapy for several ailments including AML. The consensus from other analysts is not quite so exuberant but the 6 analysts that do cover the stock have a robust $16.50 a share median price target on SNTA.

Insiders also are optimistic and have accumulated over 2mm new shares since Mid-November. The company has a solid balance sheet with over $30mm in net cash on the balance sheet although I could see a need for the company to raise additional money in the medium term given its cash burn rate. That being said, SNTA seems to be worthy of a small, speculative position given insiders' and analysts' outlooks and the progress of "ganetespib".

Novavax (NASDAQ:NVAX) also gets called out for significant upside in this report. This small vaccine maker has been in my portfolio since it was selling at $1.30 a share in March 2012. It is now at ~$5.30 a share and I am still holding.

The company presently has six vaccine candidates undergoing clinical trials. 24/7 Wall Street notes that the Novavax makes the Piper Jaffray list of top stocks to buy for 2014 and is also a buy at Lazard and FBR Capital. Impressively, despite the huge run in the stock over the past two years; insiders are still net buyers with their most recent purchases coming less than two weeks ago.

The four analysts that cover the stock have price targets ranging from $9 to $12 a share on NVAX, all substantially above the current stock price. The company has over $140mm in net cash on the balance sheet and revenues are projected to double in 2014 to ~$36mm.

Disclosure: I am long FURX, NVAX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.