3 Small Cap Biotechs With Near-Term Catalysts

Includes: IDRA, INSM, SYN
by: StockMatusow


Today, we are going to look at 3 companies with near-term binary catalyst events approaching that could have a positive effect on their collective stock prices.

Examples of these binary catalyst events include, but are not limited to, Food and Drug Administration (FDA) approval decisions, data releases, and advisory committee recommendations (Adcom).

Small cap stock trading can at times, be very volatile, and is not for everyone. As the rewards can be very high, the risk is also very high.

Written by Scott Matusow.

Synthetic Biologics (SYN) expects to present top-line data from its Trimesta/Copaxone combo Phase II multi-center clinical trial involving 164 women for the treatment of relapsing-remitting multiple sclerosis (MS) in women.

The data will be presented April 29th and April 30th at the American Academy of Neurology's (AAN) 66th Annual Meeting in Philadelphia.

Trimesta, which is Synthetic's patented and trademarked name for oral estriol, has shown some positive effect on MS, but not overly impressive. However, with the addition of Copaxone, we feel the trial could be a success, as Copaxone has been a long time moderately successful treatment for MS. The addition of Trimesta with Copaxone could very well provide sufferers from MS the relief they seek. Currently, many MS patients seek new treatments, but doctors are reluctant to prescribe them, as most of them are not FDA approved.

Synthetic also holds the patent license to the Trimesta/Copaxone combination. Compound pharmacies offer oral estriol in limited quantities now for doctors to prescribe to their patients. However, if Synthetics data for the combo is good, the company may file for a new drug application (NDA) with the FDA. If approved, compound pharmacies will no longer be able to offer an FDA approved drug.

Teva's (NYSE:TEVA) Copaxone goes off patent this year. If Synthetic shows good data here, there is a decent chance that Teva could find Synthetic's combination treatment useful for a way of extending its Copaxone patent. Therefore, Teva may be interested in partnering with Synthetic for its combination drug.

We feel that good data here could provide the company with the needed leverage to raise money to advance its early pipelined SYN-004, an oral beta-lactamase enzyme tablet to treat C. difficile overgrowth infections that patients typically pick up in hospitals. SYN-004 is potentially more valuable in the long term than the Trimesta/Copaxone combination drug, as President Obama is proposing to double spending on these types of drugs in the future.

Annual worldwide sales of current MS therapies are estimated at $14.1 billion, so overall, for a company with a market cap around $150M, we feel this catalyst is a very important one for the company and its investors.

Idera Pharmaceuticals (NASDAQ:IDRA) expects this quarter to report top-line data from the first three dosing groups from its Phase II trial of IMO-8400, which is designed to treat patients with moderate to severe plaque psoriasis.

Plaque psoriasis is caused by a toll-like receptor (TLR), and the most common form of psoriasis. It is very unsightly and painful, and most often appear on the scalp, knees, elbows and lower back.

TLR's are proteins whose activation plays a significant part in autoimmune diseases and forms of B-cell lymphoma where the MYD88 L265P genetic mutation is present. IMO-8400 is designed to prevent the over-activation of these proteins.

In Laymen's terms, the drug is designed to block excessive TLR activation in genetic mutations, so a disease does not aggressively progress which would cause a patient's condition to worsen.

The company hopes the data sets will confirm that the drug does in fact work as designed.

Positive data here for plaque psoriasis would only be the tip of the iceberg for the company as shown above, this drug could potentially treat a wide array of genetic mutations, Idera's stock has been on quite a run lately, and we think it has the potential to move significantly higher over time, especially if the first of 3 data sets here show to be positive. It's worth noting that the Baker Brothers own over 3M shares of the company. The Bakers have had great success the last couple of years with many developmental biotechs as we have noted in several articles covering some of their positions.

We feel Idera is at a pivotal point as a company, and good data here could eventually propel it into the biotech limelight.

Insmed Incorporated (NASDAQ:INSM) is expecting to release data from a Phase II trial for non-tuberculosis mycobacterial infections in the 1Q 2014, from its lead drug Arikace.

Arikace is an inhaled antibiotic intended to treat cystic fibrosis patients with Pseudomonas and non-tuberculosis mycobacterial (NTM) lung infections. Arikace uses an antibiotic called amikacin, which is FDA approved for gram-negative infections.

Arikace is an inhaled therapy and is delivered once daily. Insmed hopes the upcoming data for Arikace will show to be efficacious, safe, and convenient for patients.

Insmed has been a successful past pick of ours when in July, 2013, the company announced that data from a Phase III trial for cystic fibrosis with Pseudomonas met its primary endpoint of non-inferiority. Since our coverage at near $9, the stock reached over $20 a share. Now the company is expecting to release data from a Phase II trial for non-tuberculosis mycobacterial infections in the 1Q 2014.

Additionally, Arkice has orphan status and there are no approved treatments in the United States. There are about 50,000 patients in the United States and good data could be a major milestone for the company since this is an unmet need. If it is eventually approved, the company would also have about 12 years of market exclusivity.

We believe Insmed stock has a chance to run higher as speculation increases before data release. There is no specific date for the release, and the data can come at any time this quarter, so this one is a risky hold. However, since the company produced positive data for the same drug for another indication and we believe there is a good chance of good data for this indication as well.

Having said this, there is substantial risk in holding shares in developmental biotechs through their respective binary catalyst events. A strategy we use is that if we feel the chances are good that a binary event will be positive is to take profit from trading the shares, and roll them into the option chain via buying calls.

By purchasing calls, this allows for a limited loss, should a binary event turn out to be negative. An example of this would be, let's say you want 100 call contracts at $0.50. 100 contracts are the equivalent of controlling 10,000 shares if the stock reaches the strike price of the contract before it expires.

In this scenario, your cost would be $5000. If a negative result occurs, the most you can lose is $5000. However, if you hold 10,000 shares through a negative binary event and if the stock drops 3 dollars, you would be down $30,000. While holding the stock provides you with unlimited time (unlike time limited options) for the stock to rebound, often times it does not, leaving you holding a very expensive "bag."

Developmental small cap biotechs are very speculative. If you pick the right one to invest in, it's a good chance you can strike it rich in time. But with constant binary events associated with them, they are also extremely volatile. Always be sure to full do your due diligence before investing your hard earned money in them!

Disclosure: I am long SYN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: This article is intended for informational and entertainment use only, and should not be construed as professional investment advice. They are my opinions only. Trading stocks is risky -- always be sure to know and understand your risk tolerance. You can incur substantial financial losses in any trade or investment. Always do your own due diligence before buying and selling any stock, and/or consult with a licensed financial adviser.