Investing In Small Cap Bio-Pharma: Striking It Rich Or Going Bust

by: StockMatusow

"I'm going to be rich, I'm going to be rich, I found a small company with a potential blockbuster drug, time to put all my money into it." Hold on a second there, but have you first taken a look at the basic fundamentals of that company with that new "blockbuster" drug?

  • Have you done the dd on management's reliability and competence?
  • Have you done the dd on the CEO, what does their past history look like?
  • Have you checked the company's current balance sheet?
  • Will they have enough money to fund bigger Phase 3 trials?
  • What is the current cash burn rate?
  • What is their debt? What is the leverage on that debt?
  • What is the chance they will have to take on toxic financing?
  • Did you investigate the viability of the blockbuster drug?
  • What phase clinical trial is the drug in?
  • Have you carefully read the official certified results of clinical trials?

These are just a few things to consider first before investing your money into bio-pharmas, and even more consideration is needed before investing in small cap bio-pharma.

It is great you found a company with a potential blockbuster drug, but this does not mean you are going to make money. In fact, you could lose a good deal of your investment, if not all of it.

Provenge from Dendreon (NASDAQ:DNDN) is an FDA approved blockbuster drug for the treatment of Prostate Cancer.

In March of 2009, the anticipation of FDA approval for Provenge began to take effect on the stock price. The stock began March trading in the high 2 dollar range. By the end of April, immediately after The FDA approved Provenge, the stock was trading in the low 20 dollar range. On one trading day alone, the pps gapped up 14 dollars.

If you bought In March of 2009 and sold your shares 2 months later, you made yourself a killing. If you decided to hold the stock even longer, you would have made an enormous killing.

If you had bought the stock on April 30th, 2010 and held it to the current date of Jan. 12th, 2012, you would be holding a monumentally monstrous bag on par with the size of King Kong's genitalia.

2 key points to consider:

  • Did the people buying around $55 understand the risks of investing in a once small cap bio pharma?
  • Did they do the basic dd?

For the most part, Dendreon stock took a huge fall because of management's failure to do correct marketing of Provenge to insurance companies and doctors. The cost of Provenge to insurance companies was not made clear, and many doctors did not even know about the drug. Because of those 2 factors, earnings were not close to the guidance management gave and The stock fell to as low as 7.81 on Oct. 11th, 2011. Management showed itself to be unreliable with their guidance, some would even argue that they were downright incompetent.

Dendreon has since rebounded a bit and is currently trading in the mid-$13 range.

Many people ask me why I like a small company like Antares Pharma (AIS) so much. I like Antares because it scores high on fundamentals listed below;

  • Management shows to be reliable and does not over state on company progress.
  • Management focus on bottom line.
  • Balance sheet coming into line, with a likely 2011 Q4 profit.
  • Cash burn before Q4 2011 was 4 million year over year; with profit likely now, no more cash burn.
  • No debt, no toxic banking relationship, no toxic financing.
  • Solid growth plan involving royalty streams from their remaining advanced gel platform to fund their self-injectors, their core business and focus.
  • Partnership with Teva (NYSE:TEVA).
  • Partnership with Watson Pharma (WPI).
  • Partnership with Jazz Pharma (NASDAQ:JAZZ).
  • Partnership with Pfizer (NYSE:PFE).
  • New Korean pharma royalty partner for bladder control gel product.
  • More royalty partnerships worldwide likely for bladder control gel product.
  • VIBEX MTX; self-injector for the treatment of Rheumatoid Arthritis and other implications (no partner, will go this one alone).
  • CEO with a strong history of success (SkyPharma, dd it).
  • Conservative management with a solid business plan, team orientated and single focused.
  • Management expresses a clear desire for Antares to be a top line company, not just a royalty based R&D Company and explain in detail how they plan to go about achieving this. (listen to CC's here)
  • Entire product line and technology platform is viable.
  • Well positioned for entry into the multi-billion dollar Biosimilar market.
  • Potential blockbuster drug NestraGel, female gel contraception (more about NestraGel here) which is not a speculative high risk drug like oncological trial drugs.
  • Keeps details of deals quiet to ensure company retains proper leverage in future partnership deals.
  • Costs of revenue is low = high margins.

Antares is a solid long term growth company with an attractive PPS.

Will I strike it rich with Antares? Barring a huge natural disaster and/or major terror attack, (both are always possible) it is a good bet I eventually will. I look to invest in bio-pharma companies with viable platforms, steady long term fundamental growth, and exceptional management. I am not buying into a company for a long term hold that has a very speculative drug in clinical unless the company has the fundamental factors I look for.

When investors buy into a bio-pharma on the only factor a company may have a blockbuster drug without asking any of the questions I list at the beginning of this article, they are simply rolling the dice.

I take as much risk off the table as possible and still remain an aggressive investor. I ask the fundamental questions and do the dd to the best of my ability;

You should too.

Disclosure: I am long AIS.

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