3 Speculative Biotech Stocks To Electrify Your Boring Portfolio

by: Michael J. Ray

When it comes to investing, I always say that boring is best. This is not a hard concept to grasp for any income investor in the markets. We are not big fans of change. We like the predictability of standard business models coupled with a steady distribution of dividends. When asked to help put together portfolios for individuals, this is typically my philosophy, and it's easy to see in my picks. For example, my own personal holdings include names like Linn Energy (LINE) and Eaton Vance Tax Advantaged Global Dividend Income Fund (NYSE:ETG).

LINE is a great energy company that hedges its production nearly 100%, which takes away a lot of the drama. An even more boring name is ETG, which is a closed end fund that generates little excitement. What these names have going for them is a history of steady and reliable dividends, which I find most appealing. But alas, they do not provide much excitement to the portfolio. That is not their job. I always feel that each portfolio should have at least one speculative play to keep things interesting. This would be a stock or investment that has the ability to provide huge outsized gain while only risking a small initial investment. For those types of investments, I have three potential candidates that might fit the bill and add some spice to keep things interesting.

Advanced Cell Technology Inc. (ACTC.OB)

My first idea is a company called Advanced Cell Technology, and as many know, this is one of my favorite speculative biotech plays. So much so, that I even was able to interview the Chairman and CEO of the company in a recent Seeking Alpha article.

The question is why would ACTC be such a good pick for someone looking for a promising speculative play? The answer to that is easy. ACTC is a biotechnology company that is engaged in the development and commercialization of stem cell technology in the field of regenerative medicine. This is one of just a handful of companies that is leading the charge into tomorrow's world of medicine.

Stem cells are proving to be a revolutionary method in treating currently unmet medical needs. Needless to say, new technologies move at a very slow pace, especially when being tested on actual patients. They also tend to be very expensive to complete the clinical testing. This is where we find ACTC as they push forward on their trials dealing with Stargardt's and dry age-related macular degeneration.

Looking at their trials, we find that ACTC has treated their eleventh overall patient. Also we find that the company is working with multiple eye centers in both the US and Europe to test the new technology. There have been no reported complications, and the patients have recovered smoothly from their procedures. Patients who were treated early in the clinical testing have reported some dramatic results that seem to support the idea that ACTC is on to something.

As exciting as this all is, let's boil this down from an investor's point of view. The company's market cap is around $173 million. In the past, the company's finances were poorly run, to say the least. This forced ACTC into various toxic financing deals over the years that left the share price beaten to a pulp. A recent stock dilution to help settle litigation issues arising from the toxic financing have not helped matters any. So far, this does not sound exciting for a potential investor. Actually, it sounds more like a train wreck. The question is why would this stock be a perfect choice for an investor to take a speculative chance on?

The answer to this is also easy. To make this simple, let's forget about their other projects and focus solely on the macular degeneration trials. Macular degeneration is currently an unmet medical need that is said to be worth well over $30 billion in the US and Europe. If we add on the Chinese and Asian markets, that number grows larger, much larger. The amount of money that ACTC could generate would be staggering, and so would the stock price.

Remember, though, that this is pure speculation. Currently, we find ACTC in a position short on cash, which is a common theme in speculative biotech. For the second quarter, the net cash used in operations was $2.9 million. ACTC ended the 2012 second quarter with cash and cash equivalents of $9.9 million. Is this cash burn rate a bit of a concern? Of course it is, but after discussing this with the CEO, he stated that ACTC was funded into the third quarter or early fourth quarter of next year. He also stated that prior to that time, the company will address the cash needs and act accordingly so that they don't repeat the same mistakes as in the past.

Of course, the source of this cash infusion could come from lots of places. My bet is that ACTC will enter into a joint venture partnership with one or a host of interested companies that are said to be in discussions with the company. These partnerships should come with upfront cash payments that would alleviate any liquidity concerns. This is pure speculation on my part, so obviously this could not turn out like I expect.

What this all boils down to is that ACTC is one of the most disproportionate risk reward scenarios I have come across. The stock's price has been so depressed in value that the risks have been mitigated. I would not bet the farm on the company, but even a small investment could return some very outsized gains if the company can succeed in their mission.

Galena Biopharma, Inc. (GALE)

The next interesting speculative biotech that deserves some attention is Galena. GALE is a Portland, Oregon-based biopharmaceutical company that develops innovative targeted oncology treatments that address major unmet medical needs to advance cancer care. GALE actually has a couple potential products in its pipeline, but the one that is most interesting is NeuVax, and its use with breast cancer patients.

Needless to say, investing in biotech can get into some pretty complicated science and biology. When it comes to NeuVax and how it works, it gets really involved. In layman's terms, the best way to describe this treatment is that NeuVax stimulates T cells in a highly specific manner to target cells expressing any level of Human Epidermal Growth Factor Receptor 2 (HER2). HER2 is an established tumor-associated antigen found at various types of human cancer cells. Basically, this treatment gets the body's immunity system to combat cancers.

The Phase II trials for the company seem to have gone rather well for GALE. So much so, that the Food and Drug Administration [FDA] granted NeuVax a Special Protocol Assessment for a Phase III clinical trial.

The question now is why should a potential investor bother with a company like GALE? Much like ACTC, GALE is in a unique position with its therapy. Consider this; according to the National Cancer Institute, over 200,000 women in the U.S. are diagnosed with breast cancer annually. Of these women, about 75% test positive for Human Epidermal growth factor Receptor 2. Of that number, only 25% of all breast cancer patients, those with HER2 3+ disease, are eligible for a drug named Herceptin. This is a drug that is marketed by the Roche-Genentech team. Looking at their 2010 revenues, one can see that it reached over $5 billion in sales. NeuVax's target is the remaining 50% of low-to-intermediate (also known as HER2-Negative) patients who are not eligible for Herceptin. These patients would be the ones who achieve remission with current standard of care, but have no available treatment options to maintain their disease free status.

Now the picture should be a bit clearer. There is lots of cash to be made if this treatment is to prove successful. Like ACTC though, nothing is without risk. Turning our attention to GALE's second quarter financial statements highlights some of these risks. As of June 30, 2012, Galena had cash and cash equivalents of $19.2 million, compared with cash and cash equivalents of $11.4 million as of December 31, 2011. The cash burn for the six months ending June 30, 2012 was around $9.1 million. That amount was made up of $6.09 million of research and development expense, while $3.04 million was general and administrative in nature. GALE believes that their existing cash and cash equivalents should be sufficient to fund operations through at least the second quarter of 2013. After that the company will face liquidity problems.

So here is where the speculation aspect comes into play. GALE's funds are limited, and they have to spend quite a bit of cash to ramp up of their Phase 3 "PRESENT" clinical trial. With funds running out by 2013, the question is what will be the source of the new funding. Will GALE further dilute shareholders with the sale of more equity, or might they find the funds with a partnership or collaborative agreements? Time will tell.

Finally, there is also a concern dealing with interruptions in the supply of NeuVax. Gale does not have the facilities or expertise to manufacture any of the potential products for their clinical trials. That means that they will be dependent upon contract manufacturers to complete the work. Obviously, this has many risks. For example, NeuVax is administered in combination with a product called Leukine. This product comes in both liquid and lyopholyzed (freeze dried) forms, and is available exclusively from Genzyme, which is a subsidiary of Sanofi-Aventis (NYSE:SNY). In June 2012, Genzyme recalled all liquid Leukine without explanation. As a result, GALE began to incorporating lyopholyzed Leukine as another option in clinical testing for their Phase 3 PRESENT study. The company believes that their current supply of lyopholyzed product should be adequate for the completion of our trial.

Much like our friends at ACTC, GALE has its own unique set of challenges and risks. Following this company and their potential should be a rather exciting prospect as they make their way closer to the finish line.

Catalyst Pharmaceutical Partners Inc. (NASDAQ:CPRX)

CPRX is one of my newer discoveries in the speculative world of biotech, and it holds an interesting place in that arena. I am a big fan of the television series "Breaking Bad" where the characters are in the business of manufacturing illegal drugs like methamphetamine. As good as the show is with its dramatic cliffhangers, it also highlights the dangers of drug use. Drug addiction ruins the lives of countless numbers of people, and in addition, costs billions of dollars. This is where CPRX comes into play.

CPRX is developing a product called Vigabatrin, which they have given a designation of CPP-109. This product is being tested for the use as a treatment of addiction to cocaine, methamphetamine, and other addictive substances. Before going any further, it should be known that Vigabatrin is also marketed as Sabril outside of North America by Sanofi-Aventis and within North America by Lundbeck Inc. Sabril is used in combination therapy for specific types of epilepsy, and alone in the management of infantile spasms (West Syndrome). So CPRX is not bringing a completely new product on the market. The hope is that this should make things a bit easier in the long run as the company tries to get to commercialization.

CPRX also has another product designated CPP-115, which is related to CPP-109. Basically CPP-115 can be thought of as a newer and more advanced version of CPP-109. For example, CPP-115 may not cause the visual field defects associated with chronic administration of Vigabatrin. Also CPP-115 has been shown to be at least 200 times more potent than CPP-109 in studies. The increased potency opens up lots of doors for CPRX in that it could allow the company to development new dosage capabilities and different routes of administration.

Both products definitely have lots of potential. The FDA must think so as well, as they have granted the company Fast Track status for CPP-109. The Department of Veterans Affairs has also joined forces with the company in conducting the U.S. Phase II clinical trial evaluating CPP-109 for the treatment of cocaine addiction. Not to be left behind, CPP-115 has also been designated as a Fast Track development program for the treatment of cocaine addiction. It has also been granted an orphan drug designation for the treatment of infantile spasms, both by the FDA and the European Commission.

So let's boil this one down for potential investors. This situation reminds me of a similar event that just occurred with a company named Arena Pharmaceuticals (NASDAQ:ARNA). ARNA, after a long and grueling fight, just got the drug Lorcaserin past the FDA for weight management. This drug is one of the first products that have been given recent approval for the use in weight management. It seems the FDA is pushing to have new treatments available for some of the unmet medical needs. If this trend continues, then CPRX should be in a good place. Drug addiction should certainly fall into this category, and I would think the FDA will be eager to get more help onto the market for those looking to kick their addiction.

Turning our attention to the company's liquidity issues, we see the same theme as our other two companies above. Since the company's inception, they have financed their operations primarily through the net proceeds of private placements, an IPO, and secondary public offerings. As of June 30, 2012, CPRX had cash and cash equivalents of $7.5 million, which is not much of a cushion. When CPRX reported these numbers, they believed that they had enough cash resources to complete the ongoing clinical trials. This means that they should be able to operate through the first quarter of 2014.

In more recent filings, the company has announced that it entered into definitive agreements to sell 4 million shares of the company's common stock and warrants. The net effect was that CPRX's offering resulted in gross proceeds of $6 million. As one might expect, the company stated that the proceeds will be used to fund costs associated with product development efforts and for general corporate purposes.

CPRX is operating in a space that clearly has potential. If it will be ultimately successful is anyone's guess, but it should provide investor a very unique perspective into an atypical biotech company. Much like cocaine or meth will hype up your brain, let's hope CPRX will have a similar effect on one's portfolio as they knock out these deadly drugs.

In conclusion, these are just three new and exciting speculative biotech companies that could offer investors a bit of excitement in their portfolio. Needless to say, much more research should be done before one makes the decision to invest. Each company has the potential to capture a huge amount of their market share if they can prove their products work. In turn, a small initial investment could yield some eye popping returns. On the other hand, any failure will be met with an equally crushing loss.

Disclosure: I am long LINE, ETG, GALE, ACTC.OB. 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.