Swing for the Fences With These 5 Biotech Stocks

by Jeff Reeves | July 16, 2012 11:44 am

Swing for the Fences With These 5 Biotech Stocks

Ah, the fickle world of biotechnology stocks and medical device startups. One day these small-cap stocks are close to doubling your money … the next, they’ve sucked your portfolio dry.

InvestorPlace’s Dan Burrows recently recapped the ups and downs[1] of MAKO Surgical (NASDAQ:MAKO[2]) as a case study. The company has pioneered a less-invasive knee replacement surgery, and MAKO stock had been soaring earlier in 2012. From January to May it ran up dramatically, from around $25 a share to $40.

Then in May, it fell off a cliff after disappointing earnings[3]. And just last week, MAKO was kneecapped after a disappointing sales forecast. Now it’s around $15 a share.

In his article, Dan has a great analogy about the home run derby that is the world of small-cap stock investing:

“When swinging for the fences, even the most towering blast off the fattest cookie of a pitch can still come down on the warning track.”

It’s sad but true, particularly with biotechs. Just like in a home run derby, there really are no options for slow and steady progress like singles or walks. With biotech stocks, it’s all or nothing. These companies bleed red ink as they focus on research instead of sales — meaning either they come up with a landmark treatment and are set up for huge future profits and a big pharma buyout … or they fail to get FDA approval or impress doctors and fall to earth with a thud as the money runs out.

This, of course, actually is thrilling to many investors. They don’t mind the extra risk in exchange for the extra reward. After all, if you strike out three times but hit two home runs, that’s a pretty good inning.

If you’re not prepared for the very high stakes and high risks of biotech investing, stop reading now. But if you’re looking to hit a big home run, then consider taking a whack at these five biotech stocks. All are extremely volatile and have no guarantees — but they have potential for big success.

(Important note: These stocks have very small market caps and are thinly traded, so always use a limit order if you’re buying or selling one of these picks. The illiquid nature of these stocks means a big transaction can move the share price, so protect yourself. Oh, and it goes without saying you should do your own research, too, before dumping cash into these picks. I am an English major, not a doctor, after all.)

Trius Therapeutics

Trius Therapeutics (NASDAQ:TSRX[4]) is a thinly traded biotech focused on the development of antibiotics for serious infections, including MRSA. Anyone who knows anything about antibiotic resistance and the threat of “superbugs” knows that medical professionals need a heckuva lot more than just penicillin in their pockets these days — meaning Trius is pursuing a very important area.

Some of the biggest names on Wall Street understand the potential of TSRX and are throwing cash behind the stock. Take Wellington Management, one of the biggest independent investment companies in the world with some $600 billion in assets. It just upped its stake by 445% last quarter. Vanguard Group, the mutual fund and ETF giant, also increased its stake by 160%.

Yes, Trius is bleeding cash, but the company currently has more than $95 million in cash and equivalents with zero debt. At the very least, the big institutional move into this stock might mean it’s worth a look. Shares are down 17% year-to-date, however.

Oncogenex Pharma

Oncogenex Pharma (NASDAQ:OGXI[5]) is another very thinly traded biotech company that’s seeing big institutional buying lately, which could be a good sign. OGXI is a company focused on new cancer cures, and as of March 31, FMR LLC announced a 662% increase in its position in this biotech — FMR, of course, stands for Fidelity Management & Research.

The potential of new cancer cures is enticing, and Oncogenex has a number of ideas in the pipeline. However, it’s worth noting that unlike Trius or some other stocks on this list, it has been around a very long time — with its Nasdaq IPO way back in 1995. Bears might argue that this company has had way too long to come up with a successful product and point to the long-term trend for OGXI shares, which clearly is down. But the biotech has forged a decent partnership with Teva Pharmaceuticals (NYSE:TEVA[6]) to support its pipeline (which might be greasing the skids for a buyout later on, to hear rumors). Shares of OGXI are up 26% year-to-date.

Horizon Pharma

Horizon Pharma (NASDAQ:HZNP[7]) is working on treatments for arthritis pain, and like Oncogenex has a big pharma partner to help it along. In June, Covidien (NYSE:COV[8]) entered into a deal with Horizon to promote its DUEXIS cure for rheumatoid arthritis and osteoarthritis through the end of 2014. Of course, shares have run up dramatically since then — with HZNP up more than 80% year-to-date – but shares are still 30% off their 52-week high from recently.

Another plus is that Horizon has seen big institutional interest lately, including health care VC fund Essex Woodlands and mutual fund group Fidelity both doubling their stakes. Also, a number of new institutional money has entered the fray, as Ayer Capital Management, the Vanguard Group and the Cowen Group all opened up positions in Horizon last quarter. These big positions also have increased the daily volume in this pick, which has helped liquidity.

Medgenics

Medgenics (AMEX:MDGN[9]) is a fascinating biotech opportunity because it has received “orphan drug” designation from the FDA for its hepatitis treatment, the Infradure Biopump. As the name implies, orphan drugs have no other treatments in their family — so the U.S. government can fast-track certain medications for approval to serve a health need. The various forms of hepatitis and the lack of competition means promise for MDGN … if its drugs win approval, of course.

The company is tiny at less than $150 million, and it’s still bleeding cash, but the prospect of an accelerated pipeline and bolstered buyout talk has caused shares to surge as much as 500% in 2012. Clearly there’s the risk of buying a top after this run, but a buyout with a premium on shares could make it worth your while.

Affymetrix 

The “smart money” just can’t seem to agree on genetics research company Affymetrix (NASDAQ:AFFX[10]). A few days ago, JPMorgan (NYSE:JPM[11]) cut the stock to underweight with a $5 price target[12]. But not long before that, Steifel Nicolaus put a “buy” rating on the stock with a target of $19. That’s par of the course with unproven biotechs like this.

But if you’re looking for reasons to err on the side of bullishness, consider that the stock is up almost 11% year-to-date, and though the run has been volatile, huge hockey sticks that indicate a large move either way haven’t stuck. Furthermore, the 1.3 million shares traded daily provides a little more stability in this stock when you’re placing orders. The kicker? Piper Jaffray recently placed Affymetrix on a list of possible biotech buyout targets.

Remember, if you’re going to play “biotech home run derby,” please make sure you are not risking your entire retirement nest egg. It’s fine to swing for the fences once in a while, but make sure you are not putting too much of your portfolio into these risky ventures.

Also, please consider this article as just a jumping-off point. Any of these picks could collapse tomorrow based on regulatory approval or other important news, so please do your own research — or post links and commentary in the forum section below to help your fellow biotech investors.

Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.”[13] Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP. As of this writing he did not own a position in any of the stocks named here.

Endnotes:
  1. recapped the ups and downs: http://investorplace.com/2012/07/mako-surgical-kneecapped-on-sales-shortfall-again/
  2. MAKO: http://studio-5.financialcontent.com/investplace/quote?Symbol=MAKO
  3. disappointing earnings: http://www.fool.com/investing/high-growth/2012/05/15/how-low-can-mako-surgical-go.aspx
  4. TSRX: http://studio-5.financialcontent.com/investplace/quote?Symbol=TSRX
  5. OGXI: http://studio-5.financialcontent.com/investplace/quote?Symbol=OGXI
  6. TEVA: http://studio-5.financialcontent.com/investplace/quote?Symbol=TEVA
  7. HZNP: http://studio-5.financialcontent.com/investplace/quote?Symbol=HZNP
  8. COV: http://studio-5.financialcontent.com/investplace/quote?Symbol=COV
  9. MDGN: http://studio-5.financialcontent.com/investplace/quote?Symbol=MDGN
  10. AFFX: http://studio-5.financialcontent.com/investplace/quote?Symbol=AFFX
  11. JPM: http://studio-5.financialcontent.com/investplace/quote?Symbol=JPM
  12. a $5 price target: http://www.jagsreport.com/2012/07/affymetrix-stock-rating-lowered-by-jpmorgan-chase-affx/
  13. “The Frugal Investor’s Guide to Finding Great Stocks.”: http://www.amazon.com/dp/B007KB9CSI/ref=rdr_kindle_ext_tmb

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