Last year, as the market sank, one group actually went up—large-cap, cashflow positive genomics and biotech companies.
This year, interest has shifted to the little guys—the speculative biotech stocks that could be 10- or 20-baggers with one
breakthrough.More and more, biotech stocks appear to be trading independent of anything but a market crash. Just look at Compugen (CGEN),
which went from 40 cents to $2 this year, or Curis (CRIS), which jumped
from 80 cents to $1.60.
Three years ago, many biotech stocks would be trading five to 20 times higher than they are today based on the potential of
their science—and they’ll have their day in the sun again. So I’ve put together a list of six biotech companies that you
should take a look at now.
#1 Gilead Sciences (GILD)
Few would argue with the claim that Gilead Sciences (GILD) is the
best-managed biopharma company on the planet. It dominates the HIV treatment market and gets a 19%-plus royalty on Tamiflu, which
is used to treat H1N1 (swine) flu. Gilead also has several drugs on or headed for the market to treat pulmonary disease and hard-to-treat
high blood pressure.
Best strategy: Buy the stock and sell the calls (then use the cash to buy puts on the market, which is headed down further).
Or buy long-term calls and keep an eye on them.
Don’t gamble away your profits. Learn when to exit an
#2 Questcor Pharmaceuticals (QCOR)
Imagine a company with 90%-plus margins and huge cashflow that uses its cash to carefully expand its business and buy back stock—with
a P/E under 8! That’s Questcor Pharmaceuticals (QCOR).
QCOR has a treatment that is approved for spasms from multiple sclerosis, but is mostly used to treat radical infantile spasms
that kill or retard babies.
Best strategy: Buy the stock and wait for it to appreciate or for the company to get bought out. You could also buy the
(illiquid) options, or buy the stock and sell the
#3 Cepheid (CPHD)
When my son had a huge boil under his arm, it turned out that it was filled with the killer staph, MRSA. It also turns out that
my (otherwise) great doctor used a traditional lab to process the test, which took a week to determine it was MRSA. Cepheid
(CPHD) manufactures the equipment and test that takes just two hours to
do the same thing—and is better and cheaper than traditional tests.
CPHD wins 90%-plus of all competitive bids and its test could be available in low-tech facilities, such as doctors’ offices
or nursing homes, next year. The big catalyst for this stock, however, is that Medicare will stop paying for all hospital-acquired
infections except MRSA in October. So institutions need a quick test if they are going to be reimbursed for treatment. The stock
has fallen from $30 to $9 and change. It’s worth $20-$22 to an acquirer.
Best strategy: Buy the call options.
#4 Curis (CRIS)
Curis (CRIS) is a speculative stock—no approved product and
no revenue—that, in former markets, would sell for $10-$12. It is now a buck and half, after doubling in the past few months.
CRIS focuses on cancer treatments, and is partnered with Genentech/Roche. It has a new therapy for basal cell carcinoma in mid-stage
trials. The results appear very promising. In fact, they are so promising that Genentech is treating this as the last trial needed
before seeking FDA approval. This stock is a potential 10- to 20-bagger with an FDA approval in 2011 or so. And the company is
on the verge of a licensing a new molecule that could be a big catalyst for the stock in the short term.
Best strategy: Buy CRIS now. (In the interest of full disclosure, I own a lot of CRIS.)
#5 Cerus Corp. (CERS)
Cerus Corp. (CERS) is a real company with real revenues, but no profits,
yet, and could be at a $50 million revenue run rate in 2010. It is a pioneer in something called “pathogen inactivation”—a
technology that cleans blood, making blood banks almost completely indifferent to the health of donors. It’s the perfect system
in the age of AIDS, bird flu and other infectious disease. Cerus’ INTERCEPT Blood System is currently sold in 18 countries, and
a potential major catalyst is an expedited approval process in the United States.
The stock is trading around a buck—down from nearly $8 about a year ago—and it could be worth $10 in a couple of
Best strategy: Buy the stock and wait. You may be waiting a while, but this is a solid company with a real product and
profits, and stock appreciation should come in the next two years. Make that big-time appreciation.
#6 Illumina (ILMN)
Do you think we’re going to see more or less genomics research in coming years? End of discussion. Illumina (ILMN) is
the leading provider of equipment for genomics researchers and its lead is growing. Buy and hold may be almost dead, but it certainly
applies to ILMN. The stock has been trashed along with the market, but it’s simply the best at what it does—and getting
Best strategy: This is a stock to buy for the long-term to use as a base for selling calls. Or, even better, you can
write some credit spreads, as the calls have terrific premiums.