One of my favorite — and most profitable — areas to invest in is heath care, specifically biotech. New breakthroughs are happening all of the time, not just in drugs but in all aspects of health care, such as diagnostic devices, robotic surgery, titanium hips, cancer treatments and more.
More times than not, these breakthrough discoveries come from newer, smaller companies whose stocks are low priced. Smaller biotech companies can push the curve in new research in ways that larger companies cannot. (In fact, they often are acquired by the larger companies or partner with them.) It only takes one new great drug or surgical device to send these stocks climbing quickly.
Here are a couple of biotech bargains I have my eyes on right now:
Exact Sciences
Exact Sciences (NASDAQ:EXAS) is a great example of a smaller company ($430 million market cap) with excellent potential in a fast-growing and high-priority area of oncology — screening and early detection. This trend of screening for cancers — especially breast and prostate cancers — has been a major contributor to a significant drop in the mortality rate of these dreaded diseases.
EXAS is developing a noninvasive screening test to detect colorectal cancer early, sometimes before it even starts. Colorectal cancer claims more than 57,000 lives each year in the U.S. and is the second-leading cause of cancer-related deaths. The company’s product is called Cologuard, and early data has been encouraging. In one study, Cologuard detected 85% of colon cancers and 64% of pre-cancerous polyps. The pre-cancer success was particularly noteworthy because colon cancer is much more treatable if discovered early. The five-year survival rate can be greater than 90%.
The most common detection method right now is the colonoscopy, which is unpleasant, invasive and inconvenient, so the number of people who are screened is far below what it should be. Cologuard wouldn’t replace colonoscopies, but it would be a much easier and more patient-friendly way to determine if further testing is needed. Cologuard still is in clinical trials. The current study started this summer and is expected to continue through next summer, so results probably would come in the fall.
EXAS has traded between $9.45 and $4.91 in the past 52 weeks and currently is in the middle of that range around $7.80. In the most recent quarter, Exact Sciences ended the quarter with cash, cash equivalents and marketable securities of $75.4 million, which is down $95.4 million from the year before. This is because of higher expenses from increased research and development activity with the ongoing clinical trial of Cologuard. But ultimately, if Cologuard is approved, Exact Science should see sharp revenue acceleration and growth.
BioMimetic Therapeutics
BioMimetic Therapeutics (NASDAQ:BMTI) focuses on what’s called regenerative medicine, which is basically helping the body repair itself. BMTI’s founder, Dr. Samuel Lynch, conducted research on a protein the body releases when it is injured to help the healing process. This Platelet-Derived Growth Factor (PDGF) helps simulate tissue repair, and it is the basis for the company’s focus on products to repair bone, ligament, tendon and cartilage.
BioMimetic has two products on the U.S. market: Regranex, which is approved for treatment of diabetic foot ulcers, and GEM21S, approved to treat periodontal bone defects. The next candidate for U.S. approval is Augment Bone Graft, which is approved in Canada and Australia and currently under review at the FDA.
Augment Bone Graft is designed to eliminate the need for bone to be taken from one part of the body to be used to fuse bones in another part. This process is called autograft. Specifically in BMTI’s case, bones sometimes need to be fused together in the foot and ankle to eliminate joint pain resulting from arthritis or injury, and Augment is being developed as a replacement for autograft in those instances.
In other words, surgeons wouldn’t need to take bone from elsewhere in the body to fuse bones in the feet. This would eliminate one whole surgery (autografting currently requires surgery to both remove the bone and use it in the fusion), which is more comfortable for the patient and less expensive. The company says Augment also might be more reliable in elderly patients, smokers and those with diseases such as diabetes and osteoporosis.
BioMimetic also is looking into other regenerative applications for PDGF, including spinal fusion, sports medicine (non-surgical treatment for cartilage, ligament and tendon injuries) and musculoskeletal injuries such as fractures and dislocations.
Like so many small biotechs — and small companies across the spectrum for that matter — BMTI was down in the second half of the year as the entire Russell 2000 fell with the market. The stock has traded between $2.68 and $14.80 in the past 52 weeks and currently is trading just over $3. But given the expectations for Augment Bone Graft as well as already-approved Regranex, the long-term future looks bright. The approval process for the Augment Bone Graft looks to be toward the end of 2013.
For more on how to find breakout biotech stocks, Hilary Kramer devotes a chapter specifically to the healthcare and biotech sector in her new book, The Little Book of Big Profits from Small Stocks. As of this writing, Hilary Kramer did not hold a position in any of the aforementioned stocks.
