Small-cap biotechs are worth a flutter

Release Date: 2009-07-23

Gambling on volatile small-cap biotechnology companies can be gut wrenching even in the best of times, but wild stock jumps based on positive clinical data may tempt investors to give them a second look with the hope of catching that really big payoff.

Human Genome Sciences Inc this week provided the latest golden carrot that investors may follow back into the sector.
Positive data on its experimental lupus drug that caught Wall Street by surprise led its shares to nearly quadruple to $12.51 on Monday. The stock was up another 14 percent on Tuesday as others jumped on the bandwagon.
Anyone who bought the stock when it was trading at 45 cents in March made a bundle, and at least two analysts now expect Human Genome's Benlysta lupus drug that most had written off to garner eventual annual sales of $2 billion to $3 billion.
"If the stock is going to go up 200 percent overnight people are going to start looking at some of the beat up biotech companies and wondering which one is going to be the next one to have that type of dramatic improvement," said Michael Becker, chief executive of MD Becker Partners, a strategic advisory firm specializing in biotechnology.
"This is really a more important victory for the sector, right now," he said. "Things were not looking so good for the biotech sector in February. There were a lot of biotech setbacks that month," he said, citing the failure of La Jolla Pharmaceutical Co's promising lupus drug. Investors who bet on that drug are now looking at a 16 cent stock.
"You can shake off a lot of things, but in biotech you can't shake off bad clinical news because (clinical news) is what the industry thrives on," Becker said.
The surprising success earlier this year of Dendreon Corp's experimental cancer vaccine, FDA approval of AMAG Pharmaceuticals Inc's iron replacement drug and the Human Genome news may prove to be pivot points for small biotechs, Becker said.
Other huge gainers this year include MAP Pharmaceuticals, whose shares nearly tripled in May on positive data for its migraine drug, and Vanda Pharmaceuticals, whose stock price soared from about $1 to nearly $8 in a single day that month on surprise approval of its schizophrenia drug.
"I think that really bodes well for balance of the year for biotech," he said.
Diversification
But John McCamant, editor of the Medical Technology Stock Letter, is preaching diversification by investing in companies of varying sizes and with different technologies while staying away from companies with cash problems.
"You need to diversify because some of these are still going to blow up. If Human Genome didn't win, it was probably going to go down 50-plus percent," McCamant said.
McCamant also suggested keeping an eye on any company that lands former top Genentech talent after that company's purchase by Roche. He noted that Human Genome's current head of research and development came from Genentech.
The recession and credit crunch has taken a particularly tough toll on the small-cap biotechs. Already subject to wild stock price swings based on clinical data, many companies suddenly cut off from access to capital were forced to slash costs and personnel to avoid bankruptcy.
"The shakeout is going to be good in the big picture. Getting rid of the mediocre managements, mediocre companies; that's the silver lining from all these difficulties," McCamant said.
"Given market conditions over the past nine months, it's probably not the best advice to buy these stocks before these binary event data points come up," said Ian Somaiya, an analyst for Thomas Weisel Partners.
Somaiya believes profit can still be reaped after key clinical data hits, even if it's not quite the killing real gamblers stand to make, as investors were finding with Human Genome.

Reuters

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Url:	http://www.chinadaily.com.cn/cndy/2009-07/23/content_8461683.htm