The Inside Track on Two Biotechs

 | Jul 09, 2012 | 10:30 AM EDT  | Comments
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snta

As I review the performance of my portfolio over the first half of the year, two items stick out. First, my portfolio has been much less volatile than the overall market, which was to be expected given a substantial allocation to cash that I increased in March, as well as some short positions that paid off in the rocky second quarter when the market pulled back. The second observation is that a good deal of the solid performance in the portfolio was due to my investments in the biotech sector, which performed very well in the first half of the year. Positions in SciClone Pharmaceuticals (SCLN) and Horizon Pharma (HZNP) have been two of my standout performers among other winning small positions in this speculative sector.

I believe the biotech sector still offers interesting opportunities. The sector has been driven by key approvals at the Food and Drug Administration and by solid mergers and acquisitions activity throughout the first six months of the year. The sector has also benefited, as it unaffected by the ongoing crisis in Europe. All these trends should continue to drive good performance in the second half.

I continue to look for companies in the space that have interesting drugs in the pipeline, have enough cash on the balance sheet to fund operations, as well as revenues that are projected to rise rapidly. It is also good to have insiders that are buying the shares. Here are two small biotech equities that meet those criteria.

Celsion Corp. (CLSN) is an oncology drug-development company that engages in the development and commercialization of targeted chemotherapeutic oncology drugs based on its proprietary heat-activated liposomal technology.

Three reasons CLSN is a solid speculative play at $4 a share:

  • Insiders have slowly been accumulating new shares at different price levels for the past year.
  • The company has about 20% of its market capitalization in net cash. That is enough for a year of funding at current burn rates, and it just arranged a $10 million loan facility as well.
  • Its ThermoDox liver cancer treatment is in crucial Phase 3 trials, results of which are expected by the end of the year. The company believes this product could provide a multi-billion-dollar opportunity if successful. It also has Phase 2 trials targeting breast cancer.
  • Only three analysts cover the stock. Price targets ranged from $7 to $10 a share. Given Celsion's small market capitalization (under $110 million without cash) and promising cancer therapy, it would be easy to see this company being acquired at a premium.

Synta Pharmaceuticals (SNTA) focuses on the discovery, development, and commercialization of small molecule drugs for treating severe medical conditions, including cancer and chronic inflammatory diseases

Four reasons SNTA is worth taking a flyer at just over $6 a share:

  • Insiders have bought more than a million new shares in in the past year.
  • The company has several compounds targeting various forms of cancer in Phase 2 and Phase 3 trials.
  • It has more than $40 million in net cash on its balance sheet. Given the amount of drugs in its pipeline and its cash burn, I would look for the company to either form a strategic partnership with a larger pharma firm, raise further capital or possibly be bought out at a premium.
  • The six analysts have price targets between $8 and $14 a share.

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