Two Speculative Biotech Stocks

 | Oct 31, 2013 | 11:00 AM EDT
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 We explored in Tuesday's column "pockets of strength",  within the market. These were sectors which were delivering better-than-expected results during this quarter so far.

One of these sectors was biotech -- and one company profiled, Gilead Sciences (GILD), dutifully reported better-than-expected results after the bell on Tuesday. The stock also received a couple of analyst upgrades as a result and has moved up 5% as a result.

Tuesday's column looked at large profitable biotech companies. We will move out on the risk scale within the sector today and look at a couple of more speculative plays. These are companies that are currently losing money, but have promising products and also have the possibility of being acquired by a larger player at some point.

This part of the biotech sector calls for a different investing strategy. My philosophy is to take much smaller positions in a larger amount of selections than in other sectors. I call it 'shotgun investing'. An investor must realize that there will be many misses within this biotech portion of your portfolio. This should be compensated for, however, by the occasional five or ten bagger. With that in mind, let's highlight a couple of attractive, speculative biotech equities.

Novavax (NVAX) is a small vaccine maker I last profiled in April 2012. The stock has moved up more than 150% since then but I still like the companies prospects long term. It has gotten good results in trials for its respiratory syncytial virus (RSV).

I am not the only analyst who is high on the Novavax's longer-term value. Lazard has an $11 price target on this $3 stock, noting its RSV vaccine could be deemed superior to Synagis ($1 billion in annual sales), a vaccine made by MedImmune. FBR Capital is also positive on Novavax's vaccine potential. It initiated the shares as an "Outperform" on Wednesday, also with an $11 price target

The company is currently losing money, but did a capital raise in late September. It should have plenty of cash on hand to develop its products and bring them to market without needing additional funding. In addition, insiders have been net buyers of the shares in 2013 as they were throughout 2012 as well.

InterMune (ITMN) is a small biotechnology company, which focuses on therapies for the treatment of idiopathic pulmonary fibrosis (IPF). IPF is a chronic, progressive and fatal disease with an unknown cause. It is characterized by the formation of excess fibrous connective tissue, or fibrosis, of the lungs' supporting framework. 

InterMune has one product that is approved in Europe. It is Esbriet, which treats adult patients with mild to moderate idiopathic pulmonary fibrosis. It is working on U.S approval of this drug (50,000 to 70,000 individuals in the U.S. have this disease). This compound is currently in a phase III trial to prove efficiency and gain approval here. Marketing of Esbriet has just started to private insurance patients in Canada, and the company is working through the process to get it into the country's national insurance program.

Sales are expected to more than double this fiscal year to $60 million to $70 million. The analyst consensus shows this trend continuing, as over $125 million in revenue is expected in FY2014. The company reported smaller-than-expected losses and higher revenues during its earnings report Wednesday.

Stifel Nicolaus raised its price target on ITMN to $18 over the summer. The stock currently goes for just over $13 a share. At a market capitalization of just over $1 billion, InterMune would make a bite-sized acquisition for a larger firm that wants a compound with rapidly growing revenues that might also have possible uses for other orphan diseases.

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