Biotech Stocks With Promise

 | Nov 29, 2013 | 11:00 AM EST  | Comments
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IBB

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act

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I hope everyone within TheStreet.Com community had a fabulous start to the long holiday weekend. As equity investors settle back to spend some well-earned time off with friends and family they can bask in the fact that 2013 is on pace to provide some of the best annual shareholder returns in decades.

The S&P is up better than 25% and the Nasdaq is up by a third over 2012's closing levels with a month left in the trading year.

The biotech sector has been a standout performer in this stellar year. The iShares Nasdaq Biotechnology index (IBB) is up some 60% over the last 12 months. This is roughly double the return of the S&P over the same time period.

I continue to take a lot of smaller positions in small-cap biotechnology plays with promising products. Given the inherent high volatility of this space, I think it is only prudent to spread the money I allocate to this sector into numerous attractive, but speculative positions.

 It is a strategy that I have found has provided outsized returns over the long term even as this sector provides more "clunkers" than any other area in which I invest. The occasional five-or-ten bagger more than makes up for the frequent misses. I believe this a rational way to invest in this sector.

Here are a couple of these smaller biotech plays focusing on various forms of cancer I am looking to add to my portfolio in the near future.

Merrimack Pharmaceuticals (MACK) is a biopharmaceutical company with market capitalization of less than $400 million. The company focuses on discovering, developing and preparing to commercialize medicines paired with companion diagnostics for the treatment of cancer in the United States.

The company has "MM-398", a promising compound geared toward late stage pancreatic cancer. The compound has just entered Phase III trials. The company also just entered into a 10-year agreement with Actavis (ACT). The partnership will allow the companies to develop and license new products using Merrimack's nanoliposomal tech platform to develop products together. Actavis is a larger global, integrated specialty pharmaceutical company.

MM-398 came from this nonoliposomal platform and this agreement provides Merrimack upfront payments and a double-digit percentage of the profits from any new compounds developed together over the next decade.

Merrimack has over $70 million in net cash on its balance sheet. Annual revenues should clock in at around $55 million this year. Insiders bought over $600,000 in shares in the summer of 2012 at much higher prices. The stock currently is selling for less than $4 a share. The stock sold for $11 a share in 2012 and the shares currently are significantly below the mean price target of $10 a share held by the six analysts that follow the company.

Galena Biopharma (GALE) is another small biopharmaceutical company with approximately a $400 million market capitalization, which ironically is also selling at just under $4 a share. The company focuses on developing oncology treatments to address major unmet medical needs to advance cancer care. It has several compounds in Phase II and III trials.

The company has just completed promising Phase I trials on a vaccine for endometrial and ovarian cancer. Oppenheimer just upgraded the shares to an "Outperform" with a $6 a share price target. The analyst firm is high on "Neuvax", which is a breast cancer vaccine that is in Phase III trials. Oppenheimer believes the total market opportunity in this space is $5 billion.

Galena also just launched its first commercial product. "Abstral" is focused on relieving acute or postoperative pain, including headache/migraine and in opioid non-tolerant patients. Galena's balance sheet is strong after a recent secondary offering and sales are projected to rise exponentially as Abstral sales come online and as new compounds work their way through the approval process.

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