Small-Cap Friday's Little Gem

Looking back on the small-cap selections profiled on these pages during Fridays in January, some major winners were profiled in the small-cap biotech and biopharma space. The star performer from the five picks from that month is Eagle Pharmaceuticals (EGRX), which has almost tripled since the shares were highlighted thanks to a game-changing partnership deal with Teva Pharmaceuticals (TEVA). Halozyme Therapeutics (HALO) also has not been too shabby with an over 60% return. The sector is inherently volatile and these returns are not that uncommon. Neither are huge plunges when trials do not go well. It is for this reason I have small positions in 12 to 15 promising firms across these sectors, knowing full well that some are going to implode at some point. The huge returns from the ones that go right should fully make up for these disappointments and provide a positive overall return. In that vein and within the context of Small-Cap Friday, I offer up OncoGenex Pharmaceuticals (OGXI). The company and stock had an absolutely abysmal 2014. The shares cratered after they moved north of $14 early in 2014, and bottomed at just under $2 a share by the end of the year. The triggers for the decline were a failed Phase III trial to test whether its compound custirsen added to the standard treatment of docetaxel/prednisone for men with metastatic castrate-resistant prostate cancer would improve overall survival. The company then raised $24 million to fund other trials, which diluted current shareholders significantly. Failed or disappointing trials are nothing out of the ordinary in this space. Although OncoGenex's lead compound in combination with docetaxel/prednisone failed in treating prostate cancer, the company has another Phase III trial late-stage 630 patient trial evaluating custirsen combined with a different compound for use against prostate cancer that hopefully will yield different and more encouraging results. It also has a trial going on for non-small cell lung cancer. OncoGenex is also running seven different phase II trials to investigate whether its other compound apatorsen can treat various forms of cancer combined with different compounds. Apatorsen targets a heat shock protein whose presence promotes aggressive tumor growth and treatment resistance. Most of these trials are sponsored, again greatly reducing funding needs. At current prices, investors are placing slight or no value to these trials begetting significant opportunity. The company has a market capitalization of around $50 million, which is equal to the company's cash on hand so investors are putting no value on the company's various ongoing trials. The stock has spent the majority of the last nine months in a very tight trading range and seems to have put in a hard floor right at the $2 a share level. Analysts still are fairly high on the longer-term prospects of OncoGenex, with a median price target north of $4 a share. Both Needham and William Blair have reiterated Buy ratings over the past couple of months. The company has enough cash to get through 2015 and has enough shots on goal to take a small position in this high-risk/high-reward play that is selling for pennies on the dollar from where it was one year ago. The company still has potentially positive catalysts that could help it regain some of its former glory.

Small-Cap Friday's Little Gem

One small pharmaceutical company has big potential.

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