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  1. Home
  2. / Investing
  3. / Healthcare

Biotech Bargains: Two Cheap Small-Cap Stocks in an Exciting Sector

I continue to see these names as bargains in the biotech and biopharma space.
By BRET JENSEN
Jun 10, 2018 | 02:00 PM EDT
Stocks quotes in this article: DVAX, MRK, AZN, NEOS

The huge American Society of Clinical Oncology or ASCO confab has called it a wrap for another year. We covered some of the winners and losers from the event in a previous column. Now, let's look at a few small-cap bargains in the biotech and biopharma space.

Let's start with Dynavax Technologies (DVAX) which provided an update on a Phase 1/2 trial involving its compound SD-10 combined with Merck's (MRK) Keytruda to treat PD-1-naive advanced melanoma patients. While the overall response rate or ORR dropped to 60% from 100% from an earlier study, one must remember that the previous trial involved just seven patients. 60% is more than a solid result and the combination will advance to later stage and more critical trials.

More importantly, SD-101 and a mid-stage asthma drug Dynavax is developing with partner AstraZeneca (AZN) are just a side show for the company at this point. Dynavax's main asset for the time being is Heplisav-B, a hepatitis B vaccine approved by the FDA late in 2017. The rollout is just getting traction, but the vaccine should see $300 million to $500 million in peak sales eventually just in the United States. Outside a global partnership for non-U.S. rights for Heplisav-B, I continue to believe 2018 will be an inflection year for the company and the stock. This means I think the shares continue to trade in the roughly $15 to $21 range they have been gyrating between for over six months now. I like to accumulate shares when the equity is trading in the lower end of that range as it is now. The stock is undervalued on a "sum of the parts" valuation on a longer-term basis.

Neos Therapeutics (NEOS) has drifted down in recent months after rejecting a $10.25 a share hostile buyout offer. The shares now trade at just $6.75 apiece. The company did the right thing by rejecting the lowball bid, but investors seeking a quick takeout have largely abandoned the shares as a result. However, Neos now has three approved drugs in the growing ADHD space. This means they can be pushed by the same sales force creating economies of scale.

In addition, the company is seeing very fast uptake of its latest offering and achieved 90% year-over-year sales growth in the first quarter. Neos may need to do one final capital raise if it remains a standalone entity but is cheap with just a $200 million market cap. I believe the company will eventually be acquired, but in the mid-teens range and not at $10.25 a share.

And those are two small-caps I continue to see as bargains in this space. Both stocks have options available against the equity enabling Buy-Write possibilities for those investors comfortable with basic option strategies. Accumulation for straight equity players also makes sense at these trading levels.

This commentary originally appeared June 6 on our sister site Real Money Pro. Click here to learn about this dynamic market information service for active traders and to receive daily columns from Bret Jensen, Ed Ponsi, Paul Price and others.

Get an email alert each time I write an article for Real Money. Click the "+Follow" next to my byline to this article.

At the time of publication, Jensen was Long DVAX and NEOS.

TAGS: Investing | U.S. Equity | Healthcare | Options | Stocks

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