Shotgun Investing in Biotech

It has been a while since we had a Small-Cap Friday. However, with the Russell 2000 recovered from a deep plunge that ended around mid-October, it is time to revisit the space. I particularly like small-cap biotech sector right now. Some of the names in this space in my portfolio are having their strongest performance since the deep, quick sell-off the sector experienced starting in early March. In addition, I think some fund managers are migrated to this high-beta space in an effort to catch up with their benchmarks by yearend bonus time. Finally, the appreciation I have seen within this space recently has helped soothe the deep losses in some of my small-cap exploration and production plays on the over $30 a barrel plunge in oil. When it comes to the small biotech and pharma space, I take much smaller positions in a larger amount of selections than in other sectors. You must realize that there will be many misses within the biotech portion of your portfolio. However, this should be compensated for by the occasional five or ten bagger. Over the years, I have dubbed this philosophy Shotgun Investing. Here are two small, speculative, high risk/high reward small biotech stocks I have added within that Shotgun Investing portfolio this week. I took a small stake in AVEO Pharmaceuticals (AVEO) the other day. It is hard to find a poorer performing stock in the market over the past few years. In 2011, the share went for north of $20. It can be had for $1 apiece these days. The stock basically trades for just over the net cash on its balance sheet. There is good reason this biotech stock has become a pariah. Trials for its lead product, tyrosine kinase inhibitor Tivozanib, have just not gone as expected. However, it just licensed this platform to Ophthotech (OPHT) for the investigation into the potential treatment of non-oncologic diseases of the eye for a small upfront payment and with Ophthotech bearing the full development cost. If development is successful, AVEO could eventually reap more in milestone payments than the current market capitalization of the stock. The company has some other compounds in early development and a proprietary development process called the Human Response Platform¿ it believes can help develop new cancer compounds more efficiently, which might be worth the price of the stock by itself. This is one of the most speculative plays in my portfolio right now, but I like the risk/reward outlook at this price. I also bought a slug of Zogenix (ZGNX) this week. The company's main product is Zohydro, which is a unique product for chronic severe pain sufferers who cannot tolerate the acetaminophen that is used in other extended-release opioid medications such as OxyContin and hydrocodone (Vicodin) and was approved by the F.D.A in October of last year. This is potentially a large market for a company with a market capitalization of just about $200 million. The stock soared upon approval of Zohydro to almost $5 a share earlier in the year. However, several district attorneys and governors led an effort to ban the drug in their states, as it became the poster child for accidental overdoses of opioid medications even as it did not cause these deaths. The company has got an injunction in federal court to prevent this action and sales of Zohydro are growing some 50% a year. This stock might be one of the weirder mid-term election plays. The main zealot for this effort was Governor Deval Patrick of Massachusetts. The candidate from his party lost her bid to succeed him during the mid-terms and many of the other main actors of this effort also have been sidelined. The company has an abuse-resistant form of Zohyrdo that is going through the process of approval and which should be out by early 2016. It also has a couple of other interesting compounds that should be through with Phase III trials over the next 12-18 months. About a quarter of the company's market capitalization is in net cash on the balance sheet and it sees no need to raise capital in 2015. Both of these offerings are only for investors comfortable with swinging for the fences, looking to hit a home run and okay with striking out.

Shotgun Investing in Biotech

Two speculative plays are worthy of consideration.

Columnist Conversation

Thursday Morning Fibocall for 8/13/2020

PYPL, CHWY, TTD

ZM Violated Key Support Given Earlier: No Entry

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.