Two Small-Cap Biotechnology Gems

I have always been fascinated by biotech. The innovation in the space over the past two decades has been breathtaking. Diseases such as hepatitis C, which has destroyed millions of lives over the years, are on their way to being cured by taking one pill a day for a few weeks. It is one space that American firms dominate, because of the relatively free enterprise environment they operate in. This is one thing activists and some in Congress miss, when they protest against high drug prices. About 70% of the global drug patents emanate from these American-based firms, and to a large extent, we are subsidizing the drug development for the rest of the world. The country has hundreds of firms trying to develop the next miracle cure, as well as compounds that can treat chronic diseases more effectively. It is a space I constantly troll for attractive new ideas in this high risk/high reward space, for my own account, and for speculative ideas in this column. When you get one of these investments right, it can boost your portfolio performance substantially. Avanir Pharmaceuticals (AVNR) which has tripled since I had picked it up in May, still seems like it has upside. There are two more speculative but attractive small-cap biotechs in my portfolio that I hope will see similar returns. I continue to believe in Synta Pharmaceuticals (SNTA), despite its lackluster performance since the big biotech sell-off that began in early March. Synta is a small-cap (about $350 million market capitalization) biotech company that focuses on the discovery, development, and commercialization of small molecule drugs for treating severe medical conditions, including cancer and chronic inflammatory diseases. The company's core product is ganetespib, which it is developing and testing as a treatment for non-small-cell lung cancer, breast cancer, and colorectal cancer. A phase II trial for its effectiveness against breast cancer has just begun. Synta Pharmaceuticals (SNTA) - Drug Mechanism Source: Synta Pharmaceuticals View Chart » View in New Window » The success or failure of this company will be determined over the next 12 to 18 months, as it has many phase II and phase III trials underway. I like having these shots on goal. This one of the primary reasons the stock remains in my shotgun Investing biotech portfolio. Synta Pharmaceuticals (SNTA) - Details of Clinical Trials Source: Synta Pharmaceuticals View Chart » View in New Window » In addition, the company noted during its conference call that it has about $120 million on its balance sheet, which should carry it until the fourth quarter of 2015, without any need for additional capital raises. Hopefully, by that time, Synta will have one or more positive late-stage trial result. Insiders and beneficial owners have been net buyers of the stock over the past year. Finally, four analysts that cover the stock have an about $11-per-share mean price target on SNTA. The current price of the stock is $3.20 per share. Mast Therapeutics (MSTX) focuses on developing therapies for serious or life-threatening diseases. Its lead product candidate includes MST-188, a product candidate that has hemorheologic, cytoprotective, and anti-inflammatory properties. MSTX is the only stock I hold that sells for less than $1-per-share, and it has a market capitalization of approximately $60 million. I have held the shares for a year now, in which time they have done nothing, but I have already paid for my entire investment by consistently selling covered calls at a $1-per-share strike price over that time period. I am keeping my shares, as I still believe MSTX is a solid high risk/high reward play. MST-188 targets diseases that affect membranes, such as sickle cell anemia. Mast also made a small purchase of Aires Pharmaceuticals, which gave it an entry into pulmonary hypertension, since it is believed to be complementary to developing MST-188. Much like Synta, Mast has several phase II and phase III trials currently underway. Mast Therapeutics (MSTX) - Details of Clinical Trials Source: Mast Therapeutics View Chart » View in New Window » Mast has just raised $20 million to get through critical trials. Obviously, the future direction of the stock will depend on trial results, but I am willing to stick with this high risk/high reward play through those trials. Three analysts follow the company, and they have price targets ranging from $1.20-per-share to $3-per-share. The stock currently goes for $0.50-per-share. When you are betting on drugs in development, you are making a high risk/high reward wager. When one of these shots on goal does hit, as Avanir, Progenix Pharmaceuticals (PGNX) or Achillion Pharmaceuticals (ACHN) have, the rallies can be substantial. Both Synta and Mast have several of these shots on goal in late-stage development. They have enough cash on hand to get through trials, and these potential products address lucrative opportunities. For speculative investors looking to diversify their biotech portfolios, these stocks are worthy of consideration.

Two Small-Cap Biotechnology Gems

For speculative investors.

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