5 Biotech Stocks To Avoid, 1 To Buy

Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

This article identifies stocks in the highly volatile and unique biotechnology industry that are worth considering for speculative investors. I will augment my analysis with a table to keep us concentrated on the points we must cover. Please use this analysis as a starting point for your own due diligence.

Discovery Laboratories Inc. (NASDAQ: DSCO) is a small cap having a market capitalization of $55 million and trading at about $2.15 per share. Its focus is on developing treatments for respiratory illnesses and injuries, including cystic fibrosis. It has one drug very close to FDA approval (Surfaxin) and 3 in its pipeline. I unearthed no pharmaceutical collaborations at this time. DSCO is in the process of ‘offering’ $15 million in common stock to raise additional capital. For the present, current and long term debt seems to be under control. Discovery Laboratories encountered a roadblock with Surfaxin in the first half of 2009, but overcame that and has managed to move the drug along. The management team is impressive and the company website offers up very thorough biographical sketches on key management personnel. I’m really on the fence with this one and, no doubt, persuasive arguments could be made either way. I will err on the side of caution and pass on this one given that, on a discounted cash flow basis, share are worth around $2.50 apiece.

Discovery Laboratories Inc. (DSCO)

Biotechnology Fundamentals

Pass

Fail

Research Focus

X

 

# of Products (Pipelines)

X

 

Collaborations

 

X

Capitalization

X

 

Debt Load

X

 

Products Nearing Market

X

 

Roadblocks

X

 

Management Team

X

 

Fundamentals

 

 

Debt/Equity Ratio

6.68 

 

Current Ratio

1.21 

 

Technical

 

 

Institutional Ownership %

 

17.70 

 

Curis Inc. (NASDAQ: CRIS) is another small cap ($360 million) which is trading at around $4.75 per share. Curis, Inc. is a drug discovery and development company focused on developing medicines to combat cancer. It has a few therapies in the pipeline, none of which have reached phase III. Curis is collaborating with Genentech, a Roche Holding AG subsidiary. Milestone payments are flowing to CRIS from Genetech as Curis Inc.’s cancer drug, vismodegib moves closer to approval. The FDA’s acceptance of the NDA application for vismodegib could ‘fast track’ this drug to market. The company’s financial position is acceptable in the context of biotech stock and CRIS has encountered no roadblocks. The management team appears competent . This is not a stock I feel comfortable recommending, given that on a discounted cash flow basis, I value shares at $1 each, using an 11% cost of equity for increased risk.

 

Curis Inc. (CRIS)

Biotechnology Fundamentals

Pass

Fail

Research Focus

 X

 

# of Products (Pipelines)

 X

 

Collaborations

 X

 

Capitalization

 X

 

Debt Load

X

 

Products Nearing Market

X

 

Roadblocks

X

 

Management Team

X

 

Fundamentals

 

 

Debt/Equity Ratio

 0.00

 

Current Ratio

 8.38

 

Technical

 

 

Institutional Ownership %

47.80 

 

 

Enzon Pharmaceuticals Inc. (NASDAQ: ENZN) is trading at about $7 per share and has a market cap of $324.98 million. Enzon is focused on therapeutics for cancer patients with high unmet medical needs. It has four marketed products, which are either developed utilizing its polyethylene glycol technology or acquired from other pharmaceutical firms. The company also earns royalties on sales of its hepatitis C product, PEG-Intron, from Schering-Plough (SGP). The company has developed or acquired a number of marketed products, including Abelcet, marketed in North America by Enzon, and PEG-Intron, marketed by Schering-Plough. Enzon currently has 7 therapies in phase I trials and 2 in phase II trials. The firm seems adequately capitalized at this time but is apparently feeling some pressure as evidenced by this announcement in September, 2011. There is no new product close to FDA approval. The company has not encountered any roadblocks in its trials and the management team demonstrates an adequate level of competence. I have to discourage investment in company. Sales volumes are low and there are no new market opportunities sizable enough to drive significant growth over the next few years. On a discounted cash flow  basis, shares are worth $9 apiece using an 11% cost of equity.

Enzon Pharmaceuticals Inc. (ENZN)

Biotechnology Fundamentals

Pass

Fail

Research Focus

 X

 

# of Products (Pipelines)

 X

 

Collaborations

 X

 

Capitalization

 X

 

Debt Load

 X

 

Products Nearing Market

 

Roadblocks

 X

 

Management Team

 X

 

Fundamentals

 

 

Debt/Equity Ratio

66.67 

 

Current Ratio

22.56 

 

Technical

 

 

Institutional Ownership %

99.90 

 

CytRx Corporation (NASDAQ: CYTR) is trading at around $0.25 and has a market cap of $40 million. The company is focused on the development of human therapeutics, particularly the treatment of cancer. It has three therapies in its pipeline. There are no collaborations I could locate. Capitalization is adequate at this time. There are no products imminent for FDA approval, but, on the plus side, no roadblocks encountered so far. The management team is adequate. The company is extremely light on institutional investors, has no therapy near FDA approval and no collaborations. I can only recommend this stock to gamblers -- not investors.  On a discounted cash flow basis, shares are worth between $2 and $2.50 apiece, depending on the cost of equity figure.

 

CytRx Corporation (CYTR)

Biotechnology Fundamentals

Pass

Fail

Research Focus

 X

 

# of Products (Pipelines)

 X

 

Collaborations

 

 X

Capitalization

 X

 

Debt Load

 X

 

Products Nearing Market

 

 X

Roadblocks

 X

 

Management Team

 X

 

Fundamentals

 

 

Debt/Equity Ratio

 

Current Ratio

2.71 

 

Technical

 

 

Institutional Ownership %

 

7.40 

 

Heska Corp. (NASDAQ: HSKA) is trading at about $7 per share and has a market cap of $38 million. Heska Corporation develops, manufactures, markets, sells, and supports veterinary products for canine and feline household pet health markets in the United States and internationally. The company is defined as being in the biotechnology industry but must be analyzed in conventional terms. I will analyze this stock from the paradigm of a value investor. Heska has a price/earnings ratio of 19.89 and no price/earnings growth ratio as the result of a poor earnings performance.  Price to book is 0.79 and return on equity is a rather bleak 4.15%. Quarterly year-over-year revenue growth is in territory at -0.20 and quarterly year-over-year earnings growth is 19.50. The company is in a good position with respect to long term debt, which is nonexistent, earning Heska a debt/equity ratio of 0.00. The current ratio is a more than adequate 2.76. While there is nothing to suggest this company is about to fold its tent, there is really nothing to suggest that it will not continue to merely eke out an existence. There is no ‘buy’ recommendation coming from me, given that shares are worth around $7 apiece on a discounted cash flow basis. There is no margin of safety at these levels.

Amgen Inc. (NASDAQ: AMGN) is a large cap ($60 billion), trading at about $68 per share. This California based, international leviathan of biotechnology companies, has a number of wildly successful drugs on the market and is focused on developing even more. Amgen has at least ten drugs in phase III and twice that number in phases I and II. They have multiple collaborations and make acquisitions. The company is adequately capitalized, sports a decent debt/equity ratio and an excellent current ratio (see table below). The company has talented management on the corporate, medical and research levels. Amgen is also paying a dividend yield of 2.13% against a payout ratio of 6.53%. Of 26 analysts, 15 rate the stock as strong buy/buy, 9 as a hold and 2 as an underperformer. Personally, I don’t see this stock doing anything dramatic over the next 12 months. I doubt you’ll lose money but you won’t make much either, given that shares are worth about $70 on a discounted cash flow basis. I’m going to explore other options.

Amgen Inc. (AMGN)

Biotechnology Fundamentals

Pass

Fail

Research Focus

 X

 

# of Products (Pipelines)

 X

 

Collaborations

 X

 

Capitalization

 X

 

Debt Load

 X

 

Products Nearing Market

 X

 

Roadblocks

 X

 

Management Team

 X

 

Fundamentals

 

 

Debt/Equity Ratio

60.57 

 

Current Ratio

4.60 

 

Technical

 

 

Institutional Ownership %

82.00 

 


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