Small High-Risk Biotech Offers Potential Big Returns
Monday, March 4th, 2013
By George Leong, B.Comm. for Profit Confidential
The biotechnology sector provides some of the best investment opportunities for significant returns. This is especially true with the emerging smaller biotech companies that are in the early stages of clinical trials and commercialization. Yet the risk is high. Success in clinical trials from phases one to three could reap major price appreciation for shareholders. On the other hand, many drugs in the pre-clinical and clinical trial stages also fail and never reach commercialization. This is the risk; but in our view, success could easily compensate for taking a chance.
As an investor, you can simply invest in Pfizer Inc. (NYSE/PFE) with its proven track record and market-cap of $198 billion; but the upside investment opportunity, while positive longer-term, will not make you rich in the shorter term due to the lack of strong revenue growth. Just take a look at the Thomson Financial estimates: revenues at Pfizer are estimated by Thomson Financial to contract by 2.5% in 2013, followed by another 1.8% in 2014.
Pfizer is an excellent long-term investment opportunity for the conservative investor looking for income and some capital gains; but for us, most of the easy money has already been made. We want to see stellar growth and superlative price appreciation. Given this, companies such as Pfizer are out of the equation for us, unless you’re happy with small capital-gains potential and a 3.5% dividend.
When I search for emerging biotech stocks as an investment opportunity, I look for a strong drug pipeline. The ideal investment opportunity would be a company with at least one drug in commercialization or close to it, more drugs in late-stage phase three clinical trials, and even more drugs in development.
Sometimes, all three areas of the drug lifecycle are not available, especially to small biotech companies; but one small bio-tech company, Arena Pharmaceuticals, Inc. (NASDAQ/ARNA, $7.98), is beginning to reward patient investors after its obesity drug—“BELVIQ”—was approved by the Federal Drug Administration (FDA). And what makes the approval special is that BELVIQ is the first weight loss pill approved in the last 13 years. (Source: Liston, E., “Which Of These 3 Biotech Stocks Looks Better?” Seeking Alpha web site, January 28, 2013, last accessed March 3, 2013.) Arena will get 12 years of exclusivity with its new drug due to President Obama’s Biologics Price Competition and Innovation (BPCI) Act of 2009. For Arena, that means over a decade to dominate the market and lock in record profits, making the stock a good investment opportunity.
And what is amazing is that Arena is waiting to hear if BELVIQ will also get approved by the European Medical Association—and if that happens, we have no doubt it could see another bull run and could provide a good investment opportunity.
The global market for Arena could be massive. Obesity is a chronic problem in the U.S. and worldwide, including China. The National Institutes of Health (NIH) predict that spending on health care related to obesity will rise to $343 billion in 2018. According to the American Journal of Preventive Medicine, about 42% of Americans could be obese by 2030. (Source: “Arena Pharmaceuticals and VIVUS Look to Benefit as Aetna Provides Coverage for Anti-Obesity Drug,” Yahoo! Finance, November 22, 2012, last accessed March 3, 2013.) So drugs like BELVIQ could have great potential.
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Since its upward move, Arena has paused and is looking for direction in a tight sideways channel. The near-term technical indicators point to some near-term weakness, but we would view breakdowns as an investment opportunity.
A move to the 50-day moving average (MA) around $7.73 would be an area in which you could look to buy. And in the unlikely case that Arena falls to its 200-day MA of $4.01, this would be a strong buy, based on my technical analysis.
Chart courtesy of www.StockCharts.com
The chart above shows a bullish formation with a price target of $18.50, representing a potential move of 132% and a good investment opportunity.
The reality is that Arena could easily surge on the chart, especially as BELVIQ gathers worldwide acceptance and sales pick up.
Please note: the information on Pfizer and Arena contained in this article is not to be construed as advice to buy the stock; rather, it is meant to provide an example of a potential good investment opportunity.
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