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Don't Be Surprised If Underpriced Small-Cap Biotechs Catch Investors' Eye Once Again

http://www.forbes.com/sites/genemarcial/2012/12/08/dont-be-surprised-if-underpriced-small-cap-biotechs-catch-investors-eye-once-again/

Biotechnology stocks haven’t produced much excitement for investors this year , partly because the Presidential elections and national politics usurped much of the news headlines. So Wall Street and most investors have had little chance or inclination to focus on this beguiling if complicated sector. Even so, they haven’t performed badly in recent weeks, with the biotech BTK Index up 6.6%, although they still trailed the S&P 500’s 8.4% rise and the Nasdaq’s 12% jump.

The biotechs should, however, get renewed attention as various important biotech industry groups that attract thousands of healthcare investors and professionals start holding their annual conventions and meetings where biotech and life science companies offer their outlook for the coming new year and present updates on their new products and technologies.

In fact, the first of such big events – the American Society of Hematology (ASH) Conference –is being held today (Dec. 8) and will congtinue through Dec.11,2012, in Atlanta. Next month in early January, the usually overbooked J.P. Morgan Healthcare Investment Conference will hold their annual meeting in San Francisco. So prfedictably, investors will start re-focusing on the biotechs.

“The biotechs have underperformed as they have been hit pretty hard during the market’s recent correction,” notes John McCamant, editor of the Medical Technology Stock Letter, in San Francisco. Tax-loss selling and tax planning sales have also contributed to the recently poor performance, he adds. But tax-loss selling usually abates in late December, so “investors will soon begin to look for stocks that will bounce back next month from the ’January Effect’ that’s caused by the tax-related selling that drives down stock prices to artificially low levels from which they subsequently snap back by the first month of the year.

McCamant has his favored list of non-household-name but, nonetheless. significantly important biotechs, among them: Pharmacyclics (PCYC), which is developing small-molecule therapeutics to treat cancer and immune mediated diseases, currently trading at $56 a share; Coronado Biosciences (CNDO), involved in novel immunotherapy biologic agents for autoimmune diseases and cancer, including Crohn’s disease and multiple sclerosis, trading at $4.36 a share; and Pacira Pharmaceuticals (PCRX), which makes pharmaceutical products for use in hospitals and ambulatory surgical centers, now trading at $16.27 a share.

One micro-cap biotech company that’s still mostly unknown but deeply involved in producing important drugs for hematologic malignancies that some analysts assert have potentially huge markets is TG Therapeutics (TGTX), now trading at $2 a share.

The day before the opening today of the ASH conference in Atlanta, TG Therapeitics announced it has initiated a phase 1 and 2 clinical trials to evaluate the safety, tolerability and efficacy of its product, TG-1101, a novel third-generation anti-CD20 monoclonal antibody, in combination with Revilimid for patients with relapsed or refractory B-cell lymphoid malignancies who were previously treated with anti-CD20 antibody therapy. This clinical study is the second phase 1/2 trials TG has done in North America.

“TG is in the process of developing two potential blockbuster products, (TG-1101) and TGR-1202), which are both indicated for Non-Hodgkin Lymphoma, Chronic Lymphocytic Leukemia (CLL), and possibly other hematologic malignancies or autoimmune diseases,” says Matthew L. Kaplan, analyst at investment firm Ladenburg Thalmann. He sees the stock tripling, to $6, convinced that TGT is undervalued based on multiple valuation techniques.

“We believe TG’s current valuation offers significant upside potential as we anticipate multiple catalysts in 2013, which could drive the value,” says Kaplan. The currently ongoing TG-1101 Phase 1 trial in NHL patients will have data in mid-2013, and begin to enroll Phase 2 part patients, as well, with more data expected at the ASH conference in 2013, says the analyst.

Additionally, a combination clinical study of TG-1101 with Revlimid will be started in the fourth quarter of 2012. And TGR-1202 will also enter Phase 1 in the first quarter of 2013, with data expected to bed available later in 2013.

“Therefore, with this plethora of clinical activity we anticipate TG to attract the attention of possible partners, and to continue to de-risk the product portfolio as more data is generated,” says Kaplan.

The metrics he uses to arrive at his head-turning $6-a-share price target is based on a sum-of-the-parts valuation, earnings-per-share multiple analysis, and a discounted cash flow analysis, and 9 times multiple of the 2021 EBITDA of $191 million.

The analysis only uses U.S. revenue estimates generated from TG-1101 in relapsed and refractory NHL and CLL patient populations, as well as its current cash flow position. Potential revenues outside the U.S. in TG-1101 and TGR-1202 represent future upside to his projections, as they weren’t included in his estimates.

“We view TGTX at current prices as an attractive investment opportunity,” says Kaplan, with “multiple potential clinical data catalysts in the next 12 months.”

So for investors seeking to get in on the ground floor in a biotech that analysts say has “potential blockbuster” products, TGT Therapeutics is one good investment choice.