Small-Cap Biotech Stocks: Why This Sector Is Set for a Huge Year
by Marc Lichtenfeld, Healthcare Expert
Wednesday, January 6, 2010: Issue #1169
Now that we're into the first week of 2010, let's talk about the Super Bowl.
But not the one in Miami, featuring a bunch of guys with pads and helmets. I'm talking about the healthcare sector's version of the Super Bowl, taking place on the other side of the United States next week.
On Sunday, I'll be boarding a plane and escaping from the frozen tundra that is South Florida these days (seriously, 29 degrees last night) and on my way to San Francisco for the J.P. Morgan Healthcare Conference.
And just like the Super Bowl, tickets for the conference are extremely hard to get. It's the most important healthcare conference of the year, and roughly 14,000 investors and healthcare industry people will descend upon the Bay Area for it. But only about 25% of them will get into the event...
Fortunately, I've already confirmed my ticket to the big show and I'll be your eyes and ears at the focal point of all things related to healthcare investing.
So if you're not investing in healthcare stocks - and particularly biotech - make a New Year's resolution to do so. Here's why...
2010: A Huge Year for Biotech Stocks
I expect biotech stocks to have an outstanding 2010, especially the small-caps.
Despite a very difficult year for the U.S. economy, biotech companies still managed to raise nearly $50 billion in 2009, the second highest total in the industry's history.
Last year also saw three biotech companies go public, but over the first six months of 2010 alone, a further five are expected to make their stock market debuts. And Steven Burrill, CEO of Burrill & Company, a merchant bank specializing in the biotech sector, projects 15 biotech IPOs in 2010.
Now, I typically don't recommend buying IPOs right out of the gate - especially in the biotech sector, where companies will likely have to raise money again in another year or so. But the fact that we've seen some hit the market already - and should to be able to continue raising capital and land partnerships - shows that demand is strong for biotech companies and their products.
I also expect many small-cap biotech stocks to start popping up on Wall Street's radar. In fact, over the last day or so, several prominent biotech analysts have stated that they'll be increasing their focus on smaller-cap names. This could be for a couple of reasons...
- They honestly believe small-cap biotech stocks will be the best place to make money in 2010.
- With the expected deal flow this year, analysts want to be sure they're positioning their banks to get in on the offerings and mergers and acquisition activity.
But whatever the reasons are, the increased attention could have a dramatic effect on stocks that typically garner attention from a select group of investors. And while individual stocks could soar as a result of new coverage by an analyst, the whole sector should rise on the newfound interest.
And here's another boost for biotech...
Two Big Problems for Big Pharma... And One Simple Solution
It's well-known that many Big Pharma firms face the prospect of huge patents expiring over the next few years. And with the time, effort and money it takes to develop new drugs from scratch, it's often better for them to spend their money on biotech acquisitions instead.
In 2010, large pharmaceutical firms are likely to continue partnering with smaller biotech firms on drug development. Even a partnership where they pay a biotech firm tens of millions of dollars up front is a worthwhile investment because if the biotech firm's new cancer drug works, the larger drug company will make millions (if not billions) in profit.
So it's not hard to figure out what one of my top goals at the conference will be...
Biotech's Biggest Turnaround Story of 2010?
Amid the JP Morgan Healthcare Conference presentations, seminars, and meetings, I'll be trying to sniff out the biotech companies that have the best drugs in the pipeline... but who need financial help to bring them to the market.
This strategy worked out superbly for subscribers to my small-cap healthcare and biotech investing service, Access, in 2009, as we bagged a 103% on Nektar Therapeutics (Nasdaq: NKTR).
After meeting with the company's management team at the conference, talking to a few smart investors, and conducting my own research, I recommended the stock. My theory at the time was that Nektar would soon sign a partnership deal for its opioid induced constipation drug. Sure enough, in September 2009, AstraZeneca (NYSE: AZN) paid $125 million upfront for rights to the drug. My Access subscribers doubled their money in the position and we locked in the gains shortly thereafter.
So next week, I'll be doing more of the same - meeting with the management teams of many small companies that are on the verge of medical breakthroughs and important deals.
In addition, I'll be taking in the presentations of some of the larger biotech companies. One firm that I'm very interested in is Genzyme (Nasdaq: GENZ). The company has endured a very difficult year, marked by manufacturing glitches and FDA rejections. But I believe GENZ could be one of the turnaround stories of 2010, so I'm keen to hear what the executives have to say.
Of course, I'll also be speaking with fund managers, analysts and other professionals about healthcare reform, generic drugs and everything else going on in the industry.
So be sure to check my column next week, as I recap some of the presentations and conversations at the most important healthcare event of the year.