2 Small-Cap Health Care Stocks Creating Investor Buzz
One industry that has been on fire over the past year has been health care. ETFs that track the industry are up between 20 and 30 percent during the past 12 months and show no signs of slowing down. Investors may be wondering if they’ve missed their opportunity to join the fun, but the answer is a resounding no. The two stocks mentioned below appear to be well-positioned for a bright future and one that offers investors a chance to generate substantial returns.
The first company that has recently caught my attention is Merus Labs International (NASDAQ:MSLI). The company appears to be catching on with investors, as the shares have rallied by more than 30 percent since September 17. Merus is a specialty pharmaceutical company that engages in the acquisition and licensing of branded prescription pharmaceutical products in the United States and Canada. The company is currently focused on acquiring medicines in five categories: branded generics, niche market pharmaceuticals, meds that are on-patent but at the maturity stage of product life cycle, products that haven’t met annual sales threshold for big pharma, and under-promoted products.
Merus has made several positive announcements over the past couple of weeks. On September 24, the company announced that it had successfully refinanced its debt obligation previously provided by PDL BioPharma. This refinancing will reduce the company’s interest rate by half and extend the debt maturity by one to three years. Since July 2012, Merus has been able to reduce its outstanding debt by approximately $15 million. The second positive announcement occurred on October 1, when the company announced that it regained compliance with the Nasdaq because it had maintained a share price of $1 for 10 consecutive trading days. Remaining on the Nasdaq will allow shareholders to continue receiving the fastest possible fills with the most amount of liquidity.
Since Merus is a specialty pharma, the company has the luxury of targeting a specific market. Typically, large pharma focuses on products that are able to generate annual revenue greater than $1 billion. Merus, however, is focused on products that generate annual sales of less than $200 million. This focus will allow the company to establish itself in a particular niche. In 2010, the target market for Merus accounted for sales of $80 billion across the world.
The company currently has three products: Enablex, Vancocin, and Factive. Enablex is used in adults to treat various symptoms resulting from an overactive bladder. Vancocin is used to treat Clostridium difficile-associated diarrhea. Factive is the only Food and Drug Administration-approved quinolone for the treatment of both acute and bacterial exacerbation of chronic bronchitis and mild to moderate community-acquired pneumonia. For the year ended September 30, 2012, Merus generated total revenue of $10.4 million. As the company continues to expand its portfolio of prescription products, investors can expect the revenue to continue to climb and operating losses to be a thing of the past. Future analyst estimates project total sales of $33 million in 2013. Analysts also expect the company to generate a positive net income of $2.45 million in 2014 and $7.3 million in 2015. Investors who get in now should be able to generate a nice rate of return if the company can perform as expected.
The second stock that appears well positioned for the future is Soligenix (OTCBB:SNGX). Soligenix is a clinical stage biopharmaceutical company that is focused on developing products to treat life-threatening side effects resulting from cancer treatments and serious gastrointestinal diseases. The company also develops vaccines for certain bioterrorism agents. I wrote an article on August 25 which described the overall company and the future prospects. Since that time, the stock has rallied by more than 25 percent because of several positive corporate announcements.
On September 16, the FDA granted orphan drug designation to the active ingredient SGX94 used in the treatment of acute radiation syndrome. SGX94 is a synthetic peptide that accelerates resolution of tissue damage following exposure to a variety of agents including bacterial pathogens, trauma, radiation, and chemotherapy. SGX94 has already demonstrated safety in a Phase 1 clinical study, so this FDA designation really puts SGX94 on the fast track for future approval.
In addition, the company has announced several contract awards over the past couple of weeks which will be used to further develop OrbeShield, used in the treatment of gastrointestinal acute radiation syndrome. The first one came on September 19, when Soligenix announced it had been awarded the BARDA contract. The contract has a two-year base period, with two options that would extend the contract an additional three years and potentially make the contract worth up to $26.3 million. A second contract award was announced September 25, when the company revealed it had been awarded an NIAID contract valued at up to $6.4 million. Together the company has the potential to receive $32.7 million in funding, which is extremely valuable for a clinical stage biopharmaceutical company. The company is extremely active in seeking out additional funding through grants and contracts so investors should stay tuned for further announcements.
It’s evident that the company is capital efficient with a strong track record of sourcing non-dilutive funding. The company has no debt or preferred stock and recently completed a financing agreement worth $7.1 million. Of particular note is that institutional investors in the financing included an affiliated fund of Third Security LLC, a venture capital firm founded by R.J. Kirk. Combine that with the contract awards discussed above and it is likely that new investors won’t have to worry about dilution anytime soon.
Investors are also probably curious about some of the company’s trials and when updates might be occurring. Soligenix is currently planning to begin a Phase 2 trial later this year for SGX942. SGX942 is a synthetic, five-amino acid peptide used in the treatment of oral muscositis. Investors should expect trial results during the second half of 2014. Within the next 18 months, the company is also planning to announce data from several trials including a Phase 2 for pediatric Crohn’s disease and a Phase 2 for chronic GI Graft vs. Host Disease. With all of the potential catalysts looming, investors may want to consider a starter position now.
As always, investors should exercise proper due diligence before investing in stocks. This is particularly true of small-cap stocks within the healthcare industry. Although the above stocks seem to have an incredible amount of potential, investors should always diversify across a wide variety of sectors and investment products.
Follow Tom on Twitter @tommymeyer82.
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