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Two Biotech Stocks to Buy, One to Avoid

January 08, 2012 | About:
Sometimes we value investors take ourselves a bit too seriously and I can think of nothing better to lighten us up than a stroll outside our comfort zone to experience a slice of life on the other side. Forget the fundamentals, as they have little application here. Oh, we’ll still be interested in debt/equity and current ratios, but you’ll find P/Es, return on equity, P/B and the other fundamentals on which you have come to depend, all but useless. Biotech stocks are a different breed of cat that can have significant upside, and analysis is based on more subjective criteria than we are accustomed to.

We begin with Techne Corp. (TECH), a holding company in the medical appliances and equipment industry trading at about $68. I mention this mid cap ($2.52 billion) here because it is a key provider of antibodies, assay equipment and other reagents to the biotech industry. In this role, it can serve as a barometer for the climate in the biotech industry. In other words, if biotech is doing well, TECH is doing well.

So how’s Techne Corp. doing? Pretty well. It’s beating the S&P 500 almost 3 to 1. Its operating margin is 56.48%, return on equity is 20.39%, and quarterly year-over-year revenue and earnings growth are 14.20% and 4.40% respectively. The company has zero long term-debt and its current ratio is a whopping 8.35. If you want to get your feet wet in the biotech pool, you could do worse than Techne Corp. Did I mention that it has a dividend yield of 1.60% supported by a payout ratio of 35.00%?

Next up is StemCells Inc. (STEM) trading at about $0.80 per share, just a few cents above its 52-week low of $0.70. The company has a market capitalization of $11.29 million. The company focuses on the research, development, and commercialization of products derived from stem cell technologies. It focuses on developing cell-based therapeutics to treat diseases of the central nervous system and liver. From this description, it is fair to say that the company has more than one product line or "pipeline" which is the favored term in the industry.

While the company has a number of prestigious research collaborations, I was unable to ascertain any definitive partnerships with the pharmaceutical industry. This is somewhat troubling as it suggests that STEM is not close to having any commercially viable therapy at the present time. STEM has been successful in obtaining funds for working capital, operational expenses, research and development. The company recently raised $9.5 million. StemCells Inc. is in good shape in terms of long-term debt and current obligations with a debt/equity ratio of 4.32 and a current ratio of 2.49. STEM has one clinical trial in progress, one beginning in Switzerland and one suspended due to a lack of eligible subjects. STEM’s management team includes a number of PH.D’s and M.D.’s suggesting an adequate depth of expertise. I cannot recommend investment at this juncture for three reasons. First, the company is no where near bringing a therapy to market. Second, the current thrust of the research is focused on rare diseases which translate to a limited market for any therapy ultimately gaining FDA approval. Finally, and this is a new tip, the percentage of institutional investors is quite low, under 5%. This could be abuyout target by a larger player with access (or attempting to gain further access) to the cell therapeutics market, like Amgen (AMGN) or Oncothyreon (ONTY).

Vical Inc. (VICL) is trading at about $4.00 per share and has a market capitalization of $261.65 million. The company is researching a number of therapies based upon a DNA delivery system, including vaccines for pandemic influenza and a therapeutic vaccine for herpes simplex type 2 viruses. Successful therapies would have a broad market. Vical has a number of pharmaceutical partners and is also working closely with the U.S. Naval Medical Research Center. The company is adequately capitalized and this is borne out by a recent public stock offering that will yield about $50 million before expenses. VICL’s long term debt is nil and the current ratio is huge at 10.63. The company has therapies in phase III trials and is relatively close to bringing products to market. My research uncovered no red flags with regard to the trials in progress. The management team at Vical Inc. shows considerable depth and they have a number of Ph.D.’s and M.D.’s in strategic roles. I would recommend this stock because of the large potential market for successful therapies, the advanced state of trials and the high percentage of institutional investors (51.60%). The analysts seem to concur, with five "strong buys," one "buy"’ and two "holds."

Biotechs are a fascinating area of investment and potentially a very rewarding one. I leave you with the table below which presents a rather compelling argument for investment in biotechnology. This table reports the overall market cap of the biotechnology industry and its overall performance. I think you will agree that it is impressive.

Today5 Day1 Month1 YearMarket Cap
+0.64%+3.75%+7.83%+20.36%$25.4 B


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