Watch for This Biotech's Moonshot

07/02/2012 8:15 am EST

Focus: STOCKS

Some investors are perfectly happy with all the risk in the broad market, but if that isn't enough to keep the adrenaline pumping, this biotech may be just the ticket, notes Greg Pugh of Investing Daily.

Stocks of small biotechnology companies are high reward, high risk. An investment in a fledgling biotech firm can be a nerve-racking rollercoaster ride with unexpected twists and turns along the way. These types of investments should be viewed as highly speculative and only account for a smaller portion of your portfolio.

I’ve been closely watching Arena Pharmaceuticals (ARNA), which recently received US Food and Drug Administration (FDA) approval of its diet pill Lorcaserin, also known as Belviq.

ARNA was trading at less than $3 as recently as early May. Fast forward to June 27, immediately after FDA approval, and ARNA was trading above $11. This is a quick 280% return, or 2,000% on an annualized basis.

Although ARNA was a winner, not all small biotech stocks pan out for investors. Some biotech stocks are beauties; some turn out to be beasts. However, for the aggressive investor seeking a high-reward small biotech play, I’ve found another biotech up-and-comer that stands a good chance of taking off.

As obesity becomes a worldwide epidemic, heart disease remains a leading killer. For some patients, diet and exercise are not enough to combat the hereditary factors associated with heart disease. Many drugs have been approved for various heart disease symptoms over the years, some of them quite lucrative for drug developers.

Amarin Corp (AMRN) faces excellent odds of breaking through with a new drug for heart disease. The company is close to securing a long-sought patent on its lead drug candidate, a fish-oil heart pill that US regulators are expected to rule on next month.

Amarin has a pending application with the US Patent and Trademark Office that stakes claim to use of the drug, known as AMR101, in patients with very high triglyceride levels, commonly called bad cholesterol. High levels of triglycerides can raise the risk of heart disease.

Recently, the Web site for the patent office posted a “reasons for allowance” notice on the patent, a signal that formal approval could come within weeks. If AMR101 is approved as expected, Amarin could begin selling the drug early next year.

Amarin reported cash and cash equivalents of $245.8 million on March 31. This cash balance includes proceeds from the issuance in January 2012 of $150 million in 3.5% exchangeable senior notes due 2032. During the three months ended March 31, net cash outflows were approximately $15.9 million. This indicates that Amarin has enough cash to sustain itself for over three years at its current burn rate.

Amarin’s stock price has been trending up as investors speculate on an FDA approval in the next month. AMRN was trading at $9.50 two months ago, but the stock is now trading at $14.29.

Amarin also is a potential buyout candidate, because many large pharmaceutical companies are looking to enhance their drug pipelines with new products as their brand name drugs lose patent protection. Buy Amarin up to $25.

Read more from Investing Daily here...

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