Endocyte: High Risk in Biotech

04/17/2015 7:00 am EST

Focus: STOCKS

Bret Jensen

Editor, Biotech Gems

Biotechnology is one of the few areas of the market where we're still finding good potential for outsized returns, explains Bret Jensen, editor of Small Cap Gems.

There also seems to be an uptick in merger and acquisition activity, which should continue given the need of larger pharma companies to replenish their pipelines.

Endocyte (ECYT) is a small biopharmaceutical company with a market cap of just over $250 million. The company is currently developing therapies that target both cancer and inflammatory diseases.

Its technology uses small molecule drug conjugates (SMDCs) in combination with imaging diagnostics or therapeutic agents. Endocyte currently has several SMDCs in clinical trials at various stages.

The company and its shares have had a rough go of it recently. The stock had traded up to $25.00 within the last year.

The shares cratered in May after the Data Safety Monitoring Board recommended stopping the Phase III clinical trial of vintafolide for ovarian cancer due to lack of efficacy. Merck subsequently stopped joint development and returned the rights to Endocyte.

This is exactly why we focus on companies with multiple shots on goal as disappointing trial results are part of investing in the space.

But with risk comes reward and Endocyte has many things going for it and investment sentiment seems overdone to the downside at the moment.

The company has several early stage drugs in development and vintfolide-despite failing in late stage trials against ovarian cancer-has shown promise against other indications in early Phase II trials.

The company is using its SMDC platform to create several compounds that could potentially deliver various drug payloads for various indications. SMDCs allow use of increasingly potent drugs to treat different conditions.

In addition, most of the stock's current market cap is made up by the cash and marketable securities balance on its books.

For a small-cap biotech firm, Endocyte has decent analyst coverage. Eight analysts cover the company, and the mean price target of those analysts currently is just a little north of $13.00 a share, more than twice the current stock price.

Endocyte is going to require some patience from investors. Over the next 12-18 months, important milestones for three different developing compounds will be reached. Obviously, positive results from any or all of these trials could buoy the stock price significantly.

And given the company's cash holdings, SMDC platform, and early stage pipeline, a buyout from a larger player cannot be ruled out.

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