We recently added a biotech stock to our portfolio based on the expectation of positive news developments related to an Alzheimer's treatment. Another biotech name that piques our interest is

OrthoLogic

(OLGC)

, which, at $6.17, is an inexpensive name with a lot of potential.

OrthoLogic's sole drug candidate, Chrysalin, is designed to quicken the healing time of bone fractures, tissue injuries and spinal fusion as well as repairing cartilage and treating cardiovascular disease. The company is far enough under the radar of Wall Street to be classified as a stealth stock -- a

hidden name with a potential for soaring -- given its low-trading volumes and lack of analyst and media coverage.

We see several bright spots in OrthoLogic's future and believe the 15% decline in its stock price during the past two months was unwarranted. The pullback in OrthoLogic's stock price creates a great buying opportunity for those investors willing to ride the ups and downs inherent in biotech investing.

OrthoLogic showed up on a screen we ran looking for biotech companies that had promising phase III drug candidates. We are not taking a position in OrthoLogic because we do not want to hold two speculative biotech stocks in our Stocks Under $10 model portfolio, but we think it is a remarkable name that warrants some attention.

Since 2003, OrthoLogic has transformed itself from a company that sold growth stimulation and external fixation devices. Management decided the market potential on the pharmaceutical side, estimated to be about $15 billion, far outweighed the opportunities on the device side and sold its device operations to

DJ Orthopedics

(DJO)

for $93 million. The sale gave OrthoLogic the funding to carry it deep into the clinical trial process as a stand-alone company, and will offer greater leverage when negotiating partnerships down the road because Chrysalin will be close to market by that time.

In the second quarter of this year, OrthoLogic agreed to purchase Chrysalis Bio Technology at a cost of up to $34.5 million in cash and stock, contingent on future events such as earnings and approvals. The acquisition gives OrthoLogic access to nonorthopedic uses of the Chrysalis platform for cardiovascular repair, dental repair and dermal wound healing. Chrysalin has gone through phase I/II trials in humans to treat chronic wounds (such as diabetic ulcers and infected cuts and burns) and the results have been favorable.

OrthoLogic is currently working on designing and implementing human clinical trials for the many possible indications for Chrysalin. In the bone fracture repair market, OrthoLogic is conducting a phase III trial of 500 patients to determine its effectiveness and safety in speeding up the healing process of fractures. In preclinical animal studies, fractures healed 30% quicker when Chrysalin was used in treatment. The results in humans have been positive so far and the market potential is into the billions of dollars. There are an estimated 30 million fractures a year in Europe, Japan, the Middle East and U.S.

OrthoLogic is also conducting a phase I/II Chrysalin trial for spinal repair, with more than 50 patients enrolled in the studies for cartilage defect ailments and preclinical planning for treatment of ligament and tendon damage. Results from the spinal trials are expected to be announced in mid-2005. The cartilage repair market is very compelling; current treatments are highly invasive when compared to OrthoLogic's goal of restoring, rather than replacing, damaged bones.

OrthoLogic stands out among other nonprofitable biotech plays because of its unleveraged balance sheet, strong management team and significant success in early studies. It also has cash -- $109 million at the end of the third quarter -- to fund much of the clinical trial process. Management is committed to seeking partners for the distribution and marketing of Chrysalin but cash shouldn't be a problem for several quarters, which is something the company expects will keep it out of the capital markets for at least 12 months.

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With a small float and low daily trading volume, this stock stacks up well in our Alpha component, which gauges the likelihood that a stock could make a big move on positive news. Any good news out of its FDA trials being conducted on humans should trigger a nice rally in the stock, as it will reinforce the already positive data collected in animal studies.

Potential near-term catalysts include strategic marketing partnerships, phase III data for bone fractures, and increased media and analyst focus on more innovative ways to repair cartilage as the baby boomer generation nears retirement. We believe this stock will have double-digit price potential by the middle of next year.

P.S. Remember, stocks priced under $10 have the potential to move quickly. So, you might want to get our current recommendations now with a

free trial

to TheStreet.com Stocks Under $10.

William Gabrielski is a research associate at TheStreet.com and is accredited with a Series 7 license. In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Gabrielski welcomes your feedback and invites you to send your comments to

william.gabrielski@thestreet.com.

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David Peltier is a research associate at TheStreet.com In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier welcomes your feedback and invites you to send your comments to

david.peltier@thestreet.com.