A speculative fervor has gripped small-cap biotech stocks. They're up, in some cases big. Tiny, high-risk biotech companies suffered crushing declines in the price of their shares last year. But today, investors (or perhaps just traders) are embracing many of these stocks. OncoGenex Pharmaceuticals ( OGXI) has gone from $4 to more than $13 in the last month. Hemispherx BioPharma ( HEB - Get Report) is up more than 50% since the beginning of May. Shares of Novogen ( NVGN) more doubled this week alone. Biocryst Pharmaceuticals ( BCRX - Get Report), Emisphere Technologies ( EMIS) and Immunomedics ( IMMU) are all also strongly higher in the past month. It's hard to pinpoint one reason for the embrace of the small in the biotech sector, but the confluence of a few disparate events seemed to have put investors in a risk-taking mood. First, the outbreak of the H1N1 virus sent investors looking for antiviral-related drug stocks. And, of course, many of these companies obliged by issuing press releases designed to highlight their influenza drug programs. Then came the surprising approval of Vanda Pharmaceutical's ( VNDA - Get Report) schizophrenia drug Fanapt, which sent the once penny stock soaring 900%. Last, the release of research abstracts for the upcoming annual meeting of the American Society of Clinical Oncology (ASCO) had investors scouring new breakthrough cancer treatments regardless of their odds for success. Dan Rosenblum, a biotech trader and author of the Shark Biotech investment newsletter, believes traders and momentum investors are scouring biotech for the next Vanda. "When people saw a penny stock like Vanda could move up 1000%, that created excitement for the next one. Traders are looking for the next Vanda, or at least they're hyping some of these stocks in the hope that someone believes they're the next Vanda," he says.
Hemispherx is expecting an FDA decision Tuesday on the company's drug for chronic fatigue syndrome, Ampligen, based on a single study completed in 2004. The FDA refused to review the Ampligen application in 2007, but Hemispherx resubmitted the drug in 2008. The company has outstanding manufacturing problems related to Ampligen that have yet to be resolved, according to the company's SEC filings. At various times over the years, Hemispherx has claimed Ampligen as a treatment for HIV, the ebola virus, avian flu, swine flu and smallpox. Hemispherx sold stock to raise cash on May 11 and again on May 19, a strange move for a company confident about a positive decision on Ampligen next week. OncoGenex shares took off May 14 after a research abstract for the firm's prostate cancer drug OGX-011 was released online in advance of the ASCO meeting. The interim data from a phase II study showed OGX-011 plus chemotherapy boosted survival over chemotherapy alone in patients with advanced prostate cancer. Rodman & Renshaw, an investment bank that caters to raising money for small-cap biotech companies, initiated coverage on OncoGenex with a buy rating, making the claim that OGX-011 could be a more effective prostate cancer drug than Dendreon's ( DNDN) Provenge. OncoGenex finished the first quarter with $9.4 million in cash, which makes it highly likely that a follow-on financing deal will get done soon, perhaps before or right after the ASCO meeting, where additional OGX-011 data will be presented.
The true test of whether small-cap biotech stocks can sustain this rally will come after the near-term catalysts like FDA decisions and medical meetings pass and the companies inevitably raise cash by selling stock. So far, however, investors are loving the risky biotech stuff and eschewing their larger, more successful cousins. As of last week, micro-cap biotech stocks were up almost 60% this year, while large-cap biotech stocks were down 38%.