The Insolvent Investor

Investing and economics – it isn’t easy.

Small cap biotech stocks are risky but undervalued

Posted by Warren on August 5, 2008

Biotech companies are not immune to the business cycle. Although many make life saving drugs that are consumed regardless of economic conditions, many others make products that are discretionary (eg, Botox). Also, many smaller biotech companies rely on larger pharmaceutical companies to license their drugs and even purchase their entire companies. Big Pharma’s ability to do this often can be compromised if their stock prices are depressed (as happens to almost all equities in economic slowdowns).

Despite this, many small biotech companies could be seen as underpriced because many investment analysts do not understand them and are risk adverse.

One such example of a company is Infinity Pharmaceuticals. I own shares in this company because I think it is underpriced relative to the expected value of its drug pipeline. Moreover, it is an early stage biotech company so very few analysts cover the stock and very future institutional investors are holders. I anticipate within the next 2 years a large pharmaceutical company will offer to buy them at several times their current value. However, there is also a greater than 50% chance one or more of their drugs will fail and the stock will become worth a faction of its current market capitalization. I recently a post on the company on SiteJabber.

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