Hammer Stock Blog

Morphosys (MOR.DE) is one of the most unusual biotech companies, as it breaks three basic rules that apply to drug development companies:

Rule No. 1: Development-stage companies burn cash and therefore must constantly raise capital and dilute existing shareholders.

Rule No. 2: Development-stage companies are risky and volatile because they rely on a limited number of binary events.

Rule No. 3: Investing in cutting edge, growing segments of the pharmaceutical industry is associated with a high level of risk.

Morphosys is the only company I am familiar with that systematically breaks each and every one of these rules. It does not have any drugs on the market and is not expected to have any in the foreseeable future, yet it is profitable. It is involved in drug discovery which is associated with a high attrition rate, yet statistically, there is a very high chance that it will have commercial revenues at some point in the future. It is involved in one the fastest growing segments in the industry, but can be regarded as a conservative holding since it will never be dependent on a limited number of binary events. And finally, it has no need to raise cash in the coming decade in order to support its activities, as its costs are covered by other companies.

(more…)

The past six months have not been kind to microcap biotech stocks, as it is hard to find a lot of love in today’s market for tiny, high risk, cash burning biotech companies. Honestly, who can blame investors for throwing stocks that offer a distant dream with minimal success rates and heavy spending? Surprisingly (or not), the negative sentiment also presents unprecedented opportunities in the microcap arena, as some microcaps are making tremendous progress, which is not yet reflected in their stock prices.

There are quite a few companies with market cap under $100M active in the fields of oncology and inflammatory diseases, the two fastest growing segments in the pharmaceutical industry. Hypothetically, these companies represent huge upside potential in the form of imaginary returns over a period of several years. The issue with these companies is that they usually have only one or two drugs in very early stages, the vast majority of which are doomed to eventually fail. While identifying the right drugs based on concrete clinical data is complicated but possible, evaluating drugs based on earlier results is even more challenging. The idea is therefore to identify companies who have already reached proof of concept in humans, thus facilitating better visibility to investors. Since investors today focus primarily on risk mitigation, they typically ignore potential reward and shrug off any positive developments. This, in turn, may result in an “arbitrage-like” situation, where companies with a potential success rate of 25% are traded as if they had a potential success rate of 10%, simply because the progress they have made is not factored into stock price.

(more…)