Our Top Biotech Stock Idea

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Editor's note: This article is a stock pitch made by a member on CAPS, The Motley Fool's free investing community. The pitch is published UNEDITED and is the opinion of the CAPS member whose pitch it is, in this case:zzlangerhans.

Each week, Motley Fool editors cull a top stock idea from the pitches made on CAPS, the Motley Fool's 180,000-member free investing community. Want your idea considered for this series? Make a compelling pitch on CAPS with a minimum length of 400 words. Want to follow our weekly picks? Subscribe to our RSS feed or follow us on Twitter.

CompanyYM BioSciences (ASE: YMI)
Submitted Byzzlangerhans
Member Rating99.37
Submitted On11/21/2011
Stock Price at Recommendation$1.50
YM BioSciences profile
Star Rating (out of 5)****
HeadquartersMississauga, Ontario
IndustryBiotechnology
Market Cap$172 million
Industry PeersIncyte (NAS: INCY)
Novartis (NYS: NVS)
Onyx Pharmaceuticals (NAS: ONXX)

Sources: S&P Capital IQ, Yahoo! Finance, and Motley Fool CAPS.

This Week's Pitch:

There's a move in baby biotech that I call the Sandbag, in honor of the original Indiana Jones movie Raiders of the Lost Ark. In the opening scene, Indiana braves numerous booby traps to reach his goal, the golden head of an Aztec god. Indy knows that removing the head from the pedestal will trigger the collapse of the temple so he has brought a bag of sand with him that approximates the weight of the head. He deftly knocks the head off the pedestal with the bag and leaves the bag in its place. For a moment he thinks he has succeeded in fooling the weight detection system, but then the pedestal starts to sink into the ground and all hell breaks loose.

As you might have guessed, the baby biotech Sandbag occurs when a company bumps a failing lead drug out of their PR statements and replaces it at the top with a new compound. The goal is to cushion or totally avoid the plunging share price that would be precipitated by abandoning the lead program by diverting investors' focus to a new area. If done poorly, the stock may collapse into the pennies like an Aztec temple (see CytRx, [Adventrx Pharmaceuticals]). On the other hand, companies like [Synta Pharmaceuticals (NAS: SNTA) ] and [NeurocrineBiosciences (NAS: NBIX) ] have been much more successful with the move.

After reading YMI's most recent earnings PR, I saw that they've completed the Sandbag maneuver they began about a year ago. The body of the statement features pipeline newcomer CYT387 prominently while former lead compound nimotuzumab has been relegated to the "About YMI" postscript, despite several late stage trials still in progress. Right now, YMI's pedestal seems to be quivering ominously.

I've learned not to count out a biotech because of the messy failure of a lead compound, so I'm keeping an open mind about CYT387. The drug was responsible for elevating the share price over 3.5 after the company reported encouraging response rates in myelofibrosis at ASCO, and the effects compare favorably to Incyte's ruxolitinib which was just approved for the same indication. Updated data from the ongoing phase II trial will be presented at ASH in early December, and strong results could have a very dramatic effect at the current depressed share price. YMI is looking like a potential real buy later this month as long as the world's economic cheese doesn't completely fall off its cracker.

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At the time this article was published The Motley Fool is investors writing for investors. Dan Dzombak did not have a position in any of the companies mentioned in this article. Pitches must be compelling, made in the past 30 days, and be at least 400 words. Motley Fool newsletter services have recommended buying shares of Novartis. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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