1 Cheap Biotech Small-Cap With Huge Potential

The U.S. stock market is home to roughly 6,500 companies, and just when you think you've searched through them all, a new name will pop up to remind you that no matter how hard you try, you'll never have it entirely covered or figured out.

This feeling happens to me a lot. Even though I'd like to think I cover a wide gamut of sectors, I'm humbled frequently by finding a stock I've never come across in 13-plus years of investing. Such was my feeling yesterday when a quick screen-searching for value in the biotech sector turned up Astex Pharmaceuticals (NAS: ASTX) .

Astex merged with SuperGen last year to form the company you see today with one marketed drug and more than a half-dozen others in the pipeline. There are three things which I feel could make Astex a compelling buy.

The moneymaker
First, there's the company's already-approved myelodysplastic syndrome treatment, Dacogen. The company has a royalty-based platform in place where it receives between 20% and 30% of all Dacogen sales from its marketing partners which include Eisai Pharmaceuticals in North America and Jaansen Cilag, a subsidiary of pharmaceutical giant Johnson & Johnson (NYS: JNJ) , internationally. Through the first nine months of fiscal 2011, royalty revenue is up 21%, to $45.1 million.

The really exciting news could come when the FDA makes its decision on Dacogen as a treatment for acute myeloid leukemia, which should offer Astex a broader market of potential patients. Admittedly the phase 3 clinical results weren't overwhelmingly open-and-shut. The injections' median survival time was 7.7 months versus the placebo's 5 months. Still, this statistical jump could be enough to get Dacogen approved as a treatment for AML by March.

Band of brothers
Secondly, Astex has built some amazing partnerships despite being such a small company ($267 million). As previously mentioned, it has its own pipeline of drugs under development, as well as collaborative partnerships. It currently has AT7519 in phase 2 clinical trials as a possible treatment for solid tumors and forms of leukemia and has Novartis (NYS: NVS) as a potential marketing partner for the drug. Novartis is also collaborating with Astex on LEE001, an inhibitor that targets specific enzymes of the cell cycle.

These partnerships aren't just limited to J&J and Novartis, either. AstraZeneca (NYS: AZN) and Astex are currently collaborating on two phase 1 clinical trials -- AZD3839 and AZD5363. The former could have implications on treatments for Alzheimer's while the later may offer solutions to various tumor types. It also has pre-clinical studies currently ongoing with GlaxoSmithKline (NYS: GSK) to identify therapies of interest to Glaxo.

It already has a drug on the market, another one waiting FDA approval, a vast pipeline of partnerships ... and oh, yeah, one last thing -- it has the cash to back it all up.

Astex is currently sitting on $126 million in cash with no debt, offering it the flexibility to undertake many clinical and pre-clinical trials at once. Dacogen as a treatment for MDS has recently been enough to keep the company profitable and, barring an approval of Dacogen as a treatment for AML, could be the final alluring element that coaxes one of these four marketing partners named above to purchase Astex outright.

Foolish roundup
Clearly a lot rests on what the FDA has to say in March about Dacogen, but I'm encouraged by what I've seen so far. To say the least, Astex is being promptly added to my Watchlist for further research and I highly recommend you do the same.

Just like I've done here, our analysts are always looking for the next big thing - and they just may have found it. Luckily, you can obtain a copy of this latest report for free, "Discover the Next Rule-Breaking Multibagger," but only for a limited time, so don't miss out!

At the time thisarticle was published Fool contributorSean Williamshas no material interest in any companies mentioned in this article. He sometimes wonders how he focused before he found coffee. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong. The Motley Fool owns shares of Johnson & Johnson.Motley Fool newsletter serviceshave recommended buying shares of Johnson & Johnson, GlaxoSmithKline, and Novartis, as well as creating a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policythat believes transparency comes first.

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