Is YM BioSciences the Perfect Penny Stock?

Low-priced stocks are often low-priced for a reason: they have significant problems to overcome. Yet for those that have fixed their problems, they may be ready to take off to the next level.

At Motley Fool CAPS, a "penny stock" is any stock trading under $10, and you'll find some of the best CAPS All-Stars regularly seeking out winning single-digit investments. We identify them with a penny icon and by pairing up their opinions with some top companies trading for pennies on the dollar. Relatively speaking, we may end up with more than just chump change.

Of course, just because a stock is low priced isn't necessarily enough to suggest it will have an easier time recording big gains. Low-priced stocks are often low-priced for a reason. But this week we look at biopharmaceutical YM BioSciences (NYS: YMI) , which has seen its shares rise 20% year to date and trades at just under $2 a share, but still garners top honors at CAPS.

YM BioSciences Snapshot

Source: FinViz.com. TTM = trailing 12 month. N/A = not applicable; YM Bio doesn't pay a dividend.

Plenty of question marks
In previous discussions about the prospects for biotech YM BioSciences, I've recounted my bearish thesis against the stock: It enjoyed a big run-up after reporting "significant and durable responses" in ongoing phase 1 and phase 2 trials for its myelofibrosis treatment despite still having along road to go, and the market is smaller than originally counted on, so the space won't allow for a lot of competitors. With Incyte's (NAS: INCY) Jakafi already on the market, even with a different regimen, the possibility it could unseat the market leader if and when YM Bio's drug made it to market seemed doubtful. In short, the market is Incyte's to lose.

Well, it's possible it might just be doing that, or rather, if not losing, opening up a wedge for YM to drive through.

Another fine kettle of fish
On its second-quarter earnings conference call, Incyte opened up a can of worms by saying the discontinuation rate of patients taking Jakafi is growing, and the 14% to 18% rate that's been assumed since clinical trials was really too low... and should be the low end of expectations. Incyte wouldn't put a number on what the rate should be, saying it was too early to know for sure, but it's going to be higher than everyone was previously considering.

Along with switching to a new revenue recognition model and sales of its lone drug seemingly falling, there seems to be plenty of opportunity for YM's myelofibrosis therapy. But the market saw that as a development that would weigh on CYT387 when it came to market and subsequently bid YM's shares down, though not nearly to the extent that crushed Incyte's stock.

Incyte is looking to expand Jakafi's use internationally, and received a $40 million milestone payment from Novartis (NYS: NVS) for an early positive opinion by regulators there, but I'd say things don't look as bleak for YM as I once did -- assuming they make it through the FDA's gauntlet, which is no easy task. Especially for patients with anemia, an area Incyte has had problems keeping patients, YM's treatment may be a better fit.

Penny for your thoughts
Yet when comparing the investment prospects between YM and Incyte, it's worth noting that while the former does have other drugs in its pipeline, it's really only focusing on CYT387. Incyte, on the other hand -- and notably because Jakafi has made it to market -- is working with Eli Lilly (NYS: LLY) on therapies targeting rheumatoid arthritis and psoriasis. Others are also targeting the illness, like Cell Therapeutics (NAS: CTIC) , which licensed pacritinib from S*BIO.

In short, YM BioSciences is a speculative investment requiring investors to guess how the FDA will rule sometime in the future. The early indications with the drug have seemed promising, but the road is long. Its stock will likely rise and fall on emotional ruminations -- such as those when Incyte's issues arose.

Make some change
Despite that, all but one CAPS All-Star member thinks YM will be able to outperform the broad indexes, and 96% of the broader community weighing in agrees. Wall Street is unanimous in its opinion that there are better days ahead of the biotech, but I can't see enough of a catalyst yet to change my underperform rating.

Tell me in the comments section below if you think those wedge issues are enough for YM BioSciences to drive a truck through -- or whether the bulls are merely riding on hope.

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The article Is YM BioSciences the Perfect Penny Stock? originally appeared on Fool.com.

Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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