3 Small-Cap Biotech Stocks to Buy if the Market Crashes

The Russell 2000 small-cap stock index is the most widely used proxy for small-cap stocks and the exchange traded fund that tracks that index has tumbled 11.6% this year. That's a frightening drop, but it's been proven time and time again that investing for the long haul outperforms jumping in and out of stocks in the short term, and that may mean that the Russell 2000's decline is creating a long haul opportunity in small-cap biotechnology stocks. If the index continues to fall, risk-tolerant investors may find that buying small-cap biotechnology companies is rewarding over the long term. With that in mind, here are three biotechs with promising research drug pipelines and experienced management teams that investors may want to consider.

1. Opthotech Corporation
Treating age-related macular edema and diabetic macular edema has created two multibillion-dollar blockbuster drugs. The first is Novartis' Lucentis, which is selling at a roughly $4 billion annual pace globally this year, and the second is 
Regeneron's Eylea, which is on pace to eclipse $2 billion in sales this year worldwide.

Rather than displace those two blockbuster treatments, Opthotech's Fovista is being designed for use alongside them. In phase 2 trials, patients receiving Fovista and Lucentis saw an improvement of 10.6 letters of vision at 24 weeks, compared to 6.5 letters for patients receiving Lucentis alone. Those results led to Opthotech kicking-off a phase 3 trial, but it also prompted Novartis to step-up and ink a blockbuster deal for Fovista's international rights, giving Opthotech $200 million in cash up front as part of an agreement that could be worth as much as $1 billion if Fovista ever makes it to market.

No one knows if Opthotech will remain independent, or seek a suitor, but it helps to know that this isn't the company's first rodeo. CEO David Guyer is the former founder and CEO of Eyetech Pharmaceuticals, a company that was sold to OSI Pharmaceuticals for nearly $1 billion in 2005.

Source: Opthotech Corp.

2. Portola Pharmaceuticals
Factor Xa inhibiting drugs are casting aside decades of reliance on the anticoagulant warfarin, but one big hurdle remains. There's no reversal agent for them. That means that sales of
Johnson & Johnson and Bayer's Xarelto and Bristol-Myers and Pfizer's Eliquis are only being prescribed for use in patients that are the least likely to have a bleeding episode. Portola may change that.

Portola is studying andexanet alpha in phase 3 trials as an antidote for factor Xa drugs and J&J and Bristol are impressed enough that they're helping Portola pay for the studies. Importantly, despite these big drugmakers picking up expenses, Portola hasn't given them any of its rights to sell the medicine. Also interesting is that Portola is developing its own factor Xa drug that could eventually compete with these drugmakers.

Source: Portola Pharmaceuticals

If Portola's antidote succeeds and its own factor Xa drug makes its way to market, it's conceivable that one of these large companies will look to acquire it. While that's a gamble, Portola's management team has a background that's rooted in big pharma. The company's CEO John Curnutte, was the president of Schering Plough Biopharma, which Merck  bought for $41 billion back in 2009, and a former senior manager at Genentech, which was acquired by Roche for nearly $47 billion in 2009.

Insys Therapeutics

3. Insys Therapeutics
Medical marijuana is one of biotechnology's lightning rod topics, but finding medical marijuana biotech companies that don't have sky-high valuations is tough -- unless it's Insys.

Insys is conducting a slate of pre-clinical studies on the marijuana chemical cannibinoid CBD, including research into its use in both brain cancer and epilepsy. But Insys' attractiveness really stems from its profitability -- courtesy of its opioid drug, Subsys -- and its near-term opportunity is tied not to CBD, but the marijuana cannibinoid THC instead.

Subsys won FDA approval in 2012 as an alternative spray formulation of the opiate fentanyl, which is used to treat breakthrough cancer pain. Subsys advantages include working more quickly than other therapies and allowing for more precise dose adjustments. As a result, Subsys has captured more than a third of the market for fentanyl products, resulting in second-quarter sales of $55 million, up 195% from a year ago.

Insys hopes it can deliver similar success with dronabinol, a spray formulation of marinol, or THC, which is used to treat nausea in cancer patients and weight loss in HIV patients. Insys' management, which has a background in money management and venture capital, thinks that the company has a good shot at capturing a lion's share of the $150 million a year marinol market. And, since Insys has already proven itself with Subsys, investors might be right to give them the benefit of the doubt on dronabinol, too. But even if management isn't right, investors can still take solace in knowing that Insys is already making money, with EPS of $0.26 in the second quarter, and isn't too pricey, with a forward P/E ratio of just 21. 

Even these three biotechs will be jealous of this coming blockbuster
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The article 3 Small-Cap Biotech Stocks to Buy if the Market Crashes originally appeared on Fool.com.

Todd Campbell is long Opthotech and Portola. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. Todd owns Gundalow Advisors, LLC. Gundalow's clients do not have positions in the companies mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. 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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