Another 'Picks And Shovels' Nasdaq Stock With Massive Potential

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A couple of years ago, I wrote an article that pointed out something that I believe to be important about investing in biotech. Small cap stocks in the sector can have massive potential but enormous risk, and whether or not you play in that area depends largely on your ability to deal with the risk side of that equation.

At the time, though, I pointed out that if you took a “picks and shovels” approach to the biotech boom and invested in a company that supplied the industry, you would do well for as long as research continued, regardless of the fate of the individual therapies.

My pick at that time was Repligen (RGEN), and, while not wishing to brag, I believe that the roughly 150% increase in the stock since that article was published kind of proves my point.

That point is quite simple. What makes biotech so risky is that companies invest massive amounts in individual therapies that can, and often do, fail at some point in the extensive trial and approval process. But, if you can find a company that produces something with broad based usage in the business, you massively reduce product risk.

Repligen makes a product that is used extensively in immunology research, so the success or failure of the research is not the point. They make money as long as it continues. That has worked out well and, following some news that came out yesterday there is another small cap Nasdaq-listed firm whose situation, while different in some ways, is similar enough to offer a good chance at the same result.

Agenus Inc. (AGEN) is a biotech company with a market cap of around $420 million, that has never turned a profit and has been burning increasing amounts of cash over the last few years. Those things hardly make the stock appealing, but yesterday’s news that another, much bigger company’s shingles drug, Glaxo Smithkline (GSK)’s Shingrix, received unanimous FDA committee recommendation for approval, has the potential to change all that.

Shingrix, you see, contains what is known as an adjuvant made by Agenus, QS-21 Stimulon. If Shingrix gets to market and is as successful as the committee seemed to think it would be when they pronounced themselves “very impressed,” Agenus will receive royalties on the drug for their contribution. That will be a welcome relief on the cash flow front, but it is not the end of the story.

If you are not au fait with pharma jargon, an adjuvant in this context is, to quote Merriam-Webster, “something (such as a drug or method) that enhances the effectiveness of medical treatment.” Agenus believe that QS-21 has applications beyond Shingrix in many different areas of immunology and if that is the case, the earnings potential is massive, and even the $9 or so average price target of the few Wall Street firms who are paying attention will look like a serious lowball.

Agenus now is like Repligen was a couple of years ago in several ways. They have a product that has proven successful and can be used across a broad spectrum of the biotech business. That reduces overall risk and potentially enhances overall profit, but that potential is being overlooked by the market.

Traders and investors seem to be pricing AGEN as if it has the specific product risk that is inherent in most biotech whereas the broad potential of the product nullifies that, making the stock look quite capable of similar results over the next couple of years.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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