Watch and Wait

Anyone who follows our daily blog Market Monitor knows we highlight small health care biopharmaceutical and other related stocks regularly.  These stocks move!  Today we are going to throw a change up on Astex Pharmaceuticals, Inc. (NASDAQ – ASTX - $3.01).  Put this one on watch, but wait to pull the trigger on the buy.

The Company announced 4Q12 and annual earnings yesterday after the bell, and the news was generally positive.  First, ASTX is actually generating revenue overall, primarily from its Dacogen injection product for treatment of myelodysplastic syndromes (MDS).  This is different from most biotech companies in the small cap space, which generally are still research and development firms operating in the red.  Annual sales went from $66 million in 2011 to $83 million in 2012 with an increase in YOY 4Q revenue of 14% from 2011 to 2012 and nearly 30% from 3Q12.

So why wait to buy?

First, the technical analysis is on the bearish side.  While we do not put all our ‘stock’ in charts, they do provide a quick indication of the short term capability for the stock.  Along those lines the stock seems stuck around the $3.50 ceiling.  Second, Astex is generating a huge portion of revenue from royalty agreements as opposed to new products.  Revenue from royalties went from $60.5 million in 2011 to $71.1 in 2012.  Finally, charges related to operations are increasing.  A non-cash charge for amortization of intangibles was $8.0 million for 2012 compared with $3.2 million for 2011.

Having said all that, there are some promising projects in which Astex has in the pipeline in addition to having $10 million more in cash at the end of the year in 2012 versus 2011.  The Company has two Phase 2 trials with new products related to ovarian cancer and prostate and non-small cell lung cancer.  Another Phase 2 trial was introduced for MDS.  Finally, Astex initiated an epigenetics drug discovery collaboration with The Institute of Cancer Research and Cancer Research Technology Limited, as well as a five-year strategic drug discovery alliance with the UK's Cancer Research Technology Limited (CRT) and Newcastle University.

Let’s wait until the stock breaks through the $3.50 mark and revisit.

Have a great day!

Disclosure: Goldman Small Cap Research analysts are neither long nor short these shares but may elect to purchase the stock within the next 48 hours. 

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