Hot Biotech Company

No wonder the scientists at tiny Helicos Biosciences Corporation are strutting their stuff. It isn’t every day that an obscure, small-cap company coups the multi-billion dollar giants of the burgeoning life sciences industry.

But in late September the Boston-area genetic analysis company announced the results of a landmark study that was published in the popular scientific journalNature. That turned the industry on its ear.

Helicos (HLCS:NASDAQ) really does have bleeding-edge technology: The company has the only commercially available system that performs complete genetic analysis from a single molecule.

In the quest to deliver better, more targeted drugs, biotech firms usually have to take genetic material and make several hundred thousand to 1 million copies before deciphering them. Scientists call this cumbersome process genetic “amplification.”

But the Helicos Genetic Analysis System is:

• Faster – The company’s proprietary HeliScope Sequencer delivers a 20-fold improvement over current market-leading technologies.

• Better – By directly imaging and analyzing single genetic molecules, the process eliminates errors inherent in standard amplification techniques.

• Cheaper – The system generates sequencing information at a cost that is 1,000-fold lower than other methods. Just last year, sequencing a single human genome took almost 200 people and cost $250,000.

A Biotech Cinderella

Helicos is a bit of a biotech Cinderella story. On Aug. 7, the company’s stock traded at a mere $0.60 a share. Nasdaq officials warned the company it faced delisting.

Three days later, the company announced that using its Helicos Genetics Analysis System, researchers at Stanford University had sequenced the entire genome of the company’s co-founder, Steve Quake. And it took only three people, a mere 1.5% of the size of a standard sequencing team.

Clearly this is important technology in the cost-cutting era of ObamaCare. Delivering targeted drugs more quickly, with sharply reduced overhead and better clinical trials, will help restrain rising healthcare costs.

How Helicos Stacks Up Against Other Biotechs

Nevertheless, Helicos faces substantial challenges. First, Helicos is a startup with enormous expenses for research and development. At the end of this year’s second quarter, the company had racked up a deficit of $153 million.

Sales remain spotty. To date, Helicos has sold only six sequencing machines at a cost of nearly $1 million each.

Thus, Helicos needs cash to survive. Investors recently injected $10 million. The investment group included Atlas Ventures, Flagship Ventures, Highland Capital Partners, Versant Ventures and Helicos CEO Ronald Lowy.

The closest competitor in size and scope to Helicos is Affymetrix (AFFX:NYSE). With a market cap of $598 million, Affymetrix remains five times more valuable than Helicos.

Ironically, Affymetrix trades at more than $8 a share with losses that are also five times those of Helicos. For its part, Helicos enjoys market support. The stock trades at above its 50-day and 200-day moving averages, a bullish sign.

Measuring the Investment Risk of Helicos

But it is a risky investment. Insiders control nearly 55% of the stock, meaning they could depress investment returns by taking profits. However, the recent investment group is locked up for six months.

I’m going to recommend this stock but with two caveats. The most important remains the lack of fundamental analysis that can justify a clear price-to-earnings multiple.

Secondly, the company is burning through cash in a battered economy and may need to raise more funds before selling a lot of machines.

And yet the company has breakthrough technology the biotech industry must have, raising the possibility of an acquisition by a larger firm. The venture capitalists who invested in the latest financing round are a sharp bunch who know how to find great technology and the next market leaders.

Action to Take: Consider Helicos Biosciences (HLCS:NASDAQ) at up to $3.25, a price 8% below its recent 52-week high of $3.54. The stock looks like it could hit $4.50 in the next year with wild swings along the way. Take some gains at $4.