1 Great Biotech Stock You Have Never Heard Of

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About 90% of drug candidates that enter clinical trials never make it to market. That brutal fact makes the small-cap biotech sector a tough place for investors to put their money to work.

However, one way investors can increase their odds of success is to watch where big pharma companies are putting their own money. After all, if a deep-pocketed drugmaker with massive expertise likes a small biotech enough to throw tens of millions of dollars at it, that should indicate the company is worthy of a closer look.

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That's why I think retail investors should get to know Halozyme Therapeutics (NASDAQ: HALO). This commercial-stage biotech has developed an innovative product that makes other drugs more effective. As a result, Halozyme has been able to attract capital from a who's who of pharmaceutical giants that includes Roche, Johnson & Johnson, Eli Lilly, and Bristol-Myers Squibb.

So how does the technology work and what is the opportunity ahead for investors? To answer these questions I reached out to Jim Mazzalo, Halozyme's vice president of investor relations. Below are some highlights from our conversation (which have been lightly edited for clarity).

The science

I first asked Jim to provide us an overview of the science that underpins Halozyme's technology. (Please note that ENHANZE is the name for the company's drug development platform, and that PEGPH20 is the company's lead clinical compound.)

In essence, Halozyme discovered that its enzyme can be used to alter certain microenvironments in the body. That allows other drugs to be absorbed more easily, which can increase their effectiveness.

Halozyme created a great video that illustrates how the rHuPh20 enzyme works, but here's a nice visual that helps to show what PEGPH20 can do to the microenvironment around a cancerous tumor.

Next, I asked Jim to explain the clinical benefits of the company's technology.

The opportunity 

Given these clinical benefits, Halozyme has decided to take a two-pronged approach to growing its business.

First, Halozyme reaches out to big pharma companies to convince them to co-develop drugs using the company's ENHANZE platform. Halozyme has had a lot of success with this strategy, and it now counts many big pharma companies as partners. These deals are wonderful for Halozyme because they often come with tens of millions in upfront payments (or, in some cases, more than a hundred million) plus the potential for the company to earn milestone payments and royalties down the road.

What's more, Halozyme now offers its partners (and potential partners) proof that the ENHANZE platform actually works: The company has already crossed the finish line with a handful of products that came out of its early partnered programs.

Next, I asked Jim for an overview of the drugs that have already made it to market using its technology:

What's so exciting about those seven licensing agreements is that they potentially cover 46 additional targets. This means that Halozyme has the potential to pull in a huge amount in milestone payments (and royalties) in the years ahead if the drugs work out.

So how big is this opportunity for Halozyme?

That's a big number, especially when compared to Halozyme's current market cap of $2.3 billion.

While the ENHANZE platform provides investors with reasons to be bullish, the company has a second pillar of growth: its PEGPH20 compound. Here's what Jim had to say about it:

The trial he's referring to, called HALO-301, is studying PEGPH20 in combination with Celgene's Abraxane and gemcitabine in treating pancreatic cancer. Halozyme has high hopes because data from a phase 2 study showed that adding PEGPH20 to an Abraxane and Gemzar regimine nearly doubled progression-free survival rates in patients who displayed high levels of hyaluronan.

What is the revenue potential of PEGPH20 if the trial is a success? While it's still a guessing game at this point, some analysts believe that peak sales of PEGPH20 could reach $1.5 billion in pancreatic cancer.

To add even more fuel to the fire, Halozyme has several phase 1 trials running that are studying PEGPH20's potential to improve treatments for lung cancer, breast cancer, and more. Needless to say, success in any of those indications could potentially move that peak sales number much higher.

Show me the money

While Halozyme's marketed products provide the company with several revenue streams, it is worth noting that the company is still losing money. That's not unexpected given Halozyme's status as a small-cap biotech and the large number of trials that it's running, but this is a certainly a risk investors need to consider.

Thankfully, the company recently offered some good news on this front. At the start of the year, management had estimated that its yearly cash burn would be around $80 million for the full year 2017. However, thanks to the company's recently announced partnership deals with Roche and Bristol-Myers Squibb, that forecast was recently changed to a positive operating cash flow of $50 million to $60 million for the year.

Taking it all in, Halozyme expects to end 2017 with a cash balance between $380 million to $395 million. That should be enough capital to provide the company with several years of runway.

Halozyme is a buy

Between its ENHANZE platform and PEGPH20, I think investors have plenty of reasons to bullish about Halozyme's future. I'm also encouraged by the fact that it has already proven its technology by crossing the finish line with a handful of products. That puts this company on much firmer footing than the average small-cap biotech.

While Halozyme is far from completely safe, I think that there is enough upside potential here to compensate investors for the risk. That's why the stock is a buy in my book.

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Brian Feroldi owns shares of Celgene. The Motley Fool owns shares of and recommends Celgene and Johnson & Johnson. The Motley Fool has a disclosure policy.