Dow Jones 8,313.13 -193.49  5:15 pm EST, Sat., August 3, 2002  NASDAQ 1,247.92 -32.08  For info, visit access.smallcapnetwork.com .  S & P 500    864.24 -20.41  To be removed, please click here .  Russell 2000   376.45 -12.76  VOLUME 02: ISSUE 53 SmallCap Digest Weekend Edition: A Safer Way To Invest In Biotech In the February 16th edition of the SmallCap Digest we proclaimed that the biotech revolution has begun.  At the time, the Nasdaq 100 had kicked out some of its most high profile internet related companies in favor of biotech.  It appeared there was a paradigm shift and the new leaders were crowned.  There was even talk that the tech heavy Nasdaq would rely on this sector for redemption.  However, from February 16th till now the AMEX Biotechnology Index referred to as the BTK has declined 31% causing some serious repercussions in the industry.  The entire biotech industry is based on the "haves" and the "have nots" rule where companies either have cash and revenues or don't.  The former has a high likelihood of survival while the latter is in constant danger of becoming insolvent.  Why insolvent?  Biotech companies by nature are cash burning machines.  Products often take many years to become FDA approved and require massive capital investments in research & development.  This means that biotechs are constantly out there raising money to keep the doors open.  Keep in mind that raising money is a grueling process that takes management's focus away from the company's core operations. Patience is a required trait when it comes to biotech investing.  It's much easier said then done when the volatility causes sever heart burns and headaches.  So how do investors lower the volatility when it comes to owning biotechs?  First, diversification is critical because as much as everyone wants to own the next Genentech (DNA) it is not wise to put your hopes on just one company.  Instead, the safer approach is to own a basket of biotechs that you think has the highest potential for success. When looking at biotech companies there are a few things to keep an eye on: Cash the company has relative to its burn rate.  How many quarters of cash does the company have before it reaches FDA approval or needs additional funding? What products are in the company's pipeline and what phases of the FDA approval process are they in. Does the company have revenue and if they don't when will they. The biggest thing to watch is the company's valuation.  Fortunately for some and unfortunately for many, the markets have basically valued medium and small sized biotech firms as if they were already dead.  This means there are some great bargains out there relative to valuations of old.   Many companies are being valued at a big discount to cash while some revenue generating biotech firms are having their core operations valued at zero.  It's gotten this bad for biotech but when the bandwagon comes back around the pain will be all but forgotten. Here are some companies we like that either have a very good risk/reward ratio based on the factors we mentioned previously in this edition: CytRx Corporation (CYTR) is a very interesting story.  The company has been around for over twelve years and once sported a hefty $50 per share price tag.  Now, at $0.61 per share the company's stock price is shade of its former self.  The company sports a market capitalization of $7.1 million with $5.2 million cash in the bank the company.  CytRx made $2.4 million in profits two quarters ago and lost $180k in the most recent quarter.  The company is essentially an intellectual property play that may strike it big if one of their licensees develops a commercialized product. The company has four employees and over $60 million dollars has been invested into the company's research and development over the years.  The company makes money by licensing its technologies to Merck & Co., Inc. which initiated a Phase I human study in HIV patients of an experimental DNA based vaccine incorporating CytRx's TranzFect technology.  For such a little company there are a lot of big names that are involved.  Dr. Joseph Rubinfeld one of the four founders of Amgen (AMGN) as well as co-founder of Supergen (SUPG) recently joined the company's board of directors last week.  In addition Dr. Louis Ignarro, Ph.D., Nobel Laureate in Medicine, also joined the company's board last week.  DATATRAK International (DATA) is in the biotech space but is not in the drug/therapy discovery business.  The company is an application service provider (ASP) that helps biotech and pharmaceutical companies with their clinical trials.  The results from these trials ultimately determine whether drugs are approved.  Currently, the majority of the data is recorded only by hand and on paper.  DATATRAK provides software and related services that allow for the electronic transmission of clinical research data for the industry. This solution helps customers in accelerating the completion of clinical trials with added quality and speed and at reduced costs over conventional paper processes.  The company is trading $2.05 per share with a $10.8 million dollar market cap with $7.5 million in cash.  Revenues were $2.2 million last year and should be in the $2.5-$3.0 range this year.  Eventually pharmaceuticals and biotechs will use services such as those provided by DATATRAK.  If the company can execute then it would be a good position to lead the market.   Praecis Pharmaceuticals (PRCS) is developing a treatment for prostate cancer.  This former Wall Street darling is now mostly ignored despite the fact the company has $238 million in cash and a market capitalization of $165 million.  Praecis is burning about $12 million a quarter which gives it approximately one and a half years until the cash position is equal to the current market cap. Praecis anticipates resubmitting to the FDA during the first quarter of 2003 its new drug application seeking approval for one if its prostate cancer drugs. The application will maintain its priority review status which was granted by the FDA when the NDA was initially submitted (the initial application did not get approved). Based on its recent meeting with the FDA, the company is considering its options regarding a subsequent submission to the FDA to support approval for the use in a broader advanced prostate cancer patient population.  Corvas International (CVAS) is focused on the discovery and development of drugs for the treatment of cardiovascular disease and cancer. The company recently slashed 40% of its work force to keep costs in check as it moves through the FDA approval process on its lead drug rNAPc2.  Corvas has approximately $101.4 million in cash and a market capitalization of $40 million.  The company expects its cash burn for 2002 to decrease to the mid-$20 million range. That gives Corvas two years to come up with some type of corporate development to win back investors.  Fortunately for the company, its strong cash position gives it plenty of breathing space. It is important to remember that although we all want big gainers in our portfolio it is the small gains that keep you in the game.  When it comes to biotech investing the key is to be diversified because no one outside of the FDA really knows if a drug is going to be approved.  Look at the debacle of Imclone Systems (IMCL) which has taught investors that no matter how good a drug may look the final approval is never guaranteed. The market has priced many of the biotechs as if they all will perish but undoubtedly a few will get their drugs approved and ultimately be purchased by a large pharmaceutical or develop into an Amgen on an Immunex.  When investing in biotech look at some of the things we have pointed out in this edition and the downside risk of investing in this sector may be substantially minimized. D I S C L A I M E R : The SmallCap Digest is an independent electronic publication committed to providing our readers with factual information on selected  publicly traded companies. SmallCap Digest is not a registered investment advisor or broker-dealer. 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