The Life Sciences Report: John, in February we discussed secular moves in biotech. How has your performance been since then?
John McCamant: It has been very good. For the calendar year we are up 71%, and last week The Hulbert Financial Digest ranked us number one for both the past 12 months and calendar year. Our February prediction that this would be a good year for biotech has materialized.
TLSR: Indeed. On Sept. 13, the iShares NASDAQ Biotechnology Index (IBB:NASDAQ) was up 48% from one year ago. How far along are we in this trend?
JM: We see this as a rising tide, in which you are just beginning to see some differentiation. It is no longer a matter of simply buying the space or the funds. We are at a point where individual companies will need to provide specifics, catalysts and deliverables. Going forward, I think the indexes will have a bit of a problem, because investors have become more selective.
TLSR: That is an interesting way to put it. We had the secular move and now it is a bottom-up story.
JM: Or what we refer to as a stock-pickers' market.
TLSR: Eight months ago, an investor could not buy an uptick in a biotech stock no matter what the news was. Is the market ready to react positively to good news in a company's pipeline these days?
JM: For the most part, yes. But there are different types of good news.
Companies often sell off on U.S. Food and Drug Administration (FDA) approvals, the rationale being that the company may have approval but lack experience in managing the logistical nightmare of launching and selling a new drug.
The good news needed to get biotech stocks moving is specific fundamental development, such as clinical data that exceeds expectations or delivers on a promise. Surprise news can produce substantial movement. Then an investor has to ask whether the company can maintain the gains that appealed to him or her in the first place.
"Our February prediction that this would be a good year for biotech has materialized."
The other thing to consider is that while healthcare is considered a safe investment in a recession, biotechs are now seen as more of a defensive play. When CNBC's Jim Cramer pushed a few biotechs as defensive stocks this summer, we found that positive, because it adds investors to the space.
Investing in drugs for an aging population is the bottom line, as far as a demographic trend goes. The power of the biotechnology underlying these new technologies is incredible, but you need a real market to sell into. Going forward, we think the demographics are excellent.
TLSR: If companies can sell off on FDA approval, what is the biggest catalyst now?
JM: A company putting out phase 2 or phase 3 data that might not have been expected, or exceeds expectations, is something investors can really sink their teeth into.
It is our job to get people into stocks before FDA approvals. If we see a company sell off after an approval and we still like its prospects, that may be the time to buy.
If we are in a company when it gets good phase 3 data—before it goes for FDA approval—the stock could be up three or even five times before it gets to the FDA panel.
TLSR: When you are doing due diligence, what is the first feature you look for in a company?
JM: Obviously, it is the product's technology. Is it exciting? Does it address a good market?
That is followed very closely by looking at management. Given the complexities of drug discovery, technology, science, bringing the product to market, partnerships and FDA regulations, you need really smart people running the company. You need more than a scientist; you need someone with skill and a breadth of experience.
This is an advantage in horrible markets. In a recession, there aren't as many mediocre CEOs left in biotech companies. The companies we look for are leaner, meaner and execute better than ever before.
TLSR: Would you rather see a non-scientist heading up a biotech company?
JM: It does not matter. Scientists can be very good at running companies.
TLSR: This may be the most important question I ask you: Is biotechnology a reasonable place for retail investors?
JM: Absolutely. No question.
Healthcare is a very large portion of our economy, and biotechnology companies are sustainable businesses going forward. Biotech is merging more and more with computer technology and diagnostics. The technology is powerful, and it is specialized. You need to understand what is going on and stay abreast of developments, particularly with so many potentially negative—or positive—catalysts out there.
"One thing to consider is that while healthcare is considered a safe investment in a recession, biotechs are now seen as more of a defensive play."
My father and I have been in this space for more than 30 years. Over those years, we've noted that people who subscribe to our newsletter or buy biotech stocks often get involved because of disease or cancer within their families. They start by doing research into treatments. Investing in the sector is driven by patients, as well as doctors and researchers.
TLSR: Let's talk about some specific investment opportunities, starting with Pharmacyclics Inc. (PCYC:NASDAQ). You are up 150% on that since we talked in February.
JM: We recommended Pharmacyclics at $17 back in January. We raised the initial buy recommendation three times. Our current buy limit is $70, with a $105 target.
The primary driver has been the belief that its drug development candidate, a Bruton's tyrosine kinase (BTK) inhibitor called ibrutinib, will work on lymphomas, including non-Hodgkin's lymphoma. Now we are seeing signs it could be an active molecule for multiple myeloma. If that pans out, we may be looking at a drug with huge potential in the multibillion-dollar multiple myeloma market.
TLSR: Are the new indications for Pharmacyclics driving its stock, or does it have something else in the pipeline that might be imparting value?
JM: There are some pipeline opportunities with small molecule BTK inhibitors for autoimmune disease. That would be a huge leg up for the stock, at another 100 points.
TLSR: And the B-cell lymphomas are a great trail to follow.
JM: Exactly. When Rituxin (rituximab) was in development, it was a niche product that cost Genentech (a Roche Holding AG (RHHBY:OTCQX) company) $50 million ($50M) to access in phase 2. It was expected to work for a few B-cell lymphomas. Now it is one of the world's largest-selling drugs and sells into both the cancer and autoimmune markets. We think Pharmacyclics' drug could be bigger than Rituxin.
We are hearing positive things from patients and chat rooms about Pharmacyclics' drug. The enthusiasm is not just about the treatment, but also the company, and is coming from all sources. We are looking at 80–90% implied upside on our new target price.
TLSR: What is your next idea?
JM: We are looking at Coronado Biosciences (CNDO:OTCBB). We think it has huge potential.
The company's therapy is based on what is called the hygiene hypothesis, which states that as first-world countries have gotten hyperclean, the immune systems of its inhabitants have become weaker by not being exposed to different types of foreign matter. Investigators believe that pig whipworm eggs could be the ultimate treatment for autoimmune diseases.
Coronado's phase 2 data on treatment of Crohn's disease is due from Europe and the U.S. next year. It would be an absolute home run if this treatment also works in multiple sclerosis and other autoimmune diseases. The New York Times recently ran an editorial talking about the pig whipworm's potential to treat autism. It is also being discussed as a therapy for type 1 diabetes. We are talking Holy Grail stuff here, all from a simple whipworm.
Coronado already has FDA sign-off and a really good manufacturing system. The FDA has wrapped its arms around this parasite: It is potentially very safe, in addition to possibly addressing billion-dollar markets. Coronado will not have a lot of catalysts until next year, but the upside is tremendous.
TLSR: But the stock is down 22% over the past six months.
JM: Coronado raised money in that timeframe, and the stock has held steady above the offering price of $5.
TLSR: You can't patent laws of nature or products of nature, such as a worm or a parasite. How does the company patent something so that it actually has a product with value?
JM: That is where the manufacturing component comes in. That is where value is created. Basically, you must follow the trail of the parasite. You need to ensure no living parasite is left in the body, and that it cannot be excreted from the body alive. Coronado has all these bases covered. It could also patent the whipworm for specific disease indications. This is a classic case of building a picket fence of patents.
In addition, Coronado has an experienced management team. Some of its leaders come from Indevus Pharmaceuticals Inc., where management had a very good track record of making money for shareholders by being creative with its assets.
TLSR: Do you have another story to share?
JM: Anthera Pharmaceuticals Inc. (ANTH:NASDAQ) is a company with a market cap below $100M and plenty of cash. It is ready to go into phase 3 trials with a B-cell molecule product (A-623). Yet the company appears to be misunderstood by the market.
Anthera's B-cell molecule product, targeting lupus, appears to be an improvement over GlaxoSmithKline (GSK:NYSE) Benlysta (belimumab). Anthera's phase 2 dose-ranging data was complicated and lacked statistical significance. However, the company found that the drug candidate is very active in sicker patients. Anthera has designed the clinical trials and obtained sign-off from both the FDA and the European regulatory authorities to start phase 3 late this year or early next year. We should get some additional data at the American College of Rheumatology (ACR) meeting in November.
The phase 3 trials, the ACR meeting and a good management team provide excellent catalysts in the coming months.
TLSR: Back in March, when Anthera blew up after the failure of its cardiovascular drug, the company laid off half of its workforce. Did that solve the cash drain problem?
JM: Yes, it did. We really like companies that bite the bullet and cut back when they don't need resources. Management made that decision within a week; that was impressive.
TLSR: Will Anthera need a partner for its phase 3 study?
JM: Not yet: It has two years' cash on hand. However, Anthera could partner before phase 3 starts, now that they have received sign-offs from both the FDA and Europe. The data that will be presented at ACR will also help fuel the partnership process.
TLSR: What is your next idea?
JM: Although it has run into a problem recently, Incyte Corp. (INCY:NASDAQ) is one of our favorite companies. Its drug, Jakafi (ruxolitinib), targets a rare blood disorder. Some investors think it will work in just one type of cancer. In truth, it is already in phase 3 for a second type of cancer. It is a very active molecule.
"Investing in drugs for an aging population is the bottom line, as far as a demographic trend goes."
By the ACR meeting, Incyte will have 24-week data for its lead pipeline candidate, which we expect will be even better than the 12-week data. Incyte's molecule would compete directly with Tofa (tofacitinib), Pfizer Inc.'s (PFE:NYSE) JAK-inhibitor (janus kinase inhibitor), which should receive FDA approval in the next six months. The pills will go after the anti-TNF (tumor necrosis factor) market, which runs into the tens of billions of dollars.
Incyte is a powerhouse, focused on developing small molecules, including some follow-on JAK-inhibitors. It has strong management. Its CEO Paul Friedman was president of DuPont Pharmaceuticals Research Laboratories. He created the HIV drug Sustiva and sold it for a huge multiple to Bristol-Myers Squibb Co. (BMY:NYSE).
Incyte's main problem was not being able to provide perfect guidance to the Street. Wall Street put Incyte in the penalty box after not meeting earnings expectations. It is very difficult to provide guidance on cancer drug sales in the first year. We can live with that. We believe Incyte will manage the Jakafi numbers. We would not be surprised to see the stock hit $25 again and go up to $50 or $60.
TLSR: Incyte typifies the classic problem of the small biotech company. It has to go after the most unmet need as a target for a molecule—in Incyte's case, myelofibrosis—and then the launch is slow.
JM: There might have been some pent-up demand because there were some very sick patients. There has been no good treatment for myelofibrosis for 30 years, and now some skeptics say the drug works only on symptoms.
Well, one of the symptoms is a spleen that grows to the size of a basketball. The drug reduces the size of the spleen significantly. That relieves a symptom that makes life almost unlivable. It also bodes well for early, broader use in this patient population
Incyte has had some bears against it, but the stock price has been on a nice roll over the past year. The company has shown it has the right stuff by delivering a drug to the market. Pfizer and Incyte went head-to-head in the JAK-inhibitor space. Which company got its drug approved first? Incyte.
What's more, Incyte's INCY-050 molecule is in phase 2b for rheumatoid arthritis in partnership with Lilly. We think this may be a better molecule than Tofa for autoimmune disorders.
TLSR: To clarify, is the Incyte 050 product, the small molecule, a JAK inhibitor?
JM: Yes. Basically it is Jakafi with a teeny tweak. Incyte modified it so it could be priced into two different markets. That smart decision was made by management more than 10 years ago.
TLSR: Why is the market not giving the stock any value for this program? What percentage does the company get?
JM: I believe Incyte will receive a 30%-plus royalty on the deal, which gets close to 50/50 once you take out the costs for manufacturing and sales.
TLSR: And Incyte's $2.3 billion ($2.3B) market cap is small enough to reap some terrific gains.
JM: Absolutely, when you consider that markets worth $10–20B have not yet been factored into its value.
TLSR: Do you have another name?
JM: OncoGenex Pharmaceuticals Inc. (OGXI:NASDAQ) is in a bit of a disconnect, but shows promise.
The company has no near-term catalyst because the two phase 3 prostate cancer trials for its OGXI-011 (custirsen) molecule will run for two years, as will another trial for non-small cell lung cancer. Teva Pharmaceutical Industries Ltd. (TEVA:NASDAQ) is its partner in all three trials.
Since we last talked, OGXI-047 has shown some good phase 2 data. It looks active in prostate cancer, and potentially in bladder cancer. We see a pipeline developing here, along with a very comfortable cash position, especially given that Teva pays most of the freight for OGXI-011.
"The companies we look for are leaner, meaner and execute better than ever before."
Another reason OncoGenex might be underfollowed is that it is using antisense molecules licensed from Isis Pharmaceuticals Inc. (ISIS:NASDAQ). Isis has had a hard time convincing the Street, scientists and investors that antisense technology is going to fly. Its lead drug Kynamro (mipomersen), intended to treat very high cholesterol, comes before the FDA panel next month.
If Kynamro receives FDA approval, I suspect investors will start to wonder about other companies with antisense molecules. At some point, OncoGenex will get significant attention. A near-term catalyst might be a partnership for OGXI-047. Otherwise, we will have to wait until 2013 for data. But if OGXI-011 starts delivering in phase 3, OncoGenex could be a five- or tenbagger.
TLSR: Clusterin, a cell survival protein overproduced in several types of cancer, is OGXI-011's target, right?
JM: Yes. Some people pooh-pooh OGXI-011 as a chemosensitizer, but that is wrong. It can treat cancers that become resistant to drugs like Taxol (paclitaxel), reopening the pathways or breaking down the resistance. This is a big issue for people who have been treated more than once for cancer.
If OGXI-011 works in synergy with other prostate or lung cancer drugs, it could be a home run. And, in the bigger picture, Teva is talking about a branded generic strategy. If OGXI-011 works, Teva will sell it worldwide, potentially with generic Taxol. This will provide real cost savings and potentially tremendous cancer treatment.
TLSR: Any parting words of wisdom for our readers?
JM: It is great to have the whole biotech group pick itself up, but we need to be cautious going forward in terms of stock selection.
If Europe blows up, it will have repercussions. Here in the U.S. the upcoming elections are less of an issue, because they are almost here. The FDA is doing its job a bit better. For example, Medivation Inc. (MDVN:NASDAQ) just got approval for Xtandi (enzalutamide), for treatment of metastatic castration-resistant prostate cancer, three months early. The FDA is clearly working faster to grant drug approvals.
Companies are out there and able to raise money. Not always on the best terms, but the money is there. While still cautious, we see this as the dawning of the age of biotech.
TLSR: John, thanks for your time and your insights.
John McCamant joined the Medical Technology Stock Letter as associate editor in 1987 and was named editor of the investment newsletter in August 2000. McCamant has spent 25 years on the frontlines of biotechnology investing. As an equities analyst for the American Healthcare Fund, he uncovered investment opportunities and guided investment strategy. At Burrill & Company, a San Francisco-based private merchant bank, he was a lead in raising $75M for a venture capital fund. McCamant has established an extensive network that includes contacts throughout the investment banking and venture capital communities. His expertise in biotechnology investments is a subject of media interest. He is frequently consulted and quoted by The Washington Post, Business Week, Reuters, Bloomberg, CBS and MarketWatch.
Want to read more exclusive Life Sciences Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Exclusive Interviews page.
DISCLOSURE:
1) George S. Mack conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: Isis Pharmaceuticals Inc.
2) The following companies mentioned in the interview are sponsors of The Life Sciences Report: None. OncoGenex Pharmaceuticals Inc. is not affiliated with Streetwise Reports. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) John McCamant: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.
