Best Bets in Biotech

07/11/2013 9:30 am EST

Focus: STOCKS

John McCamant

Editor, Medical Technology Stock Letter

With the US facing an aging population, biotech is about to enter its golden age, says John McCamant of Medical Technology Stock Letter.

Steven Halpern: We’re here today with John McCamant, editor of the Medical Technology Stock Letter, which has been covering the biotech sector for over 30 years.  In fact, the letter began at a time when few even knew what biotechnology was.  Hi John, could you tell us a little about the background of your newsletter.

John McCamant: Yes Steve, the newsletter has been in existence for over 30 years.  I have been in the biotech business and worked off and on for the investment newsletter for over 25 years. 

I recently joined with a partner, Jay Silverman, one of the top analysts on Wall Street in the biotech industry and Jay has been in the industry for over 25 years himself. 

It’s our belief that it’s been 30 years of the industry and sometimes that’s how long it takes for some of the technologies to sort themselves out and create critical mass, Steve, and we think we’re at a golden age of biotechnology investing going forward. 

Steven Halpern: Are there a few key areas that you look for when assessing a biotech stock such as management or their research abilities?

John McCamant: Great question Steve.  We think management at the end of the day is probably the most unique in key asset to these companies.  It’s been historically with other technology companies that it is the people, but what we’re seeing in this 30-year history now is we’re seeing executives and C-level people that have had success at other companies.

The CEOs that are joining these companies that have been sold or taken over have really been successful, these second wave of companies that are coming are voting with their feet and we’re starting to see really good experienced management show up at some really interesting companies, Steve.

Steven Halpern: Biotechs, in general, have had a really strong run over the past year with the biotech index doing twice as well as the overall market.  Do you expect that this outperformance will continue?

John McCamant: Well, we do not expect that type of performance, but we expect to outperform the markets going forward in the context of healthcare, which is a very important component of the economy, particularly specialized healthcare with some of the new drugs. 

The demographics are very strong as far as we got with an aging population of baby boomers, etc., and you throw in the India and the Chinas of the world with these emerging middle class and aging populations there is a tremendous appetite for new and innovative drugs. 

Biotechnology is the leader in innovative drug development and big pharmaceuticals will go in and buy them either as buyouts or in individual partnerships and fill in their pipeline. 

Steven Halpern: Also, at the beginning of the year, you selected two stocks as your favorite picks for the year.  They were Coronado (CNDO) and Pacira (PCRX), and both are now up over 75%.  Are you still bullish on these companies and could you give an update to those investors who bought them at the start of the year?

John McCamant: Certainly.  PCRX, we are a little more conservative on this point.  It has hit our target, it’s clearly a stronghold, and we will be reevaluating it shortly. 

Their product is approved; the long-acting pain killer, and they’re running numerous other trials, particularly things like cosmetic surgeries where this can be a huge asset, and we think that this approved drug will have very nice growth going forward and we’ll do some additional evaluation. 

Coronado is a very unique company, which is developing a parasite or a beneficial worm that will work, we believe, to reset people’s immune systems and provide an effective long-term treatment for autoimmune disease.  The symbol is CNDO.  Our buy limit is $8; it’s just trading a little bit over $8.  It began the year, I believe, under $5 Steve. 

We would certainly be purchasers of Coronado here.  What we hear from many of the big professionals on the street is they’re going to wait for the phase II data, even if the stock were to go to $15 or $20 on the data they would be buyers on good news. 

We’re going to take the risk.  We may manage it in some way, shape, or form with some put, but we’re going to take the risk going into the phase II event later this year. 

If that phase II data is positive, which we have a strong belief it will, this is a potential $10 to $20 billion product as far as it would replace things like Humira, an $11 billion drug, the top selling TNF. 

Steven Halpern: There has been a lot of media attention in the cancer-related area, and I know you followed this area closely for many years.  In fact, one of the companies that you’ve been particularly bullish on is Pharmacyclics (PCYC).  I know you started following that over a year ago and the stock has moved from the high teens up into the 80s.  Do you still find that attractive?

John McCamant: Great question Steve.  It’s right at our buy limit of $90.  We’ve raised that buy limit, I believe, four times in the last year-and-a-half from the original of $17 in January 2012. 

Basically Ibrutinib, which is their lead drug candidate, could be filed shortly imminently with the FDA.  What that will cause is that we expect it to have a very fast approval.  It’s potentially the poster child for breakthrough therapies, which is a new category that the FDA has created, which may bring drugs even faster than fast track. 

We’re excited about that process; it could happen shortly.  Wall Street expects this filing late this year early this year filing.  If filed this summer, that really will force those analysts to increase their models and estimates and the stock could blow through 100 quite easily, so we’re very happy and think people should be purchasing PCYC below 90.  It’s quite possibly the best and safest cancer drug we have ever seen. 

Steven Halpern: That’s certainly an optimistic outlook that sounds exciting.  Another favorite of yours is ISIS Pharmaceuticals.  Could you tell us a little about that company and its lifeline?

John McCamant: You bet.  ISIS is the pioneer and leader in the field called antisense.  Basically their technology allows them to go after genetic targets and turn off or on a specific process in the body. 

It’s very specific and is starting to prove some very interesting data and has in fact produced their first drug Kynamro, which was approved earlier in the year. 

The cancer pipeline at ISIS is starting to look quite interesting also, so ISIS has a deep portfolio of different drug candidates, and if each one shows some efficacy in a clinic, it adds value to the rest of the portfolios.  Every drug in the process is based on the exact same chemistry; they just changed the genetic target. 

This antisense technology is really starting to look like something very exciting.  They just put out some very good data what is on basically called APO-C3, it’s a cardiovascular target.  It’s never been successfully targeted by big pharm.  They look like they’ve done it and they have more data coming there. 

In the cancer program, they’ve partnered a drug candidate called STAT3, a very important component in cancer pathways. 

Sanofi is the partner there and will have some proof of concept phase II data later this year, Steve, at the American Society of Hematology conference.  That’s basically the second biggest cancer conference after ASCO in May. 

In addition, ISIS out-licensed their first two cancer drugs based on all this same chemistry, which are in phase III and phase II development to a company called OncoGenex (OGXI).  ISIS will receive some nice royalties on that, but OncoGenex is in a position to get 20 plus % royalty from their partner Teva (TEVA). 

We think that’s basically a stealth investment and few investors realize that this is the de facto cancer pipeline for ISIS, which is turning into a multibillion dollar drug development powerhouse.  We think the OGXI is a real sleeper. 

They’ll complete phase III enrollment later this year and we’ll get phase III data early next year and that’s definitely a binary event and we could see this double or triple on the positive cancer data that’s extremely undervalued coming into the news. 

Steven Halpern: You’ve given our listeners a lot of very interesting things to think about.  We want to thank you for joining us.

John McCamant: My pleasure.  Our website is www.bioinvest.com and we re-launched that earlier this year, Steve, so we would encourage people to take a look and see some samples of some of our work there.

Editor's Note: This interview was conducted on July 9, and the following day, Pharmacyclics (PCYC) filed a new drug application for Ibrutinib ahead of forecasts.  We contacted John for a last-minute update:

"In our view, the potential blockbuster drug will be on the market well before the end of Q3:13, 6-9 months ahead of current expectations. Just as impressive but quite a big surprise to us, the company filed for the broad Chronic Lymphocytic Leukemia (CLL) market today also.

"This opens up Ibrutinib for its major market opportunity approximately 18 months ahead of schedule by even our guess. As a result, we expect all Street forecasts to move substantially higher today.

"We remain bullish on PCYC shares. It will be fun to watch the sales of biotech’s next big drug—from Phase I to market in 4+ years. FDA approval on the way.  PCYC is a buy under $90 with a target price of $125."

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