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Three Favorites from a Biotech Expert
03/12/2014 10:00 am EST
Biotechnology analyst Jay Silverman shares his outlook for the sector and the growing trend for large drug firms to acquire successful biotech firms. The editor of The Medical Technology Stock Letter also highlights a trio of current favorites in the sector.
Steve Halpern: Joining us today is Jay Silverman, biotechnology sector expert and co-editor of The Medical Technology Stock Letter. How are you doing today, Jay?
Jay Silverman: Very well, Steve, thank you.
Steve Halpern: We’ve had a strong year-to-date performance for the biotech sector, but many investors got scared-out by a sharp pullback at the end of February and going into early March. Should this volatility be expected and what do you see looking ahead?
Jay Silverman: Excellent, we’ve had a very healthy two step forward and one step back pattern in the Biotech stocks, so, while the end of February pullback was somewhat disappointing and somewhat sharp, in the scheme of things, it actually is following the same healthy pattern as we’ve seen in the last several months, so again, the fundamentals remain very strong. We’ve had, again, a ton of good news and we are just in the midst of a typical volatile biotech market.
Steve Halpern: Now, there were some important investor conferences occurring and, as you’ve noted in the past, these events can have a big impact on the sector, could you expand on that?
Jay Silverman: Well, there are a couple of major investor conferences during the course of the year. Of course, you are familiar with the JP Morgan conference in San Francisco in early January.
The next bigger investor conference is Cowen Conference up in Boston, which is finishing up as we speak, and Cowen also attracts every major big drug, and pharmaceutical, and biotech company, but also brings a lot of experts to the table, that’s their differentiating factor versus JP Morgan. So, again, it’s well attended up in Boston.
All the companies get to present and there’s a wonderful turnout, again, this one more east coast-based, and JP Morgan is based in San Francisco.
Steve Halpern: Now is it typical that companies will wait until these conferences to make announcements?
Jay Silverman: If they have announcements that they can control, yes, they would like to do that. Again, the time difference between JP Morgan and Cowen is not very long. It’s only about—it’s less than two months—so sometimes, a lot of people like to open the year at JP Morgan with a major announcement.
This one, again, is, sort of, how the year has started off for the companies who are selling drugs, and registering sales and earnings, and then updates on the clinical developments and, as I mentioned, Cowen has a number of scientific experts so there’s a lot of focus on new classes and what are the key clinical trials that are going on right now.
Steve Halpern: Now one thing that people have been talking about in this sector are acquisitions, as the global drug companies look to expand their pipelines, could you share your thoughts on this.
Jay Silverman: Sure, well, many of the big pharmaceutical companies, even today, are a combination of multiple smaller companies, as in the past. There are too many names to talk about, but even Pfizer (PFE) has made an untold number of acquisitions to get to the size they are.
But, more importantly, is that the innovation has really come from the small companies, so when you get the next big blockbuster drug, it’s usually coming from the small company that is either innovative, has some of the smartest people out there who are willing to take risks in developing new compounds.|pagebreak|
Just yesterday, Gilead (GILD), one of the biggest and most successful US biotechs, raised $4 billion in bonds, which, again, makes you question if they’re going to buy someone.
And Gilead, too, has been one of the most aggressive acquirers in biotech, particularly acquiring Pharmasset in 2012 for $12 billion, which probably added upwards of $50 billion to Gilead’s market cap, if not more, over that period.
So buying the right names has been a very successful strategy for driving growth in both the big pharma and even the big biotech companies.
Steve Halpern: So let’s turn to some individual names. In our last interview you were particularly bullish on Pharmacyclics (PCYC). Could you update us on what’s happened with that company?
Jay Silverman: Well, Pharmacyclics got approval and launched Imbruvica for mantle cell lymphoma and, more recently, got the label expanded to include CLL (or chronic lymphocytic leukemia), which is about a market five times as big as mantle cell.
The launch is going quite well. The prescriptions come out every week on Fridays and they continue to be higher than everybody’s forecasts.
More recently, we have raised our buy limit on Pharmacyclics and our target price to $200 because they just filed an IND (that’s an investigative new drug application), with the FDA to begin trials on an autoimmune compound.
And again, as you know, Imbruvica is cancer-based, but there was early Imbruvica data in multiple publications on autoimmune, particularly rheumatoid arthritis, and so, they basically have developed a new compound.
And today, most aggressive autoimmune disorders, such as severe arthritis, are treated by what’s called anti-TNF inhibitors that make a $20 billion market today, but are injectable drugs and, as you remember, Imbruvica is a once a day pill for cancer and most cancer drugs are injectable or infused products.
Not only is Imbruvica a pill, but it’s also quite safe, so if, I believe, PCYC has a once a day pill for severe arthritis and other autoimmune diseases, this drug could be as big, or bigger than Imbruvica itself, and I don’t think anybody is focusing on that yet because it’s still very early, and we just wrote a very big piece on that in our last issue.
Steve Halpern: So, you mentioned that you have a new price target and a new buy limit on that, what would people be able to buy that up to?
Jay Silverman: Well, we believe they could buy it up to $160, I think it’s $160 and the $200 target price, which would give you a, roughly, 25% return from $160.
Now the stock hit $155 and pulled back, again, at the end of February with the rest of the group so now you have it stopped around $140 with a $200 target and, in my opinion, because the launch is going so well, the risk horizon, or the risk scenario, for PCYC has dropped dramatically.
Steve Halpern: Now you’ve also been a long-term fan of a company called Novavax (NVAX). What’s happening there?
Jay Silverman: Well, Novavax is a development stage company in the vaccine business. They have two major programs, one in flu—both seasonal flu, and the pandemic (or the bird flu) that's been going around in China and even here several years ago—but the real crown jewel is a vaccine for what’s called RSV.|pagebreak|
RSV, as you know, is another lung disorder and it is a virus. It’s seasonal and it affects premature babies, as well as young children and elderly people.
They have an ongoing Stage Two study in 740 pregnant-age women that is going to prevent RSV, which is, again, respiratory syncytial virus, and that’s due in the second quarter and possibly as early as April, so it’s a very important event.
Last year they had three positive studies with the RSV vaccine and now they’re going into the advanced trials. This is another market that is served by a drug called Synagis, but Synagis is much more of a treatment versus a vaccine, and also, the combined markets of flu and RSV are over $3 billion.
Lastly, the company, just today, posted on the government clinical trial Web site a Phase Two study for their H7N9 pandemic flu vaccine, with BARDA, which is the government’s health and human services pandemic preparedness program.
So it is in combination and is being funded entirely by the government, so that’s another good sign for Novavax. We think Novavax can be a stock that doubles from here, in fact, the stock’s around $6.5 and our target is $13.
Steve Halpern: Now finally, I notice that you just raised your buy limit and target price for Alkermes (ALKS). What’s the attraction with that company?
Jay Silverman: Well, Alkermes has been a public company for over 20 years now and we know the management quite well.
They started out as a very typical—what we call—drug delivery company, making long-acting versions of existing drugs and taking the company that originated the drug and making the partnership and getting a royalty based on that. Now that’s been successful in, at least, five different instances.
And they actually have a very solid base of growing sales that is patent protected until the end of 2028, but, more recently, they’ve developed their own drugs, what I call, are "proprietary drugs," and they will have data for two drugs, one key drug in schizophrenia in the second quarter.
It’s going to hit Phase Three, so that’s the late stage trial, and again, this is a completely-owned drug by Alkermes, so when you own your own drug in biotech, the leverage to your long-term valuation is enormous.
We believe that, again—because of Alkermes' success in the past at developing these types of drugs—that bodes quite well for the likelihood of success for the Phase Three. It’s called AL for short and the AL data is due in the second quarter, so we believe Alkermes is in that transition now from a royalty-based company to their own proprietary drugs.
Steve Halpern: Well, it’s always fascinating to listen to you. I really appreciate you taking the time today.
Jay Silverman: It’s always my pleasure, Steve, thanks so much.
Steve Halpern: Thank you.
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