Five Prime: A Prime Play on Proteins

09/22/2014 10:00 am EST

Focus: STOCKS

John McCamant

Editor, Medical Technology Stock Letter

Following a recent meeting with top management at this firm, John McCamant—editor of The Medical Technology Stock Letter—has issued a buy recommendation for the early-stage biotech, noting that it could become a leader in immuno-oncology.

Steven Halpern:  Our guest today is John McCamant, the newsletter industry’s leading biotechnology expert and editor of The Medical Technology Stock Letter.  How are you doing today, John?  

John McCamant:  I’m doing great, Steve.  How are you?  

Steven Halpern:  Very good.  Thanks for joining us.  Let’s begin with your overall outlook for the biotech sector and some of the industry catalysts that you think could impact the sector between now and yearend.  

John McCamant:  Okay. Well, basically, Steve, we’re looking at some of the technical indicators here early in the fall as we’ve recently crossed back over the 50-day and 200-day moving averages.  Very important in biotechnology as far as we’ve had a volatile year-to-date and there’s a lot of people that watch or pay attention to the charts.  

That being said, we believe that the fundamentals are in place and that regulatory, the FDA’s been doing a good job.  The financings are in place as far as money is accessible from the Wall Street with the caveat of too many IPOs will be one of the things that will stop biotech rallies.

And then, most importantly, we continue to deliver on the fundamentals, whether it’s actually drugs to the market, but new clinical data, and whether it’s partnerships or mergers and acquisitions, we’re seeing other validations of the value being created in the biotechnology sector.  

Steven Halpern: Now, one of the things that you’re best known for is uncovering promising opportunities that are yet being discussed on Wall Street and in your latest issue of The Medical Technology Stock Letter, you talk about a company called Five Prime Therapeutics, with the symbol (FPRX).  Could you give our listeners an overview of what the company is working on?  

John McCamant:  Okay, Five Prime Therapeutics is focusing on developing a comprehensive library of all the known proteins.  Proteins are some of the main molecules that the biotechnology industry has focused on over the last 30 years, and out of 30 to 14 protein targets, they’ve created roughly 70 to 80 different drugs in oncology and immunology.  

The company now has amassed a library of 5700 proteins, Steve, so there may be some other ones that they will discover, but by amassing this library of proteins that basically no one else has this in the world.

And they’ve been putting this together for years, but this will provide them with a database, one could say, of information that is proprietary to them that they can sell and figure out ways to create new targets and new drugs for their partners.

So this is what we would call a platform that should provide—a technology platform—that would provide a multitude of drug development opportunities.  

Steven Halpern:  Now, one of the factors you emphasized in your stock selection process is top quality management.  In fact, the leadership at a company is so important to you that you often visit directly with the management there.  Could you tell us about your recent meeting with Five Prime?  

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John McCamant:  This was a really interesting meeting and basically, we’re talking about "Rusty" Williams here, who is the CEO, is probably the key player.

Our relationship with Rusty probably goes back 25 years, Steve, as he was the chief science officer at Chiron, one of the original premier biotech companies that was an outstanding recommendation in The Medical Technology Stock Letter.  We recommended it for over 15 years, and it was eventually bought out at a huge premium by Novartis (NVS).  

Then Rusty went on to cofound a company called COR Therapeutics, and COR was another outstanding recommendation for The Medical Technology Stock Letter, and it went up multiple times also before it was bought out, and the buyer in that case was Millennium.

So Rusty’s been below the radar a bit.  He’s been at Five Prime for I think roughly seven years, and they just came public last year.  I’ve been aware of the company and their technology probably three-to-four or -five years.  

One of the things we do Steve is we track the private companies as they can be competitors to our public company recommendations, but basically, Rusty has created a first-class management team, attracted a lot of great talent.  They have good money.  

They’ve been validated with some partnerships, but given the long timeline, it takes over ten years to develop a drug from discovery to the market, there’re so many variables in this space, and that’s one of the main reasons we emphasize that the management, Steve, is, as exciting as the technology is, unless you have really capable hands making these decisions, there will be some problems that we know that in drug development you can run into. 

That creates some of the volatility and a lot of these things don’t make it all the way to the market, so it’s important to have a diverse pipeline or other assets to fall back on and that’s exactly what Five Prime is developing here.

Steven Halpern:  Now, one thing I found really interesting in your latest review of the company is that you point out that Rusty Williams has had a long-term vision to create this library, this protein library that you’ve alluded to.  Could you expand on what his long-term view on this industry is?  

John McCamant:  The long-term view of the industry is that because they’ve done such a good job with the few targets they had, intuitively, as we get more targets we should really be able to develop more drugs, but also get closer to the origin of the disease process or get where we’re seeing with some of the newer drugs, we’re getting some functional or potential cures.  

Proteins are key molecules in the body and this library allows him to do deals like they did earlier this year with Bristol-Myers Squibb (BMY) where they don’t even know exactly what the target’s going to be, or a drug yet, but they’re going to do a lot of work together, and they’ll share their library.  

They’ll work with Bristol and wherever the discovery comes out of which either company, they’ll still share in the profits down the road, so they’re being able to do very early stage deals, which is unusual, and I think is a very strong validation of how exciting their platform is, and Bristol-Myers is a major player these days, and they appear to be one of the leaders, if not the leader in the emerging field of immuno-oncology, Steve.  

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Steven Halpern:  Now, I know you rarely recommend a biotech stock that’s in such an early stage of development, but in this case, you suggest that Five Prime could be poised to be a leader in immuno-oncology. So being aware of the risk, which I know you highlight for your readers, could you perhaps speculate on what is the long-term potential with this company, if things go right.  

John McCamant:  If things go right, the platform becomes validated and they share some of these discoveries or the products, have the partners develop them, and they get royalties.  

As they advance just a little further along, they will be in a position to start owning those drug development candidates further into the cycle and potentially keep them all the way to the market.  

That would make them a fully-integrated pharmaceutical company and at that point, the stock would probably be up five to ten times, so this is what we see for them going forward and the Bristol-Myers deal was done before we recommended the company and showed the tremendous promise.  

The deal was done on very good terms and then Bristol-Myers also took an equity investment in the company, just really showing us that they believe in the long-term value, but this is a significant investment, and of that on Rusty and his team, and the power of proteins within the biotechnology sector.  

Thirty years this business has been going on here, Steve, and we believe over the next 15 to 25 years most of the fruits or promises that we had out of biotechnology will be delivered and particularly as we’re seeing with functional cures.  These new drugs are doing much more than treat patients, Steve, they’re really getting at the heart of disease.  

Steven Halpern:  Finally, I know that in your model portfolio you very often will hold a stock for many years.  Do you foresee that this could become one of those companies that you would still be following years from now?  

John McCamant:  That’s a great question, Steven.  We will have to approach that as time goes on, but given that the two previous companies Rusty’s been at, we raised those recommendations and followed them for five, ten, 15 years, it’s quite possible, and this is why we want to get in early when we believe the fundamentals and we know the company has outstanding potential.  

As I said, we don’t go after these companies at early stage very often, but I anticipate this to be a long-term winner for us, Steven, particularly with this kind of experienced management at the helm and with this very exciting protein library, it’s a very nice mixture. We’d like to basically think of Rusty as a tier one biotech CEO hanging out in a tier three, where the logical intuition from there is he’ll turn this into a tier one biotech.  

Steven Halpern:  Well, we really appreciate you taking the time, today.  It was a fascinating discussion.  Thanks.  

John McCamant:  My pleasure Steve.  You have a great day.  

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