A Trio of Biotech Favorites

04/06/2015 10:00 am EST

Focus: STOCKS

Jay Silverman

Analyst, Medical Technology Stock Letter

Our guest today is Jay Silverman, a leading biotechnology sector analyst and editor of The Medical Technology Stock Letter. He updates us on the acquisition of one of his long-standing recommendations, the impact of this deal on the biotech space, and a trio of additional ideas for long-term investors to consider.

Steven Halpern: Our guest today is Jay Silverman, biotechnology sector analyst and editor of The Medical Technology Stock Letter.  How are you doing today, Jay?

Jay Silverman: I’m great, Steve. Thanks a lot.

Steven Halpern: Well, first off, kudos are in order.  In previous conversations with MoneyShow, you’ve highlighted Pharmacyclics (PCYC) as one of your favorite biotech investments, and, in fact, have recommended the stock several times for our listeners at prices around $100 a share. Now the stock is about $250.  Could you update our listeners on the developments and what caused the sharp price increase?

Jay Silverman: Certainly.  It’s definitely been one of our longer-term recommendations. PCYC is being acquired by Abbvie (ABBV) as many people know for $261.25 and just today we received the merger documents or acquisition documents.

Investors will have the choice to get all cash payouts when the deal is completed or 58% cash and 42% in ABBV shares, which I think also is very attractive.  It’s a fixed price, so the combination will always equal $261.25 and it’s not dependent on the fluctuations in either PCYC and Abbvie share prices right now.

Steven Halpern: Now, I’m certain you’re happy to see such a significant price gains, but you also mentioned in the past you would hope to hold the stock for many years, so I assume you have some mixed feelings about the buyout?

Jay Silverman: I do, in a sense that we’ve been following this company for two or three years, or so, at the Letter and I’ve personally followed it for about six years and they did have a non-cancer opportunity at the company over time, which I thought could have doubled the stock back then, so yeah, there are some mixed feelings, but clearly it’s been one of our most successful recommendations, so we’re pretty happy.  

Steven Halpern: Could you explain to our listeners how buyouts such as this will impact the overall sector and what your overall outlook on biotechnology is at the current time?

Jay Silverman: Certainly.  There’s a very big merger wave in biotech takeover. Takeovers are occurring regularly of all sizes. Teva (TEVA) is going to acquire a biotech company called Auspex, which is a $3.2 billion acquisition—not the size of the $21 billion Addvie’s paying for PCYC—but still, a nice sized deal and it does several things.  

First of all, it returns a lot of cash to investors who, in many cases, recycle the cash back into biotech stocks, so that’s a good thing.  It reduces some other supply of the stocks out there, and on the other hand, there has been a number of IPOs coming out the other end. One goes away and five come out. That’s one thing.  

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It also keeps a lot of generalist money in the sector; people who just are looking for the next buyout. Sometimes that adds to some volatility when things turn poorly like they did about a week ago when we had a 10% correction in the sector, so it adds to volatility.

Finally, the valuations that the drug companies are paying, and the biotech companies for these blockbusters, and future blockbusters, it’s really unbelievable and unprecedented, and that also makes you wiry how much longer it can last.

Steven Halpern: Turning to some of your other recommendations.  Could you tell our listeners about Novavax (NVAX), another longstanding recommendation of yours?

Jay Silverman: Yes, they are a vaccine maker and a very exciting technology because they use what’s called a VLP, a vaccine like particle, to produce vaccines very rapidly, and also lower cost, and finally they are able to manufacture significant quantities in a shortened time frame as well.  

That’s very important; more recently they’ve presented data this weekend on their Ebola virus vaccine, which this trial was actually the second one in nonhuman primates. It was successful, and it was conducted, not by Novavax which the first trial was, but by the NIH.

The race for an Ebola virus vaccine is very important, but more importantly is how quickly can you manufacture a large quantity and Novavax is definitely in the lead for that and soon the FDA will hold a panel in May to discuss Ebola virus vaccines and we’re certain some of this data will be there.  

Novavax also, as you know, is a leader in all viruses, serious viruses, such as the flu and RSV, which is, in our opinion, their crown jewel, and they are not partnered with anybody, so that creates them as a great takeover potential.  We’ve liked Novavax for a long time and very recently we raised our buy limit from six to 11 and our target price from 13 to 16.  

Steven Halpern: Could you tell us a little about The Medicines Company (MDCO), another firm that’s been on your buy list for quite a while?

Jay Silverman: Sure. It’s actually been, I’d say, one of our less successful recommendations and the majority of that has been because of the patent litigation for their lead drug, Angiomax, which is a cardiovascular drug with Hospira (HSP), who is developing a generic version.  

In early March, they actually had a hearing for the Supreme Court to decide on the validity of Medicines Company’s patent and that’s been an overhang on the stock.  

In the meanwhile, while the patent situation has evolved in the last three or so years, The Medicine Company has added a number of new products that are getting introduced as we speak around the world, and a couple of potential real blockbuster drugs for the next three to five years, including one of those PCSK-9 cholesterol drugs that is a hot topic in biotech with Amgen, and Regeneron (REGN), and Sanofi (SNY).  

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If this is the period to buy the stock while the shares reflect uncertainty of the Angiomax patent—which is not going to be really around for even longer than four years if they win the patent—and that’s really not a growth driver.

The growth driver is all of these nine to ten new products that are being introduced globally and they’re all synergistic with the hospital-based focus of Medicines Company.  

To me, it’s one the better managed companies in biotech. I’ve known Clive Meanwell for about 20 years, the CEO, and we think this time—as long as there’s an overhang reflected in the stock on the uncertainly of the patent—the real value there is in the pipeline and that is really developing as we speak.  We have a buy under 42 and a target price of 60.

Steven Halpern: Finally, let’s turn to a recent new recommendation Anthera Pharmaceuticals (ANTH). What’s the story here?

Jay Silverman: Yes, well, Anthera, I’m very excited about.  I describe them in a nutshell as like a phoenix.  This is one that has actually had some disappointments in the past, and, of course, the stock looks like that and now they’re trying to rise again as they take their lead compound—blisibimod—or B-mod for short, and develop it for lupus, and there are two Phase III trials on the way.

The company took two interim looks, one in January and one earlier in March, both of the two Phase III trials were recommended to continue as planned and both had already enrolled more than half of the patients in the study.  

They will both run blind for the second half next year, which is not too far away, a little over a year or 15 months from now and with a valuation closer to $100 million with over $50 million in the bank, the risk-to-reward to us is unheard of should this become a successful drug and they also have a second drug behind it for cystic fibrosis patients for their nutritional needs, which they licensed from Eli Lily (LLY) last year.  

Here you have a company that’s entirely out of favor with one of the lowest market caps you could find for two to three phase III trials and I believe there’s a likelihood of successes rising after the interim looks—and there’s no need for capital—and I do think this is the one that can really give you that kind of biotech return that makes it really exciting—and I mean on success—10 to 20 times where the stock is now and still not look expensive at those levels.

Steven Halpern: Well, we really appreciate your insights today. Thank you for joining us.

Jay Silverman: Thanks, Steve. Great talking to you.

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