Meet Dr. Duarte: Smart Tech Goes Biotech

05/18/2015 10:00 am EST

Focus: STOCKS

Investing Daily's Smart Tech Investor—the tech stock-focused advisory—has just expanded its coverage to include biotechnology. Here, we talk with biotech expert Dr. Joe Duarte, who has just has joined the newsletter's editorial team to focus on this sector.

Steven Halpern: Our special guest today is Dr. Joe Duarte, a medical doctor, author of the book, Successful Biotech Investing, as well as the latest edition of Trading Options for Dummies. How are you doing today, Joe?

Dr. Joe Duarte: Great. Nice to hear from you, Steve.

Steven Halpern: You've also just become the newest member of the Editorial Team over at Investing Daily's Smart Tech Investor, which has also just expanded its tech focus to include biotechnology. Could you tell us a little about the decision for Smart Tech to expand into the biotech sector and how your personal investment philosophy fits in with this new role?

Dr. Joe Duarte: Sure. I started with biotech probably 20 or 25 years ago when I wrote Successful Biotech Investing, and at that time, the craze—or the major dynamic—was the Human Genome Project and there was a lot of promise in the sector based on that information, but, as with biotech, everyone knows it's kind of here-and-there and hit-and-miss and everything else.

But it looks like after a couple of decades, the biotech companies have finally got it to where they're making really excellent use of that data, and a lot of the companies that were in the development stage 20 years ago, are finally starting to deliver on that promise and STI clearly noticed that and decided that-

Steven Halpern: For our listeners, the STI you're referring to is Smart Tech Investor? Correct?

Dr. Joe Duarte: Correct. Smart Tech Investor recognized that and decided that this was a good time, and fortunately for me, I was available and sort of came to the same conclusion at the same time, so it was a really good development at a good time. I'm very excited about the opportunity and it looks like we're going to be able to make this go for a good while.

Steven Halpern: Now, you note that when assessing biotechs, the investor needs to step away from the more traditional valuation criteria and add a healthy dose of both risk tolerance and patience, could you expand on that?

Dr. Joe Duarte: Sure. Biotech, by design, or by development over the years, a great deal of what goes on depends on the FDA approving products; so, there's a great deal of volatility that is inherent to the sector because of that—sometimes companies have hits, sometimes they miss—if you're an earlier stage company that's trying to make a breakthrough, a lot depends on whether the FDA decides to approve your drug or not.

A lot of those companies don't make money and so traditional price/earnings ratios and EBITDA—those kinds of things—don't really make sense; so you have to have a little bit of a fuzzier kind analytical method, which includes things like cash on-hand, what is management up to, and what are the results of the most recent clinical trial, and basically, you have to gate the odds for those companies.

Now bigger companies like Amgen (AMGN) and Gilead (GILD), and companies like that that are established, they're more traditional healthcare pharmaceutical companies, so you can always value them fairly close to what you would value the rest of the market.

Steven Halpern: Now, for your first featured biotech report at Smart Tech Investor, you took a look at a company called Medivation (MDVN), which focuses on the potential of its drug called Xtandi for prostate cancer. Could you tell us a little about this company and the potential for this drug?

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Dr. Joe Duarte: Sure. Medivation is the prototypical company that STI is focusing on. Its valuation is a little bit on the upper end of our target range, but it does meet the criteria. It's a company that has one product and the product sales are growing rapidly domestically and internationally and it's a great, interesting product against prostate cancer.

Unfortunately, the cancer cells grow faster in the presence of testosterone, which is, of course, the male hormone, and Xtandi blocks the receptors for testosterone and thus slows the growth of the cancer cells.

The key to Medivation now is the effect of Xtandi with and without chemotherapy, and there's been some encouraging data on that, but that's still to be worked out.

But I think based on what we know right now, the drug has a fairly good future and certainly they're expanding their sales worldwide and the results of the clinical trials, and so on, are very encouraging.

Steven Halpern: Now, to tie this back to the comments you made earlier about your valuation methods in the area, could you give us a quick overview of how you would assess Medivation on a fundamental and a technical standpoint?

Dr. Joe Duarte: Well, certainly. First of all, do they have a product? Yes, they do. Is the product growing and doing what it's supposed to do? Yes. Are sales expanding? Yes. More importantly, are the insurance companies and third-party payers who run the healthcare system, paying for this drug?

And the answer to all of those things is yes. If you look at the valuation, trailing price/earnings ratio is 36 and the company is making money and is giving good guidance; so, for a growth stock, a P/E ratio of 36, especially in biotech, when you put all those other things that I talked about earlier together, it's in pretty good shape.

Steven Halpern: Now, interestingly, you also highlight a second company that offers investors an additional way to play the potential of Xtandi and that's a Japanese company called Astellas Pharma (JP: 4503) (OP: ALPMY), which trades on the Tokyo Exchange. How is this company involved?

Dr. Joe Duarte: Astellas is basically the distributor for Xtandi, and if I'm correct, they have two different models. Basically, if they sell the drug overseas, they pay Medivation royalties and if they sell the drug in the United States, it's a split of the profit. The problem with Astellas is that it also has a more diversified and mainstream pharmaceutical profile.

So, Astellas is competing with the Pfizers and the J&Js of the world, which are huge, behemoth companies, and so, you know, Medivation is a bright spot for it, but some other areas may or may not be meeting expectations and so Astellas is kind of lagging the market right now, and if I was going to choose between the two of them, at this point I would probably decide on Medivation.

Steven Halpern: Again, our guest is Dr. Joe Duarte of Smart Tech Investor. Congratulations on joining the group over at Investing Daily and thank you for joining us today.

Dr. Joe Duarte: My pleasure.

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