Biotech Bets: A Mispriced Trio

11/09/2015 10:00 am EST

Focus: STOCKS

John McCamant

Editor, Medical Technology Stock Letter

Recent volatility has created an environment for biotech stocks in which company fundamentals are mispriced relative to their stock prices, according to John McCamant. Here, the editor of The Medical Technology Stock Letter discusses the current state of the biotech market and highlights a trio of well-positioned stocks currently being undervalued by the market.

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

John McCamant:  Great Steve, how are you?

Steven Halpern:  Very good.  Now you’ve been involved in this area since the 1980s so perhaps you’re used to the volatility, but it’s been a particularly challenging period for investors lately. Now, you emphasize that—despite this volatility—the sector really remains in great shape.  What factors are keeping you bullish while so many others are running scared?

John McCamant:  Well, I think what happens is people become extremely price sensitive and reactive technically, Steve, but underlying every single one of these charts of a company would be what we would call the fundamentals.  

What are the products or the drug candidates?  Where are they in the development cycle?  What kind of intellectual property do they have?  Have they been validated by third party or Wall Street?  

A lot of variables. When we add those up, in particular, we just kind of go through the bigger ones, regulatory, the FDA.  We have a company named Acadia that just got an acceptance today, a priority review.  Those are the type of things that we’ve seen consistently out of the agency for the last few years and is it an accident that it happens to coincide with what we think is not just really a biotech bull but more of a coming of age.  

Financially, particularly with low interest rates, we’ve attracted a lot of generalist money to this space.  It’s a growth sector that also represents healthcare so we bring in multiple different sectors of potentially interesting investment in this space.  There’s cash, the fundamentals are strong, and the last is probably most important.  

Where we come in, Steve, you and myself, is we have to dig through these hundreds of companies and find the ones that are the best investments.  We believe that’s what we do best, and quite honest, over the last three years, you could have bought indexes and made a good amount of money in biotech.  

Going forward that will always be the best way to play this sector. Particularly if we can find specific names that have—what we would call—at balanced risk-reward ratios.  That’s where we want to emphasize our investments.

Steven Halpern:  As you’ve alluded to, there appears to be a disconnect between company fundamentals and their stock prices.  Are these periods just part of the long-term cycle that biotech investors need to take into account and is this typical for what you’ve seen over the years?

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John McCamant:  We may be getting a little more staying power out of our, I would say, cult of personality or some of the high-flying IPOs over the last year, maybe the Bluebirds, the Kites, and the Junos.  They’re holding most of their valuation regardless of where they are in the development cycle.  

What we do know is that these development cycles are basically ten years to discovery to get a drug to the market so that they’re basically being viewed through a more positive lens, even rose-colored glasses.

But, in the bigger picture, you’ve got companies like Novavax that have been around years and have mixed reputations, maybe deserved or not, where we look at the underlying fundamentals and what have they done at execution recently. We can get pretty excited as we think that there’s a lot of value that hasn’t been represented there in a couple of these different names, Steve.  

Steven Halpern: Turning to a couple of specific names, in your latest research you suggest that the risk-to-reward potential at OncoGenex Pharmaceuticals (OGXI) is exceptional now.  What’s the attraction you see?

John McCamant:  We’re testing a lead drug in a subset of prostate cancer patients. This is a compound that was previously partnering with Teva Pharmaceutical (TEVA) that has failed in a Phase III Trial.

But as we’ve seen, particularly when you go into some of the subsets, sometimes they didn’t maybe enroll the right patient population for that drug candidate.  In particularly, in oncology, that’s very important.  

They have a second Phase III ongoing now that also was paid by Teva before they basically gave the drug back because they’ve completely changed their emphasis.  What we’re getting here, Steve, is potentially a registrational trial.  

If this data is good they will be in over 400 patients and will be in position to file for approval, when normally at this stage—particularly with their valuation below $100 million—they’d be running an exploratory Phase II on that subset of patients.  What we are getting is basically a free Phase III Trial from Teva.  

What we also believe is that the previous trial was run in healthier prostate patients who had not failed different lines of therapy so what we have now is patients that have failed some of the front line therapies, and also, are being chosen for poor prognostic factors.  

Which we think can make a difference, and when you add in the valuation, the stock basically sells at cash or below cash, Steve.  In addition, there’s another compound behind this in Phase II.

Steven Halpern:  You’ve also been a long-term fan of Alkermes (ALKS) and you’ve suggested that both their growth profile with the company as well as the potential take-over value is on the rise.  What’s the story here?

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John McCamant:  Well, what we’ve...the big story with Alkermes is its transformation, Steve, from a royalty-based specialties pharma drug delivery company with really neat technology where we can take somebody’s drug, Risperdal, reformulate it, and create instead of a daily pill, or some monthly, or every couple of month injections.  

Over the last two, three, maybe five years they have been working very hard at creating proprietary molecules and they have a wholly-owned pipeline.  It just had its first approval with more compounds coming behind it where we believe it is not reflected in their MPV as they’ve been basically viewed as this royalty-based model.  

As these wholly-owned compounds increase in value, that in particular actions are attractiveness as an M&A as you get 100% of economics of any of those drug or drug candidates that are wholly-owned.

Steven Halpern:  Now, I know a lot of our listeners would like me to ask you about Novavax (NVAX).  Now this was a stock you picked in January as your favorite for 2015, and while it’s up a very respectable 20% plus so far this year, it’s also down sharply from the highs it reached in the middle of the year.  Could you explain what’s behind this roller coaster ride and what do you see for the company looking forward?

John McCamant:  Great question, Steve, so, timing, timing, and timing.  Phase II data that was positive in the RSV vaccine probably came out at one of the worst periods it could have at the low points there in late July and early August.  Also, there’s some misinformation campaign, and in this industry, misinformation can work over time.  

There was a bear raid on the stock.  We’re not big fans of that type of action, but we do believe over time the fundamentals and good data will rise above that. We’ve had a significant amount of pressure on the stock with some basically misinformation spread regularly.  Going forward, some of this RSV data will be resented shortly, Steve.  

They continue to execute, since all of these things have been started, other trials, and this is one of the, we think, a very valuable asset.  The other thing is that in very difficult biotech markets, there’s some very strong lines.  This was considered only a Phase II product, a long ways from the market.  Well, there’s some misperception there probably, but they sell the Phase II names before asking questions.  

They will start Phase III shortly, Steve, and could have an approval Phase III or filing for FDA approval by this time next year with what we believe is a blockbuster vaccine, the RSV vaccine, there’s multi-billion dollar potential, wholly-owned.

Steven Halpern:  Is it safe to say that despite the volatility over the year, you’re as optimistic looking long-term as you were at the start of 2015?

John McCamant:  Absolutely, Steve, and that is with a firm belief and not just in underlying fundamentals but execution by management, strong balance sheet, and tremendous opportunities going forward in their markets.

Steven Halpern:  Again our guest is John McCamant of the Medical Technology Stock Letter.  As always, thank you for your time.

John McCamant:  My pleasure, Steve.  

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