Biotechs: Catalysts, Approvals and Takeovers

05/16/2016 10:00 am EST

Focus: HEALTHCARE

Bret Jensen

Editor, Biotech Gems

Bret Jensen, editor of Biotech Gems, looks at a variety of catalysts that can impact stocks in the biotechnology sector, from the release of drug trial data to merger & acquisition activity.

Steve Halpern: Our special guest today is Bret Jensen, a leading expert in the challenging biotechnology sector and editor of Biotech Gems. How are doing today Bret?

Bret Jensen: Great Steve; thanks for having me on.

Steve Halpern: Well thank you for taking the time. You’ve recently pointed out that the biotech sector has been in a major rut, but that perhaps the worst is over. Can you share your outlook for this sector in general?

Bret Jensen: Yes. The sector’s gone from probably a little bit of in a bubble last summer after about a year and a quarter of huge gains to be deeply oversold, but we’re starting to see some stabilization as far as some of the earnings from some of the big cats.

And we’re starting to see an uptick of merger and acquisition activity, especially around a company called Medivation (MDVN), which seems to be igniting a bidding war from some of the heavy hitters in the industry, such as Sanofi (SNY) and AstraZeneca (AZN), potentially Merck (MRK) as well.

Steve Halpern: Now you’ve emphasized how important catalysts are to biotech stock analysis. Could you explain some of the types of catalysts you look for when
researching opportunities in the biotech universe?

Bret Jensen: Oh absolutely. I think that one of the things you need to go ahead and be aware of is when upcoming trial milestones are going to go ahead and come out, as well as what is called a PDUFA date, which is meeting with the FDA to get a drug approved. Those are two of the key catalysts that investors can easily find.

Steve Halpern: And those types of catalysts are often very significant now, so even more so than other areas. The results of those catalysts could really either be a boon or a bust for a stock correct?

Bret Jensen: Especially in the small and the mid cap space where a company can have so much riding on one key trial result or a decision by the FDA. These types of events can pop a stock 30%, 40%, 50%, 60% in either direction.

Steve Halpern: Now you cover the full spectrum of biotech companies from the most speculative to leading blue chips. Could you share an idea or two from the heart of that spectrum that you would consider to be your core large cap ideas?

Bret Jensen: Oh absolutely. I think all investors should have at least 50% to 75% of their overall biotech holdings in the large cap core positions, just to lower
volatility within their overall portfolio.

Two stocks that really stand out to me right now are Amgen (AMGN) and AbbVie (ABBV). Both have good growth, both in earnings and revenue. Good pipeline. It’s a very solid balance sheet. Reasonable valuations and they pay nice dividends as well.

Steve Halpern: Now you’re also known as an expert in small caps and did you even publish a newsletter called Small Cap Gems. Sticking with the biotech theme, are there any small cap stocks that you find particularly compelling?

Bret Jensen: With the huge bear market, I could probably talk for the next hour on quite a few that look good from a long-term basis, but there’s one that recently came into the portfolio called Ardelyx (ARDX). It’s about a $300 million market cap company. It has about $180 million in cash.

That’s going to go ahead and fund three key trials -- one around a compound that’s being investigated both for GI symptoms, as well as too much phosphate in the blood stream.

Another that’s being investigated for too much sodium in the blood stream, a condition called hyperkalemia, which has become kind of a hot part of the market with Veltassa, the first new drug out for that market in some 50 years.

Anyway, they should be able to go ahead and get all the way through trials and beyond. They have the possibility of three NDA filings by the end of 2017, so you have a lot of stocks on gold and even one of those being successful would be worth much more than the market value of the stock currently.

Steve Halpern: Now, you have emphasized that you never buy a biotech stock based solely on the possibility of being a buyout candidate. However, with that as a background, you also do look at take out potential as a factor. Are there any speculative names where you might think there’s a potential chance for a buyout in the future?

Bret Jensen: Oh absolutely. In the mid cap space, you have Acadia Pharmaceuticals (ACAD), about a $3 billion market cap. This had its first drug approved, Nuplazid, for psychosis associated with Parkinson’s disease, which could be a $1 billion peak sale drug.

That, in and of itself, is up on phase 2 trials for the same type of condition in Alzheimer’s and schizophrenia, which may bump that level up to $3 billion in annual sales. They do have 500 million in cash. The can go in alone, but they have to build a sales force from scratch.

A deal with a larger player makes a heck of a lot more sense; even at a significant premium it would be accretive. I watch out for Biogen (BIIB) as a possible suitor. They have just announced they’re going to spin off their hemophilia franchise, which should be worth $5 billion to $6.5 billion, according to Citi.

They want to go ahead and go deeper into neurology type diseases, which includes candidates in Alzheimer’s and Parkinson’s, it’s almost a marriage made in heaven, so I wouldn’t be surprised if that combination happens in the foreseeable future.

Steve Halpern: Now finally, just given the overall speculative nature of biotechs, how important is diversification for investors in this area?

Bret Jensen: Absolutely critical. My rule of thumb if I was constructing a $100,000 portfolio from scratch, I have at least five good core large cap, like Amgen and AbbVie that would get $10,000 to $15,000 a piece.

And I’d have at least 10 to 15 smaller caps diversified across different focus areas and they’d probably get $2,000 to $3,000 apiece -- depending on the risk preferences of the individual investing.

Steve Halpern: Again, our guest is Bret Jensen, editor of Biotech Gems. Thank you so much for your time today.

Bret Jensen: Thank you for having me Steve.

By Bret Jensen, Editor of Biotech Gems

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