Biotech Stocks Start Strong in 2012: John McCamant
Source: George S. Mack of
The Life Sciences Report
After a three-and-one-half year slide, biotechnology stocks
started 2012 with a powerful move to the upside. Is this an
arms-acquisition race for products in development, or is it about
excellent fundamentals that are just getting noticed?
Medical Technology Stock Letter
Editor John McCamant sees a bit of both, and in this exclusive
The Life Sciences Report,
he has selected a few names that he believes will rise to the
The Life Sciences Report:
John, I'm looking at a basket of biotech stocks that I follow,
and it is down about 60% since the beginning of August 2008, and
this even includes the recent strong uptick. What is going
I would say I'm surprised that it's only down 60%, given that
this has been far and away the worst economic period of our
lifetimes. The fundamental question is: did these companies wreck
60% of their value over the last three years? Is this industry in
its totality worth 60% less? Was it extremely overvalued in 2008?
We could debate that. But, I would certainly argue that over the
last three years with so many advances in the clinic and the new
products we have now, we have created value. It just hasn't been
reflected in the stock prices.
Are we in a true secular shift?
Well, it is just not that simple because we're not in an
environment where we are going to have clean shifts. We are now
in a big political year, and there is global upheaval. But before
we started the economic downturn, we were in a secular shift with
a rapidly aging population and a tremendous amount of wealth
being created. It's not just in the United States but also in
China and India. People are living longer and the demand on
healthcare is basically one of mankind's greatest challenges
going forward. The business model has been to focus on research
and development (R&D), the engine that drives new
pharmaceuticals. But today, the emphasis is to cut to try to
create efficiency. This is probably truer today than it was three
years ago. The cost of bringing a new drug to the market today is
anywhere from $1 billion (
) to $4B. These are very large numbers.
Biotechs are more efficient than big pharmas, aren't they
I can guarantee you most of the biotechs do it all more
efficiently. You have companies more focused basically because
the capital markets have been very difficult, and you have to
come in with good stories and allocate your capital well. This is
no market for an IPO of a company that just has a great idea.
Do you believe the recent upward movement has anything to do with
Yes, these are unprecedented markets we are coming out of, and
one needs to pull away and look at the big picture. What are the
underlying fundamentals? Are you and I going to be using drugs?
Once we have the jobs situation and our economy in halfway decent
shape, healthcare really starts to rise near the top of what
people are going to spend money on and what they actually
We have seen a couple of interesting acquisitions recently with
Bristol-Myers Squibb Co. (BMY:NYSE) acquiring Inhibitex and
Gilead Sciences Inc. (GILD:NASDAQ) getting Pharmasset Inc.
(VRUS:NASDAQ). Do you think these have anything to do with the
kind of optimism we're seeing in the biotech markets?
Well, I think it's a reflection of all of the above. So, if you
are a larger company and you are making money, do you feel a
little better than you did in the last two years? I would say
absolutely. Your business has weathered most of this recession,
and now your goal is to build your business.
Gilead paid a huge chunk for Pharmasset, about $11B, but it
was considered a leader. The story we are hearing is that there
were four other companies that didn't get that asset. It's
impossible to put this into some sort of chart, data or
algorithm, but there is a psychological tipping point where these
large pharmaceutical companies and big biotechs that have huge
sales forces and infrastructure need drugs to sell, and they need
to fill their pipelines.
There have also been two recent acquisitions in the cancer
space. Micromet Inc. (MITI:NASDAQ) is being bought by Amgen Inc.
(AMGN:NASDAQ), and another small private company, Avila
Therapeutics, is being bought by Celgene Corporation
(CELG:NASDAQ). So, it looks like we are getting some acceleration
The other thing is that over the last few years in these
difficult capital markets, the big pharmaceutical and the large
biotechs were just being a little more patient. And, when they
are all patient together, they can slowly work thorough the deals
and get the ones they want. Once they miss a deal or two, they
should become more aggressive, and aggressive bidders will drive
more acquisitions and at higher prices.
Is this recent M&A wave going to stimulate IPO activity?
IPO windows don't really exist anymore, but investment banks will
continue to put those little seeds in our heads. The IPO model in
biotech was flawed. The IPO was a way for venture capitalists and
investment banks to dump their investments on the public. Very
few people will say that, because no one really speaks for the
public retail investor. But we do. IPOs will always be there, but
they have to be good. IPO windows are horrible because they are
not discriminatory. The IPO should always be a discriminatory
process where a company becomes public when it is ready. In the
past we had open windows with good and bad things coming in at
the same time. And that's just not a good model.
John, can we talk about the small and midcap companies you are
recommending to your readers currently?
Certainly. I will start with the two bigger names and then some
that are smaller cap. The two larger names are Incyte Corporation
(INCY:NYSE) and Pharmacyclics Inc. (PCYC:NASDAQ).
Incyte just got approval in November for a drug called Jakafi
(ruxolitinib). It's a Janus-associated kinases (JAK1 and JAK2)
inhibitor that is approved for myelofibrosis, a bone marrow/blood
cancer. Jakafi is the first drug ever to be approved for this
indication by the FDA. It is partnered with Novartis AG
(NVS:NYSE), and it looks like the companies have a solid launch
In addition, Incyte has almost the same molecule (LY3009104)
with one slight tweak that differentiates it from Jakafi in a
phase 2b trial for rheumatoid arthritis (
) with partner Eli Lilly & Co. (LLY:NYSE). Data are coming
mid-year, and if they are good, we believe we'll find that this
stock has been very much underappreciated. In phase 2 data to
date, this product, a small molecule oral drug, has shown the
same potency as injectable TNF (tumor necrosis factor)
inhibitors, such as large molecule monoclonal antibody Humira
(adalimumab) from Abbott Laboratories (ABT:NYSE), which is now
the world's biggest selling drug at $13B/year. Now $20B of TNF
inhibitors are being sold per year, but remember these anti-TNFs
are injectable drugs with high side effects. The Incyte/Lilly
drug (LY3009104) would be a pill, and it has huge potential. We
want to compare apples to apples, and so we compare its ACR
(American College of Rheumatology) scores for RA to the TNF
inhibitors, and they are really good. An oral drug would be a
huge difference maker for RA patients over an injectable.
Incyte is up 15% since January 2. What can we expect going
It still has some room to go, we believe. It's definitely on the
M&A list and what we've seen historically is that big pharma
prefers to buy some of these biotechs after they get their first
drug approval. This company and its assets are significantly
derisked and pharmas may be willing to pay for it. We are very
excited about this program and we believe in this stock.
What about Pharmacyclics? It's up in a big way since the
beginning of the year.
Pharmacyclics has a great team and a really good CEO in Robert
Duggan, who owns 25% of the company. Part of the reason the
shares move so much is there is just not a lot of stock available
for purchase. The company has a B-cell lymphoma drug (PCI-32765)
in phase 2, and in December a deal for the product was made with
Janssen Biotech, which is the cancer unit of Johnson &
Johnson (JNJ:NYSE). It is one of the largest and best cancer
deals we have ever seen with a $150M upfront payment and a 50/50
profit/loss split worldwide. But the upfront $150M plus
regulatory and development milestones could total as much as
This drug already works in a couple of lymphomas. It may work
in things like non-Hodgkins lymphoma (NHL), which is the target
of Rituxan (rituximab) from Genentech, a unit of Roche Holding
Ltd. (RHHBY:OTCPK) and Biogen Idec Inc. (BIBB:NASDAQ). This is
potentially the most exciting molecule in hematology/oncology
that we have seen. Heme/onc has been a hugely successful area for
Celgene, Genentech and others. This is really one of the sweet
spots in cancer investing. Duggan has brought in some very good
former Genentech people who helped guide the development of
Rituxan. Longer term, these B-cell drugs could also work for RA,
and that is why you are seeing a lot of excitement about
Pharmacyclics. It's one of the most exciting names in biotech
What's so interesting for me is that this drug, PCI-32765 has
been very successful in treating lymphoma patients who have been
pretreated with other products such as with Velcade (bortezomib)
from Millennium Pharmaceuticals, a unit of Takeda Pharmaceutical
Co. Ltd. (TKPYY:OTCPK). The response in these pretreated patients
has been dramatic.
It's bigger than that because people are clearly seeing that this
might work in NHL and RA and might be a much better molecule than
Rituxan. It looks like an absolute homerun with its great
efficacy in the lymphomas. That's why it's key to have these
B-Cell people from Genentech on the team. They understand these
molecular pathways and what is going on here better than anyone
else in this space. And it's a small molecule that can be used
orally, another great advantage.
What small caps are you talking to investors about?
We have three smaller ones. OncoGenex Pharmaceuticals Inc.
(OGXI:NASDAQ) is a very interesting, underfollowed and
underappreciated Canadian biotech that has licenses to the two
lead cancer drug candidates from ISIS Pharmaceuticals Inc.
(ISIS:NASDAQ). Custirsen (OGX-011) is the lead drug. It is in two
large phase 3 trials for castration-resistant prostate cancer.
It's partnered with Teva Pharmaceutical Industries Ltd.
(TEVA:NASDAQ), the world's largest generic drug maker, which is
going to be a big player in generic chemotherapies. Teva is now
making a huge push into branded pharmaceuticals.
Custirsen has shown excellent synergy with Taxotere
(docetaxel) from Sanofi SA (SNY:NYSE). It actually helps in
resistant cancers and gets into pathways where resistance
develops and overcomes the resistance. It may work in many of the
different types of cancer where other prostate cancer drugs are
all fighting for market share now, including Provenge
(sipuleucel-T) from Dendreon Corporation (DNDN:NASDAQ). If
Custirsen works in other cancers, OncoGenex Pharmaceuticals will
be a home-run stock (Teva is starting Phase III in lung cancer
What is another small cap?
We believe Sangamo Biosciences Inc. (SGMO:NASDAQ) is a leader in
gene therapy, but management won't say gene therapy because the
term has such a negative bias. It recently did a great deal with
Shire Plc. (SHPGY:NASDAQ) for preclinical targets and got
double-digit tiered royalties. Note that I said
targets. That's about as good as you're going to get in biotech.
The key here is that the technology can literally change a
monogenetic, a single gene, defect and have it be permanent. The
partnership with Shire was Sangamo's first human therapeutics
deal, and so that validates the human therapeutics side of its
business. The company also has very good deals with Dow
AgroSciences, a unit of The Dow Chemical Company (DOW:NYSE) and
also with Sigma-Aldrich Corporation (SIAL:NASDAQ) on the tools
side. Sangamo is the leader in its space, and its intellectual
) has been fully validated.
The company has a very interesting HIV program. Do you know of
the Berlin man? The Berlin man has HIV, but his immune system is
fully intact. He got another copy of the CCR5 gene by accident
during a bone marrow transplant. What Sangamo is doing is finding
some patients with these copies. Investigators are changing the
CCR5 gene in an early phase 2 trial and showing that they can
rebuild the immune systems of HIV patients. This is what we could
call a functional cure for HIV. The patient would not take
antiviral drugs for a lifetime but would instead have a gene
therapy procedure that would allow the patient to fight off the
virus with his own immune system.
Has this shown proof of concept?
It has not shown broad placebo-control proof of concept. But it
has shown proof of concept in humans. The other thing with
viruses is that you can demonstrate very clean endpoints as we've
seen with HCV (hepatitis C) and HIV. These are measurable. We'll
have data throughout the year on that and there is a point where
that could get very exciting.
Shares are up 38% in the last 12 weeks.
The Shire deal was a big for the company, and that's why shares
went basically from $3 to over $4.
Was there one more you wanted to tell me about?
The last company I want to talk about is Aastrom Biosciences Inc.
(ASTM:NASDAQ). We believe it to be the world's leader in stem
cells. The company is about to enter a phase 3 trial that has
been signed-off on by the FDA for critical limb ischemia (
) where blood flow to the legs and feet is reduced and patients
end up having legs amputated. This is an autologous procedure,
meaning that the patient's own stem cells are taken from the
body, in this case from hip marrow, and then processed, expanded
as a multicellular dose and then reinserted into the patient in
20-minute procedure. This autologous cell technology was
pioneered by Dendreon with its Provenge therapy. It's basically
about modifying a patient's cells outside the body and then
giving them back to that same patient.
Why is it important to use an autologous system?
By using your own stem cells you avoid all the IP problems, for
one, and second you also avoid all of the embryonic stem cell
religious and political controversies. In addition, the FDA is
comfortable with personalized treatments like this, whether it be
bone marrow grafts or Dendreon's Provenge cancer-treatment model.
If this works and if Aastrom gets approval, we could be using
these types of procedures further down the road in many of the
other potential stem cell areas, including some of the more
exciting ones such as regenerative medicine where we're really
starting to see things happen.
An autologous graft could be a two-edged sword. You avoid
immunotoxicty because patients receive their own cells back. But
couldn't those cells contain the same genes and produce or allow
the same disease phenotype to reappear at a later time?
That's why the company is running the trials, to show safety and
efficacy over time. Most of the failed wound healing drug
candidates focused on a single protein, but at the end of the day
the body uses many different proteins in the wound healing
process. So, one of the underlying theories is that by using stem
cells we might get the full cascade of wound-healing proteins
instead of just one specific protein. That could make a big
difference. Off-the-shelf therapies make sense in lots of ways,
but they have been extremely tricky with a lot of issues. There
are still so many IP problems, and that scares me as an investor.
Aastrom can bypass so much of that.
John, do you have an investment theme?
Well, I know a lot of people are talking about and focusing on
platforms, and a couple of our names fit that theme. But, we are
really looking for classic, innovative biotechs. We are looking
for real fundamentals, but also good management teams that can
execute. Right now we are seeing tremendous opportunity for
investors and traders.
Many thanks to you, John. I have enjoyed it.
My pleasure, George.
John McCamant joined the
Medical Technology Stock Letter
as associate editor in 1987 and was named editor of this
leading investment newsletter in August 2000. McCamant has spent
25 years on the frontlines of biotechnology investing. As an
equities analyst for the American Healthcare Fund, he uncovered
investment opportunities and guided investment strategy. At
Burrill & Company, a San Francisco-based private merchant
bank, he was a lead in raising $75M for a venture capital fund.
Mr. McCamant has established an extensive network that includes
contacts throughout the investment banking and venture capital
communities. His expertise in biotechnology investments is a
subject of media interest. He is frequently consulted and quoted
by The Washington Post, Business Week, Reuters, Bloomberg, CBS
1) George Mack of
The Life Sciences Report
conducted this interview. He personally and/or his family own
shares of the following companies mentioned in this interview:
2) The following companies mentioned in the interview are
The Life Sciences Report:
none. Streetwise Reports does not accept stock in exchange for
3) John McCamant: I personally and/or my family own shares of the
following companies mentioned in this interview: None. I was not
paid by Streetwise for participating in this story.
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