The biotech bull market is far from over due to several secular
and macro drivers like an aging population, cash-rich "big pharma"
facing patent cliffs forcing them to buy new drugs, and the
incredible success of small companies doing innovative disease
One such small company making headlines lately is
(EPZM), a clinical stage biopharmaceutical company creating
personalized therapeutics for patients with genetically defined
cancers. Epizyme has built a proprietary product platform that the
company uses to create small molecule inhibitors of a 96-member
class of enzymes known as histone methyltransferases, or HMTs.
HMTs are part of the system of gene regulation, referred to as
epigenetics, that controls gene expression. Genetic alterations can
result in changes to the activity of HMTs, making them oncogenic
(cancer-causing). By focusing on the genetic drivers of cancers,
Epizyme's targeted science seeks to match the right medicines with
the right patients for a personalized approach to cancer treatment.
Phase I Data Encouraging
Writing for TheStreet.com this week,
David Sobek summed up the pre-clinical data
and early clinical observations from an ongoing Phase I trial...
"Epizyme reported the first clinical data on its blood cancer
pipeline candidate EPZ-6438 at the ASH Lymphoma Biology Conference
last week. The drug is designed to block a specific enzyme, EZH2,
which when mutated, is involved in development of certain cancers,
including forms of non-Hodgkins lymphoma (NHL).
"The first look at EPZ-6438 came from an early-stage (phase I)
study, but was encouraging. Two of the four NHL patients reported a
partial tumor response, a third patient had stable disease. The
responses came from relatively low doses of EPZ-6438 and the safety
profile was clean enough to allow Epizyme to continue the study
using higher doses of the drug."
In response to this data and a surprise 13% earnings beat last week
(reported a loss of only $0.40 vs consensus expectations of $0.46),
Wedbush analyst issued an updated report where they reiterated
their OUTPERFORM rating on EPZM shares and their $52 price target.
"Our PT of $52 per share is derived from applying 8x and 15x
multiples to our 2019 estimated sales and royalty revenues,
respectively, discounted by 25% annually back to YE:14."
No Profits in Sight
As with many clinical stage biotech companies, positive earnings
are a long ways off for Epizyme. In fact, the company is expected
to burn more cash next year than this year. Here are the detailed
EPS tables that show how the two covering analysts have been
adjusting earnings over the past 90 days...
Speaking of cash to burn, the company had $232 million at the end
of the recent quarter and provided guidance of $170 million at year
end, sufficient to last until at least mid- 2016. Wedbush analysts
noted, "The cash runway does not take into account any additional
milestone payments from partners, and we note that we expect EPZM
to receive at least $10M in milestones (from Eisai for the start of
the Phase II EPZ-6438 trials) for the remainder of 2014."
Eisai is a Japanese pharmaceutical company. Partnerships with large
biopharma companies are essential to emerging biotechs who need
much financial support for heavy R&D in the early stages.
In his recent article, Sobek indicates that "Outside of EPZ-6438,
Epizyme is developing a drug with
(CELG) and has three other drug candidates still in preclinical
testing which are part of a partnership with GlaxoSmithKline."
High Risk, High Reward
Currently there are so many Zacks #1 Rank (Strong Buy) and #2 Rank
(Buy) stocks in the Biomedical/Genetic industry group that it ranks
in the top 30% of all industries. This is quite a feat for a group
with 180 companies in it and it is driven by the secular and macro
trends I mentioned at the top of this article.
EPZM first became a Zacks #1 Rank on July 9 when the stock was
trading around $30. It subsequently shot up to $40 after their
recent earnings surprise. As with all emerging biotechs, there is
significant risk around clinical trials and FDA events on the long
road to profitability.
As these companies advance through Phase II trials, the
possibilities increase for wild price swings, often without
justification from a change in the earnings outlook but merely from
speculation about a take-over by a bigger biopharma franchise.
But checking the estimate tables above periodically can keep you
abreast of the earnings trends where analysts suddenly see
significant upside in sales projections, which might make these
stocks an attractive opportunity for the "bio speculator" part of
Another element I like to track is institutional buying. In Q2, the
biggest buyer was QVT Financial adding 531,900 shares to boost
their stake to over 1 million. They were followed by T. Rowe Price
starting a new position with 524,531 shares. This not heavy
accumulation but it is something to keep an eye on.
Kevin Cook is a Senior Stock Strategist for Zacks where he runs
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