Five Companies in the Casey Portfolio Worth Watching:
Source: George S. Mack,
The Life Sciences Report
Biotech and medtech expose investors to rapid growth in
healthcare innovation. In this exclusive interview with
The Life Sciences Report,
Chief Investment Strategist Alex Daley of
Casey's Extraordinary Technology
matches science to unmet needs to bring big ideas and big returns
The Life Sciences Report:
How do you find the companies that you recommend?
We look for the science first. There are a lot of companies in
the biotechnology field. Some pin the number at more than 7,000
biotech companies, public and private, in the U.S. alone. That is
a lot of data to sort through. The sector possesses a great mix
of hype and expectations, which can bewilder investors at times.
We focus on finding the right therapies first, the right
management team second, and the right investment payback timeline
third. There are many very promising compounds in university and
private labs. We start with the scientific literature and the
data, looking for proofs of compound capabilities. We try to
focus on those companies that are going to provide the most
compelling investment opportunity in the near term, meaning in
the next two to three years maximum, for our subscribers.
You look at the science first, and then you want to see
market-moving activity occur in the short term. Is that
Absolutely. You can have a public company with a potentially
great therapy in the pipeline but the product might realistically
be a decade from the market. That might be OK for some investors,
but it's just not right for us.
Do you have a theme within healthcare currently?
Our theme is to focus on markets with the most profit potential,
and those shift over time. We concentrate on a couple of large,
underserved markets. We focus heavily on cancer because over the
course of the last decade or so, laboratory progress in oncology
has been absolutely incredible. However, advancement in actual
patient care has not kept up with what has been going on in the
laboratory. We are seeing a backlog of great opportunities with
huge potential in new targeted therapies that focus on any one of
the 140 or so conditions that comprise cancer.
Another focus is the orphan disease market. Orphan diseases
can be underserved for any number of reasons. One is simply that
the disease has never gotten research funding. Just as with
anything, research funding is to some extent a popularity
contest. Things go in and out of style, and governments tend to
support certain core areas. Diseases can be out of the limelight
even though there is no standard-of-care therapy. A disease can
also be an orphan because we simply don't understand how the
disease works-and even if we do understand it, we may not have
the tools to build a therapy. That is especially true of genetic
diseases. We like to focus heavily on genetic diseases.
Our third and fourth areas of focus are on what we call the
nonregulated or less-regulated spaces in genetic
testing/diagnostics and medical devices. These fields make it
easier to treat patients with chronic diseases, both to determine
what treatments will be effective and to actually administer
Are you saying that in addition to cancer and orphan diseases,
you like diagnostics and medical devices that may not require
long periods of time for development and approval the way drugs
Yes. We are constantly looking at what is available in terms of
the science and how that market is being served today.
You have written that biotech is ripe for speculation. Why is
A couple of things make for a good speculative market. First,
there is a lot of opportunity in the market. The average public
investor can get involved in a large number of companies. If you
only had 10 companies in a market, it would be very difficult to
speculate. A large number of players also enables you to spread
your risk. When you are dealing in speculative markets, the last
thing you want is only one or two positions. No matter how good
your research is, you're bound to get something wrong. You want
to diversify across a reasonable number of investments, and we
like large markets for that reason.
When a drug trial fails, do you expect a company to have a
lingering hangover, even if there are secondary candidates in the
pipeline? Do you find opportunity in these situations?
There is no question that whenever a trial fails-or doesn't meet
its primary endpoint or other expectations-there is hangover.
That can be a huge potential opportunity for investors in some
cases, but certainly not in all.
For example, a company may have conducted a poorly designed
trial, in which the primary endpoint was the wrong one. The
therapy doesn't cure a disease but does significantly extend
patient survivability. It could be very successful in the right
You may also find a company that has a large pipeline, but
only one of its lead candidates makes up the bulk of market value
for the company. If that drug fails, investors panic and run
A third type of likely hangover that can be advantageous is
just a delay. We saw this with
Amylin Pharmaceuticals Inc. (AMLN:NASDAQ)
, which made a significant return for our investors over the last
year. Amylin was three years late to market with its
next-generation diabetes drug, Bydureon (exenatide). However,
despite all of the setbacks, the company had a solid drug with
absolutely great efficacy data. It was much more convenient for
patients, being a once-a-week injection versus a once-daily
injection. Everything was going for it. There was a large market,
existing experience in that market and a strong management team.
Very little was going wrong for the company other than the time
delay. Just by being willing to wait it out, we were able to make
a significant return for investors.
How do you decide when a company is overvalued?
Deciding that a company is overvalued, especially at the extreme
end, is often much easier than finding an undervalued company.
Generally, when a company gets really overvalued, the market cap
gets out of whack with the company's market potential. You saw
Human Genome Sciences Inc. (HGSI:NASDAQ)
, which had huge run-ups in its stock price over a number of
years. I believe that the market cap hit a peak somewhere around
$7 billion (
). Even if it had a 100% success rate with its entire pipeline,
the company never could have justified the market capitalization.
For it to be in line with the average large therapeutic company
trading at about three times gross revenue, the company would
have had to pull in $2.5-3B/year. The company simply didn't have
the pipeline to bring in that kind of revenue.
The math is usually pretty simple. If a company with a large
market cap is successful with a reasonable percentage of its
pipeline, can its revenue and earnings bring it in line with its
peers eventually? If there is no way, it is clearly
Can you speak about some of the companies that you are
We tend to invest on a 24- to 36-month time horizon. A good
example of a company that has been in our portfolio for a year
but hasn't yet performed is
Isis Pharmaceuticals Inc. (ISIS:NASDAQ)
. Isis is a combination of a pick-and-shovel play, supplying an
industry, and a direct-therapy play.
Isis is one of the leaders in antisense drug development.
Antisense drugs generally block genetic activity. Basically, they
flip a temporary on-off switch for genes. We like Isis is because
its platform for discovering drugs is the strongest out there.
Almost every major company working in RNA interference (RNAi),
from the largest pharmaceutical companies down to the smallest
research-stage private companies, uses Isis' tools to discover
their potential therapies. And Isis is using its tools the same
way, to build a strong pipeline of genetic therapies.
Isis has filed its lead candidate, KYNAMRO (mipomersen), with the
U.S. Food and Drug Administration (FDA), and last summer with the
European Medicines Agency (EMA), correct?
Yes. With mipomersen, which is targeted for high-risk patients
with high cholesterol, Isis has a near-term portfolio candidate
that should help boost its revenues, make it less dependent on
outside cash and shore up its ability to do long-term
development. Mipomersen itself is one of those drugs that has
been overhyped and overvalued by 30-40% over the last couple of
years. As that has shaken out of the portfolio, Isis has become a
much stronger buy over the last year or so. We have had it in our
portfolio since its price was high, but we see a lot of long-term
potential in the company and, in general, in the RNAi and
antisense therapy areas.
Mipomersen's lead indication is for a small population of
patients, but if the product is approved, doesn't it prove the
platform for many of the products in Isis' pipeline?
Absolutely. Mipomersen is the sacrificial lamb at some level. It
is the first infantry. No RNAi or antisense therapy has been
approved for human use by the FDA thus far, so this is the first
drug going through what is bound to be a much longer and harder
evaluation process than the standard for average drugs. That is
saying a lot, given how long and complex the FDA approval process
has gotten. The fact that it is going to be the leading drug
candidate in its area is great. It shows the major confidence of
management in its own science.
One of our favorite companies is
Curis Inc. (CRIS:NASDAQ)
, which is focusing on pathway inhibitors, an area where it has
first-mover advantage. A lot of major pharmaceutical companies
are spending their resources in this area these days. Curis is
focused on the hedgehog signaling pathway to shut down the growth
of cancer cells. What's interesting is that the company is
currently focusing on just a few small cancer areas, like basal
cell carcinoma (BCC), where it is furthest along. However, behind
its initial indications and trials is a whole pipeline of
potential therapies for many different cancers, all using the
same basic approach. Even if Curis was focused only on BCC, it
would be interesting at its current valuation, with some
potential upside. It is very much a small-cap biotech company
with large potential. Before the BCC treatment was approved, we
told our readers that the stock, which now trades just under $5,
would either go to $25 or to zero. A binary investment. With one
therapy approved, the story is much stronger than it was.
The hedgehog pathway is extraordinarily important in metastasis.
The small-molecule tyrosine kinase inhibitors, which inhibit the
hedgehog pathway, may turn out to be chronic therapies that
prevent metastasis and make cancer treatable in the way we treat
atherosclerosis with statins today. What do you think about
That is a potential risk and a potential benefit at the same
time-but yes. What is unique about Curis' product is that it
holds cancer at bay. It is not necessarily a cure for the
underlying disease. However, if accepted by oncologists who are
less accustomed to maintenance therapies, it has the potential to
generate very lucrative income for the company as it becomes a
long-term treatment regimen.
Do you have another favorite?
One of our favorite companies in the biological area is
Genomic Health Inc. (GHDX:NASDAQ)
. We like it because it is involved in cancer, but not in
treatment. It provides an assay of genetic tests that help guide
oncologists in choosing the appropriate therapies for patients.
Samples of thousands of tumors from many different patients have
been studied to see how they behave and whether tumors with
certain genetic profiles will respond better to chemotherapy or
to radiation, as well as to determine how likely they are to
metastasize and how quickly.
The tests are designed to help the physician make the best choice
the first time, correct?
Yes. The results of the tests are changing what oncologists
prescribe for patients in a significant way. In more than 30% of
cases, after getting results of the tests, doctors actually take
a different course of action than they originally intended, which
means significantly less money spent on therapies that are
ineffectual and more money spent on therapies that are effective
up front, and potentially lifesaving.
I'm looking at Curis, with a small market cap of $382M and a
powerful therapeutic pipeline versus Genomic Health, a
prognostic/diagnostic company with a market cap of $840M. Other
companies may come along and, in a two- to three-year period,
develop a better diagnostic/prognostic. Doesn't that hurt the
margins of a company like Genomic Health?
Of course. Genomic Health is always at risk from lower-cost
competitors, but that is why intellectual property (
) protection is important. The company has to manage its IP
portfolio well when it is in a space like this. It has to take
advantage of the fact that it is a first mover to become
synonymous with the field. Brand identity and the value of a
particular diagnostic are very much tied up together. Doctors
have to trust the tests and trust the company and believe in the
results and consistent performance. Genomic Health has performed
on all those fronts. It has not been slow to follow up on the
success of its breast cancer test with other tests. It is moving
as fast as possible to establish market leadership, and it is
producing an overwhelming amount of data to back up the efficacy
of its tests.
You follow a variety of companies, from drug development to
genomic-related diagnostics, and you also have some medtech in
your coverage. Do you want to mention some of those?
Yes. For instance, we have followed
NxStage Medical Inc. (NXTM:NASDAQ)
for some time. This is a major change from what we've been
talking about to this point, and that is why I bring it up. Not
all of the opportunity in healthcare is in cancer. Not all of the
opportunity is in genetics and biologics. There is a side to care
that just uses good old-fashioned analog technology.
NxStage was focused on kidney dialysis centers, but these
facilities are very expensive to run. The care that people got at
dialysis centers was lifesaving, but it wasn't of the highest
possible quality. Sitting for four or five hours twice a week at
a renal care center to go through dialysis is an incredibly
boring, painful and depressing experience. The company has
invented a machine it calls System One, which allows patients to
go through home dialysis. This is great for all kinds of reasons.
Number one, the company can sell the machine to insurance
companies or to patients directly. It is more of a cash-up-front
business. Significantly fewer capital costs exist for the company
because it doesn't have to own buildings, operate centers and pay
as many employee salaries. The business' margins are much better.
On the flip side, System One is better for patients, who would
much rather have treatments at home. The home environment is good
for patients, and that better environment means better outcomes.
The machine allows patients to do daily hemodialysis or
every-other-day hemodialysis, and the more often they have
dialysis, the better the outcome as well.
The company's stock is close to your target price of $20. Are you
reevaluating that target?
We reevaluate all of the stocks in our portfolio consistently. We
have yet to raise our target price on NxStage Medical formally.
However, I would say the company has shown every sign of good
execution. We are waiting to see it turn the corner into solid,
consistent profitability and to show that it can successfully
make the remaining few steps in the transition from dialysis
centers to home hemodialysis. We are not ready to tell
subscribers to buy again today, but that could potentially
I'd like to hear another story if you have one.
I can provide one more:
Techne Corp. (TECH:NASDAQ)
. It has been one of the staples of our portfolio and has been
there for quite some time, with slow, consistent annual growth of
13-15%. Techne is not the kind of company that is going to double
overnight. Rather, it is the ultimate pick-and-shovel play for
the biotechnology business. It provides different types of
biological compounds to companies doing research, and supplies
every major pharmaceutical company in the world that is getting
into biologics, as well as a good majority of small upstarts.
Techne has been a great addition to our portfolio in the sense
that it gives us exposure to the biological revolution without
having to bet on any particular horse. It is like saying, "I
think the racetrack will be profitable, but I don't know which
horse is going to win."
Thank you so much, Alex.
Thank you. I've enjoyed it.
is the senior editor of
Casey's Extraordinary Technology
In his varied career, he has worked as a senior research
executive, software developer, project manager, senior IT
executive, and technology marketer. He is an industry insider of
the highest order, having been involved in numerous startups as
an advisor to venture capital companies. He is a trusted advisor
to the CEOs and strategic planners of some of the world's largest
tech companies. And he's a successful angel investor in his own
right, with a long history of spectacular investment
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1) George S. 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:
Isis Pharmaceuticals Inc.
2) The following companies mentioned in the interview are
The Life Sciences Report:
None. Streetwise Reports does not accept stock in exchange for
services. Interviews are edited for clarity.
3) Alex Daley: I personally and/or my family own shares of the
following companies mentioned in this interview: Amylin
Pharmaceuticals Inc., Human Genome Sciences Inc., Isis
Pharmaceuticals Inc., Curis Inc., Genomic Health Inc., NxStage
Medical Inc. and Techne Corp. I personally and/or my family am
paid by the following companies mentioned in this interview:
None. I was not paid by Streetwise Reports for participating in
The Life Sciences Report
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