Markets

Biotech: The Tide Is Turning

By SA Marketplace :

2017 has been an exciting year in the markets. All-time highs seem to fall every week, the market has shaken off three Federal Reserve rate hikes as no big deal, and there is so much Bitcoin to talk about that it makes a head spin.

It's also been an exciting year on the Seeking Alpha Marketplace. Marketplace is our platform for authors to offer investing services that go beyond what they can do in public articles. In 2017, we went from 75 authors on the platform to 157. Those authors have a wide range of expertise and backgrounds. And while 2017 has felt like a year where everything has gone in one direction - up - we wanted to draw on this diverse array of backgrounds.

So, we're doing a Year End Marketplace Roundtable series. Over the next 2 weeks or so, we will be featuring expert panels giving their outlook on 2018 in corners of the market ranging from Tech to Energy, Dividends to Alternative Strategies, Gold to Value investing. We hope you'll find these discussions useful no matter how you invest.

Today's Roundtable discusses biotech. Will 2018 be a year for mergers and acquisitions in the space, and will this be the year investing in biotech becomes "chic" again? Read on to find out what our panelists have to say.

Our panel:

Dr. Tran BioSci , author of Integrated BioSci Investing

Terry Chrisomalis , author of Biotech Analysis Central

Jerome Verony , author of Second-Level Investing

ONeil Trader , author of Growth Stock Forum

Avisol Capital Partners , author of The Total Pharma Tracker

Slingshot Insights , author of Become the Smart Money

Editors' Note - questions were sent out on November 30th and answered in early to mid December, as the U.S. tax reform bill was still pending.

Seeking Alpha: We entered 2017 with a lot of talk about lowering drug prices and fundamental changes to America's healthcare system. We leave 2017 with not much change on either front; how have you adjusted to these changing winds and where has this had an impact on your investing, if at all?

Dr. Tran BioSci: First of all, I appreciate Seeking Alpha for the opportunity to share with readers my perspective. It's an honor to be here. Without further ado, I'll jump into the questions.

Despite the increasing cost of healthcare that, in and of itself, exerts pressure on policymakers to lower the pricing of branded therapeutics, I believe that the focusing on disease prevention is more fruitful than lowering drug pricing. The innovation process (from bench research to marketing) takes roughly a decade while yielding less than 5% success rate and incurs over a billion dollars. Lowering drug pricing would hamper innovation. On the other hand, focusing on disease prevention would surely cut down healthcare costs. Discussions are healthy and constructive; however, I still bet on therapeutics innovation (and I keep my investing approach the same).

Terry Chrisomalis: Even though nothing changed on this front in 2017, it doesn't mean that action is not being taken behind the scenes. The most important thing to consider is that regulators will continue to go after higher drug prices in the coming years. This changed my investment thesis to move away from companies that have priced their drugs higher than the industry average. The best thing you can do is position yourself away from higher drug price companies now to avoid problems in the future.

For example, I have been staying away from generic drug makers such as Teva ( TEVA ), Mylan ( MYL ), and a few others. In my opinion, they are likely to be hit the most when regulators go after high drug prices. For example, Mylan was caught raising the price of its EpiPen, where the price had risen by 500% in just under a decade. It went from being around $103 back in 2009 all the way to $608.61 in 2016. The same can be said for Teva, which has continued to increase its price for Copaxone. Since 1996, Copaxone has risen by 1006%.

The problem is that these generic drug makers are already facing pricing pressure from other generics. If regulators are able to achieve their goal in 2018 in going after higher drug prices, then generics will be the first to have many problems. In addition, all the other companies that rely on charging a lot, such as rare disease treatments, will also be affected. For example, regulators are concerned about rare disease treatments costing $300,000 or more per year. Spark Therapeutics ( ONCE ) recently obtained FDA panel approval to treat a rare eye disease known as inherited retinal disorder. There has been no set price yet, but many analysts believe that Spark is attempting to price treatment for this rare disease at $1 million. Such action by regulators going after high drug prices will also greatly affect these rare disease companies. It is best to change your portfolio strategy now to avoid pitfalls and problems in the coming years.

Jerome Verony: Next to zero impact. When asked a similar question during my interview for Seeking Alpha PRO in August, I said: "In the near term, pricing concerns will linger and flare up from time to time as they make for excellent political fodder. Concrete legislative action is much more difficult to implement and I don't expect dramatic shifts in the U.S. any time soon." In hindsight, this remains a valid assessment. I tend to focus on companies that are successfully homing in on niche opportunities with a high unmet need, and that ideally benefit from orphan drug designation and other legal carve-outs, which allows my readers to be relatively indifferent with regard to potential pricing headwinds.

ONeil Trader: Yes, it had an impact. I have been avoiding and continue to avoid areas where I thought the impact could be the worst. The generics industry, for example.

Avisol Capital Partners: I have just become more cautious heading into major catalysts like PDUFAs. That is because there's a perception today that even if a drug gets approved, the company may not have pricing power given the politics around drug pricing. So, I don't go into the catalyst expecting much. I try to take out my profit from the play as much as possible, as early as I can. That's just the way it is these days. You have to deal with it because you cannot control those headwinds. However, having said that, I must also say that these things make the future a little more predictable. This has become more of a stock picker's market, which is where niche services like ours have a great deal to contribute.

Slingshot Insights: We came into 2017 very skeptical of Congress' ability to address high prescription drug prices. The rumored fixes were not likely to be very impactful if implemented or likely to gain widespread political support, in our opinion. The drug distribution industry is not well understood by legislators or the public. We continue to think that more disruptive forces on the distribution and supply side are more likely to reduce overall spend than legislation.

SA: What sub-set of biotech most interests you as you reflect on 2017 and look ahead to next year?

DTB: While there are many promising biosciences, I'm most interested in the therapeutic developers of Chimeric Antigen Receptor/T Cells Receptor ("CAR-T") - companies that provide hope to countless patients suffering from highly difficult to treat cancers as well as autoimmune diseases. To date, two CAR-Ts were FDA approved: Novartis' (NYSE: NVS ) Kymriah and Gilead Sciences' (NASDAQ: GILD ) Yescarta.

One of our biggest bets (but not our biggest winner) is Kite Pharma (NASDAQ: KITE ), the leading CAR-T developer, now acquired by Gilead Sciences: the stock delivered a whopping 82% profit in just a few months for Integrated BioSci Investing subscribers.

Notably, CAR-T is a stellar cancer-treatment breakthrough since the introduction of chemotherapy more than half a century prior. And the recent historic events opened doors to other similar firms. Other notable CAR-T innovators include Juno Therapeutics (NASDAQ: JUNO ), Atara Biotherapeutics (NASDAQ: ATRA ), and CRISPR Therapeutics (NASDAQ: CRSP ). Even companies servicing CAR-T logistics like Alpine Immune Sciences (NASDAQ: ALPN ) will benefit greatly as the new fundamental shift to focus on individualized medicine to roll out.

TC: I'm particularly fond of RNA interference or RNAi, because Alnylam ( ALNY ) was able to achieve a first by passing a phase 3 trial using an RNAi drug. That means that it could soon become the first RNAi company to obtain FDA approval. RNAi is the sub-set of biotech that interests me the most right now because of how RNAi is able to target diseases in different ways by turning off their genes.

Other RNAi companies that I would like to watch in the coming year are Arrowhead Pharmaceuticals ( ARWR ) and Arbutus Biopharma ( ABUS ), both of which are going after liver diseases. One side note I would like to mention is that Alnylam used Arbutus' Lipid nanoparticle (LPN) technology to be able to deliver patisiran to patients effectively to treat a rare nerve disorder known as familial amyloid polyneuropathy ((FAP)). RNAi was discovered in 2006, and many biotech companies have popped up since then attempting to improve upon this new type of science. RNAi works by silencing genes of a cell so that the expression of such a gene won't occur. I'm looking forward to Alnylam becoming the first RNAi company to receive FDA approval and make U.S. history.

JV: Neuroscience. The GABAergic hypothesis in depressive disorders continues to unfold thanks to Sage's pioneering work. In other words, we're looking at a new paradigm for treating depressive disorders, which is a really big deal. Benefiting from that new paradigm is Marinus Pharmaceuticals ( MRNS ) and its lead drug Ganaxolone, which explores the same GABA-A pathway in depression all the while advancing its distinct rare disease portfolio in ultra-orphan, pediatric indications.

Another recent advance in depression is Johnson & Johnson's ( JNJ ) Eskatime, which has been awarded not one, but two breakthrough therapy designations by the FDA. Oncology will continue to benefit from tremendous momentum thanks to advances in immuno-oncology and the ongoing exploration of combination therapy. Members of my premium service benefit from a number of high-quality picks in that space.

OT: I remain focused on areas with high unmet need - specialty and rare disease companies and avoiding crowded areas. Given the now ever-present pricing pressure, which is making life for biotech/pharma companies difficult in crowded areas, it makes sense to focus on products where competition is non-existent or limited or where the current standard of care is not adequate.

ACP: As part of my newly-gained caution, what I look for nowadays are small companies with a revenue-generating product. It doesn't matter how minuscule that revenue may be; just the fact that the company has done it once gives me confidence in its potential to do it again.

Take Omeros ( OMER ), for example. Here's a small company with an existing product that produces a few million dollars in yearly revenues. Supporting that is OMS721, the company's lead drug candidate targeting a number of complement-mediated thrombotic diseases. Now, OMS721 is not going to see any upside in at least one whole year. However, Omidria - that's the existing product - gives me extra confidence in Omeros' ability to do well by OMS721. So that's the subset of biotech I am looking at these days - the subset of undercovered small biotech with at least one self-developed existing revenue-generating product in the market.

SI: Our members continue to focus on the immuno-oncology space as an area of significant and meaningful innovation. With the first CAR-T therapies approved in 2017, we see this as an area for increased success and large-cap focus.

SA: What was the big story or lesson learned for you in 2017?

DTB: Diversification, diversification, and more diversification. I believe in Warren Buffett's philosophy, so I recommend investors to bet heavily on companies that I thoroughly research. Buffett believes that one does not need to extensively diversify after extensive research due diligence is in place.

In my opinion, that is true for nearly all industries; however, the bioscience sector is a different beast (especially for young companies with drugs in development). Hence, young biosciences needed to be treated accordingly. As I alluded, bioscience investors should exercise adequate diversifications (to increase one's chances of finding multi-folds winners). Diversification delivered a gargantuan win for Integrated BioSci Investing, in the form of over 182% profits with Nektar Therapeutics (NASDAQ: NKTR ). Equally as important, diversification helped us absorb the loss of over 80% when Versartis (NASDAQ: VSAR ) failed to post positive data by a thin margin. Diversification aside, extensive due diligence with an edge in the medical and scientific analysis is important to achieving stellar returns.

TC: I would say that the big story is that there were a lot of biotech companies that bounced back after their stocks fell. You should never count out a biotech company after its stock price has fallen by a large amount. This is especially true of pharmaceutical companies with larger pipelines. All it takes is one set of good results or news to swing a biotech stock up by 100% or more.

Investing in the biotech sector is kind of like a roller coaster ride; it has huge ups and downs. For example, in the beginning of 2017 (January), Esperion Therapeutics ( ESPR ) traded in the low teens. From January 2017 till now, about a one-year period, it has gained 354%. In June 2016, things looked bleak for the company, as it said that it would have to run a safety trial for eventual approval of its drug. Well about a year later, things are going smoothly and the stock has recovered. This was one of a few major stories in 2017 that I have looked into closely and appreciated as a major story.

JV: Never underestimate momentum! Whether we're looking at biotech stocks or a new phenomenon like crypto-currencies, stories matter as much as underlying, fundamental value. I remain focused on underlying value and special, event-driven situations but I'm also mindful of incorporating the momentum aspect into my analysis going forward. MRNS is a great example of a stock that benefits from improving fundamentals and a lot of momentum at the same time.

OT: Ignore headlines and short-term sentiment (both positive and negative); focus on fundamentals.

ACP: A bunch of us at ACP are doctors with years of clinical experience and so we are usually pretty good at predicting approval probabilities. However, in 2017, we learned that even when we predict an approval correctly, timing is everything. So, at least twice, we predicted an approval correctly, bought into the stock, didn't sell out before approval because we were so confident, were proven right - the drug got approved - and then the stock tanked. Now I am not saying those stocks won't recover. However, we don't like our money getting locked down like that. So, what we learned - re-learned, to be precise - is to time our entry and exit right. You can be right about everything and still lose money if you don't get out at the right time.

SI: The failure for any significant change in the healthcare landscape from the government was something we anticipated, but think surprised people.

SA: What are you preparing for in 2018? Any big themes to watch out for?

DTB: As I alluded to earlier, it is not far from the truth that more CAR-Ts will gain regulatory approvals going forward (and we'll witness increasing number of new individualized cancer treatments to hit the news). Going into 2018, I expect the market will be in an anticipation mode for the unlocking value of those aforesaid prospects. Hence, I expect CAR-T developers to deliver increasing value to investors next year. Beyond that, it is most likely that CAR-T will deliver hope for countless patients worldwide.

TC: I am preparing to see a lot more mergers in 2018. It seems as though 2017 was a little lighter in terms of biotech mergers. It is believed that 2016 had more mergers/acquisitions. There were some big deals here and there, but I believe that in 2018, there should be an upswing in mergers, especially since many big pharmaceutical companies are losing a lot of their patents or have a reduction in their pipeline due to drug failures.

Another reason would be if the tax reform ends up being passed here in the United States. That's because if the corporate tax rate is reduced from 35% to 20%, it will mean more profits for pharmaceutical companies. In tandem, such companies could put their cash to work by either merging with a company for flat out acquiring one. Gilead's acquisition of Kite Pharma for $11.9 billion was a major deal in 2017. It did so to get its hand on the new hot treatment for immunotherapy known as CAR-T or chimeric antigen receptor. I see 2018 as being a better year for mergers, and that means more profits for investors.

JV: Fundamentally, I'll continue to focus on high-quality, under-the-radar companies that provide opportunities for significant appreciation over a one-year period. Discovery and due diligence are gradual processes for me, and my readers will continue from that ongoing work next year. One "project" that is picking up steam is helping readers benefit from expert opinions and corporate access more and more, in the form of interview transcripts. Most recently, I was able to interview the CEO of Zymeworks ( ZYME ) on their science and their plans for the near future.

OT: The opioid crisis is a major theme and I have positioned a part of my portfolio in companies addressing the issue or that have the potential (drugs in development) to address the issue by offering non-opioid options for the treatment of pain. Gene therapy is a hot field right now, but I have modest exposure there due to high valuations - if that changes, I would look to increase exposure there.

ACP: With the christening of a new FDA commissioner in mid-2017, we see that suddenly, approvals have become less scarce. Scott Gottlieb, MD, has been good for biotech. Although we are still not at pre-2014 levels, we are doing better than last year.

The tides, I must say, have turned, and I look forward to 2018 as being the year when investing in biotech becomes chic again. There are more IPOs, and more funds - even generalist money - are going into biotech. Pricing issues, once a major terror, are slowly losing their fangs. Trump, our upstart American President, has not been bad for biotech. Having said that, remember that the EMA is moving from London to Amsterdam as part of Brexit. So, expect some delays in approvals in that geography in 2018.

SI: We think that M&A will be a major trend in 2018 driven by 3 main forces. First, the passage of the tax reform bill will increase established players' access to capital. Secondly, the lack of significant changes in the distribution or payment of healthcare should support investment in new drugs and technologies. Lastly, innovation continues to come from small, focused companies rather than the pipelines of large-cap players. These innovative technologies will be purchased and then supported through launch.

SA: What is one of your best ideas for 2018, and what is the story?

DTB: While there are many potentially highly profitable ideas that I discussed with subscribers of Integrated BioSci Investing (and more to come), I vote the best idea of 2018 is Protalix BioTherapeutics (NYSE: PLX ). Based in Karmiel, Israel, Protalix is innovating a disruptive portfolio of enzyme replacement therapies ("ERT") to service various orphan conditions, including cystic fibrosis, gaucher as well as Fabry diseases.

While the stock was beaten down in the second half of 2017, it still gained over 21% for the year. 2018 can be a special year for Protalix, as lead molecule PRX-102 (potentially to replace the standard of care for Fabry disease) will post its phase 3 trial results. If the data turns out positive as we prognosticated, the stock has the potential to increase multiple-fold (due to its small market cap and the blockbuster market that it will most likely procure). The early data suggested that PRX-102 exhibits substantially fewer antibodies formation (and antibodies that only remain temporary in the patient's blood), thus making it more efficacious and safe than conventional ERTs.

Protalix recently found a marketing partner (Chiesi) for PRX-102, which adds further merit to the investing thesis (as well as provides the company with needed resources and more funding for this therapeutic innovation).

I wish to send my warm appreciation to SA, Integrated BioSci Investing subscribers, and featured experts like Biotech Beast, Decision Analytics, Terry Chrisomalis, other fellow SA authors, and readers. I received much support from you all in 2017. It has been an exciting year, full of hopes and surprises, much profits and learning. I look forward to delivering more stellar research and consulting, as well as learning from you all.

TC: My best idea for 2018 would be Conatus Pharmaceuticals ( CNAT ). The reason why is because it has a pivotal phase 2 trial result to report in the first half of 2018. It is a major inflection point for the company, because it will prove whether or not its drug emricasan is effective in liver diseases. A good set of results from the phase 2 POLT-HCV-SVR study will likely result in the stock trading higher. It is one of the few biotech companies that is going after both NASH Cirrhosis and NASH fibrosis. There are plenty of other biotech companies going after NASH fibrosis - maybe 100 or more (estimate) - but NASH cirrhosis is an untapped field.

The only other player that I know of going after NASH Cirrhosis is Galectin Therapeutics ( GALT ), which reported its data. The problem is that it showed that it might achieve statistical significance in a sub-population of NASH cirrhosis patients, but failed to achieve its primary endpoint in the phase 2 trial for the entire NASH cirrhosis population. That means it will have to run a large phase 3 trial to determine if its drug GR MD 02 can help improve the liver of these patients with NASH cirrhosis.

That leaves Conatus as one of the few biotechs left to target NASH cirrhosis. If the results are highly positive, it will not only prove that emricasan works in liver diseases, but it will also validate the rest of the pipeline targeting other liver indications. The other three targets are NASH fibrosis, NASH cirrhosis portal hypertension, and NASH cirrhosis itself. I feel that Conatus has a good shot at succeeding, and is probably a big reason why Novartis has already partnered with Conatus for its emricasan program. If the phase 2 results come out positive, that will lead Novartis to be responsible for the phase 3 study for that indication, and all other liver indications for emricasan.

JV: Marinus Pharmaceuticals is on a perfect trajectory - it has a drug candidate that addresses ultra-orphan, pediatric indications (CDKL5 & PCDH19 Epilepsy) and benefits from validation of a very similar asset in multiple, large depressive disorders (PPD & MDD). Their cash runway extends to 2020 and they're in the process of making some important hires. The stock ( MRNS ) is being added to the NASDAQ Biotech Index ( IBB ) effective December 18, which will provide further capital inflows in 2018. Last but not least, smart investors including Bain Capital and Deerfield have filed large stakes in H2 2017.

With important catalysts (data readouts and regulatory updates) just around the corner, this is one stock you don't want to miss out on in 2018. I established a position in H1 2017 and I'm still holding on to more than 90% of my shares despite the significant run-up as there's still lots of room for appreciation.

OT: It's really hard to pick one as there are several stocks I really like for 2018, but if I had to pick one, it would be Neurocrine Biosciences ( NBIX ). It probably doesn't have the most significant upside potential among the stocks in my portfolio, but it has a lot of positive things going in its favor - the company recently launched Ingrezza, a treatment for tardive dyskinesia and the uptake has been quite strong and this drug is a potential blockbuster. Neurocrine also has another potential blockbuster, elagolix, which it partnered with AbbVie ( ABBV ) and which should receive approval for endometriosis in 1H 2018 and report top-line results for uterine fibroids in the following weeks. We should also know the fate of the company's third product candidate opicapone after the meeting with the FDA in Q1 2018 - whether Neurocrine will have to do a new phase 3 trial or if it can submit with phase 3 data on hand. And finally, the pipeline will expand with one or two candidates entering the clinic and other trials advancing, like Ingrezza in pediatric Tourette syndrome.

ACP: I first covered Omeros on Seeking Alpha when it was trading near $13 couple months ago. Just today (response submitted on December 18, 2017), as I published a complete research report on the stock for my subscribers, the stock is up almost 80%, trading near $20. My base case scenario values the stock at $35 in an 18-month time frame; bullish case, I see $100.

The story is simple; this is a

This is the same market where we have the world's most expensive drug, Soliris, making billions of dollars every year. OMS721 is claimed to have some advantages over Soliris. One, it doesn't alter the classic immune pathways - meaning, it leaves the immune system in proper working condition so there's less risk of treatment-emergent infections, which could be fatal. Second, it is taken subcutaneously, or in the case of about-to-be developed small molecules, orally even. Plus of course Soliris is priced at over $750,000 in some geographies. My base case model assumes only $150,000 as the price of OMS721 and gets $35 as the price target. Of course that is laughably conservative. So that's the story. We try to cover stocks like these in two detailed, analyst-firm style research reports every month. These go to our subscribers.

SI: SI doesn't make single name stock picks, but we think highly innovative therapies with meaningful patient impact will be the best performing assets. This means cures, disease modification, or platform plays that bend the curve of cost and life expectancy will be most sought after.

Thanks again to our panel. If you're interested in any of their work, check out the links below:

Dr. Tran BioSci , author of Integrated BioSci Investing

Terry Chrisomalis , author of Biotech Analysis Central

Jerome Verony , author of Second-Level Investing

ONeil Trader , author of Growth Stock Forum

Avisol Capital Partners , author of The Total Pharma Tracker

Slingshot Insights , author of Become the Smart Money

Follow the SA Marketplace account if you enjoy getting interviews and roundtable discussions with some of our top authors, as well as updates on what's going on with the Marketplace. We're wrapping up our year-end series tomorrow, and will be back to regular features next week.

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See also ConocoPhillips: My Top Energy Bet For 2018 on seekingalpha.com

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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