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When it comes to picking biotech stocks, does a buyside perspective matter more than a sellside? Not according to Zacks Investment Research Analyst Grant Zeng, who has straddled the divide. What really matters is research of uncompromised quality. In this interview with The Life Sciences Report, Zeng offers a primer on what he looks for in a biotech investment, and names companies with the potential for big returns.

The Life Sciences Report: Grant, you've been on both the buyside and the sellside. Today you're an analyst at Zacks, a noninvestment bank firm that does not have to solicit business from the companies on which it performs due diligence and research. Is there an advantage for investors in this research model?

Grant Zeng: Zacks Investment Research is an independent equity research firm. We don't provide investment banking and other related services to companies we cover. Investors can benefit from this kind of research model because we conduct independent due diligence and research.

But just because research is independent doesn't mean it's good. We conduct significant due diligence to maintain the highest quality small-cap universe. Events that may trigger publishing a research report or note include earnings, U.S. Securities and Exchange Commission filings and material events.

TLSR: Is your perspective altered by your experience as an equity analyst on the buyside, where you know your decisions will affect buy-and-sell decisions involving large-dollar and yuan amounts? Has your experience on the buyside been helpful in your process as an analyst?

GZ: This is a good question. At first glance, most people only see the difference between sellside analysts and buyside analysts. A buyside analyst performs research and analysis for his or her own company, and a sellside analyst performs research and analysis for outside investors.

But, in essence, both buyside and sellside analysts are the same. What I mean is that, as an analyst, either buyside or sellside, the most important part of the job is to conduct your own research and analysis, and come up with your own conclusion-or valuation, in the case of company research. Whether you are responsible for your own company or outside investors, the quality of the research should not be compromised, although the format and the research method may be different for a sellside analyst versus a buyside analyst (and in most cases, they are).

My experience as a buyside analyst has been helpful in my process as an independent sellside analyst. Having worked for both buyside and sellside helps me look at research from different perspectives. Both experiences are great.

TLSR: You have a lot of micro- and small-cap companies, mostly under $200 million ($200M) in market cap, in your coverage. Since your firm does not make markets in stocks, and does not advise companies or provide investment banking services for them, how do you choose which names to follow? My impression is that you and your firm have a lot of latitude as to which stocks you chose. Is that true?

GZ: Yes. This actually boils down to our mission. Zacks Small-Cap Research coverage specifically focuses on small and micro-cap companies that are underfollowed or undervalued by Wall Street. As an analyst, I seek to identify and report on these companies, bringing to investors unique opportunities to gain insight on small-cap investments that are well positioned for future growth. My goal is to produce high-quality institutional-caliber research for the small-cap portfolio.

As an analyst at Zacks, I have a lot of latitude to choose what I think are underfollowed or undervalued biotech companies.

TLSR: How do you choose a new company to follow? Do you look for companies with high visibility to upcoming catalysts?

GZ: When I choose to cover a biotech company, I usually look at three things. First, I look at whether the company has a platform technology. If the company has a platform technology, it is easy to build a diversified pipeline. Second, I look at whether the company has that diversified pipeline. Usually platform and pipeline are highly related. Third, I look at balance sheet of the company. Financing is always a problem for small, development-stage biotechs.

Near-term catalysts are also important for biotech companies.

TLSR: I understand the Zacks philosophy of investing in small companies for the potential huge gain, well beyond 100%. Given that so many stocks in this class are driven by binary events, how do you mitigate the risk, especially given the fact that they are lower-liquidity shares? Let me ask another way: Can you mitigate the risk?

GZ: When it comes to investing in the biotech industry, especially in small-cap biotech companies, I remind investors to control or mitigate risks. The best way to mitigate risks is through diversification.

There are a few diversification possibilities for biotech investors. For example, you can invest in companies in different stages of development. You can also invest in different subgroups of biotech companies, such as therapeutics, diagnostics and medical devices. Even if you only invest in therapeutic biotech companies, you can choose different therapeutic areas, such as cardiovascular, cancer, diabetes, etc. Through diversification, risks will be mitigated greatly.

TLSR: Grant, could you discuss some of your ideas for investors?

GZ: Atossa Genetics Inc. (ATOS) is a medical diagnostics company focused on the prevention of breast cancer through the development and commercialization of diagnostic tests that can detect precursors to breast cancer, and through the research, development and ultimate commercialization of treatments for precancerous lesions.

Atossa's diagnostic tests consist of patented medical devices cleared by the FDA that can collect fluid samples (nipple aspirate fluid; NAF) from the breast milk ducts, where more than 85% of breast cancers arise. These samples are processed at the company's wholly owned National Reference Laboratory for Breast Health, which has been certified pursuant to the Clinical Laboratory Improvement Amendments (CLIA). CLIA certification is legally required for laboratories to receive reimbursement from federal or state medical benefit programs, like Medicare and Medicaid, and is a practical requirement for most third-party insurance benefit programs.

Atossa's lab examines the specimens by microscopy for the presence of normal, premalignant or malignant changes as determined by cytopathology and biomarkers that distinguish "usual" ductal hyperplasia, a benign condition, from atypical ductal hyperplasia (ADH), which may lead to cancer. These cytopathological results provide patients and physicians with information about the care path that should be followed, depending on the individual risk of future cancer as determined by the results.

Additionally, Atossa is conducting research on the treatment of precancerous cells by using its patented and FDA-cleared microcatheters to deliver, directly into the milk ducts, pharmaceutical formulations to treat these lesions. By using this localized delivery method, patients receive high concentrations of the drugs at the site of the lesions, promoting efficacy while limiting systemic exposure, which has the potential to lower the overall toxicity of treatment.

Atossa is currently marketing two diagnostic tests and plans to offer two additional tests in 2013. The company launched the ForeCYTE and ArgusCYTE tests in December 2011. The ForeCYTE Test provides personalized information about the 10-year and lifetime risk of breast cancer for women between ages 18 and 65. The test involves collecting a specimen of NAF using the company's patented, FDA-cleared Mammary Aspirate Specimen Cytology Test (MASCT) System, which received 51(k) clearance from the FDA in 2003.

The ArgusCYTE Test provides information to help inform breast cancer treatment options and to monitor potential recurrence. It involves collecting a blood specimen from a patient using the company's patented, 510(k)-exempt blood collection tube and submitting it to Atossa's laboratory. The test can monitor breast cancer distant recurrence by analyzing the blood sample for the presence of circulating tumor cells, which can then be analyzed to determine the expression of estrogen receptor/progesterone receptor and human epidermal growth factor receptor 2 (HER2) in those cells, a predictor of the cancer's sensitivity to existing treatment options.

Atossa intends to launch two additional breast health tests in 2013. The FullCYTE Test is designed to assess individual breast ducts for precancerous changes in women previously identified to be at high risk for breast cancer. The NextCYTE Test is in the prevalidation phase and is designed to profile breast cancer specimens for prediction of treatment outcomes and distant recurrence in women newly diagnosed with breast cancer.

Atossa also holds numerous patents, approved or pending, and has built a strong portfolio that provides long-term growth potential. Atossa has an appropriate growth strategy in place. Recent developments within the company have made us believe this strategy will be well executed, and we have a high confidence in management's ability to lead Atossa to the next level of growth in the next five years.

We think revenue growth will accelerate in the coming years thanks to the company's focused marketing strategy and continued offerings of new products and services. We model the top line growing from $2.94M in 2013 to $53.5M in 2018, an impressive CAGR of 79%. We think Atossa will become profitable in 2016, with EPS of $0.05 that will grow to $0.62 in 2018.

Based on the company's strong fundamentals, we think its shares are undervalued. The downside risk is low at this point and upside potential is high.

TLSR: Grant, it's interesting that you follow several RNA interference (RNAi)/antisense companies. I tend to think of any technology that prevents or modifies protein synthesis as an antisense platform, but from your perspective, are there meaningful differences between RNAi and antisense?

GZ: Both antisense and RNAi are RNA therapeutics, but there are some differences between the two.

RNAi, including small interfering (siRNA) and microRNA, are short, double-stranded nucleic acid molecules that mediate RNAi and interfere with the process of producing proteins inside cells. Antisense RNAs are small, chemically modified single strands of DNA that interfere with messenger RNA ((mRNA)). These drugs (oligonucleotides) are engineered in a sequence that is exactly opposite (hence, anti) to the coding (sense) sequence of mRNA. Upon binding with the mRNA, a duplex is formed. This duplex inhibits the production of the intended protein.

The Nobel Prize-winning discovery of RNA interference marked a revolution in biology, a breakthrough in understanding how genes are turned on and off in cells, a completely new way to approach drug discovery and development. RNAi is a natural process of gene silencing. By harnessing the natural biological process of RNAi in human cells, the creation of a major new class of medicines, known as RNAi therapeutics, is on the horizon. RNAi therapeutics target the "root" genetic cause of diseases by potently silencing specific messenger RNA, thereby preventing the disease-causing proteins from being made.

TLSR: Would you discuss a company in this space?

GZ: I like Tekmira Pharmaceuticals Inc. (TKMR). Tekmira is one of the pioneers and leaders in the field of RNAi therapeutics. We are optimistic about the company's lipid nanoparticle (LNP) RNAi delivery technology, which enables systemic delivery of RNAi drug candidates. RNAi is promising, but is challenged by systemic delivery and distribution into diseased areas in humans. Tekmira's LNP platform technology has great potential to achieve this goal.

Tekmira's pipeline targets multiple indications including cancer, infection, alcohol dependence and other indications that hold great market potential. The company has advanced its lead cancer drug candidate, TKM-PLK1, into a Phase I clinical trial using its LNP delivery technology. A Phase II study is expected to begin in H2/13.

The company's TKM-Ebola product is sponsored by U.S. government under the FDA-accelerated "Animal Rule" development plan, which enables a company to get FDA marketing approval based on animal studies provided the studies show a product will likely be efficacious in humans. This will shorten the development timeline greatly. A Phase I safety trial will be initiated in H2/13. TKM-Ebola could provide significant cash flow to the company in the next one or two years.

Two other candidates, TKM-ALDH2 and Wee1/CSN5, target alcohol dependence and oncology, respectively. Tekmira is conducting preclinical work to further evaluate these earlier-stage programs, and could bring them into clinic soon.

Partnership is integral to Tekmira's growth strategy. The company has established partnerships both with the U.S. government and biotech/pharmaceutical companies. Major partners include Bristol-Myers Squibb Co. (BMY), Alnylam Pharmaceuticals Inc. (ALNY) and Talon Therapeutics Inc. (OTC:TLON) These partnerships not only provide nondilutive funding for the company, but also validate its LNP technology and management's commitment to advancing RNAi therapeutics.

Significant clinical advances enabled by Tekmira's LNP technology have been made in Alnylam's pipeline. Alnylam already reported positive Phase I data for ALN-TTR02 (for treatment of transthyretin amyloidosis), will report Phase II data this year, and plans to initiate a Phase III trial in late 2013. Alnylam also reported positive Phase I data from ALN-VSP (for treatment of liver cancer) and ALN-PCS (for treatment of high cholesterol). All these data further validate the LNP technology.

Tekmira has a very strong balance sheet. The company's current cash balance should run through at least 2016. Investors don't need to worry about the dilution of their ownerships in the next few years. With this strong balance sheet, Tekmira will be focused on its long-term growth strategy, not worrying about financing. Future license fees, milestone payments and royalties from Marqibo (the Talon Therapeutics partnership; vincristine sulfate liposome injection for treatment of adult relapsed leukemia) will provide further nondilutive financing.

We have noticed the recent run of RNAi companies such as Alnylam, as well as Isis Pharmaceuticals Inc. (ISIS), and Sarepta Therapeutics (SRPT), which indicates investors are optimistic about the prospect of RNAi therapeutics. We think Tekmira's shares are undervalued at the current market price, based on the company's strong fundamentals and compared to its peers-especially when we consider the recent great runs for other RNAi companies.

TLSR: Protein synthesis is the central dogma of biology, and you've mentioned RNAi/antisense companies that address that phenomenon. I realize that most disease is polygenic, meaning involvement of more than one gene, but since any single gene can be neutralized, doesn't that make RNAi/antisense potentially the most powerful technology medicine has ever known? Wouldn't these platforms be the Holy Grail if there ever was one?

GZ: Antisense and siRNA may offer some advantages over conventional therapies. The antisense complex can be synthesized chemically in a lab and then introduced into the cell. Once introduced, antisense can target virtually any protein synthesized by the body. This is a significant advantage over small molecule or antibody drug candidates that target only specific classes of proteins. With knowledge of the sequenced human genome, scientists should be able to develop antisense compounds for each and every gene and mRNA.

Additionally, the antisense identification and subsequent production process is more straightforward than for the traditional small molecule or antibody drug discovery platform. Scientists only need to identify the specific gene worth testing, and then synthesize the antisense oligonucleotide. This offers a significant time and cost-of-discovery advantage.

Although RNAi therapeutics is newer to the pharmaceutical industry than antisense, the structures are similar, with siRNA being a double-stranded nucleic acid complex compared to the single-stranded antisense oligonucleotide. As a result, the above-mentioned advantages of antisense over conventional therapies are also expected to apply to siRNA.

Antisense and siRNA are two of the most promising fields of targeted therapy. Development of antisense and RNAi therapeutics, however, has been limited by the lack of a suitable method to deliver these drugs to diseased cells, with high uptake and without causing toxicity. But great progress in RNA delivery has been made recently by companies including Tekmira and Bio-Path Holdings.

TLSR: Are there any other companies you'd like to talk about?

GZ: Northwest Biotherapeutics Inc. (NWBO) is a clinical-stage biotechnology company focused on discovery, development and commercialization of immunotherapy products to treat cancers. The company holds two technology platforms: dendritic cell (DC)-based cancer vaccines (DCVax), and monoclonal antibodies for cancer therapeutics. The company's current focus is on DCVax programs.

Northwest's DCVax platform technology makes use of the same immune cells as Dendreon Corp.'s (DNDN) prostate cancer vaccine Provenge (sipuleucel-T). DCVax uses a patient's own dendritic cells. The DCs are extracted and loaded with tumor antigens, thereby creating a personalized therapeutic vaccine. Injection of these cells back into the patient initiates a potent immune response against cancer cells, resulting in delayed time to disease progression and prolonged survival. The company's DCVax technology holds competitive advantages over its competitors, including the low cost of manufacturing, ease of administration, a high concentration of activated dendritic cells and fewer side effects.

The key value of Northwest Biotherapeutics relies on its late-stage cancer vaccine candidate, DCVax-L, for glioblastoma multiforme (GBM) patients. DCVax-L for brain cancer is currently in a 312-patient global Phase III trial. The U.S. arm of the trial is enrolling patients now, and the Europe arm will start to enroll soon. The company anticipates completing enrollment by Q1 or early Q2 of next year. This is faster or more efficient than relevant comparison trials with immune therapies for the same brain cancer.

Currently, two chemotherapeutic agents (including one targeted therapy) approved by the FDA are frequently used for the treatment of glioblastoma, in combination with radiation therapy. They are Temodar (temozolomide) from Merck for newly diagnosed GBM and Avastin (bevacizumab) from Roche/Genentech for recurred GBM.

There are unmet medical needs for the treatment of glioblastoma that DCVax-L may be able to address in a unique way. DCVax-L is specifically designed to target glioblastoma cells by activating the patient's own immune system. So far, data from DCVax-L are encouraging compared to marketed products and products under development.

The glioblastoma market is a multibillion-dollar business. Worldwide sales of Temodar reached $1 billion ($1B) in 2009. If DCVax-L ultimately reaches the market, it will command a huge market share of the GBM market in our view. Peak sales could reach $1B. This market potential means a lot to a small biotech company like Northwest, even if it turns out to be a few hundred million dollars in sales. DCVax-L for brain cancer could be the second cancer vaccine to reach the market after Provenge. Great progress has been made in the past few months in terms of clinical trials, business development and balance-sheet strengthening. Current valuation is attractive and upside potential is high at current price level in our view.

The last company I will discuss is Pressure BioSciences Inc. (OTCQB:PBIO), a research products and services provider. The company operates in a rather large but underserved market, with a current focus on sample preparation. The research products and services market is rapidly growing, with a large and immediate need for better technology. We expect this will create a huge opportunity for Pressure BioSciences to grow its business in the coming years.

We are impressed and optimistic with the company's patented, novel, enabling platform technology: pressure cycling technology (PCT). The PCT Sample Preparation System (PCT SPS) has competitive advantages over existing technologies in the sample preparation market. Based on the PCT platform, Pressure BioSciences has established a broad product portfolio. The instruments and consumables that form its PCT Sample Preparation System are now recognized by many research labs due to the company's focused marketing efforts. We believe uptake of the PCT SPS will accelerate in the coming years. However, Pressure BioSciences is one of the most undervalued biotech companies in our view. Our call is based on two major factors: Financial results and business development are improving, and valuation is very attractive.

Pressure BioSciences recently reported record product sales for Q3/12. Revenue from sales was $297,867, compared to $217,734 for the same period in 2011-a 37% increase. We are especially happy to see increased sales of consumables for the quarter. Sales of PCT-based consumables generated revenue of approximately $28K for the three months ended Sept. 30, 2012, compared to approximately $21K for the same period in 2011, an increase of 33%. We expect the sales of consumables will continue to grow in the coming quarters. We think this growth is very important to the company's long-term sustainable growth. Consumables are a recurring revenue source for the company, with higher margins, and are associated with the installation of PCT equipment. When more equipment is installed, more consumables will be used. The growth of installed equipment will eventually stabilize, but the use of consumables will increase each quarter as the equipment base becomes larger. Although revenue from consumables currently accounts for only a small portion of PCT product sales (about 10%), this number will become larger and make a meaningful contribution to the top line.

In terms of valuation, we think Pressure BioSciences' shares are deeply undervalued based on the company's fundamentals. Currently, the company trades around $0.30 per share, with a market cap of about $3M. We understand that the market discounts the value of the company because it has a limited revenue base and has been losing money since its inception. We also understand that the company has a relatively weak balance sheet, and further financing will be needed soon.

However, when we look at the industry in detail, we recognize that this is a company with huge opportunities. We are optimistic about its prospects. With a rapidly growing market worldwide, combined with its unique technology and broad range of product offerings, Pressure BioSciences is well positioned to boost its top line and bottom line in the coming years.

TLSR: Grant, thanks for your time and insight.

GZ: It was a pleasure.

This interview was conducted by George S. Mack of The Life Sciences Report.

Grant Zeng has more than 10 years professional experience in equity research and analysis. He is currently a senior biotech analyst with Zacks Investment Research Inc., and has been with Zacks since March 2006. Before joining Zacks, Zeng worked for TheStreet.com as a biotech analyst from 2005-06. From September 2001 to December 2003, Zeng worked for China Pacific Insurance Co. as an equity/fund analyst. Zeng was a healthcare equity analyst with Young & Partners LLC from August 2000 to September 2001. Zeng also has teaching and research experience in pharmaceutical science. Zeng obtained his master's of business administration with a major in finance in 2000 from McMaster University, Canada. He also holds a master's degree in biochemistry from the University of Western Ontario, Canada, and earned a master's degree in pharmacology and bachelor's degree in medicine from Second Military Medical University in China. Zeng is a Chartered Financial Analyst (CFA).

Disclaimer:
1) George S. Mack conducted this interview for The Life Sciences Report and provides services to The Life Sciences Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: Isis Pharmaceuticals.
2) The following companies mentioned in the interview are sponsors of The Life Sciences Report: None. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Grant Zeng: I or my family own shares of the following companies mentioned in this interview: None. I personally or my family am paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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Source: Biotechs With Staggering Potential: Grant Zeng