The specialty pharmaceuticals universe encompasses a variety of technologies, among them innovative drug delivery systems and unique pain management and orphan disease treatments. In this interview with The Life Sciences Report, Scott Henry of ROTH Capital Markets touts the value of "sound business models" in the specialty pharma space, and names companies with interesting prospects and/or stock-moving catalysts on the horizon.
The Life Sciences Report: Scott, is right now a good time to be investing in biotech?
Scott Henry: It depends on what you invest in. Picking sentiment is a fool's game, in my opinion. Rather, I try to find good companies with sound business models at reasonable prices. This sector is highly volatile and investors have to develop intrinsic valuation models for companies. That way they are best positioned to take advantage of volatility, as opposed to being a victim of it.
TLSR: Let's talk about some of the biotech sectors in your coverage universe. What do you see going on in inhalable medicines?
SH: I look at the inhalable category on a product-by-product basis, because one must demonstrate material incremental advantages to warrant the increased premium pricing over cheaper alternatives. One company I cover that I believe demonstrates these advantages is Alexza Pharmaceuticals Inc. (NASDAQ:ALXA).
Alexza has a soon-to-be-launched product in Adasuve [Staccato loxapine], for agitation in patients with bipolar disorder and schizophrenia. The product is approved in the U.S. and Europe and the company has marketing partners lined up-Teva Pharmaceutical Industries Ltd. (NASDAQ:TEVA) in the U.S. and Grupo Ferrer Internacional S.A. in Europe. Adasuve is an easily inhalable version of the antipsychotic loxapine, and could replace slow-acting pills or painful needles. I would take an inhaler over a needle any day.
For investors, I believe that Alexza offers opportunities because expectations are so low. The market cap of the company is ~$90 million [$90M]. By comparison, Teva paid $40M alone for rights to market Adasuve in the U.S., and Teva will supplement this payment with ongoing royalties. My target price on Alexza is $10/share, which is based on a sum-of-the-parts valuation, including $5.50/share for U.S. Adasuve royalties, and $2/share for ex-U.S. rights to Adasuve.
TLSR: Let's look at pain management and oncology support. What products are in the pipelines in that space? Any recent trial results that investors should take a peek at?
SH: Again, I like to find specific investment opportunities as opposed to focusing on a category. That said, pain management is a sector that I know well.
TLSR: One of my relatives recently had a terrible case of shingles. Are there any new treatment products for this condition coming our way? And do companies in this space have other products that treat central nervous system disorders and inflammations?
SH: First, I am sorry to hear about your relative, but perhaps we can find him or her some good investments to help relieve the pain. Depomed Inc. (NASDAQ:DEPO) may be one of those. The company has a high-reward, low-risk grouping of assets. The shares have performed well this year, as this proposition has become better known to investors. Shares now approach $7.50/share-up 50% from the lows. Our price target is $9/share.
The company just added ~$240M to its balance sheet by converting assets into cash. We believe that putting this cash to work could drive upside to our price target. Importantly, management has been shrewd with cash lately-including the recent purchase of the approved pain treatment Lazanda [fentanyl nasal spray]. Also, the company's shingles drug, Gralise [gabapentine], continues to grow inline and ahead of our targets. Depomed could be an emerging specialty pharma company looking to make the shift to the elite world of profitable healthcare companies. The risk here is the redeployment of cash into assets that produce high returns. We believe the current management track record could bode well for investors.
TLSR: Let's look at generic topicals. Any picks in this space?
SH: Generic topicals have been a very favorable environment, because the space is under the radar for most big players. There are also clinical barriers to entry, such that supply tends to be in check with demand. In the past few years, this has led to strong upward pricing power, which has raised all boats higher.
One of my favorite names in this space is IGI Laboratories Inc. (IG). This small, generic company has many potential positive inflection points.
First, the company could turn earnings-per-share [EPS] profitable this year, which tends to be a good time to buy generic stocks. Second, the company has 13 proprietary abbreviated new drug applications [ANDAs] at the FDA. The first proprietary approval could come in the next six months. That could validate the whole business model and send shares significantly higher.
Our valuation on IGI Labs is $3.50/share, relative to the current price of ~$2. We base this valuation on a 20x multiple of forecasted 2016 EPS. The risk here is that the approvals fail to materialize.
TLSR: What about molecular diagnostics? I understand you have a target price on PDI Inc. (NASDAQ:PDII), which has recently entered in to a collaboration agreement. Can you talk about the prospects of this firm?
SH: PDI is a really neat story; it just expanded into molecular diagnostics. The company is a contract sales organization [CSO], which means it has a "sales force for hire" for other pharmaceutical companies. That's been a tough business model the past few years, but we expect it to improve the next two years. That alone makes PDI stock interesting to us, given that it trades just below $5, with ~$3.50/share in net cash.
The kicker is that PDI is putting small amounts of cash to work that could have large payouts. This includes two recent asset acquisitions for small up-front payments. The company can market these products with its excess CSO capacity such that it mitigates the marketing risk. The payouts from these recent deals could start to be apparent in H2/14. We think now may be the time to invest.
Our price target on PDI shares is $9, which is derived from cash [~$3.50/share] and the base business [~$5/share based on 20x EPS potential in 2015].
TLSR: Do economic stresses in the international market [including North America] impact the prospects of the firms we have talked about today?
SH: Fundamentally, economic circumstances do not reduce demand, as people always get sick. Economic stress may hurt healthcare coverage and reimbursement, but not in a material way. The one thing that does come into play is financing. In a low-risk investment environment, investors will demand a higher premium to invest in money-losing companies. Companies with greater financing flexibility will tend to outperform in tougher economic times.
TLSR: Thanks for your time, Scott.
SH: Thank you.
This interview was conducted by Peter Byrne of The Life Sciences Report and can be read in its entirety here.
Scott Henry is the head of healthcare research and a senior research analyst with ROTH Capital Partners, covering the specialty pharmaceutical sector. He came to ROTH Capital from OppenheimerFunds, where he led coverage of the U.S. pharmaceutical sector. He has also been affiliated with Thomas Weisel Partners, ABN AMRO and Leerink Swann & Co. His coverage universe has included specialty pharmaceuticals, large-cap pharmaceuticals, biotech and selective medical device names. He has 12 years of sellside experience. Henry was ranked #2 in The Wall Street Journal's "Best on the Street" stock-picking survey in 2010, #3 on the Forbes/Zacks Investment Research "Best Analysts" list for the Drugs category in 2010 and #3 in the pharmaceutical sector by Forbes.com/StarMine for earnings estimate accuracy in 2007. His investment views have been cited in The Wall Street Journal and The New York Times and he has made frequent appearances on CNBC, CBS Marketwatch, and Bloomberg. Henry attended the University of Rhode Island and received a master's degree in business administration with distinction from Cornell University.
1) Peter Byrme 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: None.
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3) Scott Henry: I own, or my family owns, shares of the following companies mentioned in this interview: Alexza Pharmaceuticals Inc., Depomed Inc., PDI, Inc., IGI Laboratories Inc. I personally am, or my family is, 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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