Focus On Catalysts To Cash In On Biotech: Jason Kolbert

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 |  Includes: CELG, GILD, VRTX
by: Life Sciences Report

Summary

In a bull market, everybody looks like a genius and everybody's right. But for me, as an analyst, it's all about the mathematics of modeling and the probabilities of success.

Biotech-specific funds see the hiccup as just that, a hiccup, and their bullish viewpoint overall hasn't changed.

You never have the luxury of not being focused on catalysts.

When progress is made in drug development, value is created. Investors recognize that progress by purchasing shares in companies when milestones- which act as catalysts- are met. The Maxim Group's Senior Managing Director and Head of Healthcare, Jason Kolbert lives by catalysts, and urges his investor clientele to understand there is no other reason to buy a stock except in anticipation of new information that creates value. In this interview with The Life Sciences Report, Kolbert discusses six names that have immense regenerative power for portfolios.

The Life Sciences Report: You follow some mid- and large-cap biotechs, in addition to small ones. Why did biotech shares pull back so severely starting in March?

Jason Kolbert: We had a tremendous rally in biotechnology in January and February, and then the bubble burst. Some of that is evidenced in the diatribe directed at Gilead Sciences Inc. (NASDAQ:GILD). Gilead is a large-cap leader in the world of biotechnology, and there was a lot of negative publicity directed at the company focused on the pricing of Sovaldi (sofosbuvir), its innovative therapy for hepatitis C. That seemed to be the straw that broke the biotech bubble. Gilead actually pulled back very sharply to the low $70s per share.

Then the company reported Q1/14 earnings. Not only were the earnings good, but the Sovaldi numbers were the best we've ever seen for a new drug launch in the history of pharmaceuticals. The company reported total sales of $5 billion ($5B) for Q1/14, but total antiviral product sales increased to $4.51B, which is up from $2.06B in Q1/13. That dramatic increase was due mostly to sales of Sovaldi, which launched in December 2013.

Here we have a large-cap biotech company that is knocking the cover off the ball in terms of a product launch - in revenue, size and scope. In hindsight, what a great buying opportunity we had, because right now, Gilead is trading at about $81/share.

But back to your question. Why did biotech pull back? What was the underlying reason? It wasn't pricing on Sovaldi: that was just the trigger. I think it has to do with the rate of growth in the sector. Over the past couple of years, people have been very concerned about economic growth. One of the places an investor could reach for growth was in biotech. When we have economic recovery, the need to reach out for growth is less. The reality is that, in a recovering economic cycle, we have dollar rotation out of high-growth, high-risk sectors like biotechnology into lower-risk, lower-growth companies that tend to do better in an economic recovery.

TLSR: What does that mean going forward? What are institutional investors telling you now about their plans? Will they continue to invest in biotech?

JK: We know that toward the end of the biotech bubble, we had generalists building their exposure to the biotech sector. Generalists are the last ones in, and they're the first ones out, because biotech is relatively complicated, and investors need to understand the science to understand the probabilities of success. It's not just about chasing momentum. Portfolio managers who are generalists are telling me they're done with biotech for a while, but the biotech-specific funds see the hiccup as just that, a hiccup, and their bullish viewpoint overall hasn't changed.

People are a little bit more cautious as to what they invest in. They want to make sure that the fundamentals are good and that catalysts will occur within the time frame that they're seeking for performance. I think that you will still see initial public offerings over the coming year, but they will be at lower valuations.

On balance, we remain very positive on the biotech sector. We think the worst part of the correction is over, and as we head into the summer, we look toward what might be the next major catalyst in the space, the results of the Vertex Pharmaceuticals Inc. (NASDAQ:VRTX) trials in cystic fibrosis (CF). If we were to get good data from those trials, that could spark something we rarely see, which is a summer biotech rally.

TLSR: With the generalists out, do you see the biotech market as being less volatile?

JK: I don't think anyone who's a seasoned, experienced analyst in biotech will ever say they see the sector as less volatile. Biotech will always be volatile, because it's driven by a lot of binary events. Investing in biotech is about managing that volatility. As we go up in terms of market cap, we think the volatility goes down. Even so, remember that Gilead stock virtually doubled over the last year. There has been volatility both to the upside, as well as to the downside, but ultimately, the fundamentals exert themselves.

TLSR: Since the generalists have gone to dividend-producing stocks, and the specialists are still bullish on biotech, does this imply that investors need to be more selective now in their biotech stock choices?

JK: I love your question, because everyone always says, "Well, you know, it's a stock picker's market." When is that ever not true?

Clearly, in a bull market, everybody looks like a genius and everybody's right. But for me, as an analyst, it's all about the mathematics of modeling and the probabilities of success. It's a stock picker's market no matter what the cycle. At the end of the day, whether you're a buy-side analyst, a sell-side analyst or sector specialist, your burden is always to be picking stocks. Fundamental analysis is what creates edge for biotechnology investors-being able to adjudicate the probabilities of success of any given therapeutic in development.

TLSR: Do investors have to be more solidly focused on catalysts now?

JK: No. I'm going to answer that question like I did the previous, which is to say that biotech analysts and investors should always focus on catalysts. You never have the luxury of not being focused on catalysts. The same emphasis remains in force. The reason investors should be looking at biotech companies is precisely because there are so many events in the space, and their ability to handicap those events is how they make money.

TLSR: Let me go to stem cells and regenerative medicine. What are some of the next events in the stem cell space that could get investors' attention?

JK: I think the next event will involve an acute intervention with an autologous (cells or tissue donated by the same patient) cell therapy, but I am also excited when I look at cell therapy's potential as an intervention in an acute setting, which is where a single dose could have a dramatic impact on a patient's health, whether it's a STEMI or a stroke, versus multiple doses for a chronic disease state, like CHF or ulcerative colitis. Mountains of data suggest this stuff works, but proving that clinically, with statistical significance of robust efficacy in a large pivotal trial, is critical.

TLSR: There is a player in the placenta-derived cell market, Celgene Cellular Therapeutics (a unit of Celgene Corp. (NASDAQ:CELG)). Do you have any knowledge of how these technology platforms are differentiated?

JK: I really don't know. Celgene, unlike the micro-cap biotech companies, doesn't talk a great deal about what it's working on and what the doses are. We believe that Celgene pulls its cells from a slightly different place in the placenta. I do know that in the case of Pluristem, its cells are pulled from the decidua - the maternal side of the placenta - but I don't know if that's true with Celgene. We know that Celgene is working on Crohn's disease. If Celgene were to announce data, again, that would be positive for everyone in the industry, because it would suggest that other companies' products work as well.

TLSR: Jason, thank you for taking the time.

JK: Thank you.

This interview was conducted by George S. Mack of The Life Sciences Report, and can be read in its entirety here.

Jason Kolbert has worked extensively in the healthcare sector as product manager for a leading pharmaceutical company, as a fund manager and as an equity analyst. Prior to joining Maxim Group, where he is managing director, Kolbert spent seven years at Susquehanna International Group, where he managed a healthcare fund and founded SIG's biotechnology team. Previously, Kolbert served as the healthcare strategist for Salomon Smith Barney. He is often quoted in the media and is a sought-out expert in the biotechnology field. Prior to beginning his Wall Street career, Kolbert served as a product manager for Schering-Plough in Osaka, Japan. He received a bachelor's degree in chemistry from State University of New York, New Paltz, and a master's degree in business administration from the University of New Haven.

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