- Inside ownership is one of many considerations in stock selection, and certainly not the primary one.
- It is nevertheless discouraging to make a high risk:reward investment, then find out management is selling - I prefer to partner with management that is also buying.
- Ariad is my top pick among the seven biotechs featured below with recent insider buying.
ADMA Biologicals' (OTCQB:ADMA) insider Adam Grossman bought 2,100 shares on August 13. ADMA is a $91M market cap company that collects blood, separates it into its components, and markets some of the products. Principal among them are polyclonal antibodies. Polyclonal (meaning of mixed cellular lineage) are harvested as opposed to the monoclonal antibodies that are genetically engineered from a single clone of cells. Its biggest product candidate undergoing trials is polyclonal immunoglobulin for respiratory syncytial virus known better as RSV. Upon first reading about ADMA, I thought I had discovered a gem: revenues are doubling y-o-y, losses attributable to a huge R&D budget triple that of revenue for 2013 and 2014H1. Net current asset value, a measure of financial health discussed in this SA article, increased to $21M in 2013 from $9M in 2012. ADMA is asset-light with PP&E representing only 2% of total assets on its balance sheet. Since doing the research for this SA article, I consider hard assets measured by PP&E part of a biotech company's economic moat. But what concerned me most about ADMA was this: Novavax is in stage 3 with a vaccine for RSV, and a vaccine for RSV will not be good for ADMA RSV antibody sales. I decided not to buy this one.
Galectin Therapeutics (NASDAQ:GALT) insiders bought 5,000 shares on August 14. GALT is a $101M market cap company that has a drug in early clinical trials to prevent progression to liver cirrhosis in patients with NASH. GALT is asset-light with almost no PP&E. Net current asset value was $8.2M at the end of 2013 up from $7.9M at the end of 2012. When I found in its 10K for 2013 no revenues to support its R&D budget, I stopped looking at this company, since I consider some source of revenue to be a requirement.
Enanta (NASDAQ:ENTA) insider Stephen Buckley bought 1,000 shares on August 14, but another insider sold shares the same week. ENTA is a $739M market cap developer of drugs for hepatitis C. ENTA has two protease inhibitors for HCV in phases 2 and 3 trials with AbbVie. Another drug for HCV has completed phase 1 in partnership with Novartis. It has an unpartnered drug for methacillin-resistant staphylococcus aureus (MRSA) in phase 1. About 1/3 of revenue, which is generated primarily through collaborative research and license agreements, is spent on R&D. PP&E represents only about 4% of assets. NCAV was $106M in 2013, up from $93M in 2012. ENTA has a P/S of only 4.3 and has had enough profits in the past year to have a P/E of 19. ENTA makes my short list of stocks to consider buying. My biggest concern would be the competition in the HCV market. This company was recently covered on Seeking Alpha in this article.
Insys (NASDAQ:INSY) insiders continue to buy shares, most recently 3,000 shares on August 13. SA Contributor Ken McGaha wrote a nice article on INSY on August 12. INSY, with two drugs for pain in cancer patients on the market, and a market cap $1.2B, grew revenue from $0 in 2010-11 to $15M in 2012, to $99M in 2013, and has already recognized $97M in 2014H1. At the end of 2014H1, net current asset value was $74M, up from $26M four quarters prior. My personal preference is for biotechs with a hefty R&D budget to support a deep pipeline, and I don't see much in INSY's. R&D was $18M or 11% of $166M revenue for the past 4 quarters. P/E of 24 and P/S of 5 seem reasonable with the stock 37% off its 1-year high, and I like the sales growth, but I won't buy a reasonably priced biotech that is not spending more on R&D to support a pipeline of novel drugs than INSY is.
Pacific Biosciences of California (NASDAQ:PACB) insider William Ericson bought 123K and 29K shares on August 12 & 13. This $366M market cap DNA-sequencing company has had inconsistent revenue growth from $34M in 2011 to $26M in 2012 to $28M in 2013, then $23M already in 2014H1. R&D budget exceeded revenue by 88% and 60% for 2012 & 2013; for 2014H1 R&D was just in excess of revenue at $24M. The 2014H1 revenue growth and the R&D budget interested me enough to look at ROIC which according to morningstar.com has been declining. My own calculations of ROC adjusted for R&D, which capitalizes R&D expenses, the unamortized portion of which appears as an asset on the balance sheet, also show a slight decline.
PACB stock price is 35% off its 1-year high, and P/S = 8 compared to 13 for Illumina, so I think it is reasonably priced. I won't buy.
Dynavax (NASDAQ:DVAX) insider Eddie Gray bought 25,000 shares on August 14. DVAX is a $383M market cap biotech that has a DNA-based platform for re-programming the immune system to prevent infections like hepatitis B, or suppress the immune system where it is causing the disease like in lupus and asthma. Sounds like a great platform. The HBV vaccine is in phase 3; its immune therapeutics for lupus (partnered with Glaxo) has completed phase 1; its immunotherapeutic for asthma (partnered with AstraZeneca) is in phase 1. DVAX has a cancer immunotherapeutic in phase 1. Revenues were down Y-o-Y in 2011 and 2012, slightly up in 2013 and so far in 2014 ($6.6M). R&D budget which far exceeds revenue, remained at about $50M yearly 2011-2013, and is already at $36M for 2014H1. At the end of 2013, net current asset value was $174M, up from $103M at year's end 2012. The pipeline with partnerships and the bold R&D budget interested me enough to compute the R&D-adjusted ROC which has been downtrending but turned upward for 2014H1 on an annualized basis. I attributed this to slight uptick in revenue and big increase in R&D.
DVAX is a company I may study further, but I'm not ready to buy.
ARIAD (NASDAQ:ARIA). An insider purchased shares for Sarissa Capital worth nearly $5M this month. I have looked at ARIA and its tyrosine kinase inhibitor before. Let's start with a few performance figures, then discuss its drug for leukemia:
- ARIA share price fell off a cliff in October 2013 on bad news (discussed below)
- ARIA stock is still 75% off its 52-week high
- Like Pharmacyclics (NASDAQ:PCYC), ARIA has a tyrosine kinase inhibitor on the market
- While PCYC has 3 novel molecules in phase 1 and 2 trials compared to Ariad's 1 in phase 2, ARIA's market cap is only $1.1B (enterprise value $0.9B) compared to $9B for PCYC (enterprise value $8.5B; data source: finance.yahoo.com)
- ARIA is an asset-heavy company with PP&E ($195M gross) representing 31% of total assets on its balance sheet. PP&E constitutes part of a pharmaceutical firm's moat. PCYC has much less of its asset in PP&E ($40M gross)
- ARIA spent 2.5x total revenue on R&D in 2014H1. PCYC spends a fraction of its revenue on R&D
- Despite the disappointing sales & revenue, Ariad's R&D-adjusted ROC is turning upwards in 2014, though still negative. In contrast, R&D-adjusted ROC for PCYC has turned down from 44% in 2013 to a projected 6% in 2014H1 (not shown).
The value and risk of Ariad's Iclusig. Tyrosine kinase inhibitors or TKIs are now a first-line therapy for patients with chronic myeloid leukemia or CML. The American Cancer Society has an overview here. TKIs inhibit the cancer-causing product of two genes called BCR and ABL that become abnormally fused together in CML cells. Iclusig is a third generation TKI that is effective in patients that have become resistant to other TKIs because of additional mutations in their CML cells. Iclusig, generic name ponatinib, can put such CML patients into sustained remission, which was a significant breakthrough published here. However, this research, first released in October 2013, and the FDA clinical hold that resulted, pushed ARIA's stock price off a cliff. The bad news was about blood vessel clotting events which occurred in 17% of patients in that trial. Side effects of Iclusig are discussed further in the ARIA 2014Q2 earnings release.
My own take on the November 2013 editorial in NEJM about ponatinib was that its value to CML patients who had failed other therapies was great enough that its toxic effect on blood vessels or the clotting system, once better understood, will be mitigated and eventually be infrequent enough to be accepted. This has happened with other therapies for cancer such as anthracyclines and Herceptin - the cardiac toxicity of those drugs for breast cancer are now better understood and mostly avoidable. The FDA allowed marketing of Iclusig to resume, but sales are subdued. I certainly wouldn't dismiss the concerns about the drug or the risk those who invest in ARIA are taking. However, whenever such a huge selloff occurs as did with ARIA on fears that I think might be exaggerated, I become interested.
ARIAD valuation. I do not know how to put a price tag on a company, so instead I make comparisons imperfect as that may be. I find Pharmacyclics similar to Ariad in that both have a single product - a TKI - on the market. Both have limited pipelines. Imbruvica, useful for chronic lymphocytic leukemia or CLL, has generated a lot of revenue for PCYC, so PCYC now has a market cap of $9B, and a P/S of 20. ARIA has a P/S of 23. When and if - and this is a big 'if' - Iclusig's toxicity becomes less of an issue, and sales accelerate, ARIA has much more upside than PCYC. Also, with its current market cap of only $1B, ARIA is a much more attractively priced takeover target than PCYC. I don't know of another biotech you can buy for $1B or less that has an approved drug as beneficial to patients refractory to other therapies, do you?
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