Biotech Forum Daily Digest: Will Biotech Finally Break Out? All Eyes On Gilead, Spotlight On Seres Therapeutics

|
Includes: BIIB, GILD, MCRB, MRK, OCUL, OPK, RLYP, TBRA, VRX
by: Bret Jensen

Summary

The biotech sector had another strong week and indices are within a few percent of a stubborn resistance level that has existed throughout 2016.

In order to breakthrough that ceiling, the sector needs more earnings beats from the large caps like Biogen provided last week. Gilead is on deck after the bell today.

Here is the other notable news, events and key analyst ratings from across the sector.

"The groundhog is like most other prophets; it delivers its prediction and then disappears." - Bill Vaughan

Note: To get these Biotech Forum Daily Digests as soon as they are published, just click on my profile and hit the big orange "Follow" button and choose the real-time alerts option.

Biotech posted another small gain in trading Friday and the sector has rallied within a few percent of what has proven to be a stubborn upward resistance level throughout 2016 over the past couple of weeks. Helping were good earnings from one of the first big biotech concerns to report this quarter as Biogen (NASDAQ:BIIB) beat both on the top and the bottom lines on Thursday. Also helping the sentiment especially in the small cap space was the $1.53 billion takeout of small biopharma Relypsa (NASDAQ:RLYP) at a 60% premium also on Thursday.

Click to enlarge

I am hopeful we can finally breakthrough the upward resistance levels that have existed all year on the biotech sector. I think the long bear market in this area is officially over. However, whether we can decisively rally through the top end of a recent trading range will be determined on how well second quarter earnings results from the large cap players come in over the next two weeks as well as if we continue to see an uptick in M&A activity in the space. It is something I will be following closely.

The next big biotech concern to report will be Gilead Sciences (NASDAQ:GILD) whose results will hit the tape after the bell tonight. Expectations are for $3.00 a share in earnings on approximately $7.8 billion in revenue. Investors will be keyed in to how hepatitis C sales are faring in established markets of United States and Europe.

The company had provided eight straight earnings beats since Sovaldi hit the market in the first quarter of 2014. However, last quarter the company missed both top and bottom line expectations. To be fair, the bottom line miss was the result of unforeseen $200 million reserve for litigation with Merck (NYSE:MRK), which now looks to on its way to be settled in Gilead's favor. Gilead's results will be one of the most watched in the market this week.

Speaking of Merck, it announced today that its experimental Ebola vaccine, V920 has received accelerated review status in the U.S. and EU. The FDA has tagged V920 a Breakthrough Therapy which provides for more intensive guidance from the FDA review team, the involvement of more senior agency personnel and a rolling review of the New Drug Application {NDA}.

Ocular Therapeutix (NASDAQ:OCUL) down in early trading on Monday as the FDA after reviewing the company's New Drug Application (NDA) seeking approval of DEXTENZA (dexamethasone insert) 0.4 mg for intracanalicular use in the treatment of ocular pain following ophthalmic surgery gives the company a complete response letter {CRL}.

However, the concerns center around the compound's manufacturing facility not the drug itself. We saw something similar with Opko Health's (NYSEMKT:OPK) RAYALDEE, which has since been approved after the company address the FDA's concerns. I would not be surprised to see the same happen for DEXTENZA.

I wish I could hold out the same hope for Tobira Therapeutics (NASDAQ:TBRA). The shares of this small biotech concern have been more than cut in half today after its lead product candidate cenicriviroc {CVC} failed to achieve its primary endpoint of a two-point reduction in NAFLD Activity Score in a Phase 2b clinical trial, CENTAUR, in patients with non-alcoholic steatohepatitis {NASH}.

Click to enlarge

NASH is proving to be one tough disease to make progress against as have seen few successes in this area so far. I am hoping Gilead provides some color on its mid-stage efforts within its pipeline for the treatment of NASH in its conference call later today.

Valeant Pharmaceuticals (NYSE: VRX) continues to be one of the biggest "battleground" stocks in the pharma or biotech sector. Rodham & Renshaw came out with an interesting Buy rating and whopping $90 price target on Valeant last week.

Meanwhile RBC Capital, Wells Fargo, Mizuho Securities, BMO Capital and Canaccord Genuity all stuck with their Hold or Sell ratings with price targets ranging from $28 to $38 a share on this past market darling. The shares currently trade at just under $23 a share. I still can decide if Valeant is one of the best turnaround stories of the decade or a massive value trap so I continue to avoid the shares.

Gilead Sciences continues to be a battleground stock as we await its quarterly numbers after the bell tonight. Over the past four weeks heading into earnings, Jefferies and Maxim Group have reiterated Hold ratings on the HIV & HCV market leader. Leerink Swann and Cowen & Co. are more optimistic and have reissued Buy ratings and price targets in the $120s over the same time frame. It will be interesting to see which analysts are closer to the mark after the eagerly awaited report tonight.

Note: New analyst ratings are a great place to start due diligence, but nothing substitutes for deeper individual research in this very volatile sector of the market. Many of the small-cap names highlighted in the "Analyst Insight" will eventually appear in the "Spotlight" section, where we do deeper dives on this type of promising but speculative small-cap concern.

Today's Spotlight feature to open the week will be on Seres Therapeutics (NASDAQ:MCRB) as the result of a request from a SeekingAlpha follower.

Company Overview:

Seres Therapeutics is a Cambridge, Massachusetts based microbiome therapeutics platform company that focuses on the development of biological drugs designed to restore health by repairing the function of a dysbiotic microbiome. The company just came public last year and has a market capitalization of just north of $1.3 billion and the stock trades for just a tad over $34 a share. The shares 52-week high is just above $50 a share

Pipeline:

The company has a few key compounds in development at the moment.

Click to enlarge

SER-109:

This an investigational oral microbiome therapeutic for the prevention of Clostridium difficile infection {CDI} in adults who have had three or more episodes of CDI within the previous nine months. Recurrent CDI affects 85,000 to 110,000 patients in the United States and is caused by antibiotic disruption of the microbiome. The FDA has designated SER-109 as a Breakthrough Therapy for this indication. SER-109 is currently in a Phase 2 clinical trial to assess its efficacy and safety. The company expects to initiate a Phase 3 study in the second half of this year. Results of that study should be out by yearend 2017.

SER-262:

This compound is target to be used following antibiotic treatment of primary CDI to prevent recurrence and expect to be in the clinic in the middle of 2016. Primary CDI affects roughly 640,000 to 820,000 patients in the United States each year. This drug is in Phase I trial development.

SER-287:

This is an oral therapy being developed as a potential treatment for ulcerative colitis {UC}. SER-287 is currently being evaluated in a Phase 1b study in patients with mild to moderate UC. Future development in other forms of IBD are under consideration. Ulcerative colitis is a serious chronic condition affecting approximately 700,000 individuals in the United States. The disease results in inflammation of the colon and rectum and can result in debilitating symptoms, including abdominal pain, bowel urgency and diarrhea.

Analyst Support & Balance Sheet:

In January of this year, the company entered into an agreement with Nestle Health Science for the development and commercialization outside of the US and Canada for product candidates for C diff infection and inflammatory bowel disease. It recognized a $120 million upfront payment from this collaboration in last quarter's results. It will be recorded that payment quarterly in equal installments over the next decade. Potential additional development, regulatory and commercial milestones will be recognized as revenue in the period in which they are achieved. Seres also expects to receive an additional $30 million in milestone payments later this year associated with the expected initiation of the SER-262 clinical study and SER-109 Phase 3 study. The company ended the first quarter with just over $300 million in cash which includes the $120 million upfront payment.

The company has gotten some positive analyst commentary of late. In July, Leerink Swann, Cowen & Co. and FBR Capital have all reiterated Buy ratings. It should be noted only Leerink proffered a price target and the analyst firm has $43 penciled in on Seres at the moment.

Outlook:

The microbiome area is an emerging development worth keeping an eye on. Seres has many of the traits I like to see in a small developmental firm including a few shots on goal, a significant collaboration deal and plenty of funding for development. It is also targeting addressable markets. Analyst coverage is only so-so if you consider price targets and the only near term driver is the development of SER-109. I will probably purchase a few shares and put Seres on my "watch" list, but at this time I think there are better opportunities to take fuller positions in the small cap portion of this sector.

Thank You & Happy Hunting

Bret Jensen

Founder, Biotech Forum

Disclosure: I am/we are long BIIB, GILD, OPK, TBRA.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.