Biotech: Mega-Caps Show Investors The Way

 |  Includes: AMGN, BIIB, CLBS, GILD, ONCS
by: Amy Baldwin

Having been an active investor in both the biotech and tech industries, it is my opinion that more fortunes have been won-- and lost-- in biotech than most any other industry. I might also add that the ebb and flow happens in a compressed fashion that renders the "beta" (implied volatility) for most of these stocks suitable only for intrepid investors. As a biotech investor, you knew that, right? If you've invested in even the smallest handful of biotech stocks, then you have no doubt experienced volatility. It just comes with the territory. As such, the adage "nothing ventured nothing gained" rings truer with biotech than any other segment. Just ask Dendreon (NASDAQ:DNDN) investors whereby, after promising trial data and perceived market potential, the stock rocketed from $0.90 to over $30.00 in a matter of six months. So, large sums can be made in biotech-- mostly among traders who understand the risks they assume, have a working knowledge of the biotech and investment industries, are sure to put a stop-loss behind their positions, and finally, are unafraid of going against the grain when it comes to selling and buying. That trader who booked a huge gain in Dendreon would have lost most of it had they held on. A good trader would have moved on after the gain was booked. The stock ultimately dropped back to $4.00 in the space of a few months.

Gauging Risk: Large Cap Investments, Small Cap "Specs"

If you are going to play the biotech investor game, you will first and foremost need to recognize that any investment in the small cap biotech universe is speculative, and any process should include ample due diligence as well as an exit strategy. There is a place for long-term investing in biotech, but it exists with mid to large cap companies with a proven track record of managing a diversified portfolio of treatments through the approval process and distribution in the market place. Any reasonable candidate would have a formidable stable of revenue-generating products with ample generic protection for its portfolio. Amgen (NASDAQ:AMGN), Gilead Sciences (NASDAQ:GILD) and Biogen Idec (NASDAQ:BIIB) would be the best examples of diversified biotech powerhouses. Smoother revenue and earnings trajectories have afforded terrific returns to shareholders over long stretches of time. This has endeared them to institutional investors and fund managers (who don't have the mandate to shoot for the moon with more speculative picks).

A closer look at these three large biotechs is revealing. They are usually anchored by one outstanding and hugely profitable treatment. They also have a constellation of smaller and mid-market "niche" treatments and a decent pipeline as well. See chart below:

Company Market Cap "Anchor" Drug

Amgen $64.5 Billion Epogen

Gilead $42.4 Billion Vistide

Biogen $34.3 Billion Rituxan

What is a consistent characteristic of the three is that the path to consistent profitability was generated via a breakthrough drug that paved the way for the company to more diversified channels of revenue. It makes sense if you think about it: the profits can be plowed back into R&D or for smaller acquisitions that enable a legacy of future profitable treatments. For Amgen, it could not be the company it is today without the success of "Epogen". And for Biogen, "Rituxan" was instrumental in generating revenues necessary to create the company it is today.

Ultimately, for biotech investors the search begins with smaller companies that show the promise of getting approval and, hopefully, success in the market place. We are not here to talk about "steady eddy" performers, but about candidates that have the ability to add a potential zero to the right side of your invested capital. It is the rapid escalation in value that is so compelling to biotech investors that keeps them coming back to smaller more speculative issues. It is a fact that biotech lies at the creative front of business, a place where science and business merge to form that combustible concoction of potential, that attracts some of the sharpest minds in industry. So let's talk about a couple candidates with the potential to make that trade a spectacular, albeit volatile ride to investment gains.

Two Candidates with Outsized Potential: OncoSec Medical (NASDAQ:ONCS) & NeoStem Inc. (NBS)

OncoSec Medical Incorporated

OncoSec (ONCS) is yet another San Diego based biotech with aspirations on the treatment of various skin cancers. Where it diverges from the other market entrants is its focus on a proprietary therapeutic delivery technology that centers on the notion that delivery methods haven't really kept up with advances in immunotherapic treatments. Think Medtronic (NYSE:MED) or the medical device division of Johnson & Johnson (NYSE:JNJ) as the best analogy as a company that specialize in the "razor blade", or "picks and shovel" approach to treatment. (Treatments might change, but a good delivery mechanism provides for steady earnings). By focusing on the device that delivers the chemotherapeutic agent, OncoSec is essentially delivering a next generation platform that makes treatment less intrusive and more effective--important when many of these cancers occur on the area most prone to skin cancer: the face. This is something that surgeons and their patients can easily rally behind. It is hard enough to have operable cancer on the most visible part of the human body, let alone the awkward healing process for intrusive surgery. A more effective treatment with tremendous cosmetic benefits are probably the future.

OncoSec has three Phase II clinical trials underway with its OMS ElectroImmunotherapy product (recently renamed "ImmunoPulse"). Oncosec's device using electroporation technology (stimulates cells to engage better absorption rates of an anti-cancer therapy) has shown efficacy in patient treatment outcomes with respect to the disfigurement and functional impact of existing surgical procedures. The proprietary electroporation delivery system also better enables uptake by cells for powerful cancer fighting agents. Results have been promising with 90% of treated lesions demonstrating local control and 53% of patients with metastatic showing objective response. 16% of treated patients showed complete regression according to recent data.

OncoSec 's stature as a small cap player (approximately $17M at present) belies its potential market expansion as the drug delivery component of novel immunotherapies have not evolved. OncoSec could be a hidden gem if it can capitalize on its promise as a legitimate device maker-- especially since the consensus among many analysts is that we are at "early innings" in immunotherapy treatments of cancer.

NeoStem, Inc.

NeoStem is a more established player than OncoSec, but it has faced challenges in its treatments in the development of proprietary cellular therapies in cardiovascular disease, immunology, and regenerative medicine. While it wields a market cap of $88M its stock price has languished in the sub-dollar range for months as the market takes a "wait and see" approach to its current product candidate, AMR-001, which is in Phase II trials to treat damaged heart muscles following acute myocardial infarction.

NeoStem's appeal lies in the market's reduced expectations, providing a decent entry point at current valuations. What the market may be missing is that NeoStem has several avenues to growth: While it has its own promising cell therapy, it combines this with operational expertise as a leader in the manufacture of cell therapies. It touts Baxter as one of many clients that have signed on to receive treatments that have emanated from 65,000 square feet of manufacturing capacity. Another division, also, is in the business of collecting and storing adult stem cells as well as cord blood from infants. Some of the most successful businesses have this component to their business model: proprietary storage capabilities. While the excitement over stem cells waxes and wanes, it would be hard to dispute that, in some capacity, expertise in this domain will be valuable to future generations.

Given that NeoStem had such high expectations, it might take a bit more convincing in the form of pure results to move the needle. OncoSec might seem to be the fresher choice given tremendous momentum in immunotherapy. Regardless, both firms are solid - but speculative-- candidates to add to a biotech or biopharmaceutical portfolio that has growth in mind.

Disclosure: I am long ONCS, NBS, JNJ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.