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Intrepid Investor
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Family man. Value investor. Multiple publications in peer-reviewed medical journals. No financial background.
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  • Beware Those Biotech Bargains
    • Looking for value in beaten down biotech stocks is challenging. A year ago I presented a basket of 11 that met certain criteria, and recommended 5.
    • Two of the 5 recommended (Ambit and Prosensa) are buyouts, and Curis is up more than 120%. Four of the 6 not recommended are losers down another -15 to -91%.
    • To beat a good biotech index fund by picking individual stocks, you have to be very good or just lucky.

    A year ago I presented a basket of potential biotech bargains (down from 1-year highs by more than 50%) from which to select stocks to buy and hold. Highlighted in gray in the table below are the stocks I either owned, AEterna Zentaris (NASDAQ:AEZS), or recommended: Ambit (NASDAQ:AMBI), Curis (NASDAQ:CRIS), Prosensa (NASDAQ:RNA), and Vical (NASDAQ:VICL). The average 1-year return on those 5 was +58% versus +55% for the iShares NASDAQ Biotechnology Index (NASDAQ:IBB), so my stock picking was not exceptional except that 2 of the 5 became acquisitions. Two (AEZS and VICL) were bombs because of failed trials, and are down -80% and -70%, respectively, over the past year.

    In September 2014 Daiichi Sankyo (OTCPK:DSKYF) offered $15 per share or about $315 million for Ambit so it could add small molecule FMS-like tyrosine kinase-3 (FLT3) inhibitor quizartinib to its oncology portfolio. The phase 3 investigational drug is for acute myeloid leukemia. In all, AMBI had four small molecule inhibitors for cancer and inflammatory diseases which in June 2014 were in Phases 3, 2, 1 and pre-clinical development. AMBI had Teva (NYSE:TEVA) for a partner in its Phase 1 trial of a BRAF inhibitor for cancers. AMBI had about $50 million cash on its balance sheet at the time of the offer.

    In November 2014 Biomarin Pharmaceutical (NASDAQ:BMRN), with expertise in bringing drugs for extremely rare diseases to market, agreed to pay $17.75 per share and up to $840 million to acquire Prosensa so that it could "bring drisapersen to market as quickly as possible." Drisapersen is an antisense oligonucleotide which induces exon-skipping [of the bad portion of the mutated gene in Duchenne muscular dystrophy] to increase expression of a truncated version of dystrophin, the diseased protein. Exon-skipping is an elegant methodology, or platform, that can be applied to other single gene disorders, and made RNA an attractive acquisition above and beyond the orphan drug drisapersen.

    Curis, which has not yet been acquired, is up 123% over the past 12 months. This company interested me in large part because collaborator Roche/Genentech (OTCQX:RHHBY) got market approval for vismodegib for basal cell skin cancer. In addition CRIS had just filed to start Phase 2 testing of this drug for idiopathic pulmonary fibrosis.

    (click to enlarge)

    Given that pipeline, I thought the market cap of only $175 million in July 2014 (over $400 million recently) was pretty cheap, but I didn't buy. I missed out on hefty gains for both AMBI and CRIS.

    Lessons learned and conclusions:

    • Beaten down biotech stocks are usually beaten down for a reason. Price (market cap) should be the final consideration in biotech stock selection, not the 1st. Look 1st for a biotech company with increasing revenues based on a product already on the market (e.g. CRIS which has Erivedge partnered with RHHBY). Deep pipeline supported by a hefty R&D budget is important but the value of that pipeline is not easy to assess. What I look closely at now are the scientists behind that pipeline. Platform is a key ingredient for success, and right now, gene editing is an attractive one.
    • The wide spread in stock price performance highlights the big near-term risk and reward of biotech investing. I also think it shows biotech is not as much a bubble as some think. To further that notion, I now see 38 biotech stocks more than 50% off their 30-month highs among the 187 that I track.
    • If you don't pick a company with secure revenue from either a product on the market or from deep-pocketed parnters, be prepared to see the price plunge on failed trial results. I sold both VICL and AEZS at a loss.
    Tags: RNA, CRIS
    Aug 04 2:50 AM | Link | Comment!
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