Source: George S. Mack of The Life Sciences Report (6/13/13)
Alex Daley, senior editor of Casey Extraordinary Technology, seeks out undiscovered names because that's where he finds the big upside. In this interview with The Life Sciences Report, Daley brings his best ideas to investors who won't shy away from unloved biotech and medtech names. Sharpen your pencils, steel your nerves and take note of these three growth stories.
The Life Sciences Report: As I look at your coverage list, the first thing that pops into my mind is that you are following a lot of sophisticated technology, biotechnology, specialty pharma, enabling technologies and more. Do you have a theme, or are you just looking for growth wherever you can find it?
Alex Daley: Our coverage is ultimately about underaddressed or completely unaddressed markets. A lot of great technology is out there-far more than any one person or team of people can cover across the entire biotech spectrum, let alone when you add in specialty pharma, enabling technologies and diagnostics. The industry is absolutely massive.
We look for a very large patient population that is significantly underserved or a major technological breakthrough that will change the standard of care in a market. It all starts with the questions: Is there a market there? Will the technology sufficiently address it? Will it get approval? Will it make it to the market in a way that's profitable?
TLSR: You just iterated many important factors. But what about predicting what the payers will do? Developing a drug can take 10-15 years. How do you mitigate the risk of what the payer landscape will look like that many years out?
AD: We try not to predict what the payer landscape will look like because it's going to change dramatically with Obamacare, with changes in the European Union (NYSEARCA:EU) and with the differences in quality of care between the rich and poor populations in Asia. We try to concentrate on therapies that are either sole therapies-things like orphan drug categories-or therapies that so significantly change the economic picture of treating a particular disease that payers will have almost no choice but to cover it once approved.
For instance, we're big fans of the diagnostic market because we can focus on tests that will reduce the costs of caring for the average patient. Payers, be they private or public, will be behind the diagnostics if companies can prove that the tests are effective and that they save time, money and patients' lives. At the end of the day, predicting what payers are going to do can be relatively simple, if you stick to those areas where the algebra is simple.
TLSR: Is there a single most important characteristic that you look for in a company?
AD: We look at many different characteristics, from the science to the market need. But, I will note that one of the most overlooked characteristics is the management team. For instance, have the people involved with a product successfully brought other products to market in previous careers?
One of the problems we often see in biotechnology is people coming out of academia who have been studying a particular science for a long time. They understand how to progress the technology, but many times they don't understand how to move through the political process-that is, the complex approval processes of the drug agencies of the EU and U.S. They have got to have good relationships with the U.S. Food and Drug Administration (FDA) and the European Medicines Agency (NYSEMKT:EMA).
Most important in that process, companies have to design clinical trials well. We got burned by that recently when we were investors in Aveo Pharmaceuticals Inc. (AVEO:NASDAQ). We recognize our failures just as we celebrate our successes, since we cannot learn without doing so.
The company's renal cell carcinoma (RCC) candidate, tivozanib, partnered with Astellas Pharma Inc. (ALPMF:OTCPK), has proven itself to be very effective on the measure of progression-free survival (NYSE:PFS), which for a long time was the predominant FDA decision point for cancer treatments. Unfortunately, Aveo was trying to launch into an increasingly crowded field, and two things changed between the start and finish of its trial as a result.
"We look for a very large patient population that is significantly underserved or a major technological breakthrough that will change the standard of care in a market."
First, the standard of care for RCC has changed over the last four years. The drug that Aveo went up against, sorafenib (Nexavar; Bayer [BAYN:XETRA] and Onyx Pharmaceuticals Inc. [ONXX:NASDAQ]), has taken a back seat in recent years to Sutent (sunitinib malate;Pfizer Inc. [PFE:NYSE]), and despite being approved in 2005, is widely seen as a second-line treatment. Aveo was unable to adapt its trials to compare to that newer standard of care. Despite strong PFS data, the company's prospect failed to stack up on the measure of overall survival (OS), which has become the FDA's primary measuring stick, especially in crowded spaces on the oncological spectrum. We've seen multiple cases of moves to favor OS over PFS lately. Thus, when Aveo came up short on the newly preferred metric and against a second-line treatment, its PFS data was moot. The FDA decided there was not enough benefit for approval.
A reality of clinical trials in serious life-threatening disease today is that patients are only going to stay so long in experimental treatments. If they don't see progress, they switch treatments or their doctors decide to try other things. Aveo's management team failed to adapt to the market, and the company was punished with a 13-1 vote against the drug by the FDA's Oncologic Drugs Advisory Committee (ODAC). Aveo's stock price dropped significantly.
TLSR: Alex, when you speak to subscribers of Casey Extraordinary Technology, what do you find to be the single biggest mistake that retail investors are making? You just addressed what management mistakes can look like. What about individual investor mistakes?
AD: Without a doubt, the biggest mistake investors make is not understanding the time and cost of bringing a drug to market, or the likelihood of success in bringing a therapy from a molecule that's preclinical to clinical trials. I've seen many compounds that were effective against AIDS, hepatitis C (HCV), et cetera in vitro, but then, in vivo, the science doesn't add up. We are incredibly complex beings, and lab tests only account for tiny fraction of the scenarios a drug will face.
Our drugs also go through an incredibly complex regulatory regime. The regulatory process, frankly, may have swung a little too far toward the side of complexity, to the point where it's now estimated to cost $750 billion ($750B) to $1 trillion per year in total economic output to push development pipelines forward. It's an absolutely amazing machine of clinical trials and regulatory hurdles, and it now costs nearly $1B to bring any one particular drug to market.
Investors may hear a great pitch from a scientist who says his or her drug is the future of therapeutics, and they may fall in love with that technology. Many people fell in love with a technology called RNA interference (RNAi) in the late 1990s, for instance. It's only today, a decade and a half later, that RNAi has its very first drug on the market-and that drug, Kynamro, has tons of labeled restrictions and is used to treat a very, very narrow genetic disorder called homozygous familial hypercholesterolemia, which is an extreme form of high cholesterol caused by family genetics.
TLSR: You just addressed the drug mipomersen sodium (Kynamro), developed by Isis Pharmaceuticals Inc. (ISIS:NASDAQ) for homozygous familial hypercholesterolemia. It took 25 years to get this antisense/RNAi platform to bear fruit. Do you see a brand new platform as an unreasonable risk for most investors?
AD: That fear is actually something repeated outside of biotechnology and pharmaceuticals as well. In general, any truly novel technology will take significantly more time to make it to market than most people expect.
"We're big fans of the diagnostic market because we can focus on tests that will reduce the costs of caring for the average patient."
We think of technology as something that bursts onto the scene suddenly and out of nowhere. But, as I always point out, the first plasma TV was invented in the mid-1930s, before World War II, and it took a significant amount of time for that technology to be proven, to develop and to come down enough in cost to address a mass market. A similar type of adoption curve has to occur with any new technology, biotechnology or not. In general we find that it takes 20-30 years, depending on the complexity and the novelty of the particular technology, to take a Nobel Prize-winning idea like RNAi/antisense-or something as seemingly simple as the touch screen on our phones-to market.
TLSR: Let me hear an idea for today. A favorite name?
AD: One of our favorite companies is ImmunoCellular Therapeutics Ltd. (IMUC:OTCBB), which is targeting cancer stem cells. Our understanding of how cancer is formed is still nascent, despite decades of research. What we're finding is that cancer stem cells seem to resist radiation and chemotherapy very well; they play a big part in cancers' resistance to these therapies and they seem to be at the root of disease recurrence. ImmunoCellular has a vaccine candidate called ICT-107, a dendritic cell therapy in phase 2 trials for glioblastoma multiforme (GBM), the most common form of brain cancer. It is one of the deadliest and most malignant cancers and one of the most difficult to treat. It can be very hard, if not impossible, to remove all the timorous tissue from the brain. ICT-107 has huge potential to treat one of the most awful kinds of cancer.
TLSR: This is a very advanced dendritic cell therapy versus the one that we think of first in the cancer vaccine category, which was developed by Dendreon Corp. (DNDN:NASDAQ). ICT-107 targets several antigens-six actually-versus Dendreon's prostate cancer vaccine Provenge (sipuleucel-T), which targets only one, the prostate-specific antigen (NYSE:PSA). ImmunoCellular could have three different candidates in clinical trials by the end of this year. I wonder how the company has maintained such a low valuation, at less than $125 million ($125M), and why investors are so afraid of investing here?
AD: ImmunoCellular is in early stages. It doesn't have the public relations (PR) machine that Dendreon has, and Dendreon's product is, of course, already on the market. It's a crowded field, as well. As you point out, Dendreon is the leader in this area, but it has a much simpler technology. We see ImmunoCellular as an undiscovered story, something that will eventually catch on among investors. It just hasn't yet. To your question, I don't think that anything fundamental has held ImmunoCellular back, other than competition for attention and the Dendreon hangover.
TLSR: Not to belabor this topic, but some significant differences exist between the two companies' technologies. ImmunoCellular can make multiple doses of ICT-107 from a single harvest of cells, and these can be cryopreserved as well. Do you imagine that ImmunoCellular has been hurt by Dendreon?
AD: I agree with you completely. At the end of the day the market is not an efficient thing. In science and in investing, investors fall for popular, favorite companies, only to ultimately get their shirts handed to them because these companies are no more likely to be successful than other companies.
TLSR: Let's move on to another name that you like.
AD: The biggest, most prominent and fastest-growing major health condition in the world is diabetes. We're big fans of MannKind Corp. (MNKD:NASDAQ), which is the brainchild of Alfred Mann, a longtime entrepreneurial pioneer. Al has started and sold numerous companies, and has decided to tackle insulin. He founded insulin pump company MiniMed and sold it to Medtronic Inc. (MDT:NYSE) for $3.7B in 2001. At the end of the day, whether a person is a type 1 diabetic and can't produce insulin because his or her body destroys hormone-producing cells, or is a type 2 diabetic, so his or her body's cells are resistant to insulin, the treatment for most diabetics is to take insulin.
MannKind's inhalable insulin product, Afrezza (human insulin of recombinant DNA [rDNA]) is an ultra fast-acting insulin that peaks 12-14 minutes from the time the patient inhales, versus an hour and a half for injectable insulin. Also, it lasts only 2.5 to 3 hours versus injectable insulin, which lasts five to seven hours, so blood sugar levels are still low many hours later. Afrezza is an excellent tool for managing blood sugar.
TLSR: When do we get the readouts for the two trials, Affinity 1 for type 1 diabetes and Affinity 2 for type 2 diabetes?
AD: We're expecting the readouts on both in August. That's going to be the big catalyst for MannKind. If the stock is going to move, that's going to be the time.
TLSR: MannKind is up about 263% over the past 52 weeks and up about 71% in the past four weeks. Could you envision a selloff in good news?
AD: I don't see a selloff on good news. Yes, the stock is up significantly, but it's up from a ludicrous valuation for a market of this size. When we bought into the company it barely had a $600M market cap-and this is a company that has a multibillion-dollar annual opportunity on its hands if successful. Even if Afrezza is only moderately successful, or needs to have some sort of extra health safety label, its annual sales could be as high as that market cap. Since then the stock has increased significantly, even passing our price target. I don't see a lot more upside left in the stock in the short term, but if the news on Afrezza is good, it will be categorically good.
TLSR: What is your next idea?
AD: I'd like to talk about a very different kind of company. It's actually a company with a unique opportunity in healthcare: cosmetic surgery. Cosmetic surgeries have always been extreme procedures and have not caught on in the mainstream. Liposuction, facelifts and even tattoo removal are invasive, painful and difficult procedures, such that the market had an upper limit of those willing to take on all that, and the cost, for the visual benefit.
"We recognize our failures just as we celebrate our successes, since we cannot learn without doing so."
With that background, we're big fans of a company called Cynosure Inc. (CYNO:NASDAQ), a leader in laser cosmetics. It makes machines for laser hair removal, laser-assisted liposuction and laser fat removal. These are minimally invasive or completely noninvasive. The company has a tattoo removal machine that is significantly cheaper than traditional tattoo removal devices, and that works in far fewer sessions and with far less discomfort for the patient. It's a win-win-win-a cheaper machine, a cheaper and faster procedure.
Cynosure is revolutionizing cosmetic medical procedures by turning what was termed "going under the knife" into "going under the laser." If I told you that you could spend $100 a month, go three days a week for 30 minutes each visit and lose 20 pounds, you'd probably think I told you to sign up for Bally Fitness-but I'm actually telling you to go down the street to the laser clinic and have the fat zapped off. Cynosure's new cellulite treatment, for instance-which is just coming to market-promises exactly that.
TLSR: This stock has an interesting valuation of about $400M, so it still has a lot of room to grow if investors want to buy the shares. This stock is up 27% from a year ago, but I'm sure it really hasn't performed to your expectations, correct?
AD: The stock certainly hasn't, but the company has. I'm always willing to be patient and let the market discover what I already know. Investors have got to be patient here. What you're seeing is a company that's growing revenue at 20% year-over-year every quarter, and very consistently. The company is trading at about 2.5 times its sales for the trailing 12 months, and it is growing earnings. Unlike so many of the biotechs that we talk about, which are pre-revenue, let alone pre-profit, this company is cash flow positive and making a profit.
TLSR: Do you feel that investors could be afraid of this stock, thinking it could be cyclical because it's a cash business?
AD: It could be somewhat cyclical-though the company has increasingly large revenue per procedure. It's not the razor-and-blades model you see with an Intuitive Surgical Inc. (ISRG:NASDAQ) or MAKO Surgical Corp. (MAKO:NAS), but consumables are a growing part of the revenue stream and should combat some of that fear.
Part of the reason that investors are afraid, too, is that they're still afraid of the economy. But consumer confidence is now reading out as high as it has in five years. The economy in the U.S. has stabilized for now, and that spells a wealth of demand for the services of this company. We continue to see strong growth in income in most places in South America, in Asia-though Europe is still a little weak. There's a big international market for Cynosure, and as awareness grows in the U.S., a lot of potential demand.
TLSR: I've enjoyed this very much, Alex. Thank you.
AD: Thanks to you, too.
Alex Daley is the senior editor of Casey Extraordinary Technology. In his varied career, he has worked as a senior research executive, software developer, project manager, senior IT executive and technology marketer. He's an industry insider of the highest order, having been involved in numerous startups as an advisor to venture capital companies. Daley is a trusted advisor to the CEOs and strategic planners of some of the world's largest tech companies. And he is a successful angel investor in his own right, with a long history of spectacular investment successes.
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1) George S. Mack conducted this interview for The Life Sciences Report and provides services to The Life Sciences Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
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3) Alex Daley: I or my family own shares of the following companies mentioned in this interview: Aveo Pharmaceuticals Inc., MannKind Corp., ImmunoCellular Therapeutics Ltd., Cynosure Inc. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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