When It Comes To Biotech, Diversity Is Key

by: Mike Perinotti

The biotech industry has become a bit of a crap-shoot with investors left to the mercy of FDA decisions, lawsuits, and drug recalls. Nonetheless, biotech remains one of the most actively invested in sectors with the potential for big pay-offs as many biotech companies are reporting margins of 30% or more. And according to a panel of experts at the Milken Institute's Global Conference, there has never been a better time for investors to roll the dice with biotech. Rajiv Kaul, manager of Fidelity Investments' biotechnology fund, said, "The whole biotech industry is characterized by asymmetrical risks." He continued, "Despite the challenges, this is the best time for biotech ever."

Jodi Black, program director at the National Institutes of Health said, "The scientific potential has never been greater. Now is not the time to retrench." These are encouraging statements by experts in their fields and can be backed up with many major pharmaceutical stocks posting all-time highs seemingly every other day.

A big reason for the newfound love of biotech is crowd funding in private ventures. Investors are now able to spread risk among several different companies and invest, say, $10,000 in ten different companies rather than $100,000 in one company. The idea of investing in a cure for cancer or other deadly diseases is something that resonates with investors and hits a little closer to home. It's an investment coupled with passion.

Greg Simon, chief executive of Poliwogg, a firm that searches for blooming drug makers to invest in, said, "The best is yet to fund," as many promising technologies are coming down the pipeline. Not to mention that biotech was the number one performing sector in 2012. Obviously gold, energy, and biotech are all high beta investment areas. However, I think investors can manage a strong biotech portfolio through diversity.

At the end of the day, your gold and clean-tech won't mean anything if you're dying from cancer. Healthcare, and specifically biotech, is a classic growth scenario. And I believe the sector's golden years are still to come.

An easy way to diversify your biotech portfolio is through platform investments that add polymers to drugs and create different ways of producing time-released products. A perfect example would be Alkermes Inc. (NASDAQ:ALKS). Alkermes specializes in taking other companies' drugs and developing extended release versions of the compounds, then collecting royalties on the drugs. Their partners include pharma giants Merck (NYSE:MRK), Pfizer (NYSE:PFE), and Novartis (NYSE:NVS).

Other platform plays include the cutting-edge, gene technology of Sangamo Biosciences Inc. (NASDAQ:SGMO) and the anti-sense technology of Isis Pharmaceuticals Inc. (ISIS). Sangamo's proprietary technology is based on the engineering of a naturally occurring class of DNA transcription factors called zinc finger DNA-binding proteins (ZFPs). naturally occurring ZFP proteins are highly conserved across species and are used by organisms from yeast to man to control gene expression. They have two domains, the first is the ZFP portion or recognition domain, which recognizes and specifically binds to a particular DNA sequence. The second component is a functional domain which when brought into close proximity with a gene has a biological effect on that gene. The two-component structure of Sangamo's engineered ZFPs is modeled on the structure of naturally occurring transcription factors. The company can engineer ZFPs to bind to virtually any DNA sequence. Sangamo can then combine the engineered ZFPs with a variety of different functional domains to generate novel ZFP transcription factors which are proteins that can activate or repress gene expression. Additionally, Sangamo can create novel ZFP Nucleases that enable them to specifically modify gene sequences in a variety of ways.

Isis's anti-sense technology targets and binds to RNA (ribonucleic acid) rather than proteins, which have been the focus of the pharmaceutical industry for 100 years. RNAs are a family of large biological molecules that perform multiple roles in the coding, decoding, regulation, and expression of genes. Together with DNA, RNA comprises the nucleic acids, which, along with proteins, make up the three major macromolecules essential for all known forms of life. RNA is assembled as a chain like DNA but is usually single-stranded.

Isis's anti-sense technology targets RNA because it is universal and vital to all living things so it affects the expression of all genes. It is also a simpler molecule than proteins in that it's composed of four fundamental building blocks called nucleotides while proteins are made from 20 different building blocks called amino acids. Isis designed their anti-sense drugs to interact precisely with a specific sequence of RNA. They design their drugs to selectively target one and only one gene product. The more selectivity the drug has the better the drug. Isis drugs then bind to messenger RNAs and inhibit the production of disease-causing proteins. The company has had a lot of success with their drug discovery platform to generate a large pipeline of first-in-class anti-sense drugs, each unique to a specific RNA target.

You can't have a strong biotech portfolio without oncology investments. Two that stand out to me are Pharmacyclics Inc. (NASDAQ:PCYC) and Nuvilex Inc. Both companies' stocks have outperformed the market having gained 384% and 400% since 2012 respectively.

Pharmacyclics has already received three breakthrough therapy designations from the FDA on its Bruton's tyrosine kinase inhibitor ibrutnib (PCI-32765), which is being developed for treatment of B-cell malignancies such as mantle cell lymphoma and chronic lymphocytic leukemia. Their partner on the drug is Janssen Biotech Inc. (subsidiary of Johnson & Johnson (NYSE:JNJ)). But what is a breakthrough therapy designation? A drug is designated for breakthrough therapy if it is intended to treat serious or life-threatening diseases, and preliminary clinical evidence suggests it provides a substantial improvement over existing therapies. Many people believe the drug will receive full FDA approval by Q3/2013. The European Medicines Agency has also said that they will explore a breakthrough designation for Pharmacyclics' Bruton's tyrosine kinase inhibitor.

Nuvilex Inc. is an oncology and platform company capitalizing on medicinal marijuana through its subsidiary, Medical Marijuana Sciences Inc. Nuvilex already had two successful Phase I/II clinical trials using their proprietary cell encapsulation technology to treat patients suffering from non-surgically removable pancreatic cancer and is currently preparing for Phase III. By using the encapsulated cells, Nuvilex is able to convert the widely used anti-cancer drug, ifosfamide, into its cancer-killing form. So far, $30 million has been invested into this innovative technology. In the trials, twenty-seven (27) patients all showed significant improvements and reached better outcomes than those seen from Eli Lilly's (NYSE:LLY) Gemzar therapy. The trial results showed median survival time and one-year survival rates almost double as compared to historical data from Gemzar. Yet, to date, Gemzar is the only drug approved by the FDA as a single agent for the treatment of inoperable pancreatic cancer and accounts for 55% of sales of all drugs for advanced pancreatic cancer. Sales of Gemzar reached $1.36 billion in 2012.

In addition, Nuvilex's trial results reported far fewer side effects than the Phase III results of popular Celgene Corp. (NASDAQ:CELG). More patients experienced neutropenia (depression of white blood cell counts) and neuropathy (nerve pain) with Celgene's combination therapy than even the Gemzar therapy. Nuvilex's Phase II trials showed no side effects that could be attributed to the presence of the encapsulated cells or the capsules themselves. Side effects associated with the use of ifosfamide were also greatly reduced. Even after the capsules were removed, the cells that had been inside the capsules were still alive and functioning after more than two years.

Moreover, in a 6-month study by the company, pancreatic islet cells from pigs were encapsulated using the company's technology and the capsules containing the islet cells were implanted into live, diabetic rats. Within only a few days, the blood sugar levels on the rats became normal and stayed at normal levels for the duration of the study.

Many biotech investors may recall what happened with Dendreon Corp. (NASDAQ:DNDN). In April 2009, Dendreon stock catapulted from below $3.00 a share to well over $20.00 immediately after reporting positive Phase III results for their prostate cancer drug, Provenge. Dendreon went on to hit a high near $55.00 a share the following year. As a result, I will continue to follow Nuvilex and update the investment community on their Phase III progress.

Moving on to the vaccine space, I'm a fan of Novavax Inc. (NASDAQ:NVAX). The company's virus-like particle (NYSE:VLP) technology is quite intriguing. Unlike traditional vaccines that are based on killed or viruses or live, attenuated viruses, Novavax uses recombinant technology that allows them to customize the components of vaccine candidates in order to solve challenges presented by novel infectious diseases. Their proprietary platform combines the flexibility and speed of generic engineering with the efficiency of single-use disposable technology to produce highly immunogenic nanoparticle vaccines. For example, in the event of a pandemic influenza threat caused by a new influenza strain, Novavax will be able to utilize the generic code of the novel pandemic influenza viruses provided by the World Health Organization and produce, in just a matter of weeks, a vaccine candidate designed to generate protective immunity to specifically target the new virus. The company already has a Biomedical Advanced Research and Development Authority contract with more than $100 million committed with a potential $179 million total. The thing I like most about this is that government money is non-dilutive. The funding will go towards the company's work on seasonal and pandemic flu vaccines.

Novavax is also pushing for a respiratory syncytial virus vaccine. This space is wide open. Other than AstraZeneca (NYSE:AZN) buying out a drug called Synagis with sales peaking $1 billion, no one has solidified a spot on top for this virus.

My last two gems to round out a diversified biotech portfolio are Incyte Corp. (NASDAQ:INCY) and Coronado Biosciences (CNDO). Incyte has a competing drug to Pfizer's arthritis drug, Xeljanz. Xeljanz was approved in the U.S. but rejected in Europe because of toxicity levels. Incyte has a drug in Phase III that could compete heavily if the results are good. The company believes they can be more effective and much safer than Xeljanz.

Moving on to possibly the strangest of the therapies discussed, Coronado's pig whipworm. This autoimmune treatment is very well researched and is completely benign. The whipworm is ingested through a glass of water every two weeks with the biggest complaint being a salty taste. And with Dr. Harlan Weisman at the helm coming over from Johnson & Johnson, I am optimistic about the company's future.

The bottom line is that this is a very exciting time for the biotech sector. New technologies are flowing down the pipeline like running water out of a faucet. Crowd funding has enabled several smaller start-ups the opportunity to make their mark on a star-studded industry filled with opportunity. The prudent investor would spread risk across several different companies focusing on different niche markets. The biotech sector is huge, it's important not to get overwhelmed and focus on strong management, successful trial data, and innovative technology.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Additional disclosure: I have no positions in any stocks mentioned, but may initiate a long position in INCY, ISIS, PCYC over the next 72 hours.