Biotech Forum Daily Digest: Can Biotech Rebound? Jefferies Says Sector Undervalued; Spotlight On Kite Pharma

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Includes: AKBA, AMGN, BLUE, CELG, CRSP, GILD, GLPG, KITE, OMER, SHPG
by: Bret Jensen

Summary

The biotech sector has started to stabilize in recent trading sessions after an over six percent drop last week.

Jefferies states sector is significantly undervalued and that political worries due to the upcoming election are overstated. This is a view I share.

All the other notable news, events and analyst ratings from across the sector as well as a Spotlight feature on Kite Pharma are below.

"Luck is where opportunity meets preparation." - Seneca

Biotech has started to stabilize after declines last Tuesday and Wednesday took the main indices down over six percent and the sector broke through lower resistance levels of a relatively tight trading range that had been in place since biotech's big rise in the market during July.

After a few days of flattish trading, the sector even managed to stage a 1.4% rally in trading yesterday. Helping was a view published by Jefferies stating the biotech industry offers "attractive buying opportunities" given pre-election weakness, The analyst firm went on to say that Valuation multiples are near-historic lows and that policy concerns are likely overstated. I agree with this outlook, but we may need to wait for the election to show continued divided government before a significant rally takes place in the sector.

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Beaten down small cap Omeros (NASDAQ:OMER) has gotten a double dose of good news from trial results this week. Yesterday, positive Phase II results for lead product candidate OMS721 in patients with four different types of complement-associated kidney diseases were disclosed. Today, another Phase II trial showed patients using OMS405 experienced a significant time-dependent reduction is cocaine craving compared to placebo.

Omeros is deeply undervalued here in my opinion and that of analysts. The stock currently goes for $7.50 a share. The company recently raised funding via a secondary offering at $11.50 a share. The median price target by analysts on this small biopharma concern is also north of $35.00 a share.

Speaking of beaten down small cap stocks, Merrimack had an important milestone on Tuesday. The company's primary drug candidate Onivyde won approval in Europe for pancreatic cancer. European rights are owned by Shire (NASDAQ:SHPG) but this will increase Merrimack's royalty stream. I would not be surprised if the company uses this positive to address funding concerns either via a debt or secondary offering. Merrimack also recently pushed out its CEO and is frequently mentioned as a buyout target.

The market continues to be challenging for IPOs in this sector as it has been all year. CRISPR Therapeutics (NASDAQ:CRSP) had to downsize its offering and lowers its offering price by a $1 a share to $14 to get the deal down the other day. CRISPR is one of the new "gene editing" concerns which is shaping up to be the next hot thing in biotech. In better times, this offering would have been very oversubscribed with a substantial opening bump.

Galagagos (NASDAQ:GLPG) was upgraded to a Buy yesterday by Goldman Sachs. Cowen & Co. and Morgan Stanley have also reiterated Buy ratings on this small cap concern over the past month. Recently, the company's lead drug candidate filgotinib which is being targeted at several indications; seems to be superior to Celgene's (NASDAQ:CELG) earlier stage candidate for Crohn's disease. GIlead Sciences (NASDAQ:GILD) has a large collaboration deal around filgotinib with Galapagos. Phase II results were very encouraging and a Phase III trial for Crohn's should commence shortly. Galapagos could be a logical buyout candidate for Gilead, but not to its standstill agreement expires late in 2017.

Speaking of Celgene, this biotech juggernaut seems to be getting a lot of praise this week. It was mentioned as one of the undervalued biotech names in Jefferies view that biotech is undervalued. In addition, four analyst firms have reiterated Buy ratings on Celgene this week including Cowen & Co. and Piper Jaffray. Price targets proffered range from $134 to $156 on this stock currently trading just above $100 a share.

Akebia Therapeutics (NASDAQ:AKBA) got its first analyst mention since late August yesterday. Brean Capital reissued its Buy rating and $18 price target on this small cap concern. Akebia's primary drug candidate is AKB-6548, which the company believes to be a best-in-class hypoxia inducible factor-prolyl hydroxylase (HIF-PH) inhibitor for the treatment of anemia secondary to chronic kidney disease ('CKD'). After a rapid fall after its IPO in early 2014, the stock has been stuck in a very narrow trading range over the past two years. If all goes well in trials, the company should file a NDA for its lead drug candidate sometime in 2019.

Note: New analyst ratings are a great place to begin your 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 our spotlight features is on one of several "CAR-T" concerns that came public a few years ago when this area of the market was "red hot".

Company Overview:

Kite Pharma (NASDAQ:KITE) is a Santa Monica based clinical-stage biopharmaceutical company. The company is focused on the development and commercialization of novel cancer immunotherapy products using its engineered autologous cell therapy (eACTTM) technology. Kite is trying to harness the power of a patient's own immune system to target and kill cancer cells. Its platform has the potential to address both hematological (blood-based) and solid tumor cancers. The company came public in 2014, has a market capitalization of approximately $2.5 billion and trades near $50 a share. The stock's 52-week high is near $90.

Pipeline:

The company is developing an industry leading pipeline of chimeric antigen receptor {CAR} and T cell receptor {TCR} engineered T cells.

KTE-C19

The company's most advance CAR compound which is currently in two Phase II and two Phase I trials targeting various forms of cancer including Refractory Non-Hodgkin's Lymphoma & Relapsed or Refractory Mantle Cell Lymphoma. The company is also doing pre-clinical work for other indications.

MAGE A3/A6

Combination TCR product in Phase I trials for solid tumors. MAGE A3 also in separate Phase I trial for solid tumors.

HPV-16 E6 & HPV-16 E7

Two other TCR products in Phase I studies focused on neck & cervical cancers.

The company has several other TCR compounds in pre-clinical phase.

Analyst Support & Balance Sheet:

Overall the company has solid but not unanimous analyst support. Over the past month, seven analyst firms including Jefferies and Cowen & Co. have reiterated Buy ratings on Kite Pharma. Their price targets are clustered in the mid to high $70s. BTIG & Barclays have reissued "Hold" ratings over the same time period.

The company ended the second quarter with more than $530 million in cash and investments which is more than enough for now to fund development and the building of manufacturing facilities needed for its compounds.

Outlook:

The company will have several catalysts in 2017 including two Phase II trial and two Phase 1/2 readouts for KTE-CIP. Kite Pharma also has numerous collaborations with heavy hitters in the industry such as Amgen (NASDAQ:AMGN) and Bluebird Bio (NASDAQ:BLUE). The stock has decent analyst support and trial development is well-funded at this time as well. It definitely has the "shots on goal" I look for in the small developmental "Tier 4" space. That being said, the company is years away from commercialization. Given the current negative sentiment on the biotech sector, Kite is certainly worthy of being on my "watch list" but at this time I am not going to be taking a stake in this concern.

"Politicians and diapers should be changed frequently and all for the same reason". ~José Maria de Eça de Queiroz

Image result for josé maria de eça de queiroz

Thank You & Happy Hunting

Bret Jensen

Founder, Biotech Forum

Disclosure: I am/we are long AMGN, CELG, GILD, GLPG, OMER.

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.