Why I Liquidated Most Of My Biotech Holdings

by: Intrepid Investor


Ariad's Iclusig may have a competitor on the horizon.

Bluebird is a leader in the field of gene therapy and has a real chance to get it to market - years from now.

PCT subsidiary of Caldrius is a picks and shovels type of operation that is positioned at the apex of the cell therapy food chain, but I liquidated that, too.

There are good reasons to own these 3 but I believe that over-consumption of US healthcare and drug pricing have created a bubble, and "beaten down" biotech is still risky.

Since dividend-paying, consumer staple stocks have lost popularity, I have counter-rotated into that sector by tripling my stake in Proctor & Gamble (NYSE:PG) which is now my largest single-company holding; only PowerShares Exchange-Traded Fund Trust II (NYSEARCA:BKLN) is a larger portion of my portfolio.

I raised cash by liquidating most of my holdings in biotechnology including Ariad (NASDAQ:ARIA), Bluebird (NASDAQ:BLUE), and Caladrius Biosciences (NASDAQ:CLBS). Not that many should care, but there are a few who follow me on SA, and I felt compelled to confess that I have changed my mind about biotech and briefly explain why. Much of it has to do with my current position in life, and my lesser willingness to accept risk that has become more real to me than the benefits of investing in this industry. I am referring to companies that have an insecure revenue stream which is the case for much of small cap biotech (I have also gone negative on healthcare as a sector, but that's too big a topic for me to discuss). The biotech sell-off was a wake up call and I am willing to admit it.

CLBS 1st: Caladrius actually has a rapidly rising revenue stream that is probably more secure than that of just about any other company in the cell therapy space. That is because the revenue is generated by offering a cell processing service that has barriers to entry. There are lots of companies genetically engineering or otherwise designing T lymphocytes to attack cancer cells. Some of these companies will fail - all it takes is a failed clinical trial and a risk-off mentality on the part of investors, and gone will be the much needed funding. The PCT subsidiary of CLBS, on the other hand, is a picks and shovels type of operation that is positioned at the apex of that particular food chain. CLBS will survive the failure of any one of its clients. I was reluctant to sell CLBS but I am looking for some dividends and this is not a company that will be paying anytime soon. In addition the stock looks broken of late, so I reallocated the capital I had invested in CLBS.

BLUE is a leader in the field of gene therapy and has a real chance to get it to market - eventually. I seem to recall reading that Glybera, the 1st gene therapy to market in Europe, is not doing well, so this is a high risk area but one that I believe in. I just don't believe I can afford to keep money tied up in an area that may not bear fruit for several more years. Bluebird's other ventures including the joint one retained with Celgene (NASDAQ:CELG) for myeloma just aren't revolutionary enough to attract my investing funds. I don't care that the stock jumped the day (3rd January) after I sold it. BLUE will, however, pay off for investors with a longer time horizon than I have.

ARIA was a tough investment for me to liquidate for several reasons: 1) I love smart companies that employ scientists who can design molecules that are uniquely effective against specific cancer-causing mutations. Such molecules should provide their owners an economic moat. Ariad has at least two such smart molecules: ponatinib was designed to inhibit the BCR-ABL kinase that drives CML, including the form of the fusion oncoprotein that is mutated at amino acid position 315, and makes leukemia cells with that mutation resistant to 1st and 2nd generation kinase inhibitors. 2) Revenue from Iclusig ponatinib is growing. Brigatinib is another smart molecule that will likely gain FDA approval, and also drive revenue. 3) I fully expect Ariad to be acquired for many times the price at which I sold it on 2nd January. But that's speculation.

Here's the real problem for many biotech investors including myself, and I consider myself fairly well read for someone without formal training in molecular biology: a drug that appears unique may not indeed provide an enduring, competitive advantage for its owners in this rapidly evolving field of biotechnology.

A lot of companies are designing smart molecules, and Ariad's Iclusig may have a competitor on the horizon. Iclusig's specificity for the T315I mutated form of the BCR-ABL fusion oncoprotein gave it an advantage over ABL kinase inhibitors imatinib (Gleevec; Novartis), nilotinib [Tasigna; Novartis (NYSE:NVS)], and dasatinib [Sprycel; Bristol-Myers Squibb (NYSE:BMS)]. But here is a piece of information absent from my original ARIA investment decision: Pfizer (NYSE:PFE) drug INLYTA (axitinib) was approved in 2012 as a VEGF-associated tyrosine kinase inhibitor for use in patients with renal cell carcinoma. But interestingly (to me anyway), axitinib also inhibits ABL kinase that is mutated at position 315, specifically the T315I mutation against which Iclusig seemed to be uniquely effective. Okabe and coworkers in Japan have found that axitinib has activity against leukemia cells in vitro, and are investigating efficacy in patients with Ph-positive T315I-mutant leukemia. Thus a drug that appeared to be uniquely advantageous in a small subgroup of patients with CML, but is not so unique. And that is a concern for investors in a company deriving all its sales revenue from one drug.

In addition to the eventual rise of a competitor, Iclusig's price tag is a concern. Too big a topic to attempt discussing here, I believe that drug prices are part - though only a small part - of the huge bubble that is US Healthcare. Whether drug prices are pressured down politically or whether they go down with our entire current healthcare system, the risk in biotech - which many believe has been beaten down to bargain levels - is too great for me.

Disclosure: I am/we are long PG, BKLN.

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.

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