What does the Department of Health and Human Services have in common with a small bio-tech company based in Australia? Well, they both appear to be controlled by key figures in the Trump transition team. Innate Immunotherapeutics (OTCPK:INNMF) is a small firm specializing in the development and design of a clinical stage biotechnology drug that targets the human innate immune system. It is designated a small cap with a market capitalization of $280 million. Shares of the small firm have skyrocketed in the past year and could be poised to move even higher thanks to the new found powers of its owners. That, however, is contingent on what will likely be a volatile confirmation hearing of future HHS secretary, Tom Price. Depending on how that hearing plays out, investors could be richly rewarded or face significant declines in the share price of Innate.
The Trump transition team on Health and Human Services is headed by the Republican Congressman from New York's 27th district, Chris Collins. The congressman was an early backer of Mr. Trump and thus received a powerful position on the team to select key administration personnel, including the new HHS secretary. Congressman Collins also happens to control at least 21.8% of Innate Immunotherapeutics. He personally is the company's largest shareholder while his various children make up the third and fourth largest holders of the company's stock. The fifth largest holder is a UBS financial advisor who lives in Congressman Collins district and appears to have a financial relationship with the congressman. Additionally, the individual selected by Collins and the transition team to oversee all laws on Health related matters is also a large shareholder in Innate stock. In August 2016, Rep. Tom Price, HHS secretary-elect, bought $50,000-$100,000 of Innate shares. Price must have conducted some dutiful research to have come across such a low-profile company based in a different continent. As the Wall Street Journal reported last month, Price has a history of buying speculative stocks then introducing legislation that would have the effect of increasing the bottom line of those companies. This practice is not illegal but will likely be brought up during the confirmation process given the dubious ethical nature of such actions.
There are two event-driven investment thesis' revolving around Innate's stock in the next few months.
1. Democrats and the media are effectively able to put a spotlight on high level government employees owning individual stocks while simultaneously having oversight of billions that could be allocated to those companies. Given how much attention was recently attributed to Republicans dismantling the ethical watchdog for Congress, a story about the HHS nominee buying stock in a company that he will then oversee potential government investments in, could prove to be of public interest. This would negatively impact Innate by creating pressure for Rep. Price, and perhaps Rep. Collins, to divest from Innate and any health related stocks. That divestiture would put significant pressure on such a thinly traded stock.
Price himself doesn't have significant exposure to the stock, he owns 125,000-250,000 shares, which is roughly the daily trading volume, so dumping it would be easy. Rep Collins, however, would be more significant. He and his family or associates own 24% of the company (or 52,500,000 shares). Unloading that stake would put material pressure on the stock.
2. On the other hand, Democrats could (per usual) botch the PR on the nomination and allow him to get through confirmation without divesting and without bringing public attention to a situation where senior members of Congress and the incoming administration own major stakes in small companies that would massively benefit from some government investments being pushed their way. That scenario presents a particularly bullish case for Innate. With Rep. Chris Collin on the House Subcommittee on Health, he will play a key role in the introduction of legislation that will have the potential to impact private healthcare companies. Rep Price then has the authority to dole out individual grants to various biotech firms.
Investors should closely watch the upcoming hearings for Rep. Price's appointment as HHS secretary. His confirmation could send shares up. Any drawn out questioning related to his trading of stocks, or a connection to Rep Collins ownership in small private firms should give investors pause.
Wall Street investors are often cautioned when it comes piling into a trade after some well known hedge fund manager discloses a position. In this case, however, doing just that could suit investors well. Congressman Collins is a director and investor in the company. He is currently serving as the chairman of the House Subcommittee on Health and Technology. As chairman, he oversees federal expenditures on healthcare and health related technology. Innate's business model seem to be entirely based on seeking governmental grants and private capital that they hope will eventually lead to a partnership with a large pharmaceutical company. Company disclosures regularly regard this as their primary motivation. In the annual report, the chairman noted "[Innate] can also report strong ongoing interest in the Phase 2B study from several major pharmaceutical companies. If the clinical trial is successful, Innate will pursue a major corporate or partnering transaction with one of these interested parties." Recent legislation makes the process of FDA drug approval easier. An incoming administration that is less focused on ensuring safety and more focused on quick approval is immensely beneficial to Innate's business model.
Over the last several months, the value of Innate stock has skyrocketed. While this provide a note of caution for many investors, the unique circumstances around Innate could lead to significant growth. Having powerful friends in high places is always a positive for a small cap company. As long as Rep. Price is confirmed without significant obstruction from democrats, Innate stands to benefit. Given the financial incentives, republican lawmakers with stakes in the company will likely be more than willing to lobby on behalf of Innate so that the company can get the large pharmaceutical partnership it desires. That is bullish for investors.
Disclosure: I/we 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.