Biotech Forum Daily Digest: Trump Proposes Changes At FDA. Spotlight On Quotient Limited

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Includes: AMGN, FATE, MDCO, QTNT
by: Bret Jensen

Summary

The biotech indices again drifted slightly down on the week after failing once again mid-week to breach stubborn upward resistance levels.

The new Trump administration proposed several changes that could impact the industry which we will analyze further below.

All the other notable news, events and analyst ratings from across the industry as well as a spotlight feature on U.K. based diagnostic concern Quotient Limited are highlighted this Monday.

"We can easily forgive a child who is afraid of the dark; the real tragedy of life is when men are afraid of the light." ― Plato

Plato

The biotech indices once again drifted down slightly over the past week as the sector continues to consolidate the approximate 10% gains it logged in February. After a strong start to M&A activity in the first month or so in the year, transactions have dried some in recent weeks. We need to see some additional M&A deals I believe to finally get through tough upward resistance levels, that the sector tried once more and failed to broach mid-week.

There was a rash of moves by the new administration this week that could impact the industry which I cover in the section below. The market should also be watching closely to what happens the ACA repeal & replace initiative as nothing can happen on the tax & regulatory reform fronts until this effort is powered through.

Note: To get these Biotech Forum Daily Digests as soon as they are published, just click on my profile, hit the big, orange "Follow" button, and choose the real-time alerts option.

There was a flurry of proposed changes from the new Trump administration around both the FDA & the National Institutes of Health {NIH}. Given these could have impacts to the biotech & pharma industries, we will use this section to discuss each possible change.

Proposed Change #1 - Scott Gottlieb picked to head F.D.A.

Definitely a positive for the pharma & biotech sectors is the nomination of Dr. Scott Gottlieb to head the F.D.A. He previously served as deputy commissioner in the first Bush administration. He is on the record supporting speedier approvals of complex generics as well as accelerated reviews of marketing applications based on smaller clinical trials rather waiting for the conclusions of larger-scale confirmatory studies. Both items that could lower the huge costs of drug discovery & commercialization.

His confirmation might be a tough slog given his previous work for drug companies. Expect this to be a focus area for the opposition party and a good portion of media during the confirmation process. However, I expect him to be confirmed to head the agency, even if it is largely on a party line vote.

Proposed Change #2 - F.D.A. To Double Fees

The FDA will slightly more than double the fees to review drug applications to some $2 billion in the proposed 2018 fiscal budget. This is actually a good thing. The agency will add additional resources to enable it to review marketing applications more quickly.

I know that for the small businessmen & women out there, adding staff when your business has too much demand from your customers to handle is as much common sense as it is to bring your umbrella with you when there is a 80% chance of rain later in the afternoon. However, for the government this almost constitutes radical thinking. The industry will happily pay and benefit from the extra $1 billion that it will have to spend to quicken the drug approval process, even if it just marginally.

Proposed Change #3 - NIH Funding To Be Cut 20%

In the president's proposed 2018 budget, proposed funding for the NIH is to be cut 20% or $5.8 billion. The proposed plan also includes a major reorganization of NIH's institutes and centers to "help focus resources on the highest priority research and training activities." This is a non-sequitur on a couple of counts. First, compared to what the industry spends on R&D on a annual basis, this is a drop in the bucket.

More importantly, it is never going to happen along with deep proposed cuts at the EPA and other government agencies. First, it would require 60 votes in the Senate to avoid a filibuster. This is impossible as the Democrats will be united in opposition and quite a few Republicans will not back these sorts of cuts either.

This proposal is D.O.A. even before the press (which thinks a cut from 8% projected spending growth in a government program to 6% is "draconian") starts in on it full bore. There is a reason government funding programs are rarely if ever cut. This will not be the exception. Therefore, investors should ignore it.

The Medicines Group (NASDAQ:MDCO) had a wild ride on Friday. Amgen (NASDAQ:AMGN) posted trial results for its PCSK9 cholesterol drug Repatha. They showed the drug cut heart risks by 15% on the primary endpoint, and a 20% reduction in the key secondary endpoint of reduction or risk of first heart attack, stroke, or cardiovascular death. This was largely in line with the consensus but investors were obviously hoping for an upside surprise.

For some reason the stock of MDCO fell some 25% in the early going on Friday even as its potential competitor in this space "inclisiran" is in Phase III trials. Inclisiran works by turning off PCSK9 synthesis in the liver. Leerink Swann and J P Morgan both reiterated their Buy ratings on the stock around midday Friday which arrested the fall in the stock. By the end of the day, cooler heads had prevailed and the shares were able to cut their early losses by two thirds by the close of trading.

Analysts also came to the rescue of Amgen during its fall on Friday. Piper Jaffray, Oppenheimer, Cowen & Co. & BMO Capital all reissued Buy ratings after Repatha trial results were presented. Cowen has a $209 a share price target on the biotech pioneer and BMO is at $212.

Small cap immuno-therapy concern Fate Therapeutics (NASDAQ:FATE) saw its first analyst action since November late last week. On Thursday and Friday, Wedbush, Roth Capital and BMO Capital all reiterated Buy ratings on FATE with a tight price target range of $7 to $8 a share. Wedbush's analyst believes the "company is executing well on advancing its early stage cell therapy pipeline into patients, with significant data catalysts expected later this year"

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 "Analyst Insight" will eventually appear in the "Spotlight" section, where we do deeper dives on this type of promising but speculative small-cap concerns.

We look at Quotient Limited (NASDAQ:QTNT) at the behest of a Seeking Alpha follower in today's Spotlight feature as we start a new trading week. This is a new name to me but we will do a quick analysis of this company below.

Company Overview:

Quotient Limited is a United Kingdom based, commercial-stage diagnostics company. The firm develops, manufactures and commercializes conventional reagent products used for blood grouping in the transfusion diagnostics market worldwide. The company has a market capitalization of just under $200 million and ended trading Friday at $6.63 a share. Quotient is what I call a "Broken IPO" in that it sells for about 35% of the all-time highs the stock hit right after its debut on the market not quite three years ago. This is why I never touch a small cap IPO in this space until it has been on the market 12-24 months. Once the analyst hyperbole has died and share lockups have expired, it is amazing how many times one can get the same company further down its development path at 30 to 50 cents on the dollar.

Product Portfolio & Pipeline:

Quotient received its initial licenses from the FDA and commenced selling conventional, liquid reagents in the United States. Quotient also manufactures liquid reagent products to other market leaders in transfusion diagnostics. According to information from the company's website, Quotient has nearly 40 products licensed for sale in the US, with a further 35-40 products in the process of being licensed for commercialization by Quotient or its partners.

Quotient is also nearing commercialization of MosaiQ, a next generation automation platform for transfusion diagnostics. Again referencing the company's website "The MosaiQ platform will allow for full characterization (using existing serological approaches) of patient and donor red blood cells and plasma utilizing a single microarray. It is also being developed to undertake, serologically, full mandatory virology screening for donor blood." The company believes this platform can transform the ~$3 billion transfusion diagnostics market.

Currently, the company is scheduled to complete European field trials for MosaiQ for blood grouping and the initial disease screening panel in the first half of this year. Field trials in the United States will commence soon after European field trials are completed.

Picking off snippets from the company's last conference call transcript, Quotient "intends to simultaneously launch its MosaiQ™ IH Microarray into the donor and patient testing markets with its commercial partner, Ortho-Clinical Diagnostics once approved. Launch of the full MosaiQ™ serological disease screening panel is currently scheduled to commence three to six months after the initial MosaiQ™ launch." So far testing has shown strong results in molecular disease screening.

Analyst Commentary & Balance Sheet:

The company ended 2016 with not quite $45 million in cash on hand. It did a $80 million private placement of debt in October with a 12% interest rate due in 2023. Under terms of that agreement, the company can borrow an additional $36 million upon successful completion of European field tests of MosaiQ™. The company receives next to no coverage from analysts in the States. Jefferies is the lone analyst firm I can find that follows the stock. It issued a Buy recommendation with a $16 price target on January 6th.

Outlook:

The company believes it will produce approximately $21 million in sales from its existing product portfolio this year. It also believes it will post losses of approximately $75 million. This would eat up its existing cash balance and most of the $36 million debt tranche it can garnered provided European field trials are positive.

This is an interesting space and if MosaiQ™ has a successful launch it could be a game changer for the company and the stock. However, this is not my 'sweet spot' in the healthcare space and I know too little about the company to ushered up a Buy recommendation. The most I can muster is putting the company on your "watch list" to see how the development and potential launch of MosaiQ™ goes. At that time, it might be worthy of a further investment analysis.

Thank You & Happy Hunting

Bret Jensen

Founder, Biotech Forum

Disclosure: I am/we are long AMGN, FATE, MDCO.

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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