2017: The Biopharma Summer Of Love

Includes: ABUS, CYRX, KERX
by: Leonard Yaffe

I have stated previously that this leg of the bull market would not end until the small and microcap biopharma stocks rallied.

Over the past two months, my "SuperSpec 6" stocks have advanced by 24%.  I highlighted two of these stocks, DURECT Corporation and Cryoport, in a recent article.

I maintain that many of the smaller cap stocks will appreciate further, as they have been priced for "non-success" for the past year.

An additional potential tailwind is the fact that there will be ample clinical data presentations and FDA PDUFA dates over the next four months.

Most of these stocks are under-owned due to market capitalization and lack of coverage (the two are intertwined).  Therefore, as we have seen with several stocks recently, favorable news drives outsized gains.

The IBB and XBI are trading 4% below, and 11% above, their respective level of two years ago. Many of the small and microcap biopharma stocks have languished, until recently, during this time. The lack of interest in this sector resulted in several companies trading near cash levels. Meanwhile, there have been positive developments with drug trials and there are upcoming FDA PDUFA dates. Furthermore, these attractive assets are likely to draw the attention of the larger pharmaceutical companies, which need to broaden their diversification into biologicals. This subcategory of pharmaceuticals will represent 60% of incremental annual drug sales annually in the US, and therefore it cannot be ignored.

Recently, I discussed Cryoport (NASDAQ:CYRX), "the cryogenic supplier to the stars" for CAR-T therapy. It will be supporting the upcoming commercialization of Kymriah and axi-cel, and as of June 30, was supporting 172 clinical trials. My research indicates that the initial demand for the first two CAR-T drugs will exceed analyst expectations. Furthermore, I believe that cancer immunotherapies will continue to evolve over the next 30 years, with technological advances broadening the applicability.

Keryx (NASDAQ:KERX) has an FDA PDUFA date of November 6 for Auryxia for the indication of iron deficiency anemia in non-dialysis dependent chronic kidney disease. This market is much larger than that currently served by Auryxia, namely hyperphosphotemia in CKD patients. Clinical trial results appeared to be quite positive. Auryxia could therefore be the first FDA approved oral iron (those currently available are OTC supplements). The short interest in the stock approximates 15%.

Arbutus (NASDAQ:ABUS) has a market capitalization of $255 million and $100 million net in cash. It is working on a cure for Hepatitis B. It also has a technology licensing agreement with Alnylam (NASDAQ:ALNY) relating to the drug patisiran that could potentially result in a small royalty stream. Phase 3 data on patisiran is due out in the next 3 weeks. Additionally, cohort four phase 2 clinical data on Arbutus' Hepatitis B drug, ARB-1467, will be available later this month. Patients in the prior three cohorts demonstrated reductions in Hepatitis B surface antigen, but they were on monthly dosing for three months. In cohort four, patients received bi-weekly dosing over this time frame, and those who meet a predefined set of response criteria will be eligible to receive monthly dosing for an additional nine months. Longer term studies with ARB-1467 in combination with currently used drugs, ie tenofavir and Peg interferon, will begin soon. Arbutus is also studying other compounds, such as a capsid inhibitor and RNA destabilizer, for Hepatitis B. The company will be presenting six abstracts at the October AASLD meeting.

Hepatitis B therapy represents a large global unmet medical need, with an estimated 300 million people infected chronically worldwide, mainly outside of the United States. There is a definite need for a better treatment regimen as it relates to efficacy and dosing duration. After the tremendous success in curing Hepatitis C, investor focus has transferred to NASH, and not to Hepatitis B and D. Therefore, companies such as Arbutus, Arrowhead and Eiger have been largely ignored. Arrowhead has a market capitalization of $250 million, and Eiger, $85 million. It should be noted that Eiger, in addition to lonafarnib for Hepatitis D, is also in clinical studies with exendin for hypoglycemia post bariatric surgery and ubenimix for pulmonary arterial hypertension (PAH) and lymphedema. Topline phase two data regarding PAH will be available in January. The company has sufficient cash through the second quarter of 2018.

In conclusion, there are many under-followed small and microcap biopharma stocks. While not all of the underlying companies will be successful, there has recently been favorable news on several fronts, and the stock appreciation has been impressive. Over the next four months, I anticipate greater attention will be paid to this area, and stocks I am focused on include Cryport, DURECT (DRRX), Arbutus, Eiger (EIGR), Keryx, and Arrowhead (ARWR).

Disclosure: I am/we are long ABUS, ARWR, CYRX, DRRX, EIGR, KERX. 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.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.