JF's Core Biotech Buys #15: Removal Of A Key Overhang, Buying Weakness In I-O, Updates And Adding To 2 Positions

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Includes: ABEO, ADMS, ALXN, ARMO, ARRY, ATRS, BLUE, BPMC, CORT, DVAX, EXEL, GILD, GLPG, GSK, HCM, IBB, INCY, IONS, NBIX, NKTR, NVCR, NVS, ONCE, PTLA, RDUS, SGEN, TEVA, XBI, XNCR
by: Jonathan Faison
Summary

Although this series is focused on the long term, I continue to be pleased with our performance so far.

President Trump's speech on drug prices removed a key overhang for biotech (please see my blog post).

I provide important updates for several Core Biotech Holdings, including another green flag for Abeona Therapeutics.

Just as we did with gene therapy stocks, I continue to encourage readers to take advantage of weakness to buy shares in key I-O companies.

We are filling out our positions in Corcept Therapeutics and Nektar Therapeutics.

Welcome to the fifteenth edition in the series "JF's Core Biotech Buys."

Our model account utilizes a full position size of $5,000 and will hold up to 20 stocks. Trades will be less frequent with cost averages calculated at the day's close when an article is published. Depending on the size of a reader's account, buying or selling in smaller increments may be warranted or as cash flow allows. Regardless, the model account is primarily for referential purposes, so readers can easily follow along.

*New editions will be made available on a weekly basis.

**This series seeks to aid readers with a longer-term focus in building a diversified portfolio in the biotech arena via selection of stocks with multi-year upside potential and limited downside. However, the sector itself is still quite volatile, subject to unique risks (i.e., regulatory change, adverse legislation, loss of patent protection, etc.) and bad news regarding key assets (i.e., regulatory downthumb, disappointing data) could result in larger losses than expected. Readers need to evaluate holdings and ideas discussed here for themselves, weighing the risks in light of their particular risk tolerance and objectives. Blind following is strongly discouraged.

*** As ROTY is my primary focus, I may own only a few of the Core Biotech names at any given time. However, I still seek to provide my thesis and point of view, how I would approach each stock in hopes that it aids readers in making their decisions.

Current Snapshot of Core Biotech Model Account


Two Sentence Thesis/Case for Limited Downside

1. Array BioPharma (ARRY) - Updated results for binimetinib/encorafenib in BRAF positive colorectal cancer and melanoma exceeded expectations using the gold standard of overall survival. The stock is very attractive as an M&A target, and data to date provides a cushion to the current valuation considering large market opportunities being targeted.

2. Hutchison China Meditech (HCM) - The stock offers investors a strong pipeline of differentiated candidates (up to 15 possible Breakthrough Therapy Designations), China exposure (via its sales team of over 3,200 employees and 1,900 medical professionals), validating partnerships and several upcoming catalysts. Downside appears limited due to having several irons in the fire, low cash burn as a result of its prescription drug commercial services segment offsetting clinical costs and quite a few pivotal readouts lined up over the next couple years.

3. Neurocrine Biosciences (NBIX) - INGREZZA sales should continue to impress (has a leg up over Teva's (TEVA) Austedo and could do over $2 billion in peak sales), while the market opportunity in Tourette's and opportunity for elagolix appear largely ignored. The stock is also a very attractive M&A target with downside limited by a so far successful INGREZZA launch that appears to be strengthening and a run-up into T-Force GOLD results by year-end.

4. NovoCure (NVCR) - Optune is a revolutionary therapeutic option with blockbuster potential in GBM alone, the launch is going quite well, cash burn is decreasing, and data in additional indications (such as mesothelioma) could drive additional upside. It is my belief that the current valuation is backed up by the market opportunity in GBM, and for this reason (along with news flow in the medium term), I believe downside to be relatively limited.

5. Seattle Genetics (SGEN) - Management continues to make the right strategic moves, there's a strong institutional base, ADCETRIS should eventually prove to be a blockbuster, and it has a deep pipeline likely to drive future growth. The recent secondary at $52 indicates a near-term bottom, and the inherent value of ADCETRIS, plus important news flow in the medium term (including tucatinib data in metastatic CRC), leads me to believe downside risk is limited.

6. Spark Therapeutics (ONCE) - The $2 billion gene therapy pioneer has over a quarter of its market capitalization in cash, a key ex-US partnership with Novartis (NVS) (can leverage its infrastructure plus adds credibility to LUXTURNA prospects), and pipeline of promising assets with several opportunities to create value in 2018. After a post-ASH meltdown of epic proportions, SPK-8011 and other pipeline programs appear to be written off (perhaps prematurely), the market is in "show me" mode regarding the LUXTURNA launch, and it has a substantial cash position following the ex-US deal (plus priority voucher to monetize).

7. Abeona Therapeutics (ABEO) - Data for ABO-102 in MPS IIIA appears encouraging to me (decreases in heparan sulfate, neurocognitive benefits), initial data for ABO-101 in MPS IIIB showed early promise, EB-101 in RDEB could see an expedited path to market if the pivotal study yields fruit, and other gene therapy candidates are soon to enter the clinic. The short report (with several dubious claims) appears to have brought shares down to a more palatable level that provides a greater margin of safety, with current programs and its cash position providing a decent downside cushion.

8. Radius Health (RDUS) - The TYMLOS launch continues to progress well (as reflected in sales, insurance coverage and market penetration), the opportunity for abaloparatide-transdermal patch appears underappreciated and elacestrant provides high optionality. As sales and market penetration head north, the company should continue to gain significant visibility, and all three lead assets provide a substantial downside cushion.

9. Galapagos (GLPG) - Partnered assets continue to progress in the clinic, its IPF program offers optionality, efforts in cystic fibrosis to develop a triple combination therapy should not be underestimated, and Gilead (GILD)-partnered filgotinib could have peak sales of over $3 billion alone. As for downside cushion, it has a solid cash balance and impressive data to date along with the looming specter of M&A which should keep a healthy premium in the stock.

10. Exelixis (EXEL) - Label expansion and new trial data for cabozantinib and cobimetinib should continue to drive upside, while revenue growth and increased gains in market share have also been encouraging. The stock is quite attractive as an M&A candidate and the post-fourth-quarter earnings dip in share price makes for an interesting entry point.

11. Corcept Therapeutics (CORT) - Revenue growth is impressive on a quarterly and annual basis, its cash position is growing, and several pipeline assets (recorilant, CORT118335, CORT125281) could reach key inflection points in other areas such as oncology and NASH. The stock price plummeted after news of generic competition from Teva, but it has plenty of time to grow Korlym revenues and unlock value in the pipeline.

12. Adamas Pharmaceuticals (ADMS) - GOCOVRI peak sales could exceed $500 million (conservative estimate), and the company has a promising pipeline of assets (including ADS-4101) that could create value. The current depressed valuation comes as a result of a generic filing and approval of Osmotica's Osmolex, with their large cash position (includes funding from HealthCare Royalty Partners and $134 million secondary offering) providing us additional downside cushion.

13. Dynavax Technologies (DVAX) - Heplisav appears to be a superior treatment option as compared to GlaxoSmithKline's (GSK) Engerix-B with peak sales potential of $500 million, they have a strong cash position and upcoming data for SD-101 in combination with Merck's anti-PD-1 therapy KEYTRUDA provides a nice call option (ORR at ASCO last year was 100% in early-stage dose escalation study). It is possible that downside is cushioned by the potential of HEPLISAV-B and prior encouraging data for SD-101.

14. bluebird bio (BLUE) - The company's BCMA CAR-T drug candidate bb2121 remains attractive despite overblown fears on durability (peak sales of $2 billion or more), LentiGlobin has a good shot at success in TDT (Transfusion-Dependent ß-Thalassemia) and SCD (Severe Sickle Cell Disease), and they have a strong cash position. Recent pessimism and the resulting share price decline lead me to believe the valuation is attractive, while management's prior track records are suggestive of continued progress in the clinic in the medium term.

15. Xencor (XNCR) - The firm's antibody platform is quite attractive, they possess a deep pipeline, recently pulled off an upsized financing and received much needed validation in the form of positive data for Alexion Pharmaceuticals' (ALXN) ALXN1210 (makes use of Xencor's Xtend technology to extend half-life and reduce frequency of dosing). Downside appears limited after the secondary and validation of their technology, while advancement of their pipeline (IgG4-RD phase 3 trial initiation, data from phase 2 study in SLE and phase 1 study in AML) should keep Wall Street interested.

16. Antares Pharma (ATRS) - The company possesses a strong pipeline of drug/device combination product candidates which provide better treatment options in a variety of disease settings - Xyosted could potentially be approved by September and should see significant adoption due to several advantages over current treatments (keep in mind global male hypogonadism market to exceed $3 billion within 10 years). A substantial cushion to downside exists due to strength and positive trends in the core business.

17. Blueprint Medicines (BPMC) - The current $3.75 billion valuation compares favorably to $2 billion peak sales potential of two lead drug candidates, while their solid cash position after the December secondary offering and their deep pipeline provide adequate cushion to the current share price. The targeted oncology theme has been a winner for us in the past couple years, and I expect that trend to continue.

18. Ionis Pharmaceuticals (IONS) - The stock looks increasingly attractive after the expanded collaboration with Biogen (NASDAQ:BIIB), the company has done well to monetize partnered programs while retaining significant economics, they've proven themselves with the success of assets such as Spinraza, key catalysts include near term product launches and certain wholly-owned assets provide optionality and the possibility for outsized future returns. Their sizeable cash position and diversified pipeline with a variety of value drivers going forward provide adequate downside cushion.

19. Portola Pharmaceuticals (PTLA) - After the regulatory thumbs up for AndexXa, this one has become more attractive, even if we have to wait longer to see how the launch goes until Gen2 manufacturing gets approved. With 2 approved blockbuster potential treatments and several upcoming catalysts (including CHMP opinion and updated cerdulatinib data), it appears there's limited downside at this point although patience could be required.

20. Nektar Therapeutics (NKTR) - Much like how we took advantage of pessimism in the gene therapy space to add to key positions whose thesis were unaffected, current weakness in I-O has brought shares of Nektar back down to unjustified levels. ASCO and future updates will likely confirm impressive data we've already seen for NKTR-214, the size and terms of the Bristol-Myers Squibb (NYSE:BMY) collaboration (with 20 registration enabling studies to get underway and BMY footing 2/3 of development costs) lend credibility and add to conviction, and the company should do well whether they continue independently (due to impressive retention of economics) or eventually get bought out.

Performance Since Launch February 5th

9.33% for Core Biotech Model Account versus 0.98% for IBB and 4.92% for XBI

General Commentary

Takeda (OTCPK:TKPHF) and Shire (NASDAQ:SHPG) reached agreement on terms, with the Japanese firm forking over $30.33 in cash for each Shire share and either 0.839 new Takeda shares or 1.678 Takeda ADSs. After all is said and done, Takeda shareholders will own 50% of combined group. I'm betting JPMorgan Chase and the other banks are quite happy about that $30 billion bridge loan - this successful transaction should give a boost to the continuation of the M&A theme in biotech this year.

In case you missed it, be sure to check out my brief blog post on my thoughts regarding President Trump´s speech on drug pricing. It represents removal of a key overhang for biotech and could mean we are in for a much more interesting second half of the year.

The M&A theme continues in biotech as ARMO BioSciences (ARMO), an ROTY holding for which we owned a 3/4 size position, was bought out on the cheap by Eli Lilly (NYSE:LLY) for $1.6 billion. Stock prices of companies operating in the immuno-oncology space have been punished (in many cases unfairly) due to poor data for Incyte's (INCY) much vaunted IDO inhibitor epacadostat (once thought capable of doing up to nearly $2 billion in peak sales).

In the Core Biotech series, we capitalized on this weakness by purchasing Nektar Therapeutics (NKTR) prior to new data being revealed at ASCO in June, while, in ROTY, we continue to search for under-the-radar oncology stories with catalysts coming up in the near to medium term.

Updates on Model Account Positions

Xencor (XNCR) - The company reported first quarter 2018 financial results, with cash and equivalents now totaling $582.5 million. Key upcoming catalysts include initiation of their pivotal phase 3 study evaluating XmAb5871 in IgG4-RD in the second half of the year and the release of top-line data from their phase 2 study in SLE in the fourth quarter. In 2018, we can also expect data from their phase 1 study of XmAb14045 for the treatment of AML and other CD123-expressing hematologic malignancies.

Spark Therapeutics - The company reported first quarter 2018 financial results and guided for regulatory action from the EMA in Q3 for LUXTURNA. Other highlights included cash and equivalents of $587.5 million and their selling of the rare pediatric disease priority review voucher for $110 million.

Ionis Pharmaceuticals (IONS) - An FDA panel posted its briefing document ahead of Thursday's meeting to discuss subsidiary Akcea Therapeutics' (NASDAQ:AKCA) volanesorsen. Concerns over whether the benefits of the drug candidate outweighs risks (including highlighting of safety/tolerability issues such as thrombocytopenia) add to uncertainty both with the approval decision and also the drug's prospects relative to stronger competition.

Later update: The company announced that the FDA's Division of Metabolism and Endocrinology Products Advisory Committee voted 12 to 8 to support approval of volanesorsen for the treatment of FCS. Keep in mind their PDUFA date is set for August 30th.

Nektar Therapeutics - The company announced that dosing has commenced in their phase 1b study evaluating NKTR-358 (first-in-class T cell stimulator) in patients with systemic lupus erythematosus. The drug candidate is designed to correct the underlying immune system dysfunction in patients with immune disorders and could represent a major leap forward.

The company also announced first quarter 2018 financial results with their cash position totaling $333.8 million (not including $1 billion upfront payment plus $850 million share purchase according to their deal with Bristol-Myers Squibb). I remind readers that key data readouts are coming up at ASCO in June, including their oral presentation titled "NKTR-214 (CD122-biased agonist) plus nivolumab in patients with advanced solid tumors: Preliminary phase 1/2 results of PIVOT".

Neurocrine Biosciences - The company announced new data from its RE-KINECT real-world screening study involving patients with clinician-confirmed possible tardive dyskinesia (TD). Results revealed that almost 28% of patients treated with an anti-psychotic had clinician-confirmed TD, with over half of these affected by uncontrollable movements in 2 or more body regions. Results were presented at the American Psychiatric Association (APA) Annual Meeting.

Data from the long-term phase 3 KINECT 4 study was also presented and showed sustained, clinically meaningful TD improvement in patients with schizophrenia/schizoaffective disorder who received INGREZZA once-daily for up to 48 weeks. This was illustrated in the mean improvement in the Abnormal Involuntary Movement Scale (AIMS) of 10.1 and 10.7 points for the 40 mg and 80 mg doses, respectively.

Dynavax Technologies - The company reported first quarter 2018 results with cash and equivalents of $250.8 million comparing favorably to net loss of $39 million. Keep in mind that data from the phase 1b/2 study of SD-101 in combination with KEYTRUDA in advanced melanoma was selected for a Poster Discussion Session at ASCO.

Corcept Therapeutics - The company reported first quarter results and profit of $17.3 million (equating to earnings per share of 19 cents). Management has guided for 2018 full year revenue in the range of $275 million to $300 million. Cash and equivalents increased to $140.4 million. As if growth in their Cushing's Syndrome franchise weren't enough, other selective cortisol modulators continue to advance in the clinic, including a dose-ranging study of CORT125281 in combination with Xtandi in metastatic castration-resistant prostate cancer and CORT118335 in a phase 1 study for metabolic disorders. A phase 2 study in patients with antipsychotic-induced weight gain and NASH is expected to get underway by the end of the year.

Spark Therapeutics - The stock received a key analyst upgrade at Barclays. Analyst Gena Wang raised her price target to $85 stating that the Luxturna US launch progressed as she expected in the first quarter, and she believes a positive opinion will be forthcoming from the CHMP in the third quarter. She also increased the probability of a positive outcome for drug candidate SPK-8011 in its phase 1/2 data update in hemophilia A in the third quarter.

Array Biopharma - The company reported third quarter 2018 financial results and a cash position of $440 million. An important upcoming event will be the presentation of updated results from the 30 patient safety lead-in of the Phase 3 BEACON CRC trial at the ESMO 20th World Congress on Gastrointestinal Cancer in late June. Immuno-oncology collaborations continue to progress and will increasingly come into focus in 2019.

Portola Pharmaceuticals - The company reported first quarter 2018 financial results with cash and equivalents totaling $451.1 million (not including the $100 million milestone payment from their royalty-based financing). Net loss more than doubled to $84.2 million, while total revenue came in at $6.6 million (includes $6 million in collaboration and license revenue along with $0.6 million from initial sales of Bevyxxa). My recent article lays out other bullish drivers.

Radius Health (RDUS) - The company reported first quarter 2018 financial results with a cash balance of $367.3 million and net loss of $61.6 million. TYMLOS sales increased 90% to $14.5 million and captured around 13% of the U.S. anabolic osteoporosis market and 31% of new anabolic patient starts during the quarter. The company is targeting 19% to 21% share of this market and expects 2018 growth for overall said market of 5% to 7%. In February, there was a 5.9% price increase for the drug and, during the quarter, a 103% increase in the total number of physicians in the United States prescribing TYMLOS.

Keep in mind the company will be presenting at the Bank of America Merrill Lynch Healthcare Conference in mid-May and the Goldman Sachs Global Healthcare Conference in mid-June.

Exelixis - The company announced that the IMblaze370 pivotal study of atezolizumab in combination with cobimetinib did not meet its primary endpoint. While there's continued upside in this name, this turn of events does take away a potential value driver. Keep in mind other late-stage trials are ongoing include IMspire 150 TRILOGY and IMspire170 and financial results continue to be highly encouraging.

On the other hand, Needham reduced its price target to $30 from $33 suggesting minimal impact on the thesis going forward.

Abeona Therapeutics - Another green flag for the company in the form of a strengthened Board of Directors with the addition of Stefano Buono and Richard Van Duyne as independent Directors. Mr. Buno served prior as CEO and President of Advanced Accelerator Applications (acquired by Novartis) while Richard Van Duyne held high level positions at Warner-Lambert, Pharmacia, Daiichi Sankyo and others.

bluebird bio - German biotech firm Medigene expanded its collaboration with Bluebird Bio where the former is contributing screening tools to identify promising T-cell receptors (TCR). The number of projects under the collaboration is being expanded from 4 to 6, for which bluebird is on the hook for up to $250 million in milestone payments per program in addition to tiered royalties.

Actions To Take This Week

Filling out (adding to) our positions in Corcept Therapeutics and Nektar Therapeutics. Improving financials and progression of their pipeline make the former increasingly attractive, while, with the latter, we continue to take advantage of temporary weakness in I-O (especially prior to ASCO).

**Again, trades are executed at the closing price on the day the article is published (or Monday's closing price if published on the weekend).

Final Thoughts

Keep in mind that my objective for readers is to make their own decisions, do their own due diligence and invest according to their particular objectives. Stocks discussed here can be replaced or supplemented with selections readers have found from their own research that have similarly promising prospects and limited downside.

Feel free to ask questions as we strive to have an ego-free atmosphere where readers bounce ideas off each other and contribute their own DD. The goal is to constantly improve our thought processes, challenge each other's investment rationales, and learn from our losers and winners alike. Biotech can be a tricky sector, but by focusing on high-value assets, firms with growing sales/pipelines and valuations that help protect our downside, I'm optimistic that readers should see a growing brokerage account for whatever life goals they have lined up.

Disclaimer: Commentary presented is not individualized investment advice. Opinions offered here are not personalized recommendations. Readers are expected to do their own due diligence or consult an investment professional if needed prior to making trades. Strategies discussed should not be mistaken for recommendations, and past performance may not be indicative of future results. Although I do my best to present factual research, I do not in any way guarantee the accuracy of the information I post. I reserve the right to make investment decisions on behalf of myself and affiliates regarding any security without notification except where it is required by law. Keep in mind that any opinion or position disclosed on this platform is subject to change at any moment as the thesis evolves. Investing in common stock can result in partial or total loss of capital. In other words, readers are expected to form their own trading plan, do their own research and take responsibility for their own actions. If they are not able or willing to do so, better to buy index funds or find a thoroughly vetted fee-only financial advisor to handle your account. I am in a collaborative relationship with The Biotech Forum/Bret Jensen.

Disclosure: I am/we are long ARRY, NBIX, EXEL, GLPG, HCM, SGEN, NVCR, ABEO, RDUS, ONCE. 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.