Welcome to the seventeenth 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 also is 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 more than $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-B 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 (NYSE:MRK) anti-PD-1 therapy KEYTRUDA provides a nice call option (ORR at ASCO last year was 100% in an early-stage dose escalation study). It is possible that downside is cushioned by the potential of HEPISLAV-B (including its appeal to a potential acquirer) 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 two 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
Gene therapy stocks received a few points in their favor when FDA Commissioner Scott Gottlieb provided the following remarks at the Alliance for Regenerative Medicine's Annual Board Meeting (my emphasis in bold):
We're at a key point when it comes to cell and gene therapy. These therapies have the potential to address hundreds, if not thousands, of different rare and common diseases...To advance this progress, and address these challenges, the FDA is conducting applied scientific research in cell and gene therapy on novel clinical trial designs. We're also working to expedite development programs though use of all of our regulatory pathways. This includes the use of Breakthrough Therapy designation and more recently, the Regenerative Medicine Advanced Therapy designation, or RMAT designation. We advanced draft guidance on how we intend to apply the RMAT designation, along with other new steps that we intend to take to expedite the development of novel products, as part of our regenerative medicine framework that we released in November of 2017. We'll be releasing a similar framework soon that will explain how we intend to address manufacturing issues and the development pathway for gene therapy products.
CRISPR Therapeutics (CRSP) and partner Vertex Pharmaceuticals (VRTX) got hit after it was disclosed that the FDA placed a clinical hold on their IND for sickle cell disease gene therapy candidate CTX001. The companies had been planning for a phase 1/2 study to get underway soon. Weakness could spread to related gene editing tickers, but on the other hand concerns are likely overblown and the setback minor.
Updates on Model Account Positions
Exelixis (EXEL)- The company announced the appointment of Andrew R. Peters as Vice President, Strategy. The newly created position's stated purpose is to strengthen the focus of the firm's mid- and long-term strategy in advancing other product candidates in the clinic. Keep in mind that Mr. Peters worked prior for 12 years as an equity research analyst covering biotech, most recently at Deutsche Bank Securities. Could it be possible the company continues to take steps to ready itself for a sale?
The company also announced that the FDA accepted their supplemental New Drug Application (sNDA) for CABOMETYX as a treatment for patients with previously treated advanced hepatocellular carcinoma. A PDUFA date of January 14th has been assigned.
bluebird bio - The company announced receipt of the coveted Breakthrough Therapy Designation for Lenti-D for the treatment of patients with cerebral adrenoleukodystrophy (NASDAQ:CALD), a rare, serious and life-threatening hereditary neurological disorder. The designation is supported by data from the phase 2/3 Starbeam study evaluating Lenti-D in boys with CALD, 17 years of age or less who do not have a matched sibling donor in which 15 of the 17 patients (88 percent) infused with Lenti-D remained alive and free of major functional disabilities at 2 years post-treatment.
Adamas Pharmaceuticals (ADMS)- The company announced that pharmacokinetic data for GOCOVRI was published online in Clinical Pharmacokinetics and demonstrated a slow initial rise in amantadine plasma concentration (allows for effective once-daily dosing at bedtime to achieve high amantadine plasma concentrations upon waing and during the day).
Portola Pharmaceuticals (PTLA)- The company announced receipt of a $100 million milestone payment from HealthCare Royalty Partners (HCR) as a result of gaining approval from the FDA for AndexXa (this payment was expected).
Blueprint Medicines (BPMC)- Check out the recent Boston Business Journal article on their impressive growth, photos of the new HQ and interesting look at how they´ve progressed from a few employees to over 160.
The company also announced upcoming presentations at the Jefferies Global Healthcare Conference on June 7th and the Goldman Sachs 39th Annual Global Healthcare Conference on June 12th.
Galapagos NV (GLPG)- The company (along with Gilead Sciences) announced significant progress, this time achieving the primary endpoint in their phase 2 EQUATOR trial evaluating filgotinib in 131 adults with moderate to severe psoriatic arthritis. 80% of patients achieved ACR20 response versus 33 percent of placebo (p<0.001). ACR50 and ACR70 responses at Week 16 were also impressive 48% vs. 15% and 23% veresus 6%, respectively. Data will be presented at a scientific conference in the future.
Additionally, it was announced that an independent Data Monitoring Committee (DMC) conducted a planned interim futility analysis of the phase 2b/3 ulcerative colitis study, SELECTION and recommended proceeding into the phase 3 portion. Galapagos will receive a $15 million milestone payment as a result.
Nektar Therapeutics (NKTR)- The company announced submission of an NDA to the FDA for NKTR-181, the first analgesic opioid molecule to exhibit a reduced incidence of specific CNS-mediated side effects through the targeted alteration of brain-entry kinetics. Long-time readers might recall this asset and associated catalysts were one reason I suggested entering the stock in early 2017.
Actions To Take This Week
Selling our position in Radius Health (RDUS)- While I still believe they have interesting prospects longer term (per the focus of this series and prior articles on the name), I feel the selection below provides a much more attractive risk/reward profile.
Initiating a pilot, half-size stake in MorphoSys (MOR)- A related article and my full thesis will come out later. Safe to say we´ve been discussing this recent IPO for some time and I like what I see - they have an impressively deep pipeline consisting of partnered assets and select wholly-owned drug candidates they are ushering forward. With a solid balance sheet, catalysts coming, royalties ramping up for Janssen-partnered TREMFYA and other value drivers, this one provides significant diversification and potential upside. Due to lower trading volume and wide bid-ask spread, limit orders are strongly encouraged here
Keep in mind that while the focus of this series is on a multi-year time frame, that does not mean simply "buy and forget." We continue to monitor positions and their thesis.
In the event that a thesis is weakened or a more attractive opportunity presents itself, a substitution is worthy of careful evaluation.
**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).
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.
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.