Seeking Alpha

A Biotech Friendly Event In An Unfriendly Healthcare Market

|
Includes: ACAD, ALLO, AMRN, ARNA, ARRY, ARWR, ASCO, ASND, AXSM, BBIO, BHVN, BMY, BOLD, BPMC, CBPO, CHRS, CRSP, DNLI, GBT, GWPH, IBB, IOVA, IWM, JNJ, MDCO, MGNX, MGTX, MRNA, MRTX, NKTR, PCRX, PFS, PTCT, QQQ, QURE, RARX, SAGE, SGEN, SPY, TAK, TCDA, TGTX, VYGR, XBI, XLV, ZIOP
by: Tarun Chandra, CFA
Summary

American Society of Clinical Oncology ((ASCO)) annual event to provide some cheer to biotechs.

Healthcare remains a sector under regulatory stress and in political cross sight.

Broader market buffeted by trade friction and its adverse impact on domestic growth that can usher in an economic slowdown.

However, a defensive economic situation can allow healthcare to relatively outperform broader indexes.

Healthcare in general and biotechs remain a selective market as investors encounter a more difficult investing environment.

Market Pulse

PrudentBiotech.com ~ Market Pulse

The month of May thus far has been mostly a downward ride with an occasional rise, proving to be a mere bunny bump, as indexes have eroded persistently on the lack of a trade resolution with China, an outcome that at one point was considered to be almost in the bag. This is raising the probability of a US economic slowdown over the next year.

The broader Nasdaq (QQQ), S&P 500 (SPY), and small cap Russell 2000 (IWM) have slipped about -6% during the month, reflecting the heightened angst

American Society of Clinical Oncology

PrudentBiotech.com ~ ASCO

Most of the companies with oncology programs will make their annual trek to the American Society of Clinical Oncology (ASCO) annual meeting, the biggest oncology event in North America, held from May 31 to June 5 in Chicago. The event and its high-profile nature provide a much sought after platform for companies to release pivotal data and abstracts.

It also has turned out to be a good place to announce collaborations and sometimes even acquisitions. Two years ago, oncology specialist Ariad Pharmaceuticals was acquired by Takeda Pharmaceutical (TAK) during the event. But there can be disappointments too. A year ago Nektar Pharmaceuticals (NKTR), which had earlier in the year announced one of the most lucrative biotech partnership deals with Bristol Myers Squibb (BMY), walked into a brick wall after announcing diminishing response rate data on its lead drug NKTR-21, in combination with Bristol's checkpoint inhibitor, Opdivo. At that time the Company explained the muted response rate due to new cohorts joining later in the study and expected response rates to improve with maturing data.

Leading up to the ASCO, a couple of biotechs that stood out after an abstract preview release were Iovance Biotherapeutics (IOVA) and Macrogenics (MGNX).

Iovance Biotherapeutics

Iovance, which is developing novel cancer immunotherapies based on tumor-infiltrating lymphocyte (TIL) technology that amplifies the body's immune system response, released data from its InnovaTIL-04 Phase II study, at the 3.5 months median study follow-up point, in patients with recurrent cervical cancer. The data indicated a strong Objective Response Rate (ORR) of 44% and a disease control rate of 89% in patients with a mean 2.6 prior lines of therapy. For context, Merck's blockbuster drug Keytruda demonstrated an ORR of 14% when used in second line cervical cancer patients. A detailed presentation will be made on June 1 at the ASCO meeting. The results are a strong boost for the TIL approach in general and Iovance's TIL platform specifically to develop cures. Just like engineered CAR-T and T-Cell Receptor (TCR) gene therapies, the TIL cell therapy also uses the immune system to target tumors. And Iovance appears to have positioned itself in the middle of the field for further discoveries using the TIL platform.

Macrogencis

Macrogenics, which is developing monoclonal antibody cancer immunotherapies using its proprietary technology platform, disclosed data on its Phase 3 trial evaluating Margetuximab plus chemotherapy compared to Roche's standard of care Trastuzumab (Herceptin) plus chemotherapy in patients with HER2-positive metastatic breast cancer. The study met its progression-free survival (PFS) endpoint with 5.8 months compared to 4.9 months for Roches' drug. The ORR was 22% compared to 16% for the benchmark. In a large subgroup, the PFS was even better at 1.8 months. A detailed presentation will be made on June 4. The results were supportive, and the Company intends to submit a Biologics License Application (BLA) to the FDA in the second half of 2019. Antibody engineering is an advancing field and Macrogenics incremental but meaningful success against the current standard of care only boosts the promising prospects of this approach.

Amgen

Another company which will garner a lot of attention is Amgen, which has been diligently toiling away, along with a few others, in the pursuit of a breakthrough in drugging the KRAS genes, which has proven to be not an easy feat. The KRAS gene provides the instructions for making the K-Ras protein that is part of a signaling pathway relaying signals from outside the cell to the nucleus within the cell. The signals provide the instructions for the cells to either grow and divide or become differentiated, like as specialized cells. The KRAS gene belongs to a class of genes known as oncogenes. When mutated, oncogenes have the potential to cause normal cells to become cancerous.

Due to a lack of clear binding pockets, KRAS has historically been thought to be an undruggable target. For patients with a KRAS G12C mutation however, there is a potential to be able to bind the small molecule and gain sufficient control of the pathway. Programs based on KRAS have wide applicability across a number of solid tumor types with high unmet patient needs. So any breakthrough can be widely applied with multi-billion market opportunities. Amgen released preliminary data on its AMG 510, a KRAS G12C inhibitor, two weeks ago, and detailed patient data will be released during ASCO. Other companies pursuing programs in KRAS include Mirati Therapeutics (MRTX), Bridgebio Pharma (BBIO), Moderna (MRNA), and Johnson & Johnson (JNJ).

ASCO, one of the largest scientific gathering of biotech companies, typically provides a favorable short-term boost to biotechs, particularly oncology stocks, and this year may see the same.

Healthcare Remains Under Duress ...

PrudentBiotech.com ~ Capitol Hill

Source: iStock photo

The subject of healthcare, particularly drug pricing, appears to be a tonic for bipartisanship, uniting both parties and the Presidency into doing something. Although that something and the means to achieve it differ, it has not stopped proposals and executive actions to be proposed at a steady clip.

The Wall Street Journal reported last week that the executive order is finally coming on the mandatory disclosure of prices in the health care industry - from drugs to hospitals. The greater pricing transparency has been talked about since mid-2018 and is finally going to be put in place shortly, even as the industry opposes it since end users typically never pay the listed prices. However, the executive action is going to be broader by disclosing the price at every stage of the system chain from the company to the consumer.

The Senate Health Committee last week unveiled a draft of its bill, which is a broad collection of many earlier proposals and bills covering wide swaths of the healthcare industry, including the FDA, pharmaceuticals, and pharmacy benefit managers. It incorporates the House passed bills on generics and biosimilars and addresses the period of market exclusivity. The package of bipartisan reforms will be one of the most sweeping efforts aimed at controlling health care costs to consumers. Separately, the House Ways and Means Committee invited comments on a bipartisan Medicare drug pricing legislation that will specifically limit out-of-pocket expenses for beneficiaries.

It's raining healthcare bills and the industry will remain a target through at least 2020 for a variety of bills aimed at a systemic overhaul to reduce healthcare costs.

... But It's A Relatively Promising Sector In A Weakening Economic Environment

The trade conflict is contributing to raising the odds of a US economic slowdown.

Short-term tariffs by themselves are an inconvenience. But when they begin to acquire a longer life then trade conflicts can descend into a vicious circle of retaliation with an ability to disrupt and recast global supply chains, raise business uncertainty, and make a dent in global economic growth.

To put things in perspective, the direct impact of tariffs is estimated to trim US GDP by a fraction this year and by 1% in 2021. The market can manage and reset if it's clear where the boundaries exist. However, when the two largest economic giants of the world begin to harden their positions on trade, the boundaries of trade retaliation are unsettled. It's the ripple effect of unexpected reactions and unintended consequences that creates a growing shroud of uncertainty which envelops business decision-making. That continues to burden the market without reprieve.

A quick proxy for global industrial demand is the price of copper, which has been slipping alarmingly so far in May. It is most likely reflecting the reality of a potentially sharp slowdown in a key global growth engine, China, which was already struggling with weak demand prior to the recent ratcheting up of trade tensions.

At home in the US, the bond market has begun to beat the drums steadily on an upcoming economic slowdown with the longer-term treasury yields continuing to retreat. This has once again raised the focus on the hallowed spread indicators which have a strong track record of predicting recessions when they enter the negative zone. One slice of the spreads, 3 months/10 years, has drifted back into negative territory, although the prime one, 2/10 or 2 years/10 years, still remains positive for now.

Typically, in such a scenario, one would envision the market will be volatile with sharp down days. But it should not roll over into a bear market due to rising anticipation of a Federal Reserve rate cut.

Also, a weakening economic environment or its rising expectation helps defensive sectors and that includes healthcare. Perhaps, it's for this very reason that during May, while the broader market has corrected sharply by -6% as economic concerns mounted, the S&P Healthcare Index (XLV), the S&P Biotech Index (XBI), and the Nasdaq Biotech Index (IBB), have slipped more moderately, only about -2%.

The concerns over the weakening state of the economy will continue through the Summer months and may thus provide an offset to the risk of growing healthcare regulation. This can create an opportunity for the defensive healthcare sector to relatively outperform the broader market.

Conclusion

As we approach June, investors will most likely witness a volatile period for stocks as economic concerns begin to mount with a broadening and spiraling trade war, where parties may begin to misjudge each other's urgency to accommodate, leading to unintended consequences. Furthermore, the possibility of a mismatch between the market's expectation of an interest rate cut with the Federal Reserve's timeline may further enhance volatility. Investors should calibrate their portfolios with these potential scenarios in mind. If economic concerns persist, healthcare may find itself relatively better positioned as a defensive sector, although in a volatile market the biotech segment can be even more volatile.

It should be kept in mind that the tenor of the market remains suspended by the thread of a single tweet from the White House. Even a missive indicating a resumption of negotiations in good faith can provide respite to the market. But the uncertainty can be punishing on the portfolios as the business landscape will remain unsettled till a final trade resolution is achieved, whenever it may be.

The ASCO conference is a period of heightened news flow for the biotech industry. Some of the biotech oncology names that can continue to benefit are stocks like Iovance, Macrogenics, Array Pharmaceuticals (ARRY), Blueprint Medicines (BPMC), Seattle Genetics (SGEN), Ziopharm Oncology (ZIOP), TG Therapeutics (TGTX), and Mirati Therapeutics.

In addition, some other promising biotech companies, which may be now or in the past be part of the Prudent Biotech model portfolio or the Graycell Small Cap portfolio, include Biohaven Pharmaceutical (BHVN), Sage Therapeutics (SAGE), Amarin (AMRN), GW Pharmaceuticals (GWPH), Denali Therapeutics (DNLI), Acadia Pharmaceuticals (ACAD), Arena Pharmaceuticals (ARNA), Ascendis Pharma (ASND), Pacira Pharmaceuticals (PCRX), China Biologics (CBPO), Uniqure (QURE), Voyager Therapeutics (VYGR), Audentes Therapeutics (BOLD), Moderna (MRNA), PTC Therapeutics (PTCT), Meiragtx Holdings (MGTX), Ra Pharmaceuticals (RARX), Tricida (TCDA), Allogene Therapeutics (ALLO), Crispr Therapeutics (CRSP), Global Blood Therapeutics (GBT), Axsome Therapeutics (AXSM), Medicine Company (MDCO), Coherus Biosciences (CHRS), and Arrowhead Pharmaceuticals (ARWR). This is just a short list.

As always, use a portfolio approach to invest in this volatile segment to overcome the inevitable errors.

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.

Additional disclosure: Author's note: As always, kindly do your own due diligence. The small-cap/early mid-cap and biotech sector carry more risk of losses than the broader market. For additional information and helpful links, please check the Profile by clicking on the name above. Also, you can click on the orange "Follow" button to receive such information immediately when published. Please feel free to add to this commentary or point out errors in the Comments section. Opinions can change with time and additional data. More details about our exposure to the names mentioned herein are in the disclosure below.
Graycell Advisors or Prudent Biotech is not a registered investment advisor (RIA) and publishes quantitative-driven model portfolios for investors and RIAs. Some or all of the companies/stocks mentioned in the article may be in the past, now, or in the future, be part of the various model portfolios for subscribers. In addition, although there are no personal positions presently, stocks mentioned can be part of the portfolios of family and associates.

Past performance is not a guarantee of future results. The information here is only provided for a general informational purpose and not as a recommendation, and is not guaranteed to be complete or accurate. Companies mentioned here may not be favored in the future as market trend changes and/or new information emerges, and no portfolio updates will be provided unless you are a model portfolio subscriber. Opinions, where expressed, can change with time and new information.