Seeking Alpha

Biotech In 2020: M&A And Gene Therapy In Focus

|
About: Amarin Corporation plc (AMRN), ATHX, ICPT, MYOV, RCKT, IBB, XBI, Includes: ACHN, ALXN, ARQL, AVRO, BOLD, CRSP, EDIT, GLW, MRK, NTLA, THMO, TMDX
by: SA Marketplace
Summary

Our biotech Roundtable looks at the growth sector that has had a strong finish to 2019.

Gene therapy is one topic that gets a lot of attention, with the sector interest backed up by M&A.

But our panel also talks about the importance of patience and staying focused in a volatile space.

2019 finishes with an extra kick for investors. Part of that is the continued strong run of the market, erasing memories of last year's near bear market and extending the decade-long bull. There also are plenty of market headlines and events that have sprung over the end of the year, from Phase 1 trade deals to M&A to political whirlwinds and more.

More trivially, the 2010s are ending and the 2020s begin. It's been quite a decade for equity investors, with the S&P 500 returning more than 250% in that time. Even underperformance could leave a portfolio in good shape, and any alpha that was found would really leave investors well off.

Where does that leave investors and the markets for 2020, at the start of a new decade? That's what we try to answer in our annual Marketplace Roundtable series. We are publishing roundtable discussions featuring more than 80 authors from across the spectrum of investing styles and focuses you find on Seeking Alpha: Macro to value investing, small-cap to energy, gold to quant and alternative strategies, and more.

Today's discussion focuses on the Biotech sector, which finished the year strong after a slow start. We're featuring the following panel:

Questions are in bold header font, disclosures are available at the end of the article.

The stock market has had another strong year, recovering from last year's Q4 correction. The S&P 500 has returned 10% annualized over the last two years, as of early December. Yet there's still a sense that the music is due to stop among many investors (see the theme of "most hated bull market"). Where do you fall out?

Bhavneesh Sharma: Expecting 3400 PT for SPX in 2020.

Stephen Ayers: I agree that some stocks are looking quite expensive now. That's why it's especially important to always have a keen eye out for value.

Terry Chrisomalis: I believe that the market will continue to head higher. This is on the basis of the strong economic reports that have been coming in terms of jobs, unemployment rate falling, and many other positive developments like phase 1 of the China trade deal. I still see a bullish sentiment for the markets heading into 2020.

First Genesis Consulting: Ongoing innovation is an important tool for remaining competitive in the biopharmaceutical arena. The trailblazers are cognizant of the risks associated with moving paradigm-shifting drug concepts into clinical trials. I manage the fallout by discerning those trailblazers, foundational goals and the varying paths to clinical success. I avoid going with the flow but I make my flow based on my insights. Drug candidates are never identical but could have a similar pharmacological target.

Wall Street Titan: Having been a young employee in the trading room of Bear Stearns during the crash of 1987, I have experienced many market cycles. That experience puts me in the group with the cautious. One can never know when a lingering problem in the basement of concerns will rise into a perceived crisis. The growing national debt and exploding budget deficit during a healthy economy should be a cause for concern for everyone. When the Republican Party, once hawks on deficit spending, now ignore this issue, it's something to be concerned about. What happens to this structural deficit when the economy weakens? The music will stop when the reality of the exploding national debt raises its ugly head, until then its still party time.

What's a lesson you learned in 2019?

Jonathan Faison: Slow down: You don't have to nail them all. Focus on just a few ideas that interest you for deep due diligence, establishing positions where you believe you have an edge or advantage.

Bhavneesh Sharma: Markets can stay irrational for long and don't fight the Fed.

Stephen Ayers: Patience pays off! If you are convicted in an idea, stay with it until the story plays out.

First Genesis Consulting: Developed a bridge/gap plan during the long drought associated with clinical trials to reduce investor impatience. It can be very challenging to encourage investors on focus on the long-term rather than the short-term goals.

Biotech is finishing the year on a strong note, with Q4 providing most of its performance this year. What's going on?

Jonathan Faison: Perfect storm of funds and momentum money chasing the sector, combined with big pharmaceutical companies buying up small companies and drugs to replenish their pipelines as patent cliffs approach.

Bhavneesh Sharma: Strong M&A activity is fueling the surge in the sector.

Stephen Ayers: There are a few things going on that are positively influencing the sector at the moment. For one, drugs are getting approved faster than ever by the FDA. Two, big pharma is paying big premium for acquisitions (e.g. ArQule (NASDAQ:ARQL), Audentes (NASDAQ:BOLD)). And three, we are seeing a lot of technological advancement that's just now beginning to change the landscape of biotechnology. Ideas like "targeted oncology" and "gene therapy" are beginning to enter their heydays.

Terry Chrisomalis: The strong surge in biotech has come about because of strong M&A deals. Especially, in the last few months. Alexion Pharmaceuticals (ALXN) paid $930 million to acquire Achillion Pharmaceuticals (ACHN) for the treatment of diseases affected by the complement system. Merck (MRK) wanted to get its hands on a precision oncology biotech by the name of ArQule and it spent $2.7 billion to do so. Besides outright acquisitions, there also has been an increase of licensing deals as well. For example, XBiotech out-licensed its antibody Bermekimab for dermatological indications for $1.35 billion. I expect more deals like these to continue in 2020.

First Genesis Consulting: Many factors are at play from therapeutic innovation from biopharmaceutical/biotech companies to emerging solutions to the global conflict between countries and continents.

Healthcare remains one of the hottest topics in the political arena as we enter an election year. What are you watching for or expecting?

Bhavneesh Sharma: I don't expect much progress to be made in drug price control, so I'm bullish on the sector.

First Genesis Consulting: Politicians are not known for being truthful. However, I would like to see the specific workable plans to lowering prescription drug prices. This would have significant bearing on biotech stocks.

Wall Street Titan: The affordability of healthcare is the hot button issue of our time. It's well established that the United States has the highest level of healthcare spending per GDP of any other country. Politics plays the biggest role in how we got here and the lobbying power of the healthcare industry has been effective in getting keeping the status quo. Some of the 2020 Democratic presidential candidates have put out plans that basically socialize parts of the healthcare system. In the end, I expect that someone from the moderate branch of the Democratic party to move ahead against President Trump in 2020. However, this is an area that must be watched closely.

What technologies or areas of study have your attention currently?

Jonathan Faison: Gene therapy, "picks and shovels" plays, large orphan markets, drugs with a clear leg up over competition.

Bhavneesh Sharma: Gene therapy, allogeneic cell therapies in cancer.

First Genesis Consulting: Therapeutics for liver and rare diseases.

Wall Street Titan: Immunotherapy harnesses the immune system of a patient and re-engineers it as a weapon. The greatest success seen is in the clinic is a therapy called CAR-T where a T-cell is modified using chimeric antigen receptors to create CAR-T cells that target cancer. However, the manufacturing cost of CAR-T therapies is astronomical due to the personalized nature of the therapy. ThermoGenesis Holdings, Inc. (THMO) is a company I recently added to my portfolio that has developed a platform that can reduce the manufacturing costs of CAR-T therapies called CAR-TXpress. The key to the platform is a proprietary technology called Buoyancy-Activated Cell Sorting (BACS) whereby lipid microbubbles can be made to bind to targeted immune cells for more efficient cell separation during centrifugation. The company claims CAR-TXpress can reduce CAR-T manufacturing costs by 2/3. ThermoGenesis recently signed a distribution agreement with Corning (GLW) and that should make 2020 an interesting year for them.

What's a story you think the market will be paying more attention to in the next year in biotech?

Jonathan Faison: This is more of a medical device story, but TransMedics (TMDX) is of interest due to the possibility of addressing the huge problem of low supply of available donor organs and low utilization rates (65% to 80% of donated organs are wasted). Clinical trial data for Organ Care System (OCS) has shown double to triple utilization rates for donor organs and improved outcomes (50% or more reduction in post-transplant complications). They have key regulatory decisions for OCS Heart and pivotal data for OCS liver in 2020. We also have a couple ROTY members visiting the CFO to interview him with questions from our community. The movie John Q comes to mind.

Bhavneesh Sharma: Gene therapy.

Stephen Ayers: AVROBIO (AVRO) is developing a lentiviral-based gene therapy for Fabry disease. Fabry disease is a genetic disorder characterized by an enzyme deficiency, alpha-galactosidase A. The lack of alpha-galactosidase A causes a chronic buildup in globotriaosylceramide, a type of fat. Over time, the disease wreaks havoc on the entire body and decreases life expectancy by nearly 20 years (compared to the average, healthy male). Current treatments are limited to enzyme replacement therapies, but these permit bouts of severe disease activity and require chronic dosing. RD-01 is a one-time dose that appears safe and, based on phase 1/2 data, to deliver consistent control of the disease. Continued success could see a quick entry into the market, which would, assuredly, change the treatment landscape of Fabry disease. The company is expected to slowly leak more data over the course of the next several months. The market has been slow to catch on, as AVROBIO's valuation is pinned under $500M.

First Genesis Consulting: NASH. The reason being that we could see the first-ever FDA approved therapeutics for this chronic progressive liver disease.

Wall Street Titan: As gene editing moves forward into the clinic, the companies focused on CRISPR-CAS9 (What are genome editing and CRISPR-Cas9?) should garner more attention. The idea that mankind may be able to successfully repair defective DNA is still mind blowing. It wasn't that long ago when this would have been considered science fiction, not science. Charles Darwin would have surely laughed at the notion. However, CRISPR-CAS9 is still in its early stages and editing the human genome is fraught with risk such as off target edits. The market will be paying attention to see how leaders, Editas Medicine (EDIT), CRISPR Therapeutics AG (CRSP), and Intellia Therapeutics (NTLA) progress and advance their pipelines in 2020.

What do you think the most significant event in the sector this year was?

Bhavneesh Sharma: Gene therapy came back as a focus sub-sector after being beaten down for almost two decades.

First Genesis Consulting: FDA approval of innovative gene therapies for rare pediatric diseases.

What's a favorite idea for 2020, and what's the story?

Jonathan Faison: After $3 billion buyout of Audentes Therapeutics, gene therapy continues to be in focus. We've held Rocket Pharmaceuticals (RCKT) since $12ish, and initial data sets in Fanconi Anemia and LAD:I have not disappointed. Danon Disease phase 1 data in 2020 will be a key catalyst to look forward to as well.

Bhavneesh Sharma: Small caps and biotechs have been underperforming the market in 2019 and recovering now. Expecting them to outperform in 2020.

Stephen Ayers: I am still really bullish on Amarin Corporation (AMRN). Their drug, Vascepa, could be the first of its kind to secure a cardiovascular risk reduction label. Because it can be used in combination with other drugs that also reduce cardiovascular risk (e.g. Lipitor), it will not run into any relevant competition. Additionally, its label should be quite inclusive. And especially because the drug has been on the market for years already, the market uptake following broad label approval (the drug is, currently, only approved for very high triglyceride levels) should boom. Even without the extended indication, we are already seeing high demands as scripts continue to grow. For the quarter ending Sept. 31, Amarin saw 100%-plus product revenue growth, compared to the same period in 2018.

All in all, Vascepa is a blockbuster drug bound to change the treatment landscape of cardiovascular disease that should easily procure over $3B in peak annual revenue. Amarin's current enterprise value of $7.75B (as of December 11, 2019) is yet to fully recognize the potential. Do not be surprised to see Amarin acquired in 2020.

Terry Chrisomalis: My favorite idea for 2020 would be a biotech by the name of Myovant Sciences (MYOV). That's because it had surprisingly solid results in its phase 3 HERO study treating men with advanced prostate cancer. It was noted that 96.7% of men who took relugolix had achieved sustained testosterone suppression to castrate levels, which was the primary endpoint of the study. With the primary endpoint met, the biotech expects to file a NDA to the FDA for relugolix approval in the treatment of men with advanced prostate cancer. The filing of this NDA is expected in Q2 of 2020. Relugolix is being evaluated for two other large market indications. These other indications are Uterine fibroids and endometriosis. Positive results were already reported for both LIBERTY studies (LIBERTY-1 and LIBERTY-2) using relugolix combination regimen in women with uterine fibroids and menstrual bleeding. These two positive studies, along with another bioequivalence study, which is expected in the company's calendar Q1 2020, will allow an NDA filing for relugolix of this program as well by April of 2020. Another catalyst for this program is a marketing authorization application (MAA) for the relugolix combination for treating women with uterine fibroids and menstrual bleeding by Q1 2020. Lastly, another set of catalysts involves readouts from additional late-stage studies known as SPIRIT-2 and SPIRIT-1. For both of these studies, relugolix combination therapy is being explored in women with endometriosis pain. The data readout for SPIRIT-2 is expected Q1 of calendar year 2020 and then SPIRIT-1 is expected Q2 of calendar year 2020. With a strong pipeline and multitude of upcoming catalysts in the early part of next year, I believe there is substantial upside for investors. Which is why I believe it is a top idea for 2020.

First Genesis Consulting: Obeticholic acid (OCA) by Intercept (ICPT) granted FDA approval as the first-ever approved therapeutics for NASH an emerging global epidemic. As a company, Intercept has done clinical wonders for the scientific and clinical communities by bringing liver research and therapeutics to the forefront. Intercept gave a clinical voice to orphan liver diseases and non-viral liver diseases with great unmet needs, an area of medicine that big pharma typically stayed away from due to perceived lack of profitability. This is reflected in the Breakthrough Designation by the FDA for OCA in NASH.

Wall Street Titan: I have covered Athersys (ATHX) on SA for a number of years and, like all long-term shareholders, have been disappointed by a clinical timeline that has extended out much longer than anyone anticipated. However, this should be the year that we see partner data out of Japan in the huge unmet medical need of ischemic stroke using the company's regenerative stem cell product called MultiStem. MultiStem is a type of stem cell that has been shown to modulate the hyperinflammation in the brain that arises after a stroke and does great damage beyond the clot. MultiStem also creates a more favorable environment to promote neurogenesis, angiogenesis, and healing. I did a deep dive into the science behind this program in a 2016 article that reviews the Phase II results and my rationale for optimism. We should see results from stroke in 2020 and they could be a game changer. Athersys also has an advanced program in Japan in Acute Respiratory Distress Syndrome that has shown great promise in a Phase II trial. Both Japan trials are funded by partner Healios KK, (Healios K.K.) a leading Japan-based stem cell biotech that's betting its entire future on MultiStem's success and has made a substantial financial commitment to the Athersys programs. Healios is the largest shareholder of Athersys.

***

Thanks to our panel for shedding light on the biotech sector. You can find more of their work at these links:

The year-end Roundtable rolls on through the weekend. We're featuring Energy tomorrow and Gold on Sunday, so watch out for those editions.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: Jonathan Faison is long RCKT.
Stephen Ayers is long AMRN.
First Genesis Consulting is long ICPT.
Wall Street Titan is long ATHX.
The other authors have no positions in any stocks mentioned.