Source: George S. Mack of The Life Sciences Report (5/16/13)
Adventurous investors have long sought out micro-cap stocks, attracted by the profit potential of starting on the bottom floor and rocketing toward blue sky. Biotechnology can add even more power to the upside possibilities of micro caps, especially now that pharma is starved for new products and will pay well for solid ideas. Managing partner William Gregozeski of Mont Blanc Capital Management has focused on very small, unnoticed stocks for most of his career and has pegged two undiscovered biotechs that could break out to big-time valuations. In this interview with The Life Sciences Report, Gregozeski elaborates on the stories behind these two investment opportunities.
The Life Sciences Report: Bill, what industries do you follow?
William Gregozeski: I am a generalist, industry- and country-agnostic. I will look at any company listed anywhere in the world.
TLSR: I understand from your firm's website that your sellside research product was established to increase the number of companies that your asset management division could screen. Do you perform diligence on companies based on Mont Blanc's asset management needs, or do you screen companies based on what you think are the best growth stories?
WG: My background is in small- and micro-cap sellside research. I look for companies with great stories, companies that I think could use help in terms of awareness. We look at companies that the asset management side owns as well, because some are very interesting. biOasis Technologies Inc. (BTI:TSX.V) is one; it is certainly worth covering. But we're not just doing research for the asset management side. We're not covering just what they own.
Mine is more of an independent practice. I can cover whatever I want. The people in asset management may say, "Hey, we're looking at investing in this. What do you think about it?" Then I'll do a little work for them, but it's separate from what I'm publishing. The buyside and sellside are separate companies.
"I look for companies with great stories, companies that I think could use help in terms of awareness."
Just a note: There is not as much small- and micro-cap research today as there was even five years ago; there's not money for small-cap research. With the changes in regulation on the financial side of the business, like decimalization, and the focus on getting the lowest possible commissions, there is often little that can be paid for research, which is why a lot of small- and micro-cap research is tied to investment banking deals.
TLSR: You have alluded to the fact that your forte is the very small-cap company. Certainly, these companies have their limitations in terms of the marketability of shares, and certainly sometimes they're not liquid. Do you recommend that your clients have staying power? Generally speaking, should your clients be prepared to assist in dilutive financings?
WG: A lot of our research clients are institutional investors. They are used to the fact that there is dwindling liquidity and interest in the small-cap space, which poses a great opportunity for them. There's also great opportunity in small-cap companies for funds that understand the risks of having no immediate liquidity, because funds can see growth over time. The liquidity will come as the company performs.
But certainly there is risk of a company needing additional financing. There is also the risk of the fund having big redemptions, which could cause investors to lose on their positions because the fund is illiquid at the time.
TLSR: I gather that because the companies are so small, the institutions owning them are actually small hedge funds, for the most part. Would that be correct? Mutual funds can't own these stocks because they are too small, right?
WG: Right. Every fund has its own requirements on what it can and can't invest in. I would say these micro caps are owned more often by the hedge fund, the family office or the like. A micro-cap mutual fund also might own them.
TLSR: What do you look for first in a company? It sounds like you're looking for underfollowed and undiscovered stories, but what else do you look for?
WG: There is no specific formula, but the company does need to have little to no following, an undiscovered story. We don't want a company with 10 other firms following it. We're looking for new ideas that we can bring to investors' radars. It has to be a good story that makes sense, and it has to be easy to see where the upside could come from, whether it's a mining company that has a great asset or a biotech that brings something very unique to the market. And it has to have competent management. I've always said that nothing can ruin a great company like bad management. I firmly believe that to be the case.
TLSR: Certainly, especially in a nascent company, management is extraordinarily important. Do you look for management that has had previous entrepreneurial experience?
WG: I think it depends on the industry. If it's a resource company-mining, oil or gas-having management with experience building up assets and taking them into production, or getting an asset ready to sell off to a major, is important. For a biotech, a company needs to have people on the team who have a history in taking products through the clinical trial process. If someone is doing it for the first time, he or she is probably going to make a lot of mistakes along the way. I wouldn't want to be invested in someone's trials and errors. Management needs to have experience relevant to the industry.
TLSR: Reimbursement is going to be the main issue facing us as we seek to make money in biotech, and is going to become more and more important as we move toward managed care in medicine all over the world. But the problem is that it can take a decade to develop a drug. I'm wondering how you might mitigate that kind of risk when so many things can happen over the duration of a product's development?
WG: I don't think you can mitigate the risk. As far as reimbursement goes, pricing is impossible to determine early on in the drug development process. Even looking back five years, who knew what the current healthcare market would look like? It is anybody's guess as to what the market could look like in the next 5-10 years. My models are discounted back at a very high rate. I think that's the way to handle that risk.
TLSR: Let's talk about companies. You choose which you want to talk about first.
WG: We can talk about biOasis first.
TLSR: What's your value proposition here?
WG: BiOasis has a platform. It also has an Alzheimer's disease test-a blood test-in development that looks very promising and could be ready to license out. That would be an interesting story alone, but given what the company has in its Transcend platform, which can deliver existing drugs across the blood-brain barrier, the Alzheimer's CogniTest has taken a back seat.
TLSR: The Alzheimer's test could be very interesting because by the time dementia is symptomatic, the pathology is well established in the brain. Any kind of test that could alert us ahead of time could be extremely valuable as the industry develops therapies going forward.
WG: Yes, it really is important. The only surefire way right now to tell if someone had Alzheimer's is in the autopsy. Having a test that not only can tell patients whether they have Alzheimer's, but also the severity of disease, can certainly improve their lives going forward.
TLSR: One important thing here, Bill, is that a test does not need to be U.S. Food and Drug Administration (FDA)-approved. It needs Clinical Laboratory Improvement Amendments (CLIA) certification, generally speaking. A test like this could be very important as a biomarker when developing drugs for dementia.
WG: Absolutely. It would be a fantastic testing tool for anything Alzheimer's-related. With the changing healthcare environment, practices are moving more toward preventative medicine and management. I could certainly see a time when, once people reach a certain age, they take this Alzheimer's blood test. I imagine it would be significantly cheaper for an insurance provider to manage the disease as it's progressing, rather than once it has progressed significantly.
TLSR: How far along is development of CogniTest?
WG: We should see final results from preclinical testing later this year. Once that happens, biOasis will be in a position to license the product off to a laboratory or another healthcare company to do the marketing. BiOasis is not going to try and sell the product. I would imagine there is going to be quite a bit of demand for it, though.
TLSR: Tell me about the biOasis Transcend platform.
WG: It's a way to take drugs into the brain to target different diseases. BiOasis is developing a protein called p97 (melanotransferrin), which passes through the blood-brain barrier on its own, as few other molecules can. The company has been able to attach or conjugate small and large molecules to this carrier and has been able to ferry these molecules into the brain. The hypothesis is that this could be the way to treat many brain diseases. The company has done testing on several different conjugates, and each one shows that there is a significant increase in uptake versus the drug alone.
"Micro caps are owned more often by the hedge fund, the family office or a micro-cap mutual fund."
A lot of the work the company has done and announced recently is on Herceptin (trastuzumab) for HER2/neu-positive breast cancer, where metastasis to the brain is a significant problem. BiOasis' conjugate makes the drug work better. Not only that, but from the drug manufacturer's perspective, it's a new compound that can be repatented to extend the life and protection on the drug. The platform doesn't only help the patient; it is a huge financial incentive to the owner of the therapy because it could greatly extend the drug's exclusivity.
TLSR: Herceptin belongs to Genentech (a unit of Roche Holding AG [RHHBY:OTCQX]). When could we possibly see a phase 1 trial?
WG: That's hard to say. I think in the ideal scenario, biOasis would do all the preclinical testing. It is doing a lot of this with its partners-Roche with Herceptin for breast cancer metastasis to brain and Shire Plc (SHPGY:NASDAQ; SHP:LSE) for targeted enzyme replacement therapy in lysosomal storage diseases.
In the ideal scenario, once p97 is ready for a phase 1 test, the partner would enter into a formal agreement with biOasis and the partner would run the trial, because it's not biOasis' model to take drugs through clinical trials. BiOasis is more about trying to develop conjugates preclinically. Roche, Shire and other pharmas are experienced with clinical trials. If biOasis had to bring each conjugate through clinical trials, it would need to raise an awful lot of money. That's not something it is looking to do.
TLSR: Bill, it sounds like this is a pure licensing model with high single-digit or low double-digit royalties.
WG: That's exactly how I look at it, yes. The Transcend carrier is a platform product, and the company has conjugates with big-name pharmaceuticals and biotechs. The company has said that it plans to get more conjugates into preclinical trials. There is more potential for the company outside the Herceptin conjugate.
TLSR: Go to your next story, please.
WG: AtheroNova Inc. (AHRO:OTCQB) is developing therapies based on naturally occurring bile salts, which are produced in the body and used in the digestive tract to dissolve or emulsify lipids. Currently, one FDA-approved drug uses bile salts as the active ingredient to dissolve gallstones, which are hardened clumps of cholesterol.
"I've always said that nothing can ruin a great company like bad management. I firmly believe that to be the case."
The story of how this technology has developed into a way to reduce plaque in arteries is interesting. Two physician brothers, Giorgio and Filiberto Zadini, were doing autopsies on patients who died of primary biliary cirrhosis (PBC). What they found was that the deceased had extremely high cholesterol levels, but when the doctors cut open the arteries, they did not find the plaque buildups that would be expected given the cholesterol levels. Over time, the physicians found that bile salts running through the blood had cleaned out the cholesterol. The reason that doesn't occur in everybody is that bile ducts in PBC patients are destroyed as part of the disease, and thus bile salts circulate in the bloodstream instead of being stored in the gall bladder, where they might later be used as part of the digestive process. Because the bile salts circulated, they cleaned out the arteries.
There has been a lot of preclinical testing at Cedars-Sinai Medical Center and the David Geffen School of Medicine at UCLA. Most recently, a study from UCLA showed a 95% reduction in arterial plaque-which is amazing given that nothing in the giant cholesterol modulation industry, which includes statins, reduces plaque in artery walls.
I think that the product, AHRO-001, could change lives. Right now, all that's recommended to patients with high cholesterol is to take statins, change diet and start exercising more. A lot of people just don't do that. Introducing a new therapy to the market-an agent that's already present in the body and an ingredient that's already approved in another product-makes AtheroNova a very interesting story.
TLSR: Bill, if this works, it could be the Holy Grail of cardiovascular prophylaxis.
WG: I completely agree. A telling sign of how real this might be is that AtheroNova has a partner in CardioNova Ltd., a private, Russia-based company that is 50% owned by the Russian government. CardioNova is paying for phase 1 and phase 2 trials because it sees the value in how much this could help the Russian population. Russia has actually told CardioNova that upon conclusion of the phase 2 trials, assuming they're successful, it can start selling the drug in Russia. That's how great the need is.
Two doctors who have done a lot of work on those studies, Stephen Nicholls and John Kastelein, are both signed up to help run phase 2b plaque reduction trials for AtheroNova, which would be multicountry and multicenter. I think it's an endorsement to have them on board for these tests.
TLSR: Will the data from the clinical trials in Russia be transferrable to an investigational new drug (NYSE:IND) submission to begin trials in the U.S.?
WG: The company believes it will.
TLSR: Theoretically speaking for a moment, if AtheroNova gets through its phase 2 trials in Russia, would it have to start with a phase 1 trial, or could it proceed with a phase 3 trial in the U.S.?
WG: My understanding is that once it gets through the Russian phase 2a trial, which will focus on cholesterol modulation and not plaque reduction, AtheroNova-or a licensed partner, if it goes that route-could then potentially start a phase 3 trial with AHRO-001 as a cholesterol modulation therapy.
But shortly after it starts the phase 2a trial in Russia, the company plans to start the phase 2b multicountry, multicenter trial that Nicholls and Kastelein will oversee. By the end of 2014, the company could have completed a phase 2 trial for cholesterol modulation and a phase 2 trial for plaque reduction. AtheroNova could be in a very interesting situation.
TLSR: Did the company make its first milestone, to begin its first phase 1 trial in April?
WG: The company received approval from the Russian government to start the trial at the beginning of May and now must wait for governmental approval to import AHRO-001 for the trial, which management expects will happen in mid- to late June. Even with a June start, it will still be on track to start its phase 2a trial toward the end of 2013.
TLSR: I've enjoyed meeting you. Thank you.
WG: Thanks. I appreciate it.
William Gregozeski has spent more than 10 years working as an industry-agnostic equity analyst covering securities listed around the world. Gregozeski currently manages the sellside equity research department and oversees U.S. client relationships at Mont Blanc Capital Management AG, a Zurich-based investment firm. Previous work includes writing sellside research on U.S.-listed small-cap companies at Gar Wood Securities LLC, a Chicago-based broker dealer, and researching the cleantech industry in the U.S. and small-cap China-based companies at Capstone Investments, a San Diego-based broker dealer. Gregozeski is a CFA charter holder, has obtained a bachelor's degree in finance and a master's degree in business administration from Marquette University, and currently holds FINRA Series 7, 24, 66, 79, 86, and 87 licenses.
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1) George S. Mack conducted this interview for The Life Sciences Report and provides services to The Life Sciences Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Life Sciences Report: biOasis Technologies Inc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) William Gergozeski: I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
4) William Gregozeski: AtheroNova Inc.-The analyst or a member of the analyst's household has a financial interest in the securities of the subject company, including, but not limited to, a long position, short position, rights, warrants, futures or options. The subject company is, or during the past 12 months was, a client of Greenridge Global, which provided noninvestment banking, securities-related services to, and received compensation from, the subject company for such services. BiOasis Technologies Inc.- Mont Blanc Capital Management or an affiliate of Mont Blanc Capital Management beneficially own 1% or more of the common stock of the subject company as calculated in accordance with Section 13(d) of the Securities Exchange Act of 1934.
5) Mont Blanc Capital's sellside division was established to highlight unique, underfollowed small- and micro-cap companies that have been ignored or misunderstood by larger brokerage firms. Mont Blanc targets companies with unique business prospects and strong management teams without regard to industry or country. Mont Blanc does not engage in brokerage or investment banking activities, focusing instead on producing high quality equity research and assisting companies with institutional awareness.
6) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.