Source: George S. Mack of The Life Sciences Report (7/2/13)
Drug development is full of surprises, and those surprises are hitched to the catalysts that move biotech company stocks. Mike Havrilla, co-founder and analyst with BioRunUp, processes and trades on the news flow surrounding biotech and specialty pharma companies as they navigate the turbulent development cycle. In this interview with The Life Sciences Report, Havrilla talks about his methods and shares three rich ideas that could create doubles or triples for investors.
The Life Sciences Report: Do you think of yourself as an investor or a trader? I'm asking because yourBioRunUp subscription service seems to be focused on trading.
Mike Havrilla: We are focused on short-term, catalyst-based trading in biomedical companies that are developing new products and tests. We trade around all events, including data coming from clinical trials and movement through the U.S. Food and Drug Administration (FDA) approval process.
BioRunUp's short-term focus has evolved given the events of the last several years, with the financial crisis, the Flash Crash in May 2010 and other catalysts. There are so many different opportunities available on a daily basis that the old buy-and-hold strategy doesn't make sense. It really doesn't even apply-especially with small, innovative biomedical companies where fortunes change over hours. The news flow can change a company's value on a daily basis.
TLSR: So you are catalyst-focused. How do you keep your databases and calendars of events updated? Do you use an automated process or are you constantly sifting through FDA calendars of advisory committee meetings and Prescription Drug User Fee Act IV (PDUFA) dates? Even if you were only following 20 stocks, the amount of data would be immense. How do you do it?
MH: The closest thing to automation-and what's emerging as a big way for traders to keep up with the news-is Twitter. Twitter is the first thing I look at, because it integrates all the news, depending on who you follow. Twitter aggregates everything from commentary, which is a sentiment indicator, to the "actual news," such as Securities and Exchange Commission (SEC) filings and company presentations. It's all public information and all free. Twitter is the closest thing to an automated one-stop shop you will find.
That said, much of what I do is manual, where I'm tracking more than 200 companies myself in the database. The vast majority of these companies are small caps, under $1 billion ($1B) in market value. It's just a matter of keeping up with company news on a daily basis. Like you said, the amount of news flow and information to sort through is enormous.
TLSR: I want to address catalysts. Depending on the disease indication, a phase 3 trial could take three to five years. A confirmatory trial could add time to that. When you're dealing with a binary-event company or situation, what do you look for during long periods when no data are emanating? Do you look for other stocks to play?
MH: Yes. Because we're tracking over 200 companies, there is always some near-term event. But, in general, I try to focus on events that are three to four months away or less.
TLSR: How is this information translated into actionable information for your investor subscribers?
MH: For us, it's mostly just sharing the different trades that we're making.
TLSR: So you tell your subscribers what trades you're making now. Is that right?
MH: Yes, as close to real time as possible. We use a private Twitter feed at BioRunUp for our subscribers, so they know exactly what we're buying and selling. Then we publish our trades, what we hold and our watch list stocks.
TLSR: You're posting simultaneous to your trades, and not trying to front-run your subscribers-is that right?
MH: That's true. We want to share as close to real time as we can.
TLSR: Mike, how do you rate catalysts with regard to their ability to move shares? Which events offer the most leverage to move stocks?
MH: The ideal setup is a late-stage, phase 3 pivotal study, which will set the product up for a new drug application (NDA) filing with the FDA. There are also advisory committee meetings and FDA decisions at the PDUFA dates (see the Approval Process in Action).
TLSR: You just listed three events: pivotal phase 3 trials, advisory panel or advisory committee meetings and PDUFA dates. Of the three, which is the most important?
MH: I'd say the most reliable trade corresponds to the advisory panel meeting, because that date is firm. You know that briefing documents are going to be posted two business days before the panel meets. Typically there aren't any surprises, whereas with a clinical trial, you have an estimate about when results will be released, but you never know exactly when the data are going to come out. You could get a surprise. And there could be an event, such as a serious safety issue, that could derail everything for a company at any time. With regard to final approval, sometimes the FDA comes out early with a decision, instead at the PDUFA date. That is another opportunity for surprise. In terms of a trading catalyst, the advisory panel meeting, along with its vote on the product, is the most reliable.
TLSR: If a stock is too tiny, you may have no marketability of shares during quiescent periods. If it's too large, you won't get a powerful percentage move on data. Is there an ideal market cap to get the most powerful bump without sacrificing liquidity during inactive periods?
MH: That question ties into why a lot of the companies we trade and follow are in the small-cap area, with market caps of $1B or less. Data are more important to these companies. If Pfizer Inc. (PFE:NYSE),Johnson & Johnson (JNJ:NYSE) or Roche Holding AG (RHHBY:OTCQX) has a clinical trial failure or an FDA approval, it's not going to move the stock like it would for a company that is completely dependent on a single drug, or a company with only one or two products in development.
"The news flow can change a company's value on a daily basis."
As for liquidity, let me go back to near-term catalysts for a moment. Even in very small-cap stocks that are otherwise illiquid, we see an increase in trading volume and share price as a trial data release or an FDA catalyst approaches. I get more out of trading low enterprise value stocks regardless of current liquidity status because I like to find stocks that are flying under the radar. You could make 50-100% on a trade if you wait for that liquidity to come, because it typically does.
TLSR: You're so catalyst- and leverage-oriented that I wonder if you use derivatives in your own trading. Do you?
MH: Actually, I rarely use derivatives because I look for stocks that are trading like options. In general, a $1-5 share price stock is my sweet spot. I try not to trade too many penny stocks, below $1. In the $1-5 range, it's already like you're trading like an option, but without the concern of option expiration.
TLSR: Can we talk about some companies, please? Would you go ahead with your first choice?
MH: I'll start with Avita Medical Ltd. (AVH:ASX; AVMXY:OTCQX). It's got what I'd call a disruptive technology in the regenerative medicine space. Avita is developing an autologous (derived from the patient) product called ReCell Spray-On Skin, initially intended for burn victims. It's an improvement over current wound-healing cellular products, and at a much lower cost-it's priced at about $1,000 per procedure, compared to 10-20 times that amount for a skin graft.
ReCell is actually on the market right now in Europe, and is in a pivotal study in the U.S. The initial market, for burn victims, is $50-100 million ($50-100M), but there is big potential to expand into venous leg ulcers, cosmetic uses and more. Eventually it could be a $500M+ market. At the moment ReCell is not generating huge sales, but sales are growing in Europe. The pivotal study in the U.S. is expected to be finished by early to mid-2014. At that time, the company would be able to file for FDA approval.
"Twitter is emerging as a big way for traders to keep up with the news."
The reason I like Avita is that it's currently under the radar and is a good example of a stock that is pretty illiquid right now. It trades at an enterprise value of around $20M, and market cap of about $43M. This is a stock where a trade won't yield a 5, 10 or 20% return, but if an investor has a one-year timeframe, it could easily double or more. Investors with a longer timeline are going to start to recognize Avita. Its primary stock listing is actually in Australia, where the company started. But it is expanding globally now, and I think the stock will get a lot more traction as it gets picked up by U.S. investors. I think Avita will uplist onto the NASDAQ as it progresses through the regulatory process and ultimately files for FDA approval.
TLSR: Mike, what is the regulatory pathway for ReCell? I'm looking at the trial (NCT01138917), and I see that the estimated enrollment is 106 patients, but don't see any phase 1 or 2 trial designation associated with it. Is it a device pathway?
MH: Yes. ReCell is classified as a device by the FDA, so Avita plans to file through the premarket approval (NYSEARCA:PMA) route. The next update will be in late July, when the company comes to the end of its fiscal year. In the last update, as of February, the trial was 85% enrolled. I'm looking at this summer as the timeline for the company to complete enrollment, and for final data to support the approval filing by early to mid-2014.
The trial has taken a little longer than the company originally thought it would. It expected, at one point, to be able to file with the FDA in mid-2013. I'm very positive on the prospects for the trial. The company has some validation from the U.S. government-the trial is co-sponsored by the U.S. Department of Defense, with some grant funding under a U.S. Army agreement. Obviously, the army would have interest in a treatment like this.
TLSR: It's interesting to note that ReCell already has several regulatory approvals. It has the CE mark in Europe, which you have already referenced. It's also approved in China and Australia. Are data from these regions of any use in the FDA trials?
MH: Yes. The product is generating sales, so the data from other countries would help from a post-marketing safety database perspective.
TLSR: Estimated enrollment for the venous leg ulcer trial with ReCell is for 65 patients. The estimated final data collection date is April 2014, less than a year from now. Would that be a catalyst date?
MH: It is a big catalyst date. The chronic-wound market includes about 12M patients, which is about 20 times bigger than the burn victim market. I think Avita has a good strategy in looking for the quickest way to get on the market in the U.S., and to expand into the biggest market.
TLSR: I know that you're a short-term, catalyst- and event-focused investor, but I wonder how much you think Avita Medical could ultimately be worth?
MH: As of now, with only about 16M shares outstanding and $12M in cash on its balance sheet, Avita has an enterprise value of only $20M. Looking at comparables in the regenerative medicine space in the U.S.- Cytori Therapeutics Inc. (CYTX:NASDAQ), Osiris Therapeutics Inc. (OSIR:NASDAQ), and some earlier-stage companies like StemCells Inc. (STEM:NASDAQ) and Athersys Inc. (ATHX:NASDAQ)-they are valued from $50-300M on an enterprise value basis, and they are not generating the sales that Avita is, just in Europe. You hear so much about the promise of stem cells and regenerative medicine, but I think Avita is poised to be very successful commercially. The company's enterprise value could easily push $100M by next year, assuming the pivotal results are successful and ReCell is up for FDA approval.
TLSR: So you're looking at a 200% implied return between now and a year from now.
MH: I certainly think Avita could trade there. When the company's shares originally started trading on the OTC in the U.S., less than two years ago, they were in the $5 range, so there is no reason they couldn't go to high mid- or even upper single digits by next year, when the therapy should be up for FDA approval.
TLSR: What's your next idea?
MH: Another company I'm looking at is Ventrus Biosciences Inc. (VTUS:NASDAQ). It is trading at a very small enterprise value currently, with shares trading in the low $2 range but with $1.88 per share in cash. Its burn rate is about $4M per quarter. It has pivotal phase 3 trial results due this fall, in the second of three phase 3 trials. The product is a novel topical formulation-a cream-of diltiazem (VEN 307), which is an approved and established drug for treatment of anal fissures and associated pain. The product already presented positive phase 3 results last year, with its European partner SLA Pharma AG (private). The company will file for FDA approval under the 505(b)(2) pathway for a new formulation of an approved drug.
"In general, a $1-5 share price stock is my sweet spot."
The company's lead drug last year, iferanserin, which was being developing for hemorrhoids, failed a phase 3 trial. That's why the shares are trading so cheap. The company did its initial public offering a few years ago at $10/share, and it has certainly come off of that. It needs this trial to succeed. It's all or nothing from a catalyst standpoint, so Ventrus will be a great trade.
TLSR: The trial has 400 patients enrolled. Does the estimated primary completion date of December 2013 sound reasonable to you?
MH: Yes. The guidance is to finish up this year and be able to file with the FDA by late this year or early next year at the latest.
TLSR: What is the mechanism of action for diltiazem?
MH: It's a calcium channel blocker.
TLSR: Was it originally a blood pressure medication?
MH: Yes. The drug is primarily used to control blood pressure and for heart patients as an oral medication, although it is used for anal fissures off-label, obtained from compounding pharmacies as a topical treatment.
TLSR: Go ahead with your next idea.
MH: The next one also has a low valuation and offers a rich opportunity. Venaxis Inc. (APPY:NASDAQ), a diagnostics company, is developing a blood-based test called APPY1 to screen for appendicitis. It's a rapid, 20-minute screening test focused on children and adolescents who present in pain in the emergency room. It measures three inflammatory markers, one of which is proprietary and one general, the C-reactive protein. It also incorporates the white blood cell count, which is part of the triage process now. Then physicians come up with what the company calls an APPY score. The idea is to avoid unnecessary CT scans for kids, because these can produce a greater incidence of cancer later in life.
TLSR: Clearly this is not a blockbuster indication, but relative to Venaxis' $24M market cap, any revenue could be significant. How much could it be worth to investors?
MH: This is another case where the company has a CE mark in Europe, although it doesn't expect to generate any meaningful sales until next year-it is still in the early stages of marketing and distribution. The company is targeting a 10-15% market share, which would translate into sales in the $20-50M range by 2015-2016. Given the company's lean capital structure, this could be very profitable. By 2016, Venaxis could have earnings power of $0.50 per share, which is substantial given that the current share price is hovering in the low $1s. A lot of shareholder value is going to be contingent on pivotal study results that are expected later this fall. Those results are going to be a big driver. The timing is similar to that with Ventrus.
TLSR: Mike, thank you. I've enjoyed talking to you and hearing your ideas.
MH: Thank you very much.
Mike Havrilla is a pharmacist, marathon runner, writer and biotech stock trader with experience that includes being a licensed pharmacist since January 2004, online investing since August 1997 and writing for investors since April 2007. Havrilla holds a doctorate in pharmacy and a bachelor's degree in biology from the University of Pittsburgh. He worked in the pharmaceutical industry for Wyeth prior to pharmacy school. He is also an avid runner and has completed 22 marathons. Havrilla merged his previous site with BioRunUp.com/Mark Messier in October 2010, resulting in a biotech stock research and trading subscription service. For more information, visit Havrilla's LinkedIn profile.
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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: Avita Medical Ltd., Athersys Inc., Johnson & Johnson. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment. Johnson & Johnson is not affiliated with Streetwise Reports.
3) Mike Havrilla: I or my family own shares of the following companies mentioned in this interview: Avita Medical Ltd. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: My trading account positions change frequently and are updated at BioRunUp.com for subscribers. 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.
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