The Sick Economist's Blog, page 5

DON’T STOP BELIEVIN’: QUESTIONS & ANSWERS ABOUT THE BIOTECH CRASH

It’s one of the worst scenarios that you can imagine. It’s 2:00 AM and you are sleeping. The peace and tranquility of your happy home is assaulted as your phone begins to ring at an inappropriate hour. Startled awake, you answer the phone in a groggy tone. A stranger at the other end of the line tells you that a loved one has been in a car accident. 

An electric bolt of shock shoots through your body as you receive the upsetting news. However, your next response is natural. You ask questions. Is your loved one still alive? What condition is she in? Who else was hurt, and how bad? What was the situation around the crash? What prospects for recovery exist?  After suffering the initial shock of the bad news, it’s only logical for you to begin to ask questions. You are trying to process facts, and to plot a path forward. 

If you own biotech stocks, by now you have received the bad news that the biotech car has crashed. Badly. XBI, a broad index of young biotech stocks, has tumbled from $147 just one year ago, to as low as $80. Within that index, many of the less established companies have lost 50, 60 or even 70% of their stock market value. This sector of the market has crashed and burned. Now our next step is to ask some logical questions, explore answers, and create a viable action plan. The following Q&A is designed to help you process what has occurred, and to help you take the best financial path for you. 

Why did the Biotech Sector crash? 

There are three main reasons why the biotech sector crashed. The first reason is interest rates. 

It may seem like changing interest rates should not affect the biotech sector, because most young biotechs carry little debt and the dynamics of young biotechs are very different from most cash flowing, mature companies. While this thought is logical, it fails to appreciate the larger, or “macro,” view.  

In the “macro” view, all investors, large and small, sophisticated and beginner, world wide, have a wide range of options to invest their capital. Over the last few years (but, really, since 2008), interest rates in developed countries have been very, very low. This effectively eliminated a whole world of interest bearing investment options such as government bonds, corporate bonds, and even simple, old fashioned, interest bearing bank accounts (remember those?)  This had the effect of making more risky, more long term, investments more appealing. It makes more sense to take a risk to earn large returns tomorrow, when your options for earning a certain return today are virtually nil. 

Now, due to raging inflation, the process is going into reverse on a grand scale. Interest rates are going up throughout the entire developed world. Suddenly, investors will have a choice again. Do they risk their hard earned capital on a profitless biotech that might earn big bucks in the far future? Or do they plunk it down into something secure and start earning interest today?  Many will choose the suddenly available safer option. This removes potentially millions of investors from the biotech market. 

The same has happened to risky, “speculative” stocks across the entire financial universe. Cathy Wood, proprietor of the now infamous ARKK innovation fund, has seen her fund lose half its market value in the last year. In this rapidly changing financial environment, risky stocks are suddenly ice cold. 

The second reason why the biotech sector crashed is because Wall Street has been enabling excessive risk in the sector for years. Traditionally, biotech companies only went public when they had a mostly established molecule, had revenue, and were at least getting close to profit. In the last few years, the scene got so crazy that many companies were going public with just a few patents and a lot of prayers!  In 2011, just 8 biotech companies went public. In 2021, 96 entered the public markets!  Many of these companies are simply too young, too immature, and should have remained in the “incubation” stage, before being exposed to the harsh light of public scrutiny. 

The third reason why the biotech sector has crashed is simply because…..these things happen. Any high-flying sector, whether it be new innovations in software, new kinds of AI, or new biotechnology, is inherently risky and volatile. Nasdaq has done so well, for so long, that many forget that even today’s market darlings such as Amazon.com, once lost 90% of their value in a crash. If you want to aim for the potential outrageous benefits that can come from innovation stocks, you need to realize that volatility comes with it. There is no reward without risk. 

Will the Biotech Sector likely bounce back soon? 

Nobody has a crystal ball, but the honest answer is……”probably not.”  

Although no one knows for sure, history suggests that crashes of this magnitude require some time before the market heals itself. For example, when the Nasdaq market crashed in 2001, it took around ten years for the market to regain its previous highs. 

 There are a few reasons for this. If you are feeling fear and loathing after reading the above statistic, that is the first reason why rebounds take time. In the case of the Nasdaq crash of ‘01, a whole generation of high flyers was burned to a crisp. While some wise ones learned their lessons and came back as more experienced, mature investors, too many ran away screaming and missed out on all of the eventual profits. The hard truth is, the same is likely to happen with the biotech sector today. For XBI to fly to the same levels as it hit just a year ago, we will probably need a whole new generation of young investors to get excited all over again. 

The other reason why the biotech sector is unlikely to rebound sharply in the near future is that it may not be done crashing yet. As harsh as the last year has been, we are only in stage I of the unfolding drama. Right now, many companies are “Dead Men Walking.”  They have lost most of their stock market value, but are still bravely chugging along with their scientific investigations. But many were underfunded, having gone public with the assumption that they could easily raise more capital at any time. Now that “the thrill is gone” from the sector, many, many young biotechs will find the funding spigot stuck in the “off’ position. The crash always comes first; it takes about 12 to 18 months for immature young biotechs to start running out of cash. Then they will start dropping like deer that couldn’t make it through the winter. 

The last reason why a biotech rebound is probably not imminent, is that we are still in the early stages of the interest rate process that was described above. The Fed just now stopped buying bonds to repress interest rates. The Fed just made their first baby steps with a tiny increase in interest rates. Many reputable economists believe that much larger interest rate increases will be required to bring raging inflation under control.  While it’s not impossible over the long term for biotech and high interest rates to co-exist, in the short term, we are still looking at an economy in shock as the fundamentals for the last 15 years evaporate.  

What are the Characteristics of Biotech Companies that are Likely to Survive the Mayhem? 

You may have noticed earlier, I used the example of Amazon.com, which at some point during the Nasdaq crash of 2001, lost 90% of its value. Of course this situation is the stuff of legend. Amazon did not merely survive, but Amazon thrived, earning a shocking 31,472%  return for anybody who bought the company at its lows. 

Plainly stated, when the market enters into a panic, the baby often gets thrown out with the bathwater. The entire sector falls out of favor, and lots of great young companies get lumped in with the losers. Depending on your capital position, your mental disposition, and your skill level, you may be able to select some real world beaters right now. 

There are a few important characteristics you should be looking for right now in a biotech stock that has crashed. First and foremost, is cash. As the saying goes, “ain’t nuthin’ goin’ on but the rent.”  It was all fun and games during the last few years, when just about anyone with a test tube could wish upon a star and millions in funding would pour out of Wall Street. Those days are likely done. Many companies with good research will starve before the science ever comes to fruition. You want companies that have at least two years worth of cash on hand. If they have more cash on hand, even better. Scientific breakthroughs take time and patience. You want to make sure your target companies have the financial strength to complete the marathon.

You also want stocks that are fully formed companies. As mentioned above, over the last couple of years, there was a tsunami of biotech IPOs, and many of those little companies were really still embryos, not yet ready to be born into the world. Now, with funding cut off and Wall Street analysts much more skeptical than before, these proto-companies are likely to become divisions in someone else’s larger, more established corporation, or to fade away altogether. You need to look for companies that have viable molecules  in phase 2, or, even better, phase 3 trials. Meaningful revenue shouldn’t be a vague notion. Once again, paying the bills and keeping the lights on become priority number one in today’s tougher environment. 

Lastly, if you find the courage to invest in small companies while everyone is panicking around you, look for little companies with big friends. Many of the most promising biotechs today have signed and operational partnerships with major players. This lends the science some credibility, and more importantly, it provides the start-up financial support. It’s easy for a multi billion dollar pharmaceutical giant to throw a lifeline to a promising biotech partner if the sailing gets rough. 

Biotech is on sale. If you make the right moves now, you may just score yourself the deal of a lifetime. 

What Should I do if I Hold a Biotech Stock that has Lost 80% of Its Value? 

Right now, even the best biotech investors are witnessing scenes of carnage if they are brave enough to review their portfolios. If an investor has two or three stocks in the black on a ten stock portfolio, she is doing well. Many names will be down 20%, 40%, or even 80%.  

What to do about these really beaten down stocks? The number one thing you should not do is panic!  Don’t assume that, just because the market is down on a company right now, that your original investment thesis is invalid. Rather, try a triage system where all of your losing biotech stocks are carefully re-evaluated and placed into one of three groups. 

The first group are the stocks that really are now the walking dead. Everyone has a few of these. These would be names where something fundamental about the investment thesis has changed in a negative way. Maybe a certain trial yielded disappointing results. Maybe they have had three CEOs in a year. Maybe their market capitalization has shrunken so badly that they barely even belong on public markets any more (for example, market capitalization less than $100 million, or a share price of less than $2).   

This group needs to be put out of their misery. Sell them, take the loss, and use the loss as a tax write off. Try to evaluate what went wrong, and put the experience down to tuition paid at the university of life. 

The second group are companies that seem to be in a tight spot at the moment, but nothing fundamental has changed about them. Their clinical program is still on track, their leadership still retains your confidence, and they probably have enough cash to continue to move their agenda forward for at least the next year. This group, just leave be and pray for the best. Check back towards the end of the tax year; if their situation has grown materially worse, then sell them and use the loss to shelter profits you made elsewhere. 

The last group are the real diamonds amongst the coals. These are companies that have lost stock market value for no real reason. Nothing fundamental about their situation has changed, they remain on solid footing financially, and the clinical rationale for their existence is still valid. In the current panic, they have just been marked down with the rest of the sector. Think Amazon.com, circa 2002.  For these few select “diamonds in the rough,” buy more!   The way you make money with stocks is to run into the burning house, when everyone else is running away. Yes, you could get scorched. But the biotech game has never been for the faint of heart. 

Why not Just Sell Everything and Walk Away? 

You aren’t alone if you are asking yourself this question. A lot of people have asked themselves this question after various crashes over the years. In the case of biotech stocks, there are some very solid reasons to stay in the game, no matter what. 

The first reason is global demographics. In America, 10,000 people per day age into our Medicare program. And we are one of the “younger” developed countries. The over 85 age group is the fastest growing age group in the developed world. None of this is natural. Just a century ago, the average lifespan in America was 40 something years old. Americans just keep getting older and older, and that means a vast, unquenchable desire for biological innovations to keep people going. The only sector that could address the fundamental human longing to live forever is biotech. 

The second reason to keep going is math. Now isn’t the worst of times for investors. Now is the best of times. Even Homer Simpson knows that the secret to stock market success is to, “buy low, sell high.”  Traditionally, the challenge has been that it’s not so easy to see when we have hit “low” in the markets. Now we have hit “low” in biotech. Very low. It’s very, very likely that the XBI index will be dramatically higher in ten years. Now isn’t the hardest time to invest. Now is the easiest time. 

The last reason to keep going is your competition is all running for the exits. Buyers today don’t have much competition. 

You might not have thought of stock market investing as a competitive sport, but it is. Sure, there are no scoreboards, no footballs, and no post game interviews. But the acquisition and ownership of attractive assets is indeed a competitive affair. 

Think of it this way: you have your eye on Science X corporation (a made up name). They have a bunch of promising trials, their CEO is all over the news, and Jim Cramer, between belching out his opinion about a radiator company and a fast food company, declares that Science X is a “buy.”  Demand for the company’s shares goes sky high. But there are only so many shares. The number of shares is limited, and scarce. You will have to compete directly with other potential buyers if you want to land your slice of this market darling. 

But now all of the tourists and cable news cowboys have taken what little capital they have left, and fled. They are moving into other, “safer” sectors, or are putting everything into cash and heading to the bar to cry into their beers. Suddenly, nobody is interested in interviewing the CEO of Science X corporation on TV, Jim Cramer acts as if he’s never heard of the company, (let alone recommended it); certainly no one is talking about upcoming clinical results. 

This is the equivalent of you catching the football, and finding nothing but open grass in front of you. There are no defenders keeping you from the endzone, because they have all moved into another area of the gridiron, where they thought the action would be. In this case, the only one who can stop you from scoring a touchdown is yourself. 

I Got Burned Badly. How Do I Manage Risk in the Future? 

Less competition or not, right now you may just be staring at all the red in your biotech portfolio and wondering, “where did I go wrong?”  

As we discussed, your “wrong moves” may just be temporary, or they may just be a prelude to a new era of unfettered opportunity. But, it’s actually not a terrible question to ask yourself, “where did I go wrong?” 

Asking yourself that question, in a positive and non-judgmental way, is the best way to learn. And the only way to learn, sometimes, is to take your beatings. The number one factor that separates the successful long term investor from some poor guy who never managed to accumulate much, is the ability to view mistakes as learning opportunities. If you view your current mistakes as learning opportunities, you will have a chance to eventually come back stronger and wiser. If you are too hard on yourself, or decide that stock investing is some kind of scam dreamed up by an elite core of rich people, then you are committing yourself to stay poor. 

If you have lost most of your money, the first mistake is: you were too aggressive. Well, aggressiveness might not be the only problem. You also may have been too optimistic, or even (hate to say it) too gullible. You believed certain fantastical claims that just weren’t true. Or you had never really seen a sector crash like the biotech sector just has. That doesn’t mean you can never believe an optimistic claim again, and it doesn’t mean that you shouldn’t be aggressive at times! 

If you lost most of your money this time around, it means that you need more diversification next time, and more caution. Verify claims and study up. Don’t put all your money in young, start up businesses with big dreams and small revenues. Keep a certain amount of your money in big, reliable stocks like Big Pharma names, or even diversify into bonds or real estate all together. 

The other consideration is, you may not have “lost” very much at all. Just because you are currently staring at a sea of red, doesn’t mean your overall portfolio will stay red forever. We are currently experiencing some particularly rough sailing. Yes, some companies will be total losses. Many will limp along for a long time, slowly regaining lost market value. A few will rocket to greatness, like Amazon did. Use the triage process described above, and don’t assume the worst without really verifying that the worst has occurred. 

 

Hopefully, I have answered a lot of the most urgent questions that the recent market volatility has raised. The stock market game has been going on for hundreds of years, and every kind of asset in the world traded hands all over the world for thousands of years before that. We never finish learning. With a little luck, and a lot of courage, this year’s biotech route will wind up being just one chapter in your long and fruitful stock market story. 

The post DON’T STOP BELIEVIN’: QUESTIONS & ANSWERS ABOUT THE BIOTECH CRASH appeared first on Sick Economics.

3 PROMISING DRUGS IN THE BREAST CANCER PIPELINE

By Subin Im, PharmD

 

As the most common type of cancer, breast cancer is expected to be diagnosed 284,200 times in the U.S. alone in 2022. There are many ways that breast cancer can be classified in terms of stage, type, and subtype based on the characteristics and the spread of the tumor. Despite the fast-paced innovations over the past decade, there are still many unmet needs and challenges in this patient population. To name a few, there needs to be improved measures to stop the cancer from coming back. Also, some patients do not do well despite administering all the available effective treatments. In addition, for patients that do not need very aggressive therapy, it is important to determine the very few medications that their bodies need since the response is specific to the patient. For some patient subgroups, chemotherapy is their only option, which not only kills cancer cells but also healthy cells. 

At a CAGR (Compound Annual Growth Rate) of 10.2%, the global market for breast cancer treatment is expected to grow from $17.87 billion in 2018 to $38.57 billion in 2026. Below are three pipeline medications that could make a significant contribution to this growth. 

1. Amcenestrant by Sanofi ($SNY)

Amcenestrant is an oral SERD (selective estrogen receptor degrader). Right now, there is one FDA approved SERD available called fulvestrant, but there are clinical limitations due to its low bioavailability. It is given as an injection into the buttock muscle by a healthcare professional every 2 weeks or every month. An oral medication would be ideal, but so that’s when amnecestrant would come in. But to give an idea of how much profit a medication in this drug class can make, Faslodex (fulvestrant) generated over $1 billion in 2018 globally, with $537 million of it in the U.S. 

In its phase 1 (AMEERA-1) trial, amcenestrant was combined with Pfizer’s breast cancer medication (Ibrance) to treat ER+/HER2- metastatic breast cancer patients. ER+ means that the patients had estrogen receptors on their cancer cells and so they grow in response to estrogen. 85% of breast cancer patients are ER+. On the other hand, HER2 is a protein that leads to rapid cancer cell growth if there is too much of this protein, which accounts for 20% of breast cancer. So HER2- patients have normal levels of HER2; therefore their cancer grows more slowly than HER2+ patients.  

Because this drug targets metastatic breast cancer patients, it fulfills a huge clinical unmet need because there are not many treatment options available for metastatic breast cancer. Metastatic means that the cancer has already spread from the breast to other parts of the body, such as the brain, lungs, or bones. 

The phase 3 trial is currently ongoing for amcenestrant, but so far, it has shown very promising results. In its phase 1 trial, it demonstrated 34% objective response rate (ORR) and 74% clinical benefit rate (CBR). The ORR refers to their percent of people who responded to the treatment, whether the response was partial or complete, per RECIST (Response Evaluation Criteria in Solid Tumors). In addition, the CBR refers to the percentage of patients that experienced any benefit from the therapy. There were also no significant side effects from this therapy.

2. Pelareorep by Oncolytics Biotech ($ONCY)

The scientific technology of pelareorep is what stands out the most. It is an oncolytic double-stranded RNA virus, so when it is injected into normal cells, it cannot replicate. The virus is just cleared by the body. However, when it enters cancer cells, pelareorep can replicate and the cancer cells burst and release contents that infect and therefore kill other neighboring cancer cells. It activates the immune system to fight off just the cancer cells, without affecting normal healthy cells. 

Metastatic triple negative breast cancer (TNBC) is one of the most challenging subtypes of breast cancer to treat. TNBC refers to when there are no common breast cancer receptors (estrogen, progesterone, HER2) on the cancer cells. Therefore, triple negative breast cancer is much harder to treat because a lot of breast cancer medications target these common receptors. But if the patient does not have any of these receptors, these medications will not work, leaving chemotherapy as their only option. That is when pelareorep would come to the rescue if it gets approved, as it is being studied to be used in metastatic triple negative breast cancer in its phase 2 IRENE trial. However, it is also being studied in other clinical trials for multiple GI cancers, pancreatic cancer, and multiple myeloma. Each of these indications could be worth $1 billion or more. For a tiny company like oncolytics, the potential is vast. 

 

3. Disitamab vedotin by Seagen ($SGEN)

Disitamab vedotin is a novel HER2-targeted antibody-drug conjugate (ADC) therapy. ADCs are a type of cancer treatment designed to specifically target and directly deliver the anti-cancer toxic agent into HER2-expressing tumor cells without harming healthy cells. In 2020, disitamab vedotin received FDA Breakthrough Therapy designation with the indication as second-line treatment for those with HER2- locally advanced urothelial cancer with previous exposure to platinum-containing chemotherapy. Seagen and RemeGen finalized a licensing agreement, valued at about $2.6 billion, for disitamab vedotin’s development and commercialization, in which Seagen pays $200 million to license its rights. 

In clinical studies, disitamab vedotin has demonstrated antitumor activity in several solid tumor types, including urothelial, gastric, and breast cancer. Disitamab vedotin has already been approved for the treatment of HER2-positive gastric cancer in China and has been filed for HER2-positive bladder cancer. This medication has clearly shown efficacy and regulatory success in other countries. With potential success in the U.S., this medication has blockbuster potential as it is the jack of all trades. RemeGen and Seagen are targeting gastric, bladder and low HER2 breast cancer. Each indication could be worth $1 billion annually. 

 

With the ever-growing market for breast cancer treatments, these three pipeline medications definitely have the potential to become a part of the standard of care (If it gets approved). Despite all the recent innovations, there are still unmet needs, which these three pipeline medications address. Even though time can only tell for FDA approval, these are the three to be on the lookout for.  

 

The post 3 PROMISING DRUGS IN THE BREAST CANCER PIPELINE appeared first on Sick Economics.

BIOTECH VIOLENCE: SURVIVING TRENCH WARFARE IN THE STOCKMARKET

By the Sick Economist

Violence is in the air these days. Whether it’s fretting about an imminent invasion of the Ukraine, or the Chinese Communist Party’s constant threats against Taiwan, or America’s endless role as the “world police,” talk of violence is all you hear in the media. 

Anyone who has substantial investments in the biotech sector certainly feels like a victim of financial violence. XBI, an exchange traded fund that serves as a proxy for the more cutting edge names in biotech, has lost nearly 50% of its value in just one year. Within that index, many publicly traded companies have seen their share prices plummet by 60%, 70%, or more. We haven’t seen this kind of swift and total collapse of a sector since the tech collapse of 2001. Many less experienced investors are shell shocked. 

“Shell Shock.”  Most readers will have an idea what that term means, but may not fully understand its origin. Shell shock was a term used for soldiers from the World War I era who went off to war and were never quite right again, even if they were lucky enough to survive (And many didn’t. Some estimate that as many as 40,000,000 people died as a direct result of World War I).  

Not only were individual soldiers unprepared for the living hell they were wandering into, but the world, in general, had no idea about the level of destruction that was about to be unleashed. 19th century armies showed up to a 20th century war riding horses and carrying revolver pistols. They were met with steel tanks and hot lead dispensed from the muzzles of rapid fire machine guns. Many European generals thought the entire conflict would be over in less than a year. 5 years of hellish trench warfare later, the slaughter ended, due mainly to exhaustion. 

Today’s biotech investor is not much different from that innocent and naïve young man who signed up to fight in 1914. The biotech sector had been so hot for so many years, that many casual investors forgot what a risky play a profitless biotech start up can be. Additionally, many investment banks and deal sponsors forgot how irresponsible it can be to encourage very young companies to go public. In the last two years, dozens of companies went public with no life sustaining cash flow; many don’t even have revenue! 

As the era of “easy money” comes to an end, and the Fed is forced to raise interest rates, we face a world transformed just as surely as the hapless generals who wanted to make sure that their horse cavalry were ready to fight in 1914. They had no idea what they were in for. 

But we do have the benefit of historical hindsight. Financial history suggests that today’s biotech shareholders are in for long and grinding trench warfare. Any hope of a quick bounce back for XBI stocks that have lost 50 or 60% of their value is unrealistic. Some stocks will survive at a low level, some will be absorbed by healthier competitors, and many will perish on the battlefield that is the Nasdaq stock market. A few companies will dig in, fight this battle inch by inch, and eventually emerge victorious.  It’s the difference between pets.com, which got pushed down in ‘01 and stayed down, and a little struggling business called “Amazon” which lost 90% of its stock market value in 2001 and today, is, well, Amazon the company that ate the world.

Financial trench warfare is painful, slow, and often frustrating. However, mostly, it’s a game of long term strategy. Here are three investing strategies that you can use to prevail in the biotech trenches….

1. Get Companies for Free 

Nothing is quite free in life. But you might be surprised what you can grab for virtually free during the fog of war. When I say, “get companies for free” what I mean is: buy a company when its shares are trading for less than the cash it has on hand. For example, let’s say that Biotech Corp used to have a total market capitalization of $600 million, and the company had $300 million in cash on its books. Now, due to the crash and the overwhelming negative sentiment about all things biotech, the very same company is trading for just $300 million. But it still has $300 million in cash on its books. That essentially means that all of the company’s science, all of its patents, all of its molecules, are valued at $0. When you buy shares, you are obtaining a pool of cash, and the rest is basically free! 

If this sounds like a freak occurrence that shouldn’t be happening, that’s because it is. This is a very abnormal distortion that only happens during moments of panic in the financial world. According to a twitter post by Travis Whitfill, MPH, there are currently more than 129 publicly listed biotech companies in this precarious situation. (twitter, 2/17/22, 3:40PM). That constitutes a full 19% of publicly listed biotech stocks!

Wow! Great news. Open season on bargain shopping, right? Maybe, maybe not. If you are an experienced bargain bin shopper in real life, you will know that many items are selling at junk prices because they are junk products. Junk is junk at any price. 

If a company is selling at less than its cash on hand, how could things possibly get worse?  Much like Dante’s Inferno, many of these struggling companies just keep descending to new, worse, levels of hell. 

First, many have science that just won’t work out. When the investment bankers came up with the great idea of every biotech, at every stage, going public, they forgot that only 10% of medicines in phase I testing ever make it to commercialization. So, even if you have $300 million on hand, your company’s prospects can still be grim if the underlying science never quite works out. 

Second, even if your science is heading in the right direction, you can still easily burn through millions upon millions before enough progress is made. One of the guiding principles that led start-up c-suites to go public at any stage was the delusion that easy cash would just keep flowing forever. Year after year, young biotechs had no problem at all raising millions of dollars with just a few promising test tubes to entice new investors.

But the investor is a fickle creature. Many are not overly committed to biotech, and now that the sector has lost its “cool” factor, they may just as well go chase the next shiny object that comes across their polished oak desk. In the chaos and bloodshed of a post crash biotech community, many biotechs will run through their cash without enough scientific progress to attract new funds. 

Keeping all that in mind, there are still likely a few diamonds among the coals. Remember, if you chose to invest in Pets.com when it crashed, you got nothing, but if you chose Amazon.com after it lost 90% of its value, today you could be reading this post from your mansion in Palm Beach. 

Three stocks that could fall more into the Amazon category and less in the Pets.com category are: $BLUE, $DYN and $SYROS.  All three boast solid management teams with deep ties in the scientific and Wall Street community. All three are focusing on legitimate research in genetic driven diseases with huge unmet needs. And all three are very well funded for now.  

This isn’t a strategy for the faint of heart, but no one wins a war through caution. 

2. Go Full Vulture 

Vultures get a bad rap because they live by feeding on the dead. It’s not pretty to watch, but it turns out to be an outstanding survival strategy. Some scientists believe that the vulture has survived this way, virtually unchanged by evolution, for millions of years. Vultures prosper by feeding on the dead and dying, and so can you. 

Now of course, the whole business is unsavory. So this is not a strategy for those with weak stomachs. But at this stage of the post crash world, there are a lot of companies writhing around in pain, mortally wounded, but not quite dead yet. Smart vultures will circle in now, before the other scavengers realize there is an opportunity coming. 

Remember from our earlier discussion, a lot of junk companies are just that, junk. They are of little value, dead or alive. You are looking for companies that have demonstrated promising science in markets with big unmet needs. They maybe just aren’t big and strong enough to survive alone in this brutal new age. Just because they have some good clinical results doesn’t mean they have enough funding on hand to make it all the way to commercialization and positive cash flow. Also, smaller companies have had a very hard time getting attention and service from the FDA. Their drug applications tend to languish for months or years, while larger biopharma concerns have the connections and lobbyists to make sure that applications are reviewed swiftly. 

A lot of smallish biotechs will not make it as independent firms. Rather, they will be bought cheaply by larger biopharmas, who have the deep pockets necessary to survive in today’s harsher business environment. Your goal is to find promising companies that won’t make it on their own, and buy them cheap before they are consumed by larger biopharma companies seeking fresh meat. 

What would such a company look like? They should have positive data from phase I or phase II testing. The data should be clear and unambiguous in terms of verifying the basic scientific thesis of the research. Furthermore, the research should be oriented towards a large unmet need in the medical community. In today’s barren landscape, “also ran” and “me too” companies will be left to rot. Biopharma acquirers are looking to buy unique technology that is mostly proven, but just needs better funding and a stronger corporate parent.  

Three companies that could fall into this category are: $ADMA, $MESO and $SYBX. All three companies have produced substantial positive data that prove that they are onto something. All three have made substantial investments to establish a manufacturing infrastructure that has intrinsic value to somebody. But all three are “sub-scale” meaning that they are trying to cross an ocean in a dingy boat, when what is needed is a battleship. 

Typically in post crash environments, these kinds of companies don’t go bankrupt. Rather they are eaten alive by strong biotech organisms, and their technology becomes integrated into the acquirer’s programs. Your goal would be to buy the shares for a song before an acquirer realizes there is value to be had. Not an easy business, but potentially rewarding for an investor with the right temperament. 

3. Look for Allies 

One way to think of large scale war is as an industrial competition. History has proven vividly that all humans of all races, nationalities and creeds are capable of intense, sustained barbarism. So violence and aggression alone don’t win large scale conflicts. Industrial resources do. The side that can muster the largest amounts of man and material for the longest sustained period will win. 

World War I was so dreadful for so long, because it was essentially an industrial stalemate. Both sides were global leaders in innovation and manufacturing. Both sides had access to massive quantities of young men to feed into the meat grinder of war. 

The only thing that eventually broke the stalemate was the entry of the United States into the war on the side of Britain and France. Due to a series of diplomatic and military blunders by the German high command, the USA entered the war with the full industrial might of an angry continent behind them. Ultimately, France and Britain won World War I because they obtained the right ally. 

You can use the same technique to win the biotech war. As we discussed earlier, the only realistic prognosis for the biotech business environment for the next few years is: grim. Where multi million dollar funding rounds used to flow like the rising tide, now there will only be a trickle of funding for the most obviously deserving start ups. Where stock investors and biotech analysts used to give new ventures the benefit of the doubt, now we will be deeply entrenched in a “show me” phase for the sector. 

In this new, rugged environment, it will be very helpful to have big friends. And a lot of the most promising biotech startups do. If you look for small companies with big partners, you can invest with a certain amount of security. 

What are the benefits that partnerships bring to smaller outfits in this business environment?  First, having big friends makes it much less likely that your small concern will go bankrupt. Many biotech firms that are valued at just $500 million or so, are partnered with Big Pharma companies that sport market capitalizations of $20 billion or more. What amounts to a tiny amount of financial support from the partner can equal a lifeline for a floundering start up company. 

Second, the fact that certain companies already have signed and active partnerships with larger corporations lends a certain validation to their research programs. It means that these research programs have been thoroughly vetted by teams of PhDs and MDs. In an environment where quality suddenly matters, this validation helps build confidence for an investor. 

Lastly, having a big partner brings “the finish line” closer for small biotechs. As discussed earlier, in recent years, smaller biotechs have found it tougher and tougher to get anything passed by the FDA in a timely manner. Time is money. In an environment where funding is scarce, a small biotech running on fumes can easily go bankrupt in the middle of attempting to navigate the mind boggling bureaucracy of the FDA. In most biotech partnerships, all of this is taken care of by the larger partner. The start up biotech only has to produce good data. That’s it. Once the drug meets certain scientific milestones, the biopharma giant with the deep pockets can flex its muscles and make sure the cash starts flowing. 

Three examples of smallish biotechs with big partners are $FATE, $TSVT, and $CGEN. These companies have active alliances with biopharma stalwarts such as Johnson & Johnson, Bristol Myers Squibb, and AstraZeneca. All three are related to cancer, a growing market that still presents many unmet medical needs. Even when these tough little biotechs think they are on their last legs, they can count on their big ally to help win the war. This might be a good tactic for you if you want to be “the last man standing” on the other side of this spasm of biotech destruction. 

 

Everyone gets into something over their head every once in a while. Unfortunately, it’s very likely that millions of amateur biotech investors are now staring at their deeply red portfolios in shock and disbelief. As a veteran of many financial battles myself, I hate to tell you – we are in for a long, tough fight. But it’s a war that can be won, and the spoils of war will be substantial for the victors. Sheer grit is important, but toughness alone won’t be enough. You need strategies. If you follow the three strategies outlined above, you just may survive long enough to fly the flag of victory. 

 

Disclosure: The Sick Economist owns shares in: $BLUE, $SYROS , $ADMA, $MESO, $TSVT and $CEGEN

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3 BIOTECH LEADERS IN MULTIPLE SCLEROSIS INNOVATION

By Subin Im, PharmD 

 

Multiple sclerosis is one of the most detrimental progressive diseases that doesn’t have a cure. Even if it were to be caught early, the current treatment can only slow the progression of multiple sclerosis by reducing nerve cell inflammation and damage. Basically, multiple sclerosis is where the protective coating of nerves in the spinal cord and the brain gets damaged and destroyed by the body’s own immune system. So it can lead to symptoms such as vision loss, muscle spasms, and impaired coordination. Unfortunately, the cause of this disease is unknown. 

There are four different stages of multiple sclerosis: Clinically Isolated Syndrome (CIS), Relapsing-remitting MS (RRMS), Primary progressive MS (PPMS), Secondary progressive MS (SPMS). Clinically Isolated Syndrome (CIS) is where neurologic symptoms such as impaired coordination and muscle function occur for at least 24 hours. Relapsing-remitting MS (RRMS) is where there are relapses (new or worsening attacks of symptoms) and remission (recovery) in between. So the painful neurologic symptoms come and go intermittently. 85% of multiple sclerosis patients are first diagnosed with RRMS. Primary progressive MS (PPMS) is steadily worsening neurologic function from the beginning with no relapse and recovery in between.Secondary progressive MS (SPMS) comes after the first relapsing-remitting course where the patient’s neurologic function progressively gets worse as time passes. 

The medications used to treat multiple sclerosis depend on the type mentioned above. Overall, there are three pipeline medications to look forward to that are currently in or recently completed phase 3 clinical trials. 

1. Evobrutinib by Merck, KGA ($MKKGY)

Evobrutinib inhibits BTK (Bruton’s tyrosine kinase), which is a protein in B cells. Inhibiting this protein leads to a depletion of B cells and therefore less attacks mediated by B cells in RRMS. Even though B cell depletion is a good way to treat multiple sclerosis, it is not as easy as it sounds. In fact, evobrutinib is the first and only medication in the BTK inhibitor class that has shown to be effective in reducing inflammation that causes neuronal damage in the brain and spinal cord. It is also the first BTK inhibitor to complete enrollment for phase 3 clinical trial of over 1800 patients with RRMS. These participants will either get (“sugar” pill that doesn’t have a therapeutic purpose), Sanofi’s Aubagio (teriflunomide, which is the current standard of care) or evobrutinib.

The results from the phase 2 study of evobrutinib were extremely promising and worth looking forward to. At the highest dose tested, evobrutinib reduced the relapse rate of RRMS from 0.37 relapses per year in placebo group to 0.11 relapses per year in the evobrutinib group. Also, 79% of the evobrutinib group did not relapse at all after 48 weeks. But is it safe? Well.. most, if not all, drugs have side effects and the most common side effects of evobrutinib are a common cold and potential liver damage due to an elevation of ALT (liver enzyme). However, there aren’t any associated serious side effects such as infections or reduced white blood cells. Now that we know it is effective and fairly safe compared to placebo, it is now time for it to be compared to teriflunomide, which has the most market share in the RRMS market. About 570,000 people are diagnosed with MS, 85% of which is RRMS. Therefore, 484,500 is a pretty big target patient population even if half of them (242,250 RRMS patients) end up getting treated with evobrutinib. But for investors, time will only tell as evobrutinib has to be either more effective or much cheaper for patients to actually have access to this medication.    

2. Ublituximab by TG Therapeutics ($TGTX)

Like evobrutinib, ublituximab works by targeting B cells but in a different way. By targeting the CD20 protein on B cells, it leads to destruction of B cells which ultimately reduces neuronal damage and relapse rate in RRMS. In its phase 3 trial (ULTIMATE I), ublituximab has shown to decrease the annual relapse rate by 60% compared to Sanofi’s teriflunomide. This result was not due to simple luck because in another phase 3 trial (ULTIMATE II), it led to a 50% relative reduction compared to teriflunomide. Ublituximab was also generally well-tolerated with no serious adverse events. The most common one was infusion related reactions, such as nausea, headache, and rash. This was experienced at least once by 47.7% of the participants in the ublituximab group compared to 12.2% in the teriflunomide group. 

For context as to how lucrative teriflunomide (Aubagio manufactured by Sanofi) is, its 2019 net sales were $2.14 billion. Teriflunomide is currently used as first-line treatment for RRMS, it was appropriate for TG Therapeutics to compare its drug to teriflunomide. In fact, ublituximab has shown to be more effective in reducing the relapse rate compared to teriflunomide. Therefore, ublituximab has a very high chance of getting a large piece of that $2.14 billion. For a fairly small biotech company that only has one medication approved, this piece is a very large deal. 

Ublituximab is also being investigated to be used in certain types of cancer known as Non-Hodgkin lymphoma (NHL) and chronic lymphocytic leukemia (CLL). The stock price has fluctuated dramatically over every FDA intervention, whether it is meeting request or a partial hold on a clinical study. On the brighter side, FDA accepted ublituximab’s biologics license application for RRMS at the end of 2021. Even though FDA approval will lead to a skyrocketing stock price, recent investors are still in for a bumpy road.

3. Masitinib by AB Science ($ABSCF)

Masitinib inhibits tyrosine kinase, which is an enzyme that allows for communication and regulation of a cell. So by inhibiting this enzyme, masitinib regulates cells of the immune system and ultimately stops “bad” cells from growing and dividing. This drug is being developed to be used for neurology, inflammatory diseases, and oncology. Specifically, it has shown promising phase 2b or 3 data for various diseases: amyotrophic lateral sclerosis, multiple sclerosis, Alzheimer disease, mastocytosis, severe asthma, prostate cancer and pancreatic cancer. It has even shown to anti-viral activity on COVID-19 in the lab. If this drug were to get approved for these indications, it has blockbuster potential written all over it. 

AB Science currently only has two medications in its pipeline, with the second one AB8939 in pre-clinical studies for acute myeloid leukemia. But because over 4000 patients have already gotten this treatment and have shown robust clinical trial data for various indications, it’s about the quality over quantity. 

At this stage, it is hard to pick out which medications have the highest chance of getting the stamp of approval from the FDA. Usually, the general rule of thumb is that pharmaceutical giants like Merck have a much more stable return than small biotech companies like TG Therapeutics and AB Science. However, if you’re looking for slow and steady returns, S&P 500 ($SPY) might be a safer and more lucrative bet. 

It’s important to keep in mind which form of multiple sclerosis these drugs are being developed to treat. 

Evobrutinib: relapsing-remitting multiple sclerosis (RRMS)Ublituximab: RRMS and secondary progressive MS (SPMS) with relapses. Masitinib: Primary progressive MS (PPMS) and SPMS 

Because 85% of multiple sclerosis diagnoses is relapsing-remitting (RRMS), there is a bigger role for evobrutinib and ublituximab than masitinib in multiple sclerosis because they will be able to reach a much broader patient population with MS. But regardless, multiple sclerosis is a very lucrative market with many clinical unmet needs. In fact, by 2023, the MS market size is estimated to be worth $42.46 billion at a CAGR (Compound Annual Growth Rate) of 6.3%. Even if all of these medications were to be approved, these companies do not have to worry about their return on investment from the competition. 

 

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3 VALUE NAMES IN CATHIE WOOD’S ARKG FUND

By Subin Im, PharmD

 

This past year has been quite the roller coaster in the stock market, particularly for the biotech sector. ARK Genomic Revolution ETF (ARKG) is no exception. But as one of the biggest and best biotech ETFs to buy, $ARKG had proven a stellar track record of 160% over the past 5 years. So should the 57% drop of late be considered an opportunity to buy, or is this ETF filled with more trash than treasure?  As one of the most famous American investors, Cathie Wood is bullish on the future of healthcare and biotech, specifically gene editing.  Should you be, too?

Due to the exponentially rising number of public-traded biotech companies, it is challenging to keep track of each company and its pipeline medications, not to mention the constant scientific discoveries. Because these companies do not have much control over the results from their clinical trial studies, it is never really a good idea to put all your eggs in one basket. In fact, it will be hard to do so because once you immerse yourself in the biotech world, there is just so much going on. 

A big advantage of investing in the ETF is that you don’t really have to do all the research because it is all done for you by professionals. You get to enjoy a piggyback ride. However, it’s still important to note what these ETFs are made of and which companies hold the most weight. With the ARKG fund plumbing new depths all the time, it’s worthwhile to scan the fund’s holdings for value that the market has forgotten. 

 

The top 3 ARKG holdings are Exact Sciences, Teladoc Health, and Ionis Pharmaceuticals. 

 

1. Exact Sciences Corp ($EXAS)

This company takes up the most weight in ARK Genomic Revolution ETF at 8.68%, but what exactly is Exact Sciences? Let’s first take a step back and talk about cancer. 

The best way to fight cancer is through prevention and early detection since cancer is an evil disease that spreads like wildfire. Prevention is a very broad term because even though there are a lot of factors that could increase the risk of cancer, the exact cause of cancer is still unknown. That is why early detection is so important, which is why it is recommended to get routine screening for certain cancers like breast cancer with a mammogram for women over the age of 40. However, almost all cancers require a biopsy to make a definite diagnosis that the patient has cancer. Biopsies are procedures where a piece of tissue is taken out of the suspected area with cancer so that it can be examined under a microscope. 

One of the many unmet needs in cancer is making less-invasive diagnostics, which is exactly what Exact Sciences strives to do. It specializes in detecting early stage cancer through non-invasive diagnostics. For example, one of its products, Cologuard, tests for DNA in stool to detect colorectal cancer. Cologuard 2.0 is being developed to only be a blood sample, because drawing blood is much more convenient than collecting stool. Another focus is precision oncology with Oncotype Dx, which is a treatment based on genetics for specific cancers including breast, prostate, and colon. Exact Sciences is also working to become bigger with its acquisitions of Base Genomics and Thrive Earlier Detection, where they are developing an early screening test for over 14 different cancer types. But that’s not all. It not only has diagnostic genetic screening tests but also helps formulate patients’ treatment plans in terms of relapse monitoring and treatment selection, which make it much more convenient for healthcare providers. Because those at high risk for these types of cancer require rescreening, the use of Exact Sciences’ products is not a one and done deal, which is reflected in its quarterly revenue growth of 219.2% based on the combination of first and follow-up screenings over the past 3 years. 

However, the stock price also plummeted when its co-promotional deal with Pfizer for Cologuard ended at the end of 2021, so it is no surprise that Exact Sciences hired 400 former sales reps from Pfizer. Even though Pfizer’s large-scale infrastructure and commercial expertise will be hard to replace, Exact Sciences has enough of a backbone to keep its momentum going. Another possible reasons for rapid decline in the stock price is because the revenue from its COVID-19 testing decreased by 70% due to the increasing competition. But because COVID-19 tests weren’t and still aren’t the company’s focus, its trajectory of cancer screening tests is enough for it to be a long-term buy.

2. Teladoc Health Inc ($TDOC)

Like other “COVID-19 stocks” such as Zoom, Peloton, and Netflix, Teladoc Health skyrocketed during the first year of the pandemic. Different circumstances called for different demands, and these companies’ products and services are very home friendly. But now that people are starting to go out again with less fear, the effects of the pandemic are starting to quiet down. 

Despite the 75% crash from its peak, will it be able to rise from its reputation as a pandemic stock? Before selling this stock out of panic, keep in mind that the company’s revenue is not always reflected on the stock price. In fact, the stock price was higher pre-pandemic even though the revenue now is a lot higher. If the pandemic has taught us anything, it would be that people don’t like to waste time. People don’t want to wait at the doctor’s office when they could easily do it in the comfort of their own home. So it is no surprise that its revenue increased by 98% in one year from $553.3 million in 2019 to $1.09 billion in 2020. Virtual visits had increased from 10.6 million in 2020 to 14.7 million in 2021.  This momentum is expected to snowball as 2021 revenue is expected to reach $2.03 billion. 

With its acquisition of Livongo in 2020, Teladoc Health is more than a telehealth company. Now, it also specializes in managing common chronic conditions, including diabetes and hypertension. Because these chronic conditions can lead to much more expensive disease states, the market for managing these diseases is worth addressing, especially since these disease states can easily be managed virtually. 

3. Ionis Pharmaceuticals ($IONS)

Ionis Pharmaceuticals has over 40 pipeline medications, with eight of them being in phase 3 development. The medications are extremely unique because they are first-in-class medications that use unique RNA targeted therapy. By inactivating the messenger RNA, these medications called antisense medications prevent translation of DNA to a protein. So it doesn’t work to just meet a medical need or mitigate the disease by relieving symptoms. In fact, it completely eliminates the medical need by directly targeting the disease. 

One of its approved medications, Spinraza, is the first FDA approved medication to treat spinal muscular atrophy. It also has two medications for genetic disorders: familial chylomicronaemia syndrome (FCS) and hereditary transthyretin-mediated amyloidosis (hATTR). It has robust phase 3 pipeline medications that cover a variety of therapeutic areas from cardio-renal (heart-kidney) to neurological (brain) and pulmonology (lung). Five of the nine phase 3 pipeline medications are collaborations with pharma giants: Novartis, AstraZeneca, Biogen, and Roche. Last year, Ionis Pharmaceuticals’ stock plummeted after two of the partnerships with pharma giants had ended. But four of the nine are owned independently by Ionis. 

Because Ionis Pharmaceuticals is developing medications for diseases that currently have no treatment options available, it serves a very vulnerable patient population. This also means that the medications can be priced at over $100,000 per treatment. This antisense technology could have the potential to treat broader diseases, such as hypertension, which is currently being developed in phase 2 trials. Even though there are a lot of treatment options available for hypertension, it still remains one of the biggest risk factors for common causes of death, such as heart attacks and stroke. Therefore, if this drug were to get approved, it has the ability to completely resolve hypertension through its unique antisense RNA technology. Further positive clinical results would equal a world of opportunity for Ionis shareholders. 

 

With the tumbling stock market, the biotech and healthcare sectors are very vulnerable. But is now the time to buy? As the saying from Mr. Buffett goes, “be fearful when others are greedy, and greedy when others are fearful.” The reason Cathie Wood has these companies as her top 3 holdings is because they either fulfill an unmet need or a growing demand. Therefore, in the long term, these companies are bound to be successful. 

 

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PIONEERING A NEW MARKET FOR ALZHEIMER’S DRUGS

By Subin IM, PharmD

 

First rule of healthcare: do no harm. Perhaps that is why Biogen’s drug aducanumab was so controversial.  To really understand how aducanumab works, it’s important to understand Alzheimer’s first. As the sixth leading cause of death in the U.S., Alzheimer’s disease progresses when proteins clump up to form amyloid plaques. This build-up leads to brain cell death because they lose their function and can’t communicate with each other. To slow down the disease from progressing rather than curing or reversing it, aducanumab works to reduce these amyloid plaques. However, there is a lot of controversy around this drug because it hasn’t been proven efficacious nor safe. It has proven effective in reducing amyloid plaques, but it did not improve cognitive function, which defeats the whole purpose of the drug. The direct correlation between reducing these plaques and memory improvement is still unclear, but aducanumab has not shown clinical significance. In fact, in clinical trials, 30% of patients experienced reversible brain swelling with over 10% getting minor brain bleeds. So the real question is, why and how did it get approved by the FDA on June 7, 2021? Some claim that it was to give this medication a chance since there has not been any drugs approved in the last 18 years for Alzheimer’s disease. 

Following the criticism, FDA limited the inclusion criteria for those with only mild cognitive impairment or dementia. But defining “mild” becomes very tricky because it requires expensive PET scans that aren’t readily available in hospitals or lumbar punctures that have procedural risks. Adacanumab debuted with a hefty annual price tag of $56,000, which does not include the actual cost of getting the infusion every 4 weeks (for potentially the rest of the patient’s life) and expensive monitoring tests like MRIs. Recently, this price tag has been slashed, but the poor sales of the drug have given the whole affair the feeling of a used car dealer desperate to move unloved inventory. 

Due to the complexities of Alzheimer’s disease, there is currently no cure. In fact, aducanumab is the first medication that targets the course of the disease rather than just relieving symptoms. But what else is out there? Is there hope? Let’s explore three of the medications that are currently in phase 3 clinical trials for Alzheimer’s disease. 

1. Lecanemab – by Biogen ($BIIB) and Eisai ($ESALY) 

As the “pioneers in neuroscience”, will Biogen make a comeback from the controversies of aducanumab? Biogen partnered up with Eisai to pursue another innovation together. Their investigational drug, lecanemab, received breakthrough therapy designation from the FDA, which means that its review and potential approval will be expedited since Alzheimer’s is a serious condition with unmet needs. 

One of the main concerns with aducanumab was the amyloid-related imaging abnormalities (ARIA), which include swelling and bleeding in the brain. However, phase 2 data for lecanemab seem more promising as the incidence of ARIA for lecanemab was 10 percent compared to 35 percent for aducanumab. Even though 10% is still a high number for such serious side effects, Biogen is still on the right track for improvement. In addition, lecanemab slows down the progression of Alzheimer’s disease by reducing the amyloid protein plaque development. It won’t cure Alzheimer’s disease, but it can help prolong mental sharpness in those with mild Alzheimer’s disease. This study is expected to end by September 2022, so stay tuned.

2. Gantenerumab – by Roche ($RHHBY)

One unique feature about gantenerumab is that it can be injected subcutaneously under the skin, just like insulin. It makes it much more convenient for patients because they could possibly administer it themselves at home. They would not have to go to the hospital for an intravenous infusion like they do for aducanumab or lecanemab if it gets approved. Also, unlike aducanumab which has to be administered for about an hour once a month for possibly the rest of the patient’s life, gantenerumab is administered for 5 minutes once a month for two years. 

In 2014, Roche ended gantenerumab’s phase 3 trial early due to lack of efficacy. However, it brought it back in 2018 after promising data that a higher dose is efficacious in removing amyloid plaques. The higher dose led to a 80% reduction in amyloid plaques, which led to the FDA granting gantenerumab with breakthrough designation therapy. 

3. Donanemab– by Eli Lilly ($LLY)

The biggest perk of donanemab is that it removes plaque faster than any of its competitors in development. From its phase 2 study, at 24 weeks, the significant decrease in amyloid plaques led to decreased progression of cognitive decline. 

To distinguish itself from its competitors, Eli Lilly is building an infusion and diagnostic infrastructure to make donanemab treatment more accessible and feasible for patients. One of the main challenges with this therapy is identifying the appropriate patient population. As mentioned earlier, diagnostic tests such as PET scans and lumbar punctures are not ideal in most situations. Addressing this challenge with a solution will enable the use of donanemab to be maximized appropriately. 

 

Although all three of these pipeline medications have received breakthrough therapy designation from the FDA, it is hard to predict which one, if any, will receive the stamp of approval due to the complexities of Alzheimer’s disease. Aducanumab won FDA approval based on its ability to reduce amyloid plaque, not necessarily due to its impact on cognitive function in Alzheimer’s patients. Is plaque reduction simply enough for future medications to gain FDA’s approval? Or will FDA be expecting more the next time around? For approval, it is crucial for the phase 3 trial results to show that the drug is clinically meaningful and improves patients’ daily lives by enhancing their cognitive function while keeping their brain function stable. 

 

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3 STOCKS THAT CAN SURVIVE THE BIOTECH WINTER

 

By The Sick Economist

 

“Now is the Winter of our Discontent” 

–Richard III, by William Shakespeare.

 

With the biotech sector being crushed in 2021, investors continuing to drown in red ink in early 2022, and millions of global investors fleeing from risky equities in general, how do we know which biotech names will survive for the long haul?  

Pain is a biotech portfolio that only goes down. In 2021, the SPDR S&P Biotech ETF, commonly known as $XBI, plunged 20.5%. As of mid January 2022, the benchmark biotech index has tumbled another 10%. Within this index, many of the more cutting edge companies have tumbled even further. 

What happened? As recently as 2020, the biotech sector was the darling of  Wall Street. As the world confronted the worst pandemic in the last century, the public looked to the biotech industry to innovate our way out of trouble. And they did, producing a variety of Covid vaccines and treatments in record time. There is no doubt that the world in 2022 is in a much better place due to the robust innovation of the biotech sector. 

So why are we seeing red across the board? The phenomena has much less to do with the specifics of the biotech sector, and much more to do with a general “flight to quality.”  As the Federal Reserve has strongly signaled the beginning of a new interest rate regime, where fighting inflation is the priority, global investors have been abandoning risky, early stage, non profitable companies en masse. Just as Cathie Wood’s Ark Investments, a bellwether fund for innovative “new economy” companies, has been punished relentlessly, so has biotech. 

Over the last few years, Wall Street has encouraged biotech companies to go public at earlier and earlier stages. Traditionally, new biotech concerns only became public companies when they had solid data from human testing in at least phase I or phase II trials. In the last year, dozens of embryonic biotech entities have IPO’d without any “clinical stage” data. This means that these companies have literally raised hundreds of millions of public money based only on tests done on rats, or even just simulations run on a computer. These kinds of companies would be many years away from offering a viable, revenue producing product. With the sudden change in the global business climate, investors have suddenly become skittish about making such giant “risk on” plays. 

Any experienced investor knows there is opportunity in chaos. If the entire sector is crashing, some quality, sustainable companies are bound to be forgotten amongst the tumult. What are qualities that the astute equity shopper should be looking for? 

First, we should be looking for well funded entities that are not going to run out of cash during the upcoming funding winter. Why would so many very early stage companies have gone public, when they won’t realistically have a product to sell for years? Because over the last five years, raising money for risky ventures has been like taking candy from a baby. With the Fed pumping out endless oceans of money and the rich constantly getting richer, the assumption was that young biotechs could always go back to the funding well. It now appears as if that well will be capped. So if you didn’t get enough water to last while you could, get ready to die of thirst. 

Second, to earn the title of a publicly traded “company” rather than simply existing as a publicly traded “entity,” your target company would need to be reasonably close to commercial viability. This means they should have sold data in hand from at least a few stage one trials, with at least one agent in or around stage two testing. This kind of target company could realistically produce revenue in 12 to 36 months. The hundreds of prematurely IPO’d early stage biotechs may well just fade away if the market continues its downward trend over the next two years. 

This would seem like a simple screening criteria. After all, to be considered, a biotech company would only need to meet those two criteria. But when you do your research, you will be shocked how few companies really do meet those standards! 

Below find three companies that will probably survive the coming “biotech winter.” 

 

1) Sage Therapeutics ($SAGE) 

Sage may be less than a year away from launching a novel medicine into a market with massive unmet needs: major clinical depression. Anyone who has struggled through the depression of a loved one can tell you that modern medicine is only beginning to understand how to treat this devastating diseases. Most medicines on the market today take a month or more to work, if they work at all. Sage’s new medicine, Zuranalone, has been proven to work in days. 

Sage has produced an impressive raft of positive data, and pivotal stage III trials are now underway that could lead to approval at the end of 2022, and a launch in 2023. 

In addition to a real possibility for actual hard revenue in the not distant future. Sage has a number of other things going for it. The company has a diversified pipeline in the neuro/psychiatric field, with several molecules in ongoing testing to address diseases that have few effective remedies at the moment. They have a rock solid $1.8 billion in cash on their books, as well as a partnership with Biogen ($BIIB), a much larger pharma concern with deep pockets that could help their smaller partner weather any storm. And they have an energetic new CEO in the form of Barry Greene, who has demonstrated acumen in the past new product launches. 

The only question that has dogged Sage for years is: exactly how big of a market will Zuranalone enjoy? Wall Street has been very interested in Sage when they thought the novel medicine could become the “go to” treatment for depression, and less interested when it sometimes appeared that Zuranalone could be confined to a more niche role in psychiatry. Either way, the medicine would represent a bold step forward in the treatment of depression, and this company appears to be in good condition to persevere while other biotechs are dying left and right.

2) Achilles Therapeutics ($ACHL) 

Achilles is a small company with big potential, that has positioned itself in such a way that it will be able to see its research to fruition. There are a few clear reasons why their current posture looks durable. 

First, Achilles is working in the right market, at the right time. Achilles is developing cancer treatments within the immunotherapy space. They are targeting lung cancer and melanoma, which are some of the deadliest diseases out there. The media is filled with miraculous tales of breakthrough immunotherapies causing these cancers to disappear like night ghouls exposed to sunlight. When current cancer immunotherapies work, they really work. But even mega blockbuster therapies like Keytruda work less than 50% of the time. Why would these treatments work so well in some people, but not at all in others?  

Achilles believes the answer lies in personalized medicine. Each human being has a vastly complex, unique genome, and Achilles aims to unlock the individual answers that hide in all of our underlying source codes. Achilles currently has two separate phase I/phase II studies running to test these theories. This would mean that they could have viable products in two to three years. The company’s cash reserves are well stocked to make it to the end of 2023, by which time, they may not find it to be so hard to raise more cash to advance novel oncology approaches that have shown positive results. 

Of course, that is always a big IF. The reason why lung cancer and melanoma continue to kill millions of people is because these diseases are very tough opponents. That very difficulty is another advantage for Achilles. If they can demonstrate any positive results at all, they are unlikely to ever go broke. There are many pretenders to the throne, but few can demonstrate real progress against cancer. Those that can, get financial support pretty quickly. 

3) Zentalis Pharmaceuticals ($ZNTL) 

 Zentalis is also going after solid tumors, and there are several aspects of this young company that make it primed for successful commercialization in the not too distant future. 

First, the company has no less than five different phase II trials going on for two different agents. That represents a lot of “shots on goal.” The more times you kick the ball towards the goal, the better likelihood of score. 

Second, at least one of the company’s novel molecules already has a proven market. Molecule ZN-c5 is aiming to be the first oral SERD drug on the market. The existing dominant SERD is a drug known as fulvestrant, and has been administered to millions of breast cancer patients over the last twenty years. It is a very established drug in a huge market. But the current preparation of the medicine must be administered in painful and inconvenient injections. Zentalis’s new solution is a very similar medicine, but in a pill. The obvious commercial promise of this new formulation has lead Zentalis to score research collaborations with heavy hitters such as Pfizer ($PFE) and Eli Lilly ($LLY). 

So, Zentalis could realistically launch some very lucrative cancer agents within two years. And the business is very well funded to reach that point, whatever the stock market does over the next few years. Recently the company reported that it had $366 million in cash on it’s books, which it believes should fund all operations through the end of 2023. 

Lastly, Zentalis has experienced leadership in the form of Dr. Anthony Sun. Dr Sun holds both an MD, and a MBA from the Wharton School of Business. Most importantly, he spent most of his career on Wall Street before leading Zentalis. Anyone with a clinical background can lead a baby biotech when times are good and the dollars flow like wine. But when the market is crashing, and the funding spigot is suddenly turned off, it’s good to have a Wall Street veteran steering the ship. Dr. Sun knows a thing or two about funding biotech companies, meaning that Zentalis is unlikely to fail due to lack of resources. 

 

When will the pain end?

Unless you know someone with a crystal ball, it would be hard to predict. But anyone who has been through the manic cycles of Wall Street can tell you that risky, underfunded, unprofitable biotech stocks could have a long way to fall from here. There is no natural bottom for an entity that raised hundreds of millions of dollars with nothing more than a petri dish and a dream. Do your own research, and stick with companies that were built to last. 

 

 

Disclosure: The Sick Economist owns shares in $SAGE and $ZNTL

 

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3 PROMISING DIABETES DRUGS FOR 2022

By Subin Im, PharmD

 

Diabetes is one of the most common health conditions in the United States. In fact, 34.2 million Americans (~10%) have diabetes, while 88 million (~27%) have pre-diabetes. The incidence of type 2 diabetes among youth is increasing in many countries, coinciding with increasing prevalence of obesity. While diabetes is commonly associated with obesity, it has two main types: type 1 and type 2. Type 1 diabetes is not caused by obesity but by autoimmune pancreatic beta cell destruction. Because the patient’s body is attacking its own beta cells that make insulin, it does not make much, or any, insulin. Therefore, the most common treatment for type 1 diabetes is insulin. Without insulin, the blood sugar will be very high, which can damage blood vessels. Since they can’t adequately supply blood and oxygen, it can lead to diseases in the vital organs (e.g., eye, kidney, heart). On the other hand, type 2 diabetes is due to a progressive loss of adequate beta cell insulin secretion and insulin resistance. These patients can be treated with non-insulin medications, insulin or both. 

One of the main downfalls with diabetes is that patients have to inject themselves with insulin up to four times a day. Insulin injections are not fun for anyone. On top of the physical pain, having to remember the right times to do so is also burdensome, which can significantly affect patients’ quality of life. For as long as insulin has been manufactured, it has only been available as an injectable. It would be pointless to take it as a pill through the mouth because then it will get digested in the stomach instead of reaching the bloodstream where it’s needed. Or will it? Due to the unbelievable advancements over the past 100 years, maybe insulin does not have to be injected up to four times a day anymore. That is why three of the medications in the pipeline stand out. If approved, these medications will significantly improve the quality of life for diabetic patients and provide them with a less painful and more hopeful future. 

 

1.) ORMD-0801 by Oramed (ORMP)

Remember when I said it would be pointless to take insulin by mouth since it won’t reach the bloodstream that way? Well, it turns out that there is a way around that. Due to the special coating of the pill, it can avoid being degraded by the enzymes in the stomach. The phase 2 trials showed very promising results with a significant decrease in A1c levels and fasting sugar levels. A1c is a measurement of how much of the proteins in blood has been coated with sugar over the past three months. Better yet, ORMD-0801’s impact on lowering blood sugar lasted 24 hours, which indicates that this may be dosed just once daily. Because it was also proven to be safe and well-tolerated, it has now progressed to phase 3 trials. 

Oramed seeks to develop oral diabetes medications that are currently injectables. If approved, it will be hard to imagine diabetes patients having to inject themselves in a hundred years. It is worth noting that oral insulin is in phase 2 trials to be investigated for use in Non-alcoholic steatohepatitis (NASH), also known as Nonalcoholic fatty liver disease. There is currently no medication used to treat NASH, so this could also be a huge opportunity for profit if it were to get approved, as there are 30 million people with NASH in just the US alone.  

As nice as it sounds to replace injectables with oral insulin, there is undeniably a risk that may come with the successful commercialization of it, especially when it comes to its price. Insurance companies may only cover the injectable form of insulin if it is significantly cheaper than the oral version. Or they may only cover the oral version under very special circumstances, such as if a patient has a skin disorder. In addition, because ORMD-0801 is the first of its kind, there is not as much data on safety and efficacy when compared to the over one hundred-year old injectable insulin. Therefore, prescribers may be hesitant to prescribe such a medication. The FDA approval is only the beginning to the commercialization, which is the part that really brings in revenue, so it is definitely an important factor to consider. 

Oramed went through quite the roller coaster the past year, from its 52-week low at $4.24 to its 52-week high of $31.54. On January 7, 2022, its price closed out on $12.38. Would this be considered a great opportunity to buy? It may not be the best idea to put all the eggs in one basket, especially if that basket cannot produce any revenue yet as it does not have any approved medications out on the market. However, that basket also has the potential to revolutionize the treatment for one of the most common diseases in the world and a disease that is never going to go away.

2.) Insulin Icodec by Novo Nordisk (NVO)

Due to the possible risk in successful commercialization with ORMD-0801, the pipeline medication that may have a better chance with it is insulin icodec. Patients do not want to inject themselves up to four times a day, but they may not be able to afford the oral version if it gets approved. So there is a great chance that patients and insurance companies will have to compromise by shifting towards insulin icodec, which only has to be injected once a week. 

The longest-acting insulin on the market right now is insulin degludec, also known as Tresiba. But even then, it has to be injected every day. Therefore, insulin icodec could serve as a much more convenient alternative. Because there has never been a formulation of insulin that lasts for a whole week in the body, there may be some efficacy and safety concerns. However, when insulin icodec was compared to a once-daily insulin glargine, insulin icodec was shown to be more effective as it helped achieve the blood sugar goal range more without any compromises to safety. The major safety concern with insulin is hypoglycemia, which is when the blood sugar gets too low, and can lead to symptoms such as sweating, shakiness and even passing out. The hypoglycemia risk and the adverse events with insulin icodec and insulin glargine were comparable. 

With its stock price nearly doubling within the past year, Novo Nordisk has not yet reached its peak because it continues to find innovative ways to fulfill unmet needs for diabetic patients. Its new obesity medication, Wegovy, has met such a strong market response, that they can’t even make it fast enough.  The company is also pursuing new innovations in other disease states, such as hemophilia and growth disorder.

 

3.) Tirzepatide by Eli Lilly (LLY)

For type 2 diabetes patients, insulin is not the be-all and end-all. In fact, type 2 diabetics only have to take insulin if their A1c is high (over 9%) and if they have symptoms such as frequent urination and weight loss. Therefore, they have a lot of other oral options, such as metformin. But not many drugs work to address type 2 diabetes and obesity at the same time even though 90% of this patient population is either overweight or obese. That is when tirzepatide comes in. 

Tirzepatide is a combination of glucose-dependent insulinotropic polypeptide (GIP) and glucagon-like peptide 1 receptor agonist (GLP-1RA). These two hormones increase insulin secretion and inhibit glucagon secretion. This dual action works to lower blood sugar levels. Therefore, tirzepatide is a double threat that reduces A1c levels and leads to weight loss. An A1c level greater than 6.5% is considered to be diabetes. On average, in three clinical trials, tirzepatide reduced A1c levels by 2.5% for those with A1c levels greater than 8% and reduced weight by 13.1%, which was 25 pounds. Tirzepatide’s outcomes are even better than those of its competitors currently on the market, including injectable semaglutide. One of the best things about tirzepatide is that it can be administered once weekly, compared to insulin, which may have to be injected up to 4 times a day, with a minimum of twice a day. If approved, tirzepatide will be the first medication in the GLP-1/GIP combination class. Eli Lilly expects to apply for tirzepatide’s FDA approval sometime in late 2022.

If tirzepatide were to get approved by the FDA, it is a huge win for Eli Lilly and its stock price as it will be the blockbuster medication, not just for type 2 diabetes but also obesity. In 2021, the market value of anti-obesity medications was expected to be $2.4 billion and expected to increase to $5.42 billion in 2025. For type 2 diabetes, the market size value is estimated to grow from $28.5 billion in 2021 to  $58.7 billion in 2025. If this medication were to get 15% of the market in 2022 for type 2 diabetes and obesity, that is worth $4.635 billion. Fast forward to 2025, the same 15% would be worth $9.618 billion annually. 

 

Even though there already are many treatment options available for diabetes, there are still unmet needs in this patient population, such as patients having to inject themselves multiple times a day and always having to keep an eye out for their blood sugar levels. Due to its increasing prevalence and the numerous complications that uncontrolled diabetes can lead to, these three pipeline medications are definitely worth keeping an eye out for. Diabetes might not be as “new” as some other diseases, but it is unfortunately just one of those things that is here to stay.

 

 

 

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3 BIOTECH STOCKS THAT COULD DOUBLE IN 2022

 

By: The Sick Economist 

 

As another year comes to an end, and a new one approaches, we take stock of the time that has passed and we begin to evaluate opportunities that lay ahead. 2021 was certainly one for the record books. As the world bravely fought off the Covid Pandemic through scientific breakthroughs, the stock market boomed (The S&P 500 providing an eye-popping 26.67% total return through mid November). Despite the rock solid performance of most asset classes, Biotech investors were left out of the party. Some would say, not only left out of the party, but ordered to go stand alone in the corner! $XBI, an ETF that represents the most common biotech stocks, is down by 7.97% as of mid-November, and $ARKG, a popular ETF that represents the most bold, early stage biotechs, has slumped by 15.59%. 

Why has biotech been hammered while most other assets have been on a rocket ride to profit? There are a panoply of reasons, ranging from: Democrats in congress vowing to reign in drug prices, a few patient deaths in early stage genomic trials, impatient “get rich quick” investors moving on to the next thrill. However, Biotech’s long term prospects remain bright. Just take one look at the Rolling Stones, defiantly touring into their late 70’s, and realize that the Baby Boom generation will not go quietly. Any industry that can provide solutions for ageing bodies will mint money eventually. 

That being said, when the market is cold, and short term trends are conspiring against a sector, stock picking becomes important. Which biotech stocks are plummeting because they should be, and which are simply caught up in the selling frenzy? When a sector falls out of favor, there are deals to be had. Below find three small biotech companies that we believe have big futures. We believe these shares could see explosive valuation growth in 2022. 

 

1. Morphic Holdings ($MORF) 

Morphic is the perfect example of a biotech company that has their head in the clouds, but their feet firmly planted on the ground. They are pioneering all new, breakthrough technology to address a firmly established, and very lucrative, market for a chronic illness. The combination of advanced science and simple arithmetic could be powerful. 

The company is pioneering the science behind integrins, a previously little understood protein in the human body. Over time, this integrin technology will allow the team to attack a wide range of serious diseases with unmet needs. For the near to mid term, the company is focusing on Autoimmune Disease, Fibrosis, and Cancer. These are the fields where legendary pharma mega hits such as Humira and Keytruda roam. The potential rewards are rich. 

The company’s most promising near-term project is an agent known as MORPH-057. This is a new way of addressing an old problem; namely, Ulcerative Collitis and Crohn’s disease. Currently these chronic, debilitating diseases are treated by very expensive and inconvenient biologic injectables/infusions such as Humira or Entyvio. Humira has been the world’s biggest selling drug for decades. However, Entyvio is now hot on it’s trail, delivering superior results in clinical testing. These superior clinical results led to a sales boom for Entyvio. The drug achieved sales of $4 Billion in 2020, even during the depths of the Covid Crisis. 

Why would any of this matter for a potential $MORF investor? Afterall, Entyvio is not owned by Morphic, but rather by pharmaceutical giant Takeda. The team at morphic is currently leveraging the new integrin technology to create a version of Entyvio in a pill. As opposed to costly, time consuming, and uncomfortable injections/infusions that are currently required for Entyvio. 

Early testing has validated the general concept that this method of action can be transformed into a simple pill by the integrin technology. As we speak, Morphic is mounting a phase II trial that may demonstrate one of the first effective treatments of autoimmune bowel disease in a simple pill. 

The math is compelling. Morphic currently has a market capitalization of $1.9 Billion. Given that Entyvio is clocking in at $4 Billion in sales and growing, an oral version of the drug could easily attract $1 Billion in annual sales in just a few years. According to data published by the Stern School of Business at NYU, a common valuation multiple for a biotech company would be 8 times sales. So, that would mean that $MORF could be valued at $8 Billion, if just this one drug gains approval. Current shareholders hoping to see $MORF double in value are actually dreaming small.  Exponential growth is not unrealistic for this young company. 

On top of all that potential, Morphic is also very well funded. According to management, the company currently has a cash “runway” that should last until late 2024. This would give them 3 solid years to advance their clinical programs before having to worry about raising funds. It should help their C-Suite sleep well at night. Morphic’s strong cash position and attractive potential should also help investors sleep well at night. 

2. Syros Pharmaceuticals ($SYRS)

Syros is another small pharma upstart aiming for the bigtime. Much like Morphic, they are pioneering brand new technology in order to service some giant unmet needs in the medical community. 

Specifically Syros is working in the field of gene control, which is a method of turning on, turning down, or turning off the expression of select target genes in the human body. 

The company has a three pronged approach to commercialization, working on three different agents at once that can become viable, revenue producing drugs. Perhaps the most exciting thing in their pipeline is SY-5609, which is specifically targeting a few very hard to treat solid cancers. 

The last decade has seen a revolution in oncology, with medical science providing hope to millions of patients who wouldn’t have had a chance twenty years ago. In particular, great progress has been made against blood oriented cancers.

However, solid cancers have remained notoriously tough to treat. Syros is targeting two of the toughest adversaries medical science has ever faced. Pancreatic cancer is notorious for a poor prognosis (killed Patrick Swaze) and Colorectal Cancer is an infamous killer (poor Chadwick Boseman, aka “The Black Panther” was struck down at just 43 years of age). Syros has produced promising early stage data against both of these maladies, and any kind of effective treatment at all would represent a huge leap forward for modern medicine. 

Amazingly, the biotech community has largely overlooked Syros. The result is a $243 Million market capitalization, which, in biotech terms, is tiny. Any effective treatment against solid cancers could easily bring in $1 Billion a year in revenue, which could see $SYROS triple, quadruple, or even quintuple in value. 

Of course, all data is still preliminary, and a long and risky road awaits Syros shareholders. But many may find the risk/reward equation to be appealing.

 

3. Compugen ($CGEN)

Compugen is a small firm based in Israel that seeks to wed artificial intelligence and biology to create a more efficient and effective way of identifying promising new drugs. Their slogan is “From code to cure.”  Imagine a way of finding cancer drugs that involved more software and keyboards, and less test tubes and bunsen burners. 

Right now anything involving artificial intelligence is red hot in the media. This means that even small companies have a chance to attract attention from big players. This is exactly what happened to $CGEN. A few years ago they caught the eye of Cathie Wood, founder and CEO of ArkInvest, one of the most popular technology oriented exchange traded funds out there. Ms. Wood is constantly talking up companies on CNBC, Bloomberg News, and other major media outlets. $CGEN fit the narrative that Ms. Wood was seeking, and ArkInvest quickly became Compugen’s largest shareholder. 

Compugen’s shares skyrocketed from $2.50 in the beginning of 2019 to $17.50 at their peak in 2020. AI was red hot, and $CGEN was going for a wild ride on Cathie Wood’s magic carpet of media adulation. Using proprietary software algorithms, the company was pionering a unique method of attacking cancer, called the “triple checkpoint hypothesis.” This is a new way of bolstering the immune system to attack solid tumors. The approach could be used by itself, or could be combined with existing immunotherapies to ramp up the pressure on cancer. 

But the love affair with Ark Invest ended as abruptly as it had begun. With little explanation, Cathie Wood began selling huge quantities of Compugen shares. Ark Invest’s position in Compugen had become so large that the very act of selling shares caused the small company’s market capitalization to tank. Eventually ArkInvest sold more than 60% of its stake in $CGEN, and the share price came crashing back down to earth. 

But the slump in Compugen’s share price, and the cooling of relations with ArkInvest, has not stopped the pugnacious Israeli company from making solid progress and attracting new allies. This November, the company has unveiled promising new data regarding it’s “triple checkpoint hypothesis.”  The promise has been tempting enough that partner Bristol, Myers, Squibb decided to buy $20 Million in Compugen stock. 

Even though this oncology data is still preliminary, the combination with $BMS’s Opdivo could translate to massive revenue potential. Opdivo is actually considered to be the laggard in the immunotherapy space, falling well behind Merck’s Keytruda. However, even as an “also ran” Opdivo brought home $7.9 Billion in revenue during the chaos of 2020. The idea is that Compugen’s novel agent would be used in conjunction with Opdivo on a high percentage of clinical cases. BMS has a strong incentive to see this research to its conclusion, and, if results are positive, BMS has an even stronger incentive to flex its formidable commercial muscles to promote the combination. The only way that Opdivo goes “From zero to hero” in the eyes of Wall Street pharmaceutical analysts is if it becomes a key ingredient in a potent, novel, oncology cocktail. If Compugen’s new agent eventually winds up being combined with Opdivo just 15% of the time, that could easily translate to $1B a year in revenue. Quite a quantum leap for a small company currently valued at just $370 million. 

Although the stock price is currently low and Cathie Wood’s media circus has moved on to other “it” companies of the moment, $CGEN still has about 2.5 years worth of cash on hand. They have a powerful and committed new partner in Bristol, Myers, Squibb. And they are relying on computational algorithms that will only grow in strength as computing power inevitably progresses. 

$CGEN could be a good bet for a patient investor who looks at the union of information technology and biology and sees opportunity. 

 

2021 has been a very rough year for many biotech investors. The whole sector has been left behind as other kinds of companies have soared. Will 2022 be our year? No one knows for sure. But careful analysis and prudent stock selection will always increase your odds of seeing clearly into your crystal ball…..

 

Disclosure: The Sick Economist owns shares in all three of the profiled companies in this post. 

 

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GILEAD SCIENCES, INC: AN UNDERVALUED ACQUISITION MACHINE?

In today’s frothy equity markets, it’s not easy to find a good deal. With many companies sporting stratospheric valuations that would make Icarus blush, the astute investor must look for value where others only see declining revenue or diminishing prospects. In recent years Gilead Sciences has seen its fortunes decline; however, new CEO Daniel O’Day has begun executing a bold turnaround plan based on acquisitions. Does Gilead’s shopping spree qualify it as a value stock that should appeal to investors? 

 

By The Florida Atlantic University Investors Association

(Daniel Hric, Matthew Kerr, Adam Lewis, Milan Hric & Seth Dixon)

 

Gilead Sciences ($GILD) is a biopharmaceutical company that focuses on the development of medicines to prevent and treat a variety of diseases, including HIV, AIDS, cancer, hepatitis, coronavirus, and liver diseases, among others. Since its incorporation in 1987, Gilead has embarked on twenty-one acquisitions. The company has been able to furiously expand its business through M&A activity- in 1999 it acquired NeXstar Pharmaceuticals which gave the company access to the international markets. In 2020, Gilead had its largest acquisition when the firm acquired Immunomedics for $21 billion. Gilead Sciences has made a variety of deals since Daniel O’Day became CEO in 2019; in 2020 alone four transactions were completed along with the Immunomedics deal-Forty Seven in April for $4.9 billion, Pionyr Immunotherapeutics in June for $275 million,  and Tizona Therapeutics in July for $300 million. Gilead, among other biopharma companies, occupies a market that has at least a trillion dollars in capital for M&A activity available to it.

In the first six months of 2021, Gilead saw a 18% increase in revenue compared to the same time period in the previous year, increasing from $10.6 billion to $12.6 billion. However most of its already marketed products did not outperform their last sales dramatically, in fact they underperformed by around 1%. The real driver of the increased sales was the introduction of a new products Trodelvy and Veklury, earning $161 million and $2.2 billion respectively. The self developed medication Veklury was the first FDA medication approved as a treatment for Covid-19, and by the end of 2020 1 in 2 patients in the US hospitalized with Covid-19 were treated with it. Without the massive sales of Veklury, which overshadowed all other offered products as a result of the pandemic, Gilead’s revenue would have actually decreased approximately 1% as compared to the same period in the last year. 

HIV and HBV treatment constitutes the majority of Gilead’s revenue, approximately 70%, and they are currently in a downtrend of 7.7%, as compared to the same period last year. If it were not for the massive sales revenue from Velklury, Gilead would likely experience a decrease of its total revenue.

This declining revenue can be attributed to the extraordinary success of Harvoni, Gilead’s Hepatitis C treatment with 94% to 99% effectiveness. After the first 2 years that Harvoni was being sold, hepatitis cases decreased by 25% in the US, dropping from 3.2 million to just 2.4 million. Although the temporary surge in revenue was extraordinary, $25 billion to $32 billion in the first two years, the shrinkage of the patient base has negatively affected long term growth as demand decreases. With the enormous revenue produced by Harvoni and declining revenue, Gilead has decided to reinvest it’s gains and expand into other sectors, notably oncology, by acquiring other healthcare research firms to support its growth.

To offset the decline in revenue Gilead aims to introduce new products in the area of oncology and HDV treatment. In early 2021 and late 2020, Gilliead acquired two companies, a German biotechnology firm MYR, and Immunomedics, for $1 billion and $20.8 billion respectively. Immunomedics has allowed Gilead to gain access to the medication Trodelvy, which has been approved by the FDA in April 2021 for use in adult patients with locally advanced or metastatic urothelial cancer (UC) and breast cancer.

 

After it was approved to be sold in the US in late April, Gilead recorded $89 million in sales in just 3 months. If the sales do not take an unexpected turn, Trodelvy is expected to surpass most of the other medicines in it’s portfolio with expected sales of $350 million dollars in the US alone. This projection however, takes into account only it’s current indications, specifically UC cancer and breast cancer. An important possible indication currently under testing would be for lung cancer. Lung cancer is the second most common form of cancer in the US (28% of all cancer deaths), and in March 2021 Merck withdrew its indication for lung cancer for it’s medication Keytruda. Therefore supply is low for treatments of lung cancer, and if Trodelvy would get approval for this indication, the projected sales would grow even further. Keytruda generated revenue of $3.8 billion in just the first quarter of 2021. Under the assumption that 20% of sales of Keytruda were for cases of lung cancer, an additional $760 million in revenue could be generated by Gilead if Trodelvy successfully obtains this indication and replaces Keytruda for lung cancer cases. Trodelvy, listed as Finite-lived intangible assets on Gilead’s 10-Q statement, was valued at $4.6 billion at the time of the acquisition of Immunomedics, but since it gained FDA approval in April 2021 for treatment of UC and breast cancer, it’s value has increased by more than $1 billion. As a result, Gilead’s total intangible assets have grown by $1 billion, which represents a 2.5% increase since the acquisition. This value would grow even further with new indications for Trodelvy. Additionally, with the acquisition of MYR, Gilead gained access to $15.7 billion worth of in process research and development, which would indicate that Gilead will introduce more novel agents in the future, further diversifying their portfolio of drugs.

The acquisition of MYR has gained Gilead access to Hepcludex, a medicine conditionally approved by the European Commission in July 2020 for treatment of chronic HDV. Hepcludex at this time is not approved by the FDA, nor has its safety and efficacy been established in the United States. In Gilead’s 2021 Form 10-Q for the period ended June 30th, no domestic or international sale or revenue of Hecludex is recorded. At this moment there is however a contingent consideration of $300 million representing a future potential payment upon the FDA approval of Hepcludex, raising the acquisition price of MYR to $1.3 billion. 

Measuring Gilead next to its competitors of comparable size, Gilead stands at a price to earnings ratio of 16.5 and a yield of 4.2%, which is less than the average PE ratio of 29.3, and above the average yield of 2.2% annually. Also, Gilead’s current profit margin of 39% exceeds 98% of all pharmaceutical companies. For these reasons, as well as the expected increase in revenue from the aforementioned new medications, their expansion into international markets, and their possible new indications, revenue can be reasonably expected to grow. Gilead’s cash flow has been too volatile as a result of its recent acquisitions, expiring patents on medications, and sale of new medications, therefore we will use the Discounted Dividend method to value Gilead instead of Discounted Cash Flow. It is important to note, that although cash flow has been quite volatile in the past years, at times gyrating by as much as 50%, Gilead’s dividends were steadily increasing. Only in 2020, (decrease of EPS as a result of acquisition of MYR and Immunomedics) did Gilead distribute dividends that exceeded its earnings; in all other past 4 years, including 2021, earnings per share exceeded the dividends, therefore we can assume the dividends are sustainable. Gilead’s dividends have grown on average 9% over last 4 years, using the Discounted Dividends valuation method and conservative average growth of dividend amount of 4%, Gilead is valued at a fair value of $74.94 per share, which is as of writing of this article 8% above its current market price. Therefore Gilead at this moment seems to be undervalued. 

With a low price to earnings ratio, a very high profit margin, and a generous, and growing dividend, value minded investors may find it worthwhile to bet on the company’s acquisition and expansion strategy.

 

Disclosure: The Sick Economist owns shares of Gilead Sciences, Inc. 

Gilead revenue and profit data cited in this post can be found here:

Gilead Sciences Inc 2021 Quarterly Report 10-Q (sec.report)

 

 

 

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