The Life Sciences Report: What's the macro environment for
biotech right now?
Chen Lin: Biotech is red hot. The scene reminds me of the
excitement around Internet stocks in the late 1990s, when the possibilities
for growth seemed endless. Citigroup Inc. is reporting that curing cancer
will be a trillion-dollar opportunity. We are on the edge of a major
breakthrough in cancer research. In five to 10 years, as the Baby Boomers
age, cancer may be treated as an ordinary disease.
TLSR: Are we looking for a magic bullet for all cancers, or should
investors be concentrating on individual cancers?
CL: The industry focus is on treating individual cancers, although
the molecular mechanisms are similar for most cancers. For example, the
breakthrough in chimeric antigen receptors (CAR) T cells is very effective
against liquid types of cancer. It worked for Emily Whitehead, a young girl
who was diagnosed with an incurable disease, acute lymphoblastic leukemia
(ALL), and given a few months to live. She has lived for four or five years
since treatment, and everything looks fine. These genetic engineering
technologies use a patient's immune system—his or her own T cells—to identify
and kill cancer cells. Selective killing is a vast improvement over
chemotherapy, which blasts good cells alongside the bad cells.
TLSR: What indicators in the macro environment predict the
profitability of life science stocks?
CL: Central banks around the world are printing money that goes
into speculations. Biotech is a stock picker's market. Even if there is
another financial crisis, many biotechs will remain well funded as they move
through their FDA approval processes. The aging of the population will
continue, of course.
TLSR: Which biotechs on your scorecard are best positioned for the
future?
CL: A month ago, Sarepta
Therapeutics Inc. (SRPT:NASDAQ) was one of my losers, but it had a huge
breakout on May 19, after a meeting with the FDA that allowed the company to
file an NDA (new drug application). The company is now well funded, with $160
million ($160M) in cash. It has enough money to complete FDA approval for
eteplirsen (AVI-4658), which treats Duchenne muscular dystrophy (DMD) with an
RNA-based platform using the exon-skipping model. If the approval is
withheld, Sarepta will have to raise money for more trials, of course.
Frankly, the company has been struggling with the FDA's criticism of its
eteplirsen trial.
TLSR: What are the FDA's concerns?
CL: The problem is that DMD is a very rare disease and there are
not a lot of patients available for conducting trials. Sarepta's trial has
only 12 kids. Two kids dropped out in the beginning of the trial, which has
raised some procedural issues. But the other kids are doing extremely well on
the medication. Biopsies show that dystrophin is being produced in their
bodies, which is a very significant indicator of efficacy. That makes
Sarepta's medication better than that of its competitor, BioMarin
Pharmaceuticals Inc. (BMRN:NASDAQ). The FDA advisory panel will look
deeper into the trial later this year. I believe the outcome will likely be
favorable to Sarepta. In the meantime, this stock is one of the most heavily
shorted biotechs.
TLSR: Does Sarepta have other RNA-based products besides
eteplirsen?
CL: Sarepta is testing antivirals for Marburg virus and influenza.
Those tests are funded by the Department of Defense for bioterrorism
applications. But there are quite a few different types of DMD, and Sarepta
is mainly focused on developing its exon-skipping platform for that disease.
The hope is that if eteplirsen is approved, then a series of other
exon-skipping applications will be easier to approve. The technique could
take over the whole market.
TLSR: Has Sarepta been performing up to your expectations?
CL: Before the recent meeting with the FDA, I had my doubts on
whether the agency would allow eteplirsen to get to the next level. The good
news that the compound would advance to the advisory committee level came out
after the market had closed for the day; I was shocked with excitement. I
wrote a special edition for my newsletter after 5 p.m. so that my subscribers
could buy. Sarepta was trading at $21–22/share in the afterhours. Today, it
is a still good buy at $25/share.
TLSR: What has accounted for the volatility in Sarepta's share
price, which has fluctuated between $11/share and $55/share over the last 18
months?
CL: It was hugely volatile because the stock was heavily shorted.
The reason for the shorting was the FDA's previous doubts about the
effectiveness of eteplirsen. That broke a lot of people who were long on the
stock; although my position survived the downturn. And now there is a very
good chance of seeing positive advisory committee results by the end of 2015,
and an accelerated FDA approval in 2016. As the matter of fact, Sarepta
probably has better chance to succeed now than when it was trading at
$50/share. I predict a $100/share price within two years if the company gets
approval later this year or in early 2016. Sarepta has a strong balance
sheet, and even if, in a worse-case scenario, it needs to do another Phase 3
trial, eteplirsen could be approved in 2017.
TLSR: Is Sarepta going to be a target for an acquisition, or will
it develop the product on its own?
CL: Sarepta is developing the drug technology on its own, but a
competitor, Prosensa Holding N.V., was taken over by BioMarin. If the price
is high enough, Sarepta could be taken over before the approval of
eteplirsen, but my assessment is that after approval, the company will go to
the market. Of course, it could eventually be taken over at a premium because
big pharma recognizes the potential of eteplirsen.
TLSR: Who else is doing well on your scorecard?
CL: I was very fortunate to get involved in PlasmaTech
Biopharmaceuticals Inc. (PTBI:NASDAQ) earlier this year. At that time,
the stock was trading at around $3/share. I also bought the $5 warrant
trading around $1. The stock has appreciated significantly. I sold much of my
stock for a profit, but I kept my sizable warrant position.
If you look at PlasmaTech's share history, it went down in the past few
years from $40–50/share (split-adjusted) to $3/share. The old shareholders
were dramatically diluted. But the company made some very important decisions
last year. It acquired new plasma technology as well as a company called
Abeona Therapeutics Inc. for rare diseases. PlasmaTech now has a very
promising drug against mucopolysaccharidosis III types A and B (MPS III, or
Sanfilippo syndrome), which result from a rare and incurable genetic
deficiency. PlasmaTech has about $30M in cash. It just raised money at
$8/share. And because it does not need a lot of cash for a clinical trial,
PlasmaTech is well funded for the next couple of years.
TLSR: Is the drug intended to cure MPS IIIA and MPS IIIB, or to
alleviate symptoms?
CL: It is intended to completely cure MPS IIIA, as well as MPS
IIIB, with a single dose! PlasmaTech is meeting with the FDA this summer,
very soon. Then it will do a very simple trial.
TLSR: When you say it will be a simple trial, what does that mean?
CL: Right now, the model is extremely promising in mice. PlasmaTech
will enroll 6-12 patients for a human Phase 1/2 trial for both MPS IIIA and
MPS IIIB. Results will become available later this year. The cure only takes
one injection, which is basically a miracle. MPS III is a very deadly
disease, and the drug is so promising that all of the MPS III foundations are
strongly supporting the trial.
It is important to note that the plasma industry is a billion-dollar
industry and is still using a 70-year-old technology. PlasmaTech's patented
alpha-1 process can revolutionize the plasma industry. Its "fractionation"
process produces 10 times more yield than the existing technology.
So you can see PlasmaTech is not a "one-trick pony." Successes
in either rare diseases or plasma can set the share price on fire. I also
want to point out both MPS IIIA and MPS IIIB received the orphan drug and
rare pediatric disease designations. Recently a similar Rare Pediatric
Disease Priority Review Voucher was sold for $245M cash to Sanofi. Compare
that with the market cap of PlasmaTech, and you can see why I am still holding
my shares and warrants after the recent huge run-up.
TLSR: PlasmaTech has a large accumulated deficit. Does that worry
you?
CL: That deficit occurred because PlasmaTech was researching other
drugs. At the end of last year, the company did a huge reverse split and, as
I mentioned, most of the previous shareholders were wiped out. The company
was basically a shell—the accumulated deficit means that it will not need to
pay taxes for a long time. PlasmaTech is tiny, with a market cap at around
$200M. But it has two very large targets—the cure for MPS IIIA and MPS IIIB
and revolutionizing the $1.5 billion ($1.5B) plasma space. If only one of
these ventures is successful, PlasmaTech stock has huge upside. The stock
exploded in the past couple of months, and I did very well selling some of my
positions. At one point, the warrant appreciated sixfold, but I strongly
believe the stock has a lot of upside left.
TLSR: What other companies are hitting home runs for you?
CL: I got into Sorrento
Therapeutics Inc. (SRNE:NASDAQ) at $5/share and discussed it last year on your report when it was trading at around $4/share. It
is now trading at $13-14/share, but from a valuation point of view it has
better value than last year because the company made huge advances in its
programs.
The trial of Sorrento's next-generation cancer therapy, Cynviloq
(paclitaxel nanoparticle polymeric micelle), was a tremendous success.
Sorrento has entered an agreement with NantPharma LLC (private; owned by
billionaire Dr. Patrick Soon-Shiong), which will acquire rights to Cynviloq
for $90M upfront and $1.2B in future milestones and sales. There is little
risk that Cynviloq won't be approved by the FDA. It is widely used in
Asia—from Korea to India. It could be approved as a bioequivalent, or the FDA
could require more trials. But it has already finished phase 3 trials in
Asia. It will get approved one day; it's only a matter of time.
TLSR: Cynviloq's applications are for breast cancer, pancreatic
cancer, bladder cancer and ovarian cancer. How is it able to treat so many
different kinds of cancers?
CL: There was a big news story many years ago about Abraxane
(paclitaxel protein-bound), which was acquired by Celgene
Corp. (CELG:NASDAQ) for $3B. Cynviloq is a better version of Abraxane,
which is a blockbuster drug. Dr. Patrick Soon-Shiong, the same person who
sold Abraxane to Celgene, bought the rights to Cynviloq. Cynviloq has a
longer patent life than Abraxane. It is the third generation of Taxol
(paclitaxel), and it is very effective against cancer cells.
Sorrento's molecule is much smaller than Abraxane, which means it can be
administered at a higher dose for easier penetration. From my perspective,
the drug is worth $1.2B. Putting an appropriate discount cash flow model on
Sorrento shows that the company is worth a lot more than its current stock
price. The bottom line is that Sorrento has a $493M market cap. It has cash
of $150M, and a drug worth $1.2B.
TSLR: How is Sorrento different from its competitors?
CL: Sorrento is leading the research in the targeted killing of
cancer cells. To selectively kill cancer cells, scientists need to establish
a good antibody library, and Sorrento's library is one of the best in the
industry. Using the library, researchers are able to design and construct
CARs, and attach them to T cells or NK (neukoplast) cells for cancer
treatments. Attaching these CARs to T cells or NK cells helps these cells
home in on cancer cells, and thus makes them more effective at targeting and
killing cancer cells. While CAR T cells have shown very promising clinical
activity in blood or liquid cancers, I understand that Sorrento's CAR-TNKs
(chimeric antigen receptor tumor-attacking neukoplasts) may be better at
treating solid tumors, which are much more common.
A dozen billion-dollar companies, including Juno
Therapeutics (JUNO:NASDAQ) and Kite
Pharma (KITE:NASDAQ) are developing CAR-T cell therapies. There are only
two companies in CAR-TNK, Sorrento and a private company called Conkwest Inc.
Each one owns 50% because there are intellectual patent protections. Sorrento
is undervalued already, considering Cynviloq, but it has huge upside with
CAR-TNK. Plus, it can license its antibody library at a large profit.
TLSR: Are there any other companies you want to talk about today?
CL: I was very fortunate to buy Spectral
Medical Inc. (EDT:TSX; EDTXF:OTCQX) before the stock shot up recently. It
has a potential treatment for sepsis. There is no cure for this disease. This
is another drug with a low risk. It has already been approved in Japan and
Europe, and it has been used in over 100,000 cases with strong evidence of
benefit. Basically, the therapy reduces the chance of people dying by at
least 30%. Spectral needs to enroll enough patients in trials to show a
statistical difference from other treatments, and those results should be out
next year. I own a relatively small position in this stock, as I already
booked very nice profits. As the sepsis drug gets closer to approval, I will
revisit it, gladly.
TLSR: Any parting words, Chen?
CL: On any given day, any biotech stock can be cut in half. That
can happen due to an FDA response, or a decision, or bad data. My advice is
to try to take your profits when you can by trading around your position.
TLSR: That sounds like good advice. Thanks.
Chen Lin writes the popular stock newsletter What Is
Chen Buying? What Is Chen Selling?, published and distributed by Taylor
Hard Money Advisors, Inc. While a doctoral candidate in aeronautical
engineering at Princeton, Lin found his investment strategies were so
profitable that he put his Ph.D. on the back burner. He employs a
value-oriented approach and often demonstrates excellent market timing due to
his exceptional technical analysis.
DISCLOSURE:
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3) Chen Lin: I own, or my family owns, shares of the following companies
mentioned in this interview: Sarepta Therapeutics Inc., Sorrento Therapeutics
Inc., PlasmaTech Biopharmaceuticals Inc., and Spectral Medical Inc. I
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