The Life Sciences Report: Ross, you have a micro-cap theme
in your coverage. Nearly all the companies in your current coverage universe
have a market cap below $100 million ($100M), and some are under $50M. These
offer tremendous opportunity for growth. The risk in companies this small is
obviously magnified, and the downside can be a near complete loss. How do you
mitigate risk when you invest in these very small names? Could you narrow
down your criteria when evaluating opportunities?
Ross Silver: When we evaluate an investment opportunity, we
primarily focus on three subjects: management, product(s) and capital
structure.
The first thing we look at is the management team. We want to know what
success, if any, management has had historically within the applicable
industry.
Second is the product. How is it differentiated? Is it a me-too product?
Is it used in conjunction with an existing product? Is it similar to another
product? Could it be truly disruptive? Finding something that's highly
disruptive is what we're most focused on, because we believe that's where the
most upside could possibly be realized.
The third is evaluating the capital structure. How much cash and how much
debt does a company have on its balance sheet? How long will the existing
cash last? Who are the shareholders, and how long have they been
shareholders? How much capital has the company raised historically and what
has that cash spend resulted in?
We go into considerably more detail on each of the subjects I've outlined,
and I don't want to take up all of your time going through the specifics on
each subject. But I believe you get the idea conceptually.
TLSR: Can you elaborate on what you look for in management?
RS: Yes. If we're speaking of a biotech company, we want to see a
management team—and a scientific advisory board as well as a board of
directors—with some level of success. We prefer to invest in a management
team that has successfully navigated from concept to approval. We would like
to see people in management who understand the intricacies of the regulatory
process and know how to deal with the FDA from concept through approval.
TLSR: You also want to understand a company's balance sheet. Do you
mind if a company has debt?
RS: We don't mind if a company has debt. We actually prefer some
leverage. Ultimately, we like companies to be as levered as reasonably as
possible—that way they have all options open. To use a football analogy,
having debt is the equivalent of a five-wide, no-huddle offense. Companies
are aggressive and attacking their industry with all tools available to them.
If you have a considerable amount of leverage, it can also be dangerous, and
as such, we are hopeful management is prudent with any leverage utilized. You
can enhance your optionality considerably by utilizing debt properly.
TLSR: Would you rather see a company issue debt than issue more
shares and dilute existing shareholders?
RS: It depends on the situation. Equity or debt can be reasonable
means of funding the growth of the company if used wisely when needed or
justified and the terms are beneficial to existing shareholders.
TLSR: Ross, one of the major problems in the micro-cap realm is the
inability of institutions to own these names. Because of this, these
companies don't have a lot of diligence performed on them by the sharpest
minds on the Street, and most micro-cap investors are not molecular
biologists. Where and how does an investor find validation in these very
small names?
RS: Not to take anything away from my large- and mid-cap
colleagues, but you would be surprised to learn that some of the sharpest
minds on the Street are actually in small caps. They are the ones who are
willing to do the diligence all by themselves, without the assistance of any
sort of sellside or third-party research.
These investors get up to speed on a company, come up with an investment
thesis, and then take the risk at an early stage in a company's development.
As long as that thesis remains intact, those investors will stay with that
company, and if they are right, they may make transformative returns on their
investments. That's the way we approach the micro-cap world. We perform an
extensive amount of diligence on each company we invest in, focusing on
management, the product(s) and capital structure, as I mentioned earlier.
TLSR: Do you prefer names that don't have sellside research? Do you
think that gives you a leg up in an underfollowed and unknown stock?
RS: When we go into an opportunity, there could be a number of
sellside analysts on the company, and that company could still be incredibly
undervalued and underfollowed. That said, if there is no sellside coverage,
it makes our job a bit more difficult, because we then have to start from
scratch—review industry reports, speak with industry specialists and
participants, read through the 10-Ks, read through the 10-Qs and all the
footnotes that are included in those—to ensure that we know everything about
a particular company, conduct channel checks, etc. We also may meet with
management multiple times and speak with the board members if possible. There
is a lot more work to do if there isn't an analyst covering a company,
because that analyst can essentially give you the CliffsNotes, or a summary,
in advance to get you started.
It doesn't really matter to us if there is sellside research. I say that
because the model of sellside research today is very different than it was,
let's say, 20 years ago, when there was a call each morning with an analyst
on the squawk box, and both the institutional and retail desks, which were
significantly larger in number, would hear the analyst give bullet points on
the name. After that, everyone on the call was motivated to jump on the phone
to call a large number of clients to let them know that the firm had just
initiated on a new company, or that they had updated on an existing company.
That model doesn't exist so much today, and as a result, sellside research
does not always elicit the response it used to.
TLSR: Let's go ahead and talk about the companies.
RS: I'll give you an example of some of the traction we are seeing
in immunotherapies right now. At the end of April, Amgen
Inc. (AMGN:NASDAQ) had a nice success with its talimogene laherparepvec
(T-VEC) immunotherapy for metastatic melanoma, which received a 22:1 vote
from the advisory panel in favor of approval. This is exciting. It seems as
though we are moving into a new immunotherapy frontier, and we believe that OncoSec
Medical Inc. (ONCSD:OTCQB), which is slated to uplist to the NASDAQ
shortly, may be on the forefront of that revolution.
We updated coverage on OncoSec on May 6. Its technology proposes to be
able to make a therapeutic option more effective using a DNA vaccine encoding
interleukin-12 (IL-12; an immune activator), and electroporation (the
application of short electrical pulses to the skin at the injection site).
TLSR: Did you maintain your $1.20/share target price on OncoSec
when you updated your coverage—which, since the recent Financial Industry
Regulatory Authority (FINRA)-approved 1-for-20 reverse stock split, equates
to a $24/share target?
RS: Yes, we did. The company has stated it has sufficient capital
through 2017. It has $30.7M in cash as of its most recent quarter. OncoSec
has stated it will have a number of trials that will begin enrolling this
quarter—three specifically—and the company anticipates enrollment will be
completed for all three within 12 months. We look forward to data from those
trials as soon as they're available.
TLSR: OncoSec has a relationship with Inovio
Pharmaceuticals Inc. (INO:NASDAQ), and both companies use a similar
electroporation platform to enhance delivery of their DNA immunizations.
Inovio also uses IL-12 as an immune activator to simulate T-cell production.
Inovio is six or seven times larger in market valuation than OncoSec, which
makes for a compelling comparable. Can you take me through the difference
between these companies? Why Inovio is valued so much higher? Is OncoSec just
still an undiscovered name?
RS: I used to follow Inovio five or six years ago; the company has
changed dramatically since. I understand Inovio is using active DNA vaccines.
Inovio and OncoSec are both seemingly following a similar theme, and the
growing acceptance and excitement around immunotherapies in general may help
them both. Inovio has had a number of successes clinically and marquee
collaborations that have led to its market cap being what it is today. Thus,
it has a market cap of about $590M today, versus OncoSec's $57M.
As an aside, OncoSec announced this week that it has entered a sponsored
research agreement (SRA) with Massachusetts General Hospital, an affiliate of
Harvard Medical School. The release states: "Under the agreement,
researchers will evaluate the immunologic mechanisms underlying the
anti-tumor effects of OncoSec's clinical stage platform, ImmunoPulse IL-12,
in a human papillomavirus (HPV) tumor mouse model. HPV-associated tumors
include oropharyngeal and certain genitourinary cancers (e.g., cervical cancer)."
TLSR: The catalysts going forward for OncoSec are enrollment of the
three trials, correct?
RS: We believe potential catalysts are the initiation of enrollment
in three Phase 2 trials. We also view the company's planned uplisting to
NASDAQ as a potential catalyst, given that the number of investors that may
participate in, or consider investing in, OncoSec could be significantly
greater on the NASDAQ versus the OTC.
TLSR: Will we get data on any of the trials this year?
RS: The company has stated it may release data later this year.
TLSR: Go to the next name, please.
RS: Soligenix Inc. (SNGX:OTCQB) is an exciting company led by
CEO Chris Schaber, who has been with Soligenix now for nine years. It has two
parts to its development program. The first is a vaccine program that is
currently funded by the U.S. government. The company has received close to
$60M in grants for these vaccines, and has been able to push the vaccines
forward in its pipeline.
The second part of the company's pipeline contains a number of late-stage
clinical candidates, one of which is SGX203 (oral beclomethasone
17,21-dipropionate or BDP), in the treatment of pediatric Crohn's disease.
SGX203 has previously been granted both orphan drug and fast-track
designations by the FDA for the treatment of Crohn's disease in the pediatric
population. The company also plans to initiate a Phase 3 trial addressing
cutaneous T-cell lymphoma. SGX301 (synthetic hypericin), a potent
photosensitizer activated by fluorescent light, has both orphan drug and
fast-track status with the FDA.
The company has a Phase 2 program studying SGX942 (a 5-amino acid peptide)
for oral mucositis in patients with head-and-neck cancers. This study is one
that many people are focusing on because there is no known cure or adequate
therapy for oral mucositis. SGX942 is now in a dose-escalation study, wherein
the company is trying to identify the appropriate dose levels to use in a
Phase 3 study. Three dose levels are currently being given to patients in the
study. The data safety monitoring board has recently told Soligenix that it
wants to see 10 additional patients dosed with SGX942 at a specific dose, and
also 10 patients receiving placebo. That was very encouraging news, because
it seems as though the company has achieved some form of response at a
specific dose level—but this is purely speculation on my part. The company
has stated the Phase 2 data could be published in early Q4/15. If a specific dosing
level shows efficacy, this could be a very exciting compound. There are
seemingly a considerable number of large companies looking at oral mucositis
as an area in which they would like to have some sort of treatment option.
TLSR: Do you expect Soligenix to try to partner SGX942?
RS: This is seemingly a partnerable product. If you look at the
mucositis-affected population, it's approximately 500,000 people in the U.S.
per year. It occurs in 40% of patients receiving chemotherapy, and it almost
always occurs in patients with head-and-neck cancers treated with radiation
therapy.
TLSR: Ross, this sounds like a lot of activity for a company with a
$40M market cap, doesn't it?
RS: Yes, it is rare to find a micro cap with such a diverse and
broad clinical pipeline. That's one reason this story is so compelling to us.
Another reason is that, just in general terms, if you look at the level of
success that the management team, scientific advisory board and board of
directors has had, it is one of the most established that you will find in a
company of this size. It is also rare to find a company of this size that has
been able to garner as much government funding as Soligenix has.
TLSR: Earlier you said a company's capital structure was an important
factor for you. Soligenix has an interesting investor base, doesn't it?
RS: We think it is interesting to point out that the largest
shareholder of Intrexon Corp. (XON:NYSE), which has nearly a $4.5B
market cap, is Third Security LLC, which owns more than 60% of Intrexon. Upon
visiting the Third
Security LLC website, you will find that Randal J. Kirk is the CEO of the
fund, and Mr. Kirk is also the CEO of Intrexon. Note that R.J. Kirk's
investment in Intrexon, which engineers living cells into drug factories, has
been a significant winner for his portfolio. Kirk took Intrexon public in
2013, and it moved up sharply, to the tune of +50%, in its first day of
trading. Kirk's stake alone is worth more than $1B. Kirk previously sold his
drug company, Clinical Data Inc., to Forest
Laboratories Inc. (FRX:NYSE) for $1.2B in 2011, and he sold New River
Pharmaceuticals Inc. to Shire
Plc (SHPGY:NASDAQ; SHP:LSE) for $2.6B in 2007. He is currently ranked
#183 on the Forbes 400 List. Mr. Kirk's beneficial ownership position is
approximately 26% of Soligenix.
Another Soligenix investor is Sigma-Tau Pharmaceuticals Inc. (private),
which focuses specifically on orphan drugs. These two investors account for
close to 40% ownership of Soligenix. This kind of high-quality ownership is a
form of validation. One of the things that may help build valuation in the
small-cap world is validation.
TLSR: Ross, it has been a pleasure.
Ross Silver has been advising, researching and investing
in public companies across all industries throughout his career with a
significant emphasis on biotechnology, technology and natural resources.
Prior to founding Vista Partners LLC in 2005, Silver served as a research
analyst for a San Francisco-based hedge fund that invested across all
industries. From 2000 to 2003, Silver served as a research associate covering
consumer discretionary and consumer staple companies at Dresdner RCM (now
Allianz). Prior to joining Dresdner RCM, Silver was a member of CIBC's
Technology, Media, and Telecom Investment Banking group, where he assisted
with equity and debt offerings. Silver holds a bachelor's degree in business
economics from the University of California, Santa Barbara. He has served as
a consultant for government agencies including the National Institutes of
Health (NIH). He holds a Series 65 Securities license.
