Experts talk about biotech – Business Insider
Ishares Nasdaq Biotechnology Index (IBB) has been on a tear in the last year, outperforming the NASDAQ and S&P 500 by multiples greater than 3x and 6x, respectively. This rapid appreciation has spurted chatter of a bubble forming in the biotech sector. Even US leaders have expressed a difference of opinion. Yellen, for example, stated back in July 2014 that the biotech industry is seeing is substantially stretched valuations. Conversely, Obama, during his State of the Union Address in January, announced a $215M investment to accelerate biomedical discoveries, referenced to as “Precision Medicine Initiative”. On a performance basis, Yellen would be down over 60% on her call, whereas Obama would be up 24%.
Last Financier
Here’s what experts in the field had to say about the latest developments in healthcare.
The Experts:
Brad Loncar (@bradloncar), Biotech Investor
Loncar created the Loncar Cancer Immunotherapy Index (LCINDX) to track the combined performance of a basket of companies that develop immunotherapies to treat cancer.
Jake King (@Propthinker), Propthink
King is the Editor of Propthink, an independent biotech newsletter tailored for investors seeking event- driven analysis.
Michael King, JMP Securities
Michael King is a managing director and senior biotechnology analyst at JMP Securities, focusing on coverage of oncology names.
The Discussion:
What are your thoughts on the biotech index hitting all time highs and greatly outperforming other markets? Is such a move justified?
BL:
While not all stocks deserve to be participating, I think the overall rally in biotech is justified and not a bubble. A bubble is based off an illusion. The advancements in biotech are tangible. I’ll give two fundamental reasons:
1. Improvements in the science are arguably at an inflection point.
In cancer, for example, improvements historically have been incremental. A drug will extend someone’s life by a couple of months and then another drug will be approved which adds another month or so. Over a long time frame, this adds up to be significant, but over short term the improvements are incremental.
What’s going on now, with immunotherapies and other new technologies, is not incremental. Researchers are learnings how to target diseases using our own defense system and studies so far show good efficacy and safety profiles.
2. Global markets for drugs and medicine are growing
Demographics globally are supporting healthcare spending and higher standard of medical care. IMS Health released a research report suggesting that global spending on cancer drugs in 2014 was $100B. By 2018, this figure could go up to $147B! That is a significant tailwind.
JK:
The biotech outperformance is justified. Innovation in drug development has improved greatly in the last two decades. Look at target discovery, the understanding of disease state and genomics as a couple of examples.
At the same time, the FDA in the last year has been remarkably lenient when it comes to approving new drugs. The chances of successfully developing and getting a drug approved in this “easy” regulatory environment have gone up. Obviously, that’s good for drug developers and their investors.
With that said though, there are some individual equities, among the small-mid cap, that are richly or over- valued. Companies with limited or no clinical data will be the first to go in a risk-off environment. If we do see a meaningful pullback in biotech, most professionals I’ve spoken to are willing to buy that dip.
MK:
A bubble occurs when markets rise with no fundamental support. This is not the case with the biotech run which has been triggered by impressive fundamental scientific developments and a friendly regulatory environment.
Technology for drug discovery has gotten far better in the last several years. Recently released data is indicating that treatments are influencing progress like never before. Past trials, you may say, would take some disease, put it into the body and hope for the best. Now, companies are getting a lot more accurate at targeting the disease and eradicating it.
Biotechs are also seeing an evolution in the FDA’s attitude, creating a friendlier regulatory environment. If you look back, these have happened in cycles. 2002 was a terrible year for getting approval with the FDA coming down hard. Things then turned in 2003. Currently, we’re seeing the FDA be lenient with certain statuses like breakthrough therapy and expedited programs.
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What areas of biotech are you currently looking into?
BL:
My focus has been on cancer treatments, specifically immunotherapies. Chemotherapy, in most cases, affected the entire body. The immune system is dynamic and can be targeted to treat cancer. Researchers are just at the beginning of understanding how to utilize this defense mechanism and combine it with what we’ve already been using to treat cancer.
JK:
At PropThink, we’ve written quite a bit about gene therapies. The technology has come a long way since the early 2000’s and some emergent safety issues when it was swept back under the rug. It’s exciting technology, potentially creating the first cures for genetic disorders.
Bluebird Bio, just recently, presented updated data for their LentiGlobin program. In two hemoglobinopathies they’re producing some profound results that LOOK like cures.
We’re going to see results from similar blood disorder programs at other companies before long, which will inform how far the gene therapy field has really come. uniQure and Spark Therapeutics’ respective candidates in hemophilia should produce data within the next year.
MK:
My area of expertise lies primarily in oncology, dealing with targeted therapies and the antibody space. Like mentioned above, I believe this area has experienced impressive developments, even though some areas can be considered “bubbly”.
CAR-T names, such as Juno (JUNO) and Kite Pharma (KITE) for example, don’t allow much room for disappointment. However, big money is being thrown into this area with Celgene (CELG) announcing a $1B investment aimed at developing Juno’s technologies.
What would your advice be for biotech investors? Anything to look for or avoid in these markets?
BL:
Like any strategy, the key is to invest in biotech in a diversified way. That’s what the cancer immunotherapy index is meant to be and why were trying to make it an investable product. The index is comprised of 30 companies in the immunotherapy field, with both large and small names.
Some investors don’t look at biotech investments this way, which is why many lose big. The volatility of the industry entices some to put all their eggs in one basket, thinking one stock will strike gold. This is only perception and rarely works in the long run.
The area is very technical so those picking their own stocks must conduct necessary due diligence, including talking to doctors, experts and attending medical meetings. A lot of time must be spent researching whether a company is a worthwhile investment. Also, be careful about things that you read online.
JK:
Look for companies that have a strong balance sheet, a track record of MANAGING the balance sheet, an experienced executive team, and a clear path to value-creation. I can think of countless examples of companies with promising technology where the stock simply hasn’t performed in the long-run, often attributable to dilution and the slow demise of their capital structure. The long-term value creation that everyone hopes to find is wildly elusive in this sector.
One of the simplest red flags to look for is a dirty capital structure. Companies that have been around for ten years, with poor stock performance, issuing Series D and E warrants or preferred stock probably aren’t worth your time. I’m not talking about the large-caps, I’m talking about the small- and mid-sized companies.
There’s much to be said for buying best-in-class companies. New biotech investors often buy stock/company X because it’s a “cheaper” version of stock/company Y. That works sometimes, but there’s often a reason company Y is worth a few billion and company X languishes in the hundreds of millions.
MK:
With the run in biotech stocks, investors should collect some profits and lower the amount of risk they’re exposed to. This doesn’t mean that you should liquidate all your positions, but rather secure profits while still being prone to the remaining upside.
Do your homework. This includes being acquainted with management’s track record, source of the science and staying updated with the latest operational developments. One of the best ways to do this is by following people that know what they’re talking about and reading published papers. There’s a lot of noise out there, so eliminating clutter makes investing simpler.
Read the original article on Last Financier. To keep up with Deniel’s latest analysis, subscribe to his newsletter. Copyright 2015. Follow Last Financier on Twitter.
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Experts talk about biotech – Business Insider
