8 Ways to Leverage the Small-Cap Biotech Bull Market

The Life Sciences Report |

SeeThruEquity's Ajay Tandon and Jay Albany are riding the biotech bull by harnessing the huge upside potential of micro-cap companies working in multiple subsectors, particularly in the rapidly advancing cancer immunotherapy sector. In this interview with The Life Sciences Report, Tandon and Albany toss the names of several companies into the arena for investors' consideration.

The Life Sciences Report: Given the current healthcare market, how does the future look for small-cap biotechs versus large-cap companies?

Ajay Tandon: There seems to be a pretty robust market for micro caps in the life sciences sector. We currently cover 168 companies, and about a third of our coverage universe is life sciences and biotech-focused. We're seeing a lot of activity in this sector.

TLSR: Do any particular subsectors stand out?

Jay Albany: There's been a lot of excitement around precision immunotherapy recently. It has the potential to harness the immune system in a targeted and personalized way. A lot of people believe this is the future of medicine, particularly in the area of cancer treatment.

Interest in precision immunotherapy increased following the January 2015 State of the Union speech, when the President mentioned precision medicine as an area of medical promise. When something like this is called out specifically in the State of the Union address, you know it's a big deal. After that, many companies indicated this area of oncology therapy was gaining momentum. It's definitely an area that offers lots of promise.

TLSR: Is there a company working in immunotherapy that you particularly like?

JA: Opexa Therapeutics Inc. (OPXA), one of the companies in our coverage universe, has developed a precision immunotherapy technology platform that has potential application in several indications, including multiple sclerosis (MS) and neuromyelitis optica (NMO). We think that 2016 could be a game-changing year for Opexa Therapeutics.

Opexa's lead candidate, Tcelna, is being developed as a potential treatment for secondary progressive multiple sclerosis (SP-MS). That indication has a $7 billion ($7B) market with limited competition. Tcelna has received fast-track designation from the FDA.

The compound is currently in a Phase 2b clinical trial, with results expected in the second half of 2016. This will be a key event for the company, and it's why I think 2016 could be a game-changing period. The results of that trial will trigger a decision by its partner, Merck-Serono, a biopharmaceutical business of Merck & Co. Inc. (MRK), regarding the exercise of its licensing option. If Merck-Serono does license the drug, those payments would fund a Phase 3 trial and could be very lucrative for Opexa Therapeutics.

TLSR: Is there anything particular about Tcelna that sets it apart from other drugs in the space?

JA: One thing that really stands out is the early-stage interest of a quality partner like Merck-Serono. For small-cap companies in particular, it is extremely helpful to have a company of the caliber and with the experience of Merck-Serono help fund development through early licensing milestone payments.

TLSR: Opexa also has a compound at the preclinical stage, OPX-212. How does that figure into your predictions for Opexa?

JA: Tcelna is probably the biggest event to come forward in the next 12 months, but OPX-212 presents a chance for the company to transform itself from a single compound company into a platform company. We're pretty excited about that development.

TLSR: The current buzz is focused on immunotherapy, as you say, but I'm also hearing about a resurgence in small molecule drugs. Can you talk about a company in this space?

AT: We've covered DelMar Pharmaceuticals Inc. (DMPI) for quite some time. It's a platform technology company that's hitting its milestones and putting out a lot of data.

JA: DelMar Pharmaceuticals is based in Canada and also has operations in Menlo Park, California. Its lead compound, VAL-083, is a novel small molecule therapeutic agent targeting glioblastoma multiforme (GBM). VAL-083 has orphan drug status in the U.S. and recently completed Phase 1/2 trials. The company plans to launch a Phase 2/3 trial in 2016.

The data DelMar presented at the American Society of Clinical Oncology (ASCO) conference was encouraging. Patients entering the trial had only about three months to live, but those receiving VAL-083 had a median survival of nine months with doses greater than 30 milligrams. The six-month overall survival rate was 41.4%. That's a statistically significant improvement. This drug has potential alone, or in combination with immunotherapy.

GBM is the most aggressive and common form of brain cancer, and affects 15,000 adults each year. Its five-year survival rate is just 3%. A lot of the current treatments aren't working. The current standard of care for GBM is Merck's Temodar (temozolomide) and Avastin (bevacizumab; Genentech/Roche), used in conjunction with radiation therapy. GBM is a significant unmet need, with a market potential of more than $1B in annual sales. It represents a large opportunity for DelMar Pharmaceuticals.

TLSR: Switching to regenerative medicine, do you have coverage on a company working in that sector?

JA: We initiated coverage of Cynata Therapeutics Ltd. (CYP:ASX) in August 2015. The company's lead medical technology platform has very exciting potential. Called Cymerus, it is a new, validated way to manufacture mesenchymal stem cells (MSCs).

This is particularly intriguing because, historically, the manufacture of MSCs has needed donor-derived cells. Reliance on that source triggered significant supply and cost issues that held back clinical progress. Cymerus, in contrast, develops MSCs from induced pluripotent stem cells (iPSCs) in a unique process that promises nearly infinite scale, robust cells, and development costs that are a fraction of those of donor-derived methods. It stands out because its iPSC development methods were invented by stem cell pioneer Dr. James Thompson and his colleague, Dr. Igor Slukvin, at the University of Wisconsin. Dr. Slukvin is one of Cynata's cofounders. The company is in Phase 1 trials with Cymerus.

There are two possible catalysts on the horizon for Cynata. First, the company will likely need a partner or additional financing to fully pursue its development objectives. It is engaging in partnership discussions now.

Second, in 2016 it plans to launch a Phase 1 trial in graft-versus-host disease (GvHD), an indication for which the therapeutic benefits of stem cells already have been validated. That trial, if successful, can confirm the effectiveness of the Cymerus stem cell production platform. We see an attractive risk-reward profile for Cynata Therapeutics.

TLSR: You cover two companies in the filtration space. Shall we discuss them?

JA: Aethlon Medical Inc. (AEMD) has accomplished a lot since we initiated coverage September 2014. The company's lead therapeutic, the Hemopurifier, is a first-in-class device that selectively and rapidly eliminates circulating viruses and tumor-secreted exosomes that promote cancer progression. The Hemopurifier was named one of the top 25 inventions of 2014 by Time magazine, and one of the 11 most remarkable advances in healthcare in 2014. That's a really impressive accomplishment.

We've seen a lot of acceleration for Aethlon Medical during the past year, since the Hemopurifier was used successfully to treat an Ebola patient in Germany. It reduced the viral load by 99% in less than seven hours, which piqued interest in the company. Since then, Aethlon has been investigating potential applications of its Hemopurifier to a broad spectrum of the world's deadliest viral pathogens, including dengue fever, Ebola and strains of avian influenza.

Aethlon uplisted to the NASDAQ in July 2015—a major accomplishment in the micro-cap space—and it completed a $6 million ($6M) financing. That financing will help the company conduct an FDA-approved feasibility study that tests the Hemopurifier against a broad spectrum of viral indications.

Aethlon is also exploring the use of the Hemopurifier in cancer care. The Hemopurifier promises to capture tumor-secreted exosomes, and Aethlon is exploring its use in combination with emerging immuno-oncology drugs for cancer treatment.

The other company, Nephros Inc. (NEPH), sells high-performance liquid purification ultrafilters for an online mid-dilution hemodiafiltration (HDF) system used by hemodialysis machines to treat patients with end-stage renal disease.

Nephros is a commercial-stage company, with several potential catalysts in the coming months. It recently invested in its sales team and is realizing nice growth in its core ultrafilter product line, which is FDA-approved. The company is selling into hospitals for evaluation as an aid for infection control, including infection control in hospital sinks, showers and ice machines. It has also expanded the penetration of its HDF systems in clinics. This is a growth opportunity for the company to increase incremental sales.

Nephros also just raised $1.5M in a financing with Wexford Capital LP, which gives the new CEO Daron Evans some capital to execute his plans.

TLSR: That's not much money for the biotech space.

JA: This is a commercial-stage company investing in sales and marketing, so $1.5M should be enough for Evans to begin to expand distribution and improve on sales. You're right, though, we would expect the company to seek to raise more capital in the future.

TLSR: Can you talk about another company you find interesting?

JA: Tonix Pharmaceuticals Holding Corp. (TNXP) is focused on developing first-in-class medicines for common central nervous system disorders. It has three advanced-stage clinical studies underway targeting fibromyalgia, post-traumatic stress disorder, and the most common type of headache, episodic tension-type headache. The fibromyalgia study is in Phase 3 and studies for the other two indications are in Phase 2. Data from the Phase 3 fibromyalgia data should be released in 2016. All three indications are potentially lucrative for the company.

Additionally, Tonix Pharmaceuticals is well funded. It had about $50M in cash on the balance sheet in Q2/15, and has raised another $20M during Q3/15. That gives the company the flexibility to focus on clinical development and helps to derisk development.

TLSR: What are your thoughts regarding the management team?

JA: Tonix Pharmaceuticals definitely appears to have a strong management team. We notice there's been a trend of insider buying recently, which is encouraging. It suggests management believes in the company.

TLSR: Are there any other companies you'd like to mention?

JA: Yes. Another company in our universe, Applied DNA Sciences Inc. (APDN), has done really well lately. It's a pure growth story. Applied DNA Sciences uses biotechnology as a forensic foundation for botanical DNA-based security and authentication solutions. The company's flagship product is SigNature DNA. It initially was sold into the textile industry supply chain, which constitutes about three-quarters of the company's business. Lately, Applied DNA Sciences has also had success with law enforcement, government and corporate clients focused on anti-counterfeiting technologies.

Applied DNA Sciences is in the enviable position of having $10M cash on the balance sheet. That gives it the flexibility to invest in growth, which is just what it's doing. The products clearly appear to be gaining traction in the market.

We also cover RestorGenex Corp. (RESX). This is a specialty pharmaceutical company initially focused on developing products for ophthalmology, oncology and dermatology with pipelines based on proprietary platforms.

The company has two proprietary compounds in development: RES-529 and RES-440. It also has a well-experienced management team and board of directors. We expect RES-529 to commercially launch in 2021, and RES-440 to launch in 2019. With the company's main product, RES-529, targeting both the wide-open age-related macular degeneration (AMD) market, as well as the oncology market, we find RestorGenex to be a worthwhile investment.

TLSR: As new immunologic therapies emerge, how important will partnering and the development of combination therapies be in predicting companies' success?

JA: Partnerships, especially for early-stage companies, are extremely important. Early-stage companies in the micro-and small-cap space usually are at the clinical, but not the commercial, stage of development.

To develop and commercialize a drug quickly, we look for organizations that can establish partnerships with the leading companies in their spaces. Those partnerships help move the needle by investing in development and by providing license arrangements that not only inject funds but also help vet the company for the investment community. Such partnerships allow small companies to leverage the considerable expertise of an established partner that has successfully developed drugs from concept to commercialization. The momentum created by partnering with big pharma or big biotech elevates micro-cap biotech from a level of pure speculation to something more substantial.

TLSR: What advice would you give small-cap biotech investors for 2016?

JA: There's much greater risk, as well as opportunity, in the small-cap sector than in more established companies. I think this will continue to be true in 2016. Identifying those opportunities, however, requires careful research. Many more company-specific, and even product-specific, factors affect performance at small- and micro-cap companies than in the larger-cap universe.

The outlook is really interesting for small-cap biotechs. There's a lot of opportunity to have greater returns here if investors conduct diligent research.

AT: I encourage investors to be very well informed and conduct due diligence. That advice is true for any sector.

Obviously, you want to look at companies in the capital markets that are doing the right things to get visibility. That includes speaking with investors regularly, executing on milestones, reporting on those milestones, and all the factors that make a biotech business successful.

We're very bullish on the life sciences and biotech sectors and are hosting our first-ever healthcare-focused conference in San Francisco on Jan. 11, 2016, at the start of the J.P. Morgan healthcare week. We're very excited to showcase not only companies that we cover, but also new companies looking for exposure from our equity research and to investors. Our next conference of 2015 will be held Nov. 12 at the Convene Grand Central in New York City. For more information on both conferences, and to register, please visit www.steconference.com.

TLSR: Thank you very much.

Ajay Tandon brings more than 15 years of experience in the financial service industry, and considerable experience advising, structuring transactions and raising capital for small-cap public and private enterprises to his role as chief executive officer and director of research at SeeThruEquity. Tandon cofounded Emissary Capital, a private investment firm focused on micro-cap investment banking. Previously, Tandon served as vice president of equity capital markets at Maxim Group LLC, a New York City-based, full-service investment banking firm. Prior to his role at Maxim, Tandon served as an executive for Dealogic plc, an analytics platform used by global and regional investment banks worldwide to help optimize performance and improve competitiveness. Tandon began his career in financial services as a management consultant with IBM Global Services, and earned his bachelor's degree from Cornell University.

Jay Albany, CFA, has more than a decade's experience conducting equity research and analysis in life sciences and other high tech industries. He is a senior analyst at SeeThruEquity LLC, after a stint as senior vice president of equity research. Previously, Albany served as senior vice president of capital markets at Emissary Capital LLC, after working as a research analyst at Skellig Capital LLC and as a security analyst at Calisto Capital Management Inc. He began his financial services career at kozmo.com as manager of business development. Albany is a member of the New York Society of Securities Analysts and is a CFA charterholder. He earned a bachelor of arts degree from Columbia University.

Source: Gail Dutton of The Life Sciences Report

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1) Gail Dutton conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report and The Life Sciences Report, and provides services to Streetwise Reports as an independent contractor. She owns, or her family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: Aethlon Medical Inc., Cynata Therapeutics Ltd., RestorGenex Corp. The companies mentioned in this interview were not involved in any aspect of the interview preparation or post-interview editing so the expert could speak independently about the sector. Streetwise Reports does not accept stock in exchange for its services.
3) Ajay Tandon: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
3) Jay Albany: I own, or my family owns, shares of the following companies mentioned in this interview: None. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I determined and had final say over which companies would be included in the interview based on my research, understanding of the sector and interview theme. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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Symbol Name Price Change % Volume
AEMD Aethlon Medical Inc. 4.79 0.15 3.24 24,062
APDN Applied DNA Sciences Inc 2.98 -0.00 -0.07 16,067
MRK Merck & Company Inc. (new) 61.20 -0.72 -1.16 7,391,734
OPXA Opexa Therapeutics Inc. 3.45 0.00 0.00 20,393
TNXP Tonix Pharmaceuticals Holding Corp. 0.67 -0.02 -2.24 511,024


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