2013 was a banner year for the life sciences sector, with biotech, pharmaceutical and medtech companies buoyed by advances in therapeutic techniques, a friendly regulatory environment, lucrative partnerships and the overall market upswing. The 2013 Biotech Watchlist reflected this robustness, boasting a year-to-date return that blew past those posted by the major indices. Credit the basket of stocks picked by industry experts, weighted heavily with winners. Can our panel of experts pick another winning portfolio in 2014? Find out which companies they've chosen for the 2014 Watchlist in this exclusive from The Life Sciences Report.
What Is the Biotech Watchlist?
The Life Sciences Report's Biotech Watchlist is a portfolio of dynamic, innovative companies picked by industry experts based on a variety of factors, including sound science, good management, promising therapy areas and catalysts keyed to the drug development process. The companies are tracked over the course of a year: By checking the Portfolio Tracker, Watchlist watchers can follow stock price movements in real time, including changes associated with milestones in the regulatory process and clinical trial data releases.
The Watchlist selection process begins with Sagient Research Systems Inc., publisher of the BioMedTracker. Sagient crunches the data and comes up with a list of life sciences companies with catalysts on the calendar. Prospects on the Sagient list are sent to our panel of experts, each of whom picks a handful of stocks believed to possess the best chances for upward stock movement. This year's experts are Mara Goldstein of Cantor Fitzgerald, John McCamant of the Medical Technology Stock Letter, George Zavoico of H.C. Wainwright & Co. and Mike King of JMP Securities. The experts joined us at the 2014 Biotech Showcase, held earlier this week in San Francisco, where the 2014 Biotech Watchlist was unveiled in a special presentation on Jan. 13.
The 2013 Watchlist
Karen Roche, Streetwise Reports' president, noted that the 2013 Watchlist, with a return of 59% as of Jan. 8, 2014, exceeded the returns posted by the Dow Jones Industrial and Standard & Poor's 500 indices, which returned more than 25% on the year, and the NASDAQ, which returned about 38%.
"What's exciting is we've used the same process and the same panelists to generate the 2014 Watchlist," she told event attendees. The 2013 Watchlist included 17 companies, with five posting increases of 100% or more, and five up 50% or more. The biggest winners included Celldex Therapeutics ($CLDX) (+219%), Celgene Corp. ($CELG) (+81%), Pharmacyclics Inc. ($PCYC) (+91%),Sangamo BioSciences Inc. ($SGMO) (+100%), and Prana Biotechnology Ltd. (PBT) (+177%). Some of these performers make encore appearances on the 2014 Watchlist.
The moderator for this year's panel discussion of the Watchlist was Cantor Fitzgerald's Goldstein, who said that while 2013 was "a very strong year," investors should bear in mind that biotech is "a very risky sector. It's filled with binary events, so there is great upside but there can also be great downside." She also noted that 2013 was very strong for financings. "More than $20 billion ($20B) of equity came into the biotech sector via initial public offerings (IPOs), follow-ons and other equity transactions," she noted.
The headwinds that propelled stocks upward in 2013 fill the sails into 2014, Goldstein continued. "Even within the first few weeks of 2014, and even amid some pretty heavy profit-taking, we're still seeing performance ahead of the broader market." Another theme that will continue into the new year is that of catalyst-driven stock price movement. "We saw broad market valuation upgrades overall, but there were lots of different catalysts that played a big part in what was going on in the biotech sector. Many of us think that much of that will continue into 2014," Goldstein said.
The 2014 Watchlist
The top picks for H.C. Wainwright & Co.'s George Zavoico are OncoGenex Pharmaceuticals Inc. ($OGXI), CytoSorbents Corp. ($CTSO), Omeros Corp. ($OMER) and Cerus Corp. ($CERS)—choices he believes "highlight the diversity in the sector."
First up: OncoGenex, "an oncology play out of Salem, Wash. It has a phase 3 milestone coming midyear in an important prostate cancer trial called SYNERGY," Zavoico said.
Next is CytoSorbents, a smaller market cap company with a polymer bead technology that can be employed during dialysis to clear the blood of cytokines in patients who are septic and experiencing "cytokine storm." This device company is "emerging with a new technology that represents out-of-the-box thinking in terms of trying to clear blood. . .it adds an option for patients who are very septic and have very few options left," he explained.
"CytoSorbents is more of an organic growth play," Zavoico went on. "It has CE mark approval for its product, CytoSorb, in Europe. It is selling in Europe. It is building up its sales force in Europe. It is working to get CytoSorb approved in the U.S. If sales grow quarter to quarter, hopefully you'll see somewhat linear appreciation in value for this small company."
His next selection, Omeros, is flying "under the radar." The company's lead compound, Omidria, could be used in "millions of intraocular lens surgeries" each year to reduce inflammation and associated complications. The company's key milestone, due later in 2014, is potential U.S. Food and Drug Administration (FDA) approval of Omidria.
In addition, Omeros has a number of "interesting products in its pipeline, including an antibody that could challenge Alexion Pharmaceuticals Inc.'s ($ALXN) Soliris, tapping into a $1.5B market, and a phosphodiesterase 10 inhibitor for schizophrenia, which is a first-in-class therapy in that space. Then it has a discovery platform for G protein-coupled receptors. Omeros has unlocked 50 or 60 orphan receptors, for which it also has lead compounds," Zavoico said. Milestones for the company's earlier-stage compounds will play out through the year, he added.
Zavoico's last selection is Cerus, which has a blood pathogen inactivation technology and generates $40–43 million ($40–43M) in revenue in Europe. Its big 2014 milestone is approval for the platelet and plasma pathogen inactivation technology in the U.S.
"Approval should come sometime around Q3/14 and the product could launch sometime in Q4/14. That will be a big event for Cerus," the analyst said. "Cerus is an operating company that has cash flow. It should be profitable in a year or two, especially when the FDA approves its product and it begins selling."
While oncology has dominated the sector for several years, and "very interesting oncology plays" are ongoing, by selecting CytoSorbents, Cerus and Omeros, Zavoico wanted to spotlight the diversity in the sector. "It's not just an oncology play. It's not just a central nervous system play. There's a lot of variety," he observed.
Newsletter writer McCamant's picks start with Pharmacyclics, "a leading cancer company" that was on the 2013 Biotech Watchlist.
McCamant thinks Pharmacyclics' Imbruvica (ibrutinib), a once-a-day pill approved in 2013 for treatment of mantle cell lymphoma, is a drug that "patients could be taking for three, four or five years—or even longer. One of the keys is a pent-up demand in elderly patients who are too fragile to take any of the current oncology drugs. They will be taking a lot of Imbruvica. We expect prescriptions to ramp up very aggressively. In our view, that's the key for biotech sector performance, having new drugs and exceeding analysts' expectations." Imbruvica is also in phase 3 trials in chronic lymphocytic leukemia (CLL) and other blood cancers.
Imbruvica is "going to be an absolute cash cow," McCamant said. "We believe that the Imbruvica launch could be the largest cancer launch in history, and will be probably the primary driver of biotech performance in 2014 if other things fall into place. This sector does not go up without the NASDAQ and some of the broad markets performing, but as we've seen throughout the last year or two, almost every day the NASDAQ is up, the Amex Biotechnology Index ($BTK) and NASDAQ Biotechnology Index ($NBI) outperform."
Mike King of JMP Securities shares McCamant's enthusiasm for Pharmacyclics, echoing the idea that Imbruvica "is going to be the biggest drug in hematologic malignancy, bigger than Celgene's Revlimid (lenalidomide) potentially."
"I personally believe that Imbruvica going to be a transformative therapy, because now you have an oral agent that appears to suppress CLL for long periods of time," King said.
Anthera Pharmaceuticals Inc. ($ANTH), McCamant's next pick, " is a B-cell company [with] a couple of more orphan, or niche, indications. At present valuations, it's only sold a little below cash most of the year. Anthera is one of the companies that investors need to buy a basket of, to diversify. There could be some very large upside, but it's certainly not a company you would buy as a standalone investment."
Incyte Corp. ($INCY) has been one of McCamant's favorite companies. "I'd like to give a shout out to Incyte's [former] CEO, Paul Friedman, who took a very mediocre genomics company in Palo Alto and turned it into a small molecule powerhouse with an approved cancer drug (Jakafi/ruxolitinib) and, in our view, one of the best small molecule pipelines in the industry."
McCamant noted that, significantly, Jakafi has been shown to be efficacious in treating solid tumors, as well as myelofibrosis. "We think Jakafi is potentially going to be another blockbuster, instead of a niche oncology drug," he said.
"The other thing we're very excited about at Incyte are IDO (indoleamine 2, 3-dioxygenase) inhibitors," as well as "some other follow-on JAK1 and JAK2 (Janus kinase) inhibitors. The pipeline has gotten very strong. . .this is a company that is an oncology powerhouse."
McCamant's fourth pick is a vaccine company, Novavax Inc. ($NVAX).
What sets Novavax apart is a "major differentiation that a lot of us in the industry don't always fully appreciate," McCamant said. "Vaccines don't have to shrink tumors. They don't have to have monster responses. They need antibody levels. If you can show you get protection, potentially vaccines are a very lucrative business."
Novavax is addressing the seasonal flu, "a $3–4B business today," as well as respiratory syncytial virus (RSV), "the crown jewel," McCamant said. The RSV vaccine "can be a huge opportunity in pregnant women and also the elderly," and if combined with a flu vaccine the combo could "significantly outcompete some of the other players. . .this really is potentially a game-changing vaccine with minimal competition."
Novavax also has a huge contract from the government—the Biomedical Advanced Research and Development Authority (BARDA)—to develop seasonal and pandemic flu vaccines, the newsletter writer noted.
McCamant's enthusiasm for Novavax was seconded by Zavoico, who noted, "We like Novavax a lot as well as a 2014 pick. . . .One of the key differentiators is that as a vaccine company, it doesn't use eggs. It uses virus-like particles. It's a new type of technology." That technology, he and McCamant agreed, speeds up the development of vaccines.
Mike King of JMP Securities says his "large-cap/mega-cap favorite continues to be Celgene. . .It is a $75–80B market-cap company. We think that could be $150B in a three-year time frame." Revlimid, which King says is a "great" drug, is a Celgene frontrunner.
Goldstein picked Celgene for the 2013 Watchlist, and continues to like the company. Revlimid continues to grow, but the Cantor Fitzgerald analyst points to the company's early-stage pipeline, which "the market is not paying that much attention to."
Goldstein also likes the "revenue diversification story [that is] starting to play out in additional indications for drugs like Abraxane (paclitaxel protein-bound particles for injectable suspension) and new products like apremilast, which will get the company into the autoimmune space and will be approved this year." And Revlimid "continues to have new life" because data suggests that the drug should be more widely used.
"It's scary to think about how big the [Celgene] story could get," King said.
Sticking with oncology, BIND Therapeutics Inc. ($BIND) is also one of King's favorites. BIND uses "nanotechnology to deliver docetaxel in both prostate cancer and lung cancer. It's a little bit of a sleepy story right at the moment, but data from two randomized, phase 2 trials is expected later in 2014."
The small company, with a $200M market cap, is run by "a team that has built and sold companies in specialty drug delivery in the past," King explained. Both the CEO, Scott Minick, and the CFO, Andrew Hirsch, have been involved with companies that have been acquired by bigger fish. "The ultimate exit [may] be a trade sale, probably sometime in the 2015–2016 time frame," King said.
King said he'd nominate BIND as his favorite for acquisition, but when asked to reflect on the "appetite for acquisition" going forward, he equivocated. "The way I look at mergers and acquisitions is that they are just part of the ecosystem. They happen." He cited Alnylam Pharmaceuticals Inc. ($ALNY), which "just went into a whopper of a deal with Sanofi SA ($SNY)/Genzyme, with a $700M upfront payment for collaboration on the Alnylam pipeline in which Alnylam is going to have equal status in development, equal status in commercialization—at least in North America and Western Europe—and rest-of-world royalties that approximate a profit split. That's unbelievable, and was unthinkable even 10 years ago in our space."
Such partnerships are likely to continue, King asserted, citing a statement by Chris Viehbacher, the CEO of Sanofi. "He said something very insightful and wise, which is that you typically don't get what you want from an acquisition, at least in an enabling technology company, because most of the people leave. It's better for big pharma. . .to be collaborative, let the crazy-haired scientists do their best [work] and have a shared interest in the output. I think Celgene, again, has been a model of how to collaborate with kind of these best-in-breed science companies."
McCamant agreed with King, and explained what he called the "halo effect" of large pharma collaborations with smaller, innovative biotechs. "One of the keys is that with these partnerships, you're getting the validation." He cited Sangamo BioSciences' alliance with Biogen Idec Inc. ($BIIB) with respect to Sangamo's gene editing technology. This "strong and powerful technology" now has Biogen's stamp of approval on it, making it more attractive to investors. Other examples of the partnership magic were cited as well.
"Celgene has sprinkled its pixie dust on a lot of companies," King noted, "and that's the reason whyAcceleron Pharma Inc. ($XLRN), bluebird bio Inc. ($BLUE) and Agios Pharmaceuticals Inc. ($AGIO) have had such successful IPOs."
Goldstein's additions to the Watchlist were Celldex (on the 2013 Watchlist) and Verastem Inc. ($VSTM).
Celldex "has very, very good scientists, scientists with track records," Goldstein said. "A cloud overhanging the company based on one product largely began to erode away as the rest of the products in its portfolio began to take on greater visibility through pipeline advancement."
The company, she noted, went from a sub-$250M market cap in 2013 to $200B today—"a huge valuation increase. It brought in a whole group of new investors. The question I like to ask myself is: Is it just the fact that the stock has pulled back, or do I really think that there are more value creation opportunities?" In the case of Celldex, Goldstein believes there is more opportunity within the pipeline. The company will read out data on a drug for an ultraorphan indication, and "orphan drug indications, particularly [for] ultrarare diseases, do particularly well because there is a lot of pricing power in them."
In addition, "the bread and butter pipeline of the later-stage products to me looks very compelling. A potentially transformative drug in breast cancer began enrolling this year in a phase 3 trial. . .as well as a therapeutic vaccine for glioblastoma and a very interesting new compound in phase 2 that looks to potentially be combined with checkpoint inhibitors."
Verastem is a small-cap name working in the field of cancer stem cells, Goldstein explained.
"A lot of its technology comes from one of the leading minds in the field of oncology and cancer stem cells, a guy by the name of Dr. Robert Weinberg. . .He discovered not only the first oncogene but also the first tumor suppressor gene, so Verastem has a very, very good technology foundation," she said.
But what intrigues Goldstein is Verastem's clinical trial looking at a phase 2 product called afatinib in mesothelioma. "Verastem believes it has found a biomarker for the treatment of mesothelioma. It is going to take an interim look sometime toward the end of Q1/14, and that will tell the company if it can enrich its trial population based on this biomarker. I think that represents a real valuation inflection because if Verastem's thesis is right, we are looking at the concept of this drug, as well as this biomarker—and, broadly speaking, cancer stem cells—in a whole new light."
The panel concluded with discussion of biotech's 2014 prospects for capital raising. "Given the universe and your collective wisdom," Goldstein asked her fellow analysts where the most important drivers will come from: Industry, which was a big source in a capital-constrained environment? Could public markets be a source in the foreseeable future?
Industry is definitely going to drive M&A activity, McCamant replied. When companies are seen as good merger or acquisition prospects, "we'll see a nice pop in the stock and the shorts will be driven out." The environment is also very favorable for IPOs, which were plentiful in 2013. Partnerships and retail opportunities will also play into the mix. A "potential bugaboo" could be regulatory, "which always comes out of anywhere. It's been very important to have the FDA working with companies" on accelerated approvals.
Zavoico prefers to see companies "raise after they deliver good data and really show that they've created value."
"I will say, though, the FDA is as constructive as it's ever been," King observed. "I think that comes from companies improving the quality of their science." He doesn't believe the current biotech market is frothy "because froth implies that [the current market is] unsustainable and comes from speculation rather than solid fundamentals." Instead, King believes companies have "figured out how to launch drugs and beat expectations."
"Phase 3 trials don't fail so much anymore," he said. "Success rates have gone up because we, collectively as a scientific community, understand what's going on better. . .Good science, good regulatory."
In addition, Zavoico noted that drugs in phase 1 at a time when capital was scarce are now in phase 3, with companies having "scratched by," to raise the funds they needed to keep their products moving forward. King concurred, noting that lot of companies have been "tempered by near-death experiences and learned to survive. . . .They're smarter companies because of it."
Mara Goldstein joined Cantor Fitzgerald & Co. from Thomson Reuters, where she served as director of research for Reuters Insight. Goldstein was initially responsible for the firm's healthcare research practice, and later assumed responsibility for all research activities and sectors. Prior to that, Goldstein was an executive director and senior pharmaceutical analyst at CIBC World Markets. At Cantor, Goldstein covers the biotechnology sector. Goldstein also worked at Alex Brown & Sons and CS First Boston. She holds a bachelor's degree in economics from Purdue University.
Michael G. King Jr. is a managing director and senior biotechnology analyst at JMP Securities. King comes to JMP from Rodman & Renshaw LLC, where he was managing director and senior biotechnology analyst. He has more than 17 years of experience as a leading biotechnology equity research analyst, consistently ranking at the top of Institutional Investor magazine's annual sellside research survey, in addition to being named that publication's "Home Run Hitter" in 2000. King also served as senior vice president of corporate development and communication at ZIOPHARM Oncology (ZIOP:NASDAQ). Prior to joining ZIOPHARM, King was a managing director and senior biotechnology snalyst at Wedbush Securities. He holds a bachelor's degree in finance from Baruch College.
John McCamant is the editor of the Medical Technology Stock Letter, a leading investment newsletter. McCamant has spent 25 years on the frontlines of biotechnology investing. He has established an extensive network that includes contacts throughout the investment banking and venture capital communities. His expertise in biotechnology investments is a subject of media interest. He is frequently consulted and quoted by The Washington Post, Reuters, Bloomberg, CBS and Marketwatch.
Dr. George Zavoico joined H.C. Wainwright & Co. in January 2014 to focus on healthcare research. He has more than 10 years of experience as a life sciences equity analyst writing research on publicly traded equities. His principal focus is on biotechnology, biopharmaceutical, specialty pharmaceutical, and molecular diagnostics companies. He received The Financial Times Starmine Award two years in a row for being among the top-ranked earnings estimators in the biotechnology sector. Before joining HCW, Zavoico was managing director and senior equity analyst at MLV & Co., and helped establish the healthcare equity research platform there. Previously, Zavoico was an equity research analyst in the healthcare sector at Westport Capital Markets and Cantor Fitzgerald. Prior to working as an analyst, Zavoico established his own consulting company serving the biotech and pharmaceutical industries, providing competitive intelligence and marketing research, due diligence services and guidance in regulatory affairs. Zavoico began his career as a senior research scientist at Bristol-Myers Squibb Co., moving on to management positions at Alexion Pharmaceuticals Inc. and T Cell Sciences Inc. (now Celldex Therapeutics Inc.). Zavoico has a bachelor's degree in biology from St. Lawrence University and a Ph.D. in physiology from the University of Virginia. He held post-doctoral fellowships at the University of Connecticut School of Medicine and Harvard Medical School/Brigham & Women's Hospital. He has published more than 30 papers in peer-reviewed journals and has coauthored four book chapters.
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1) Tracy Salcedo-Chourre composed this story for The Life Sciences Report and provides services to The Life Sciences Report as an employee. She or her family own shares of the following companies mentioned in this interview: None.
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3) Mara Goldstein: 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: Celldex Therapeutics, Verastem Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. 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.
4) Mike King: 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 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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