Recent advances in biotechnology, from data-driven diagnostics to game-changing gene therapies, suggest we’re on the cusp of a golden age in which many feared diseases will become treatable, or even cured. Yet for all the optimism in the lab, pessimism reigns on Wall Street, where investors lately have been yanking money from health-care and biotech stocks and funds. Given a 25% slide in the Nasdaq Biotechnology Index (.NBI) from its mid-2015 peak, the disconnect between a looming scientific revolution and investors’ disillusion has grown too big to ignore.
The five members of Barron’s first biotech roundtable zeroed in on this paradox when they met with us recently in New York, and they didn’t stop there. Biology, treatment modalities, regulatory matters, companies, and stocks—all came under the microscope of this discerning group of analysts and investors, who shared what excites them about the coming disruptions in health care—and how to invest in and profit from them, too.
The members of our biotech panel include: Gbola Amusa, director of research and head of health-care research at Chardan Capital Markets, a boutique investment bank focused on health-care innovation; Ziad Bakri, manager of the $12.5 billion T. Rowe Price Health Sciences fund (PRHSX), rated five stars by Morningstar; Eli Casdin, founder and chief investment officer of Casdin Capital, a New York-based investment firm focusing on life sciences and health care; David Schenkein, general partner at GV, the venture-capital arm of Alphabet (GOOGL), and co-head of the GV life-science investment team; and Gena Wang, director of biotech equity research at Barclays and a research analyst covering U.S. small- and mid-cap biotech stocks.
Amusa, Bakri, and Schenkein all are physicians; Wang has a doctorate in molecular and cell biology, and Casdin is a longtime investor in the sector.
In biotechnology, and biotech investing, hope and hype intertwine like the strands of a double helix. Our roundtable panelists tease them apart in the edited conversation below.
Q: Why have many investors soured on biotech, and what might rekindle their enthusiasm?
A: Ziad Bakri: If you looked back to the period from 2011 to 2016, when biotech stocks were in favor, you would see a number of tailwinds to the sector. There were high-profile scientific breakthroughs and high-profile, highly successful drug launches—for hepatitis C and multiple sclerosis, for example. There were also some high-profile acquisitions in the industry. At the same time, the regulatory pendulum was swinging; the Food and Drug Administration was getting more lenient and approving more drugs faster, and the payer environment was becoming more favorable. At the beginning of that period, biotech stocks had low valuations, and there had been years with a dearth of new stock issuances.
Fast-forward to today, and many of the big tailwinds have moderated. There have been some high-profile scientific failures—in the Alzheimer’s arena, for example. The payer environment is more stringent, and the regulatory environment, while still reasonably lenient, is getting a little tougher. There have been hundreds of new biotech initial public offerings, and the stocks no longer have a pricing tailwind. But I don’t want to paint too bleak a picture; things aren’t that bad. There’s still a good environment for new stock issuance. It is a tougher environment for larger companies trying to replicate their past success.
David Schenkein: Two things haven’t changed. The scientific knowledge and breakthroughs that we’re seeing across therapeutic areas, in both treatment modalities and our understanding of the biology of disease, continue to break open at a pretty incredible pace. Also, the regulatory environment is still much more favorable than it was a decade ago.
Eli Casdin: There are lots of reasons to be excited, beginning with the dramatic innovation taking place, a supportive FDA, and a new generation of entrepreneurs, operators, and managers born of some of the most successful companies in the space, such as Genentech, Biogen (BIIB), Amgen (AMGN), and Gilead Sciences (GILD). The people behind the endeavor are the biggest predictor of success. Science and technology are only a part of the equation, and great people can do a lot with mediocre assets, just as poor managers can destroy the value of even the best science and technology.
That said, biotech remains a market of speculators and event-driven strategies. Most biotech investors continue to focus on the next data-driven catalyst, obscuring the longer-term growth potential of a company. Until the sector evolves into being viewed with a growth-like equity mentality, as we see in tech, the volatility in biotech stocks will continue. For example, today one stock has fallen about 70% in pre-market trading, and another is down 30%. This volatility makes it hard for most investors to maintain broad conviction, which limits the sector’s ability to sustain momentum.
Gena Wang: I cover small- and mid-cap biotechs. The stocks are usually high-risk/high reward, and dramatic moves are considered normal. The generalists are often intimidated by this. But we have seen how scientific breakthroughs translate to successful drug development, from monoclonal antibodies in the 1990s to immunotherapies today. I anticipate the next new drug-class frontier will be gene and cell therapies. Two gene therapies have already been approved in the U.S. Of course, investors then want to see how the new class of drugs will sell. A lot of potential investors are sitting on the sidelines.
Gbola Amusa: We’re going into an election year, and that creates additional uncertainty—and more volatility. In past election cycles, biotech stocks suffered at times on worries about coming legislation, such as the Medicare Prescription Drug Benefit or the Affordable Care Act. But therapeutic-company fundamentals didn’t change as much as some feared after enactment of these and other policies. Biotech investors should remember that the worst-case scenario for U.S. health-care policy is adopting something that looks more European. Europe historically has devoted a higher percentage of its health-care spend to drugs, because drugs save costs elsewhere in the system. In theory, even a European-style outcome might increase the relative emphasis on drugs, with low-value drugs seeing heavy price pressure and high-value ones being more resilient.
My advice is to focus on disruptive innovation and drugs that save costs. For drugs like Zolgensma [a gene therapy for treatment of spinal muscular atrophy in pediatric patients] there is no good substitute. Yes, drugs like Zolgensma can cost up to $2 million, but if a company is an innovator and there is no good substitute for its product, the company is effectively a monopolist with pricing power, even when drug pricing is a concern. I’m not saying biotech stocks won’t fall on political uncertainty. It’s more that if they do, it is often a good opportunity to load up on the most disruptive companies. Similarly, avoid companies whose business model is to grow by borrowing money to buy non-innovative drugs and then boost prices. Examples of products that can save the system costs are a new class of therapeutics called prescription digital therapeutics. These are FDA-approved prescription programs to treat medical conditions. Think of it this way: Many chronic-use drugs have a 35% to 50% one-year compliance rate. Prescription digital therapeutics can improve compliance and thus save future health-care costs.
Q: How can nonspecialists identify the industry’s disruptive innovators?
A: Bakri: It is difficult to differentiate among early-stage opportunities. We look for therapies that have achieved some level of proof of concept, whether in terms of survival benefit or other clinical benefit. If they are without competitors, that is the holy grail. Recently, there has been so much innovation that multiple companies are coming to market to treat the same conditions. When that happens, you see price competition. The migraine space is a good example.
You’ll pay more for proof of concept, but the risk is diminished. If a company has a good management team and a platform that suggests the science that produced its first product can produce more than one drug, that’s even better. But they don’t have to do it again. AveXis had one successful product [Zolgensma] and got acquired by Novartis (NVS).
Schenkein: I am super-optimistic about novel therapies, particularly cell and gene therapies. But one challenge is to figure out manufacturing and access. It is one thing to be able to deliver these therapies in an academic medical center in New York or Baltimore or Boston, but in smaller centers around the world, the technology still requires a fair amount of heavy lifting.
Casdin: There are investment opportunities around that statement. We’re an investor in BioLife Solutions (BLFS), which offers a diverse set of gene- and cell-therapy tools, including products for freezing, thawing, and delivering cells and tissues. There are a lot of lower-volatility investment opportunities in the biotech ecosystem. Investors typically think about therapeutics, but there are a lot of companies and technologies that support the therapeutics.
Q: Which new therapies excite you most?
A: Schenkein: I’m a hematologist and medical oncologist. There has been an incredible change in the past two decades in our ability to understand the biology driving individual diseases. Instead of lumping patients into a large group based on where in the body a tumor shows up, we are now better able to understand that lung cancer, for instance, is probably 50 different diseases, and design more precise therapies for individual patients. This involves capturing more data, and analyzing the data in a different way.
Also, new and exciting modalities are arising in oncology, including the ability to edit cells in the body, and alter T cells outside the body and reinfuse them. We have seen a big push in the development of drugs for rare diseases. The patient populations are very small, so you need fewer patients for trials. Things can move quicker. But this is leaving out some of the biggest killers, such as heart disease and diabetes. We need to see the science move there.
Q: Why has the focus been largely on rare diseases?
A: Schenkein: Probably the riskiest part of creating a new medicine is understanding the biology of the targeted disease. In a rare genetic disease, you know what the biology is. If you can figure out how to fix what’s broken in the single gene or amino acid driving this disease, your probability of technical success is high. Ziad mentioned the AveXis drug, which got approved based on a trial of 15 patients. In a case like this, where you need a much smaller number of patients to prove that your drug works, the regulatory timeline and your spend are compressed.
Casdin: Knowing the biology of these diseases reduces the chance of developing a drug that has little chance of working. On the regulatory side, the FDA is designed as a risk-mitigation and risk-management organization. From a risk perspective, any approved orphan drug by definition will be used in a small number of patients, limiting the danger of unforeseen toxicity in a large patient population. Similarly, the potential for dramatic positive impact is huge, as the alternative to a successful treatment for these patients is often death or a life of high morbidity. The agency often views the risk/benefit proposition of a rare-disease drug program as far more favorable, and is more willing to give it accelerated approval over a drug developed for a common and complex disorder like heart disease.
Wang: In heart disease and other big diseases, you need to run multiple drug trials with at least several thousand patients. With rare-disease treatments—a rare disease is considered one with 200,000 or fewer patients—you can run a single trial with as few as 15 or 20 patients and no control group. The drug-development path can shrink from five to 10 years to maybe two or three, and the cost is dramatically lower. Then, approved drugs have pricing power, and insurance coverage is usually good.
Bakri: Here is a good example. When David was CEO of Agios Pharmaceuticals (AGIO), which focuses on rare cancers and other rare diseases, he sought to raise money from many investors, including T. Rowe Price Group (TROW). The selling point for me was that he said the biology is defined, the company would know early on whether its drug worked, and it could sell the drug itself. Unlike many typical Big Pharma companies, such as Pfizer (PFE), a company with a rare-disease therapy doesn’t have to hire a huge sales force. I like the idea of investing in a small company like that, which can redeploy its capital to go after other diseases using a similar playbook.
Q: So, you gave him money?
A: Casdin: We all gave him money. He built a great company and made investors money along the way. That’s a really good investment formula.
Q: What does the focus on rare diseases mean for the treatment of common diseases?
A: Schenkein: Some companies are going after the big diseases that cause so much morbidity and mortality, but the biology is really hard. One of the most important breakthroughs we need as a society is to understand neurodegenerative diseases, such as Alzheimer’s.
Wang: When I was in graduate school more than 15 years ago, we were already talking about beta amyloid plaques and tau protein tangles in Alzheimer’s patients. Since then, to David’s point, there has been little scientific advancement.
Casdin: There has been a lot of investment in cancer research for a long time. It is time to direct capital to teasing out the genetic drivers of disease in other areas. Better data aggregation and analysis is a critical component of this. There is a huge and largely untapped opportunity to invest in data extraction, whether through electronic medical records, or EMRs, or genomic data from large sequencing programs and clinical genetic testing. Companies like Verana Health, which counts GV as an investor, are starting to license, organize, and analyze patient and disease data across multiple disease categories. One area in which Verana is making a big push is neurology, where organizing and examining data might enable us to break dementia into many different disease categories, as we have done with cancer. This opens the door to more precision-based drug-development strategies, which have a substantially higher likelihood of success.
Amusa:If we can break larger diseases into smaller ones—for example, by genetically defining them—we can start to develop precision therapies. A disease like inflammatory bowel disease, or IBD, is probably going to be considered something like 20 or 30 different diseases in 10 or 20 years. If you pick the right therapy for each of them, you will see better outcomes. In Parkinson’s disease, Prevail Therapeutics (PRVL) is testing a gene therapy targeting a particular genetically defined population. I don’t cover the company, but to me that’s a good starting point.
Casdin: The promise of gene therapy to cure rare genetic disease is now a reality, and yet for most patients it takes a multiyear diagnostic odyssey that costs tens of thousands of dollars before they know what’s wrong with them. We’re investors in Invitae (NVTA), a company that provides clinical sequencing for inherited genetic diseases. Invitae solves the diagnostics problem with a DNA sequencing-based test costing an average of $471 that takes less than two weeks to come back with an answer as to the genetic mutation responsible. It isn’t hard to imagine that in 10 years, most children, particularly those displaying signs of a rare disorder, will be sequenced at birth. The potential of this practice to change clinical care is huge.
Schenkein: Take it a step further. Imagine the day when you visit your primary-care doctor, who tells you your blood pressure, cholesterol level, and germline genome. Based on that information, you can discuss the diseases you’re at risk for and therapies that can intervene. This isn’t so far away—maybe 10 years-plus—given how cheap sequencing has become, and how much better we’re getting at understanding the data.
Casdin: Although a huge investment is happening in data management, most medical records remain isolated within your individual provider. If you see a primary-care physician and three specialists in New York, they’re all using different record-keeping systems, and the data are trapped within each. We have to get much better at aggregating large data sets and using machine-learning tools to understand them. That is coming—and it’s coming fast.
Q: Let’s move on to the companies that look most promising to all of you. Gena, care to start?
A: Wang: Adverum Biotechnologies (ADVM) is one of the stocks that sank this morning, after the company disclosed disappointing results in a Phase 1 study of its gene therapy for wet age-related macular degeneration. Patients didn’t see an improvement in visual acuity. We don’t cover the stock, but we follow it closely. Our pick is Regenxbio (RGNX), which has a competing gene therapy that appears to reduce the need for intraocular injections of a monoclonal antibody, the standard treatment for this incurable condition. Before this morning, I was a bit worried about competitors’ data.
Regenxbio holds the intellectual property rights for many AAV vectors [adeno-associated viral vectors used to deliver genes and gene-editing tools to the patient’s body], including the vector licensed by AveXis to develop Zolgensma. The value of this provides a floor value for the stock. Regenxbio hasn’t benefited much yet from the Zolgensma launch, but we expect that it will. In the fall, we will have more data on Regenxbio’s wet AMD gene therapy, which could provide upside to the stock. Our price target is $88. Regenxbio is trading for around $40 a share.
Sarepta Therapeutics (SRPT) is another gene-therapy company we like. The stock is out of favor, having fallen on negative news. Sarepta focuses on treatments for Duchenne muscular dystrophy. The patient population is meaningful, at 13,000 to 18,000 in the U.S. There is only one treatment now, which isn’t very good. Sarepta has shown initial proof of concept for its microdystrophin gene therapy with four patients. Pfizer has a competing program, and its initial data have independently validated that approach. Near term, Sarepta doesn’t have too many catalysts, but we see upside longer-term before the company releases important data in the second half of 2020.
Q: Hemophilia has been a battleground for biotech companies. Which companies do you expect to prevail with successful gene therapies?
A: Wang: BioMarin Pharmaceutical (BMRN), Spark Therapeutics (ONCE), and Sangamo Therapeutics (SGMO) are all developing one-time gene-therapy treatments for hemophilia A. This is a big disease, too, with a moderate and severe patient population of about 12,000 in the U.S. alone. We aren’t impressed by BioMarin’s data so far. There is a lot of variability, and its drug’s durability isn’t very good. Spark has a better clinical profile. Sangamo’s data also looks good, but I would like to see more about durability, which we will get at ASH this year. [The annual American Society of Hematology conference will be held in December.] We favor Spark and Sangamo’s hemophilia A programs over BioMarin’s. Spark also has reported good data on its hemophilia B treatment, as has uniQure (QURE). Based on clinical profiles, they are close competitors.
Q: Many people have focused on the $2 million price tag on Zolgensma. Less attention has been paid to the treatment’s effectiveness. Is it curing patients?
A: Wang: We have looked at all treatments for spinal muscular atrophy, including Biogen’s Spinraza, approved in 2016, and Roche’s risdiplam, partnered with PTC Therapeutics (PTCT), comparing them side-by-side across different patient populations. We still think Zolgensma shows the best clinical benefit.
Q: Thanks, Gena. Eli, which companies intrigue you?
Casdin: We have invested in the shares of BioLife Solutions, mentioned earlier, and gave the company needed capital to aggregate smaller businesses, building a one-stop bio-production resource for gene- and cell-therapy companies. Buying service providers to gene- and cell-therapy companies like BioLife is a great way to benefit from the industry’s growth without encountering the volatility of binary therapeutic solutions. Every cell-therapy company we talk with is looking for a strong provider of solutions.
BioLife has a market cap of about $415 million. Through consolidation and execution, BioLife should build a high-margin, high-revenue growth company, with a diverse product portfolio. Over the next few years, the company will have a substantially bigger business and, as a result, a much higher stock price.
One of the biggest barriers to the success of cell therapy is the conditioning regimes that patients must undergo. In the case of some treatments, a patient’s entire immune system must be ablated prior to treatment to allow the new, genetically modified cells to engraft. David can speak to this as a physician. We are invested, along with GV, in Magenta Therapeutics (MGTA), another small company developing targeted conditioning regimes for cell therapy and transplant patients, to make the procedures less toxic and more accessible. If Magenta is successful, it will build a company with multiple high-value, high-margin products.
Q: Does Magenta have any revenue yet?
A: Casdin: Like most early-stage drug-development companies, it is pre-revenue, with little to show but expenses and cash on the balance sheet. It isn’t well appreciated by investors and today has an enterprise value of just under $400 million. If encouraging signs of success in its pipeline emerge, which could occur in the next year and a half, the stock would be significantly higher.
As demand for precision medicine and gene and cell therapies grows, so will demand for tests that diagnose these patients. Three or four years ago, there weren’t many companies in the molecular diagnostics space providing these types of tests. Today, there is a whole ecosystem of companies. Most are in cancer, some are in transplants, and only a few are in the broader inherited-genetic-disease testing space. Price-to-revenue multiples are high. Growth investors are buying into the expectation of accelerating revenue growth and the broad value and applicability of the genomic data these companies are capturing. Invitae, which I mentioned earlier, is a stock we own in this area.
Q: Why Invitae?
A: Casdin: Invitae is a $1.9 billion-market-cap company. The stock trades for about $21. The company had $148 million of revenue last year. Invitae has sold hundreds of thousands of genetic tests since inception, and volumes are exploding. While they aren’t making money on the bottom line, it is only a matter of time before they start generating substantial cash flow to reinvest in the business. As the volumes grow, the value of the genomic data they capture will grow, too. It is a virtuous cycle that promises to create a next-generation molecular information company, which few investors appreciate today.
Any recommendations come with the caveat that the stocks we invest in are extremely volatile and can often go down before they go up. Some never get off the mat, making sizing your position critically important. My therapeutic pick is MyoKardia (MYOK), which is developing targeted small-molecule therapies for congestive heart failure and hypertrophic cardiomyopathy [thickening of the heart muscle]. Heart disease is a big disease, but they’re thinking about it as a rare disease, isolating the patient population with a particular genetic makeup and providing solutions to address that piece. The market cap is about $2.5 billion. MyoKardia doesn’t have any profits, but the data look really compelling. If future data hold, the stock has a long way to go.
Q: What metric do you use to value these companies in the absence of revenue and profit?
A: Casdin: First we ask, what would a perfect future look like? What is the possibility the company could get there? How much market share could it reasonably get, and what would it cost to achieve that? Then you back into a reasonable expectation of value. We create many scenarios. With any given program, the chance of success is low, so you need to size for the risk and make sure the clinical trial is designed for unambiguous data. As my father used to say, “If the data is ambiguous, there is no ambiguity.” Meaning, when a drug works, it is obvious, just as when it isn’t working.
You also want to make sure to invest in companies that have multiple programs, maybe around a therapeutic identity or technology platform, all at different stages of development. If one fails, the company—and you, the investor—aren’t out of the game. Unfortunately, this isn’t value investing, where there are hard numbers to anchor to. Biotech valuations are like a thermometer that tells you how hot or cold the potential is; they aren’t a precision instrument.
Bakri: In small- and mid-cap biotech, in particular, all your returns typically come from a small percentage of winners. You can lose 100% of your money, but you can make 500% or 1,000% on an investment. When you do the decision-tree analysis Eli described, you should hypothesize that one tree can grow to the sky. One of your companies could become really big. You don’t want to sell your winners early.
Q: Ziad, which of your biotechs could be big winners?
A: Bakri: Vertex Pharmaceuticals (VRTX) is a larger company that hits on a lot of themes we’ve been discussing. Vertex generates more than $3 billion of revenue a year from cystic fibrosis treatments. The company has developed transformational drugs for a severe, life-threatening disease. It has a defined patient population, and no competition. It can reach 70,000 patients around the world with a small sales force. This is precision medicine at its finest, and also a really good business. Its costs are relatively low.
Many biotech companies stumble as they become bigger because they have to replicate their success, and in a big enough way to move the needle. This isn’t like Facebook (FB) or Google, where the bigger you get, the bigger you’re going to get because of the network effect. In biotech, past success often doesn’t correlate with success in the future. This is why larger companies often buy other companies. Vertex will be able to replicate its success. It is going after other diseases, including Alpha 1-antitrypsin. Vertex also has a business-savvy management team. The pieces are in place for it to become much larger over time, and in a relatively low-risk way.
Q: What is the price/earnings multiple?
A: Bakri: The stock is trading for about $172. Consensus earnings estimates for 2020 are $6.17 a share, so the multiple is around 27 times earnings. But profitability is going to ramp up because a lot of the spending has been done. Vertex is going to layer on new indications for existing treatments, which will take revenue up to $7 billion to $9 billion. Profit will drop to the bottom line, and the multiple will contract. For someone who wants to play biotech in a lower-risk way, Vertex allows you to benefit from the scientific innovation without the idiosyncratic risk.
Casdin: Vertex just announced the acquisition of an early-stage cell-therapy company with transformational potential in the treatment of Type 1 diabetes, one of many recent deals and partnerships they have done. We love to see forward-thinking companies expanding their pipelines into new growth areas. Gilead did this extremely well and built a tremendous business.
Q: Could Vertex be an acquisition candidate?
A: Bakri: Yes and no. If I ran a big pharma company, it is exactly what I would want to buy. On the other hand, an acquirer would probably have to pay a big premium. I hope they don’t get acquired because I need companies that can grow and become profitable.
Q: Why do you think Vertex can repeat its success?
A: Bakri: Vertex has an excellent chemistry platform and is better at designing small molecules than almost anyone. It has a lot of scientific capabilities and good partnerships with academic institutions. Vertex hired David Altshuler from the Broad Institute of MIT and Harvard [a biomedical and genomic research center] in 2014 as its chief scientific officer.
I’ve also got two small-caps to recommend.
Ascendis Pharma (ASND) isn’t a sexy gene-therapy company or a player in molecular medicine. It modifies the drug-like properties of hormones used to treat medical conditions, such as parathyroid hormone and human growth hormone. It turns out you can achieve a lot of therapeutic benefits by changing the pharmacokinetics—the half-life and other pharmacology properties of these treatments. This is like a value-investing theme in biotech; it isn’t in the limelight but could yield big rewards. Ascendis will have a revenue-generating product in the growth hormone area on the market in the next couple of years, and it has a pipeline of other products, including parathyroid hormone, that address known large markets and could bring potentially big improvements in the standard of care. The stock is trading around $105, and the market cap is $5 billion.
Tricida (TCDA) is an off-the-radar company focusing on a drug for kidney disease. It is using an older polymer technology approved in other diseases to soak up hydrogen ions, which makes kidney-disease patients less acidotic. Tricida’s drug application has been filed with the FDA, and the drug could be approved next year. There are a lot of data indicating that if you improve the acidosis [reduce the level of acid in the blood] of these patients, you will affect the course of the disease in a positive way. Tricida has a market cap of about $1.7 billion.
Q: Let’s turn to Gbola. What excites you?
A: Amusa: Phage therapeutics, a subset of microbiome medicines, might soon emerge as a precision tool to eradicate specific strains of bacteria implicated in chronic diseases like IBD. [The human microbiome refers to microbes that live on and in the body.] The prescription-digital-therapeutics space can also perform by saving the health-care system costs. Among publicly traded names, I tend to like gene-therapy companies that are post-proof of concept, with internal manufacturing, and gene-therapy companies levered to synthetic biology.
Gena spoke of Regenxbio, one of our top picks for 2019. I’ll discuss it in different terms. Regenxbio has about $450 million of cash, and may capture up to 10% of the economics from Zolgensma in AveXis, which was bought by Novartis for about $9 billion. Add up $450 million and $900 million and that’s roughly where Regenxbio’s market cap has been lately. The opportunity derives from investors not yet modeling the majority of the 30 or so products in the company’s pipeline. The consensus has modeled only five to seven. Ten to 15 are in the clinic and could soon generate data. Thus, many Regenxbio products should soon be modeled by analysts, which tends to lead to better stock performance from earnings estimate upgrades. Think of the company as having up to 30 shots on goal. My price target is $150.
UniQure, another of my top picks entering 2019, is up about 50% this year, resulting in about a $1.6 billion cap. I expect it to get acquired, perhaps by BioMarin, and perhaps after uniQure releases in 2020 its pivotal Phase 3 data for its hemophilia B gene therapy. BioMarin has a hemophilia A gene therapy in late-stage development and would see synergy in having a hemophilia B asset, and uniQure also has rights to National Institutes of Health patents and hemophilia B Padua transgene patents that could be useful for BioMarin. Furthermore, BioMarin, as I understand it, is using a manufacturing process similar to uniQure’s, which is patent-protected. Finally, uniQure could produce proof-of-concept data in Huntington’s disease in 2020. UniQure’s one-time gene therapy, if successful, would be addressing a large gene-therapy market. Clinical success in Huntington’s disease in 2020 could lead to uniQure shares doubling or tripling. The stock is around $47. My price target is $125.
Q: What else do you like?
A: Amusa: MeiraGTx Holdings (MGTX), despite roughly doubling this year, continues to be a top pick. It is levered to synthetic biology, or gene regulation. For gene therapy to work in mass-market conditions, clinicians will need to be able to turn it on and/or off as needed. Johnson & Johnson (JNJ) partnered with Meira on Meira’s gene-regulation technology before it took an equity stake in Meira, and before J&J effectively derisked the inherited retinal disease, or IRD, platform by partnering to pay most of the costs of these programs. Meira potentially could double in the next year if the company produces positive data on large-market indications not partnered with J&J. Success there could increase the long-term potential for J&J to acquire Meira. My MeiraGTx price target is $45.
Medicines Co. (MDCO) was another of my top picks entering 2019. The stock has more than doubled this year, and the market cap is now over $4 billion. The company is reporting positive test results for inclisiran, an anti-PCSK9 genetic medicine to lower cholesterol, in pivotal Phase 3 studies. The market is skeptical on inclisiran, due to the lackluster performance of anti-PCSK9 monoclonal antibodies Praluent and Repatha. Unlike these competitors, which require cold storage and administration every two weeks, inclisiran can be stored at room temperature and administered only twice a year. To me, companies like Pfizer, Eli Lilly (LLY), and Roche Holding (RHHBY) don’t have heir-apparent cholesterol products. That makes Medicines another potential acquisition target. My Medicines target price is $100.
I have two more stocks to discuss.
Q: Let’s hear them.
A: Amusa: Krystal Biotech (KRYS), another of my top picks, is up more than 50% in 2019. Krystal is unique in doing gene therapy for the skin and showing enough success to achieve important regulatory designations in the U.S. and Europe. Under success scenarios, the company could have the opportunity to address everything from rare skin diseases to mass-market skin diseases like diabetic ulcers or even aesthetic conditions. Krystal has invested meaningfully in manufacturing—a credible signal that management believes in its own products, which isn’t a given in biotech. My price target is $75.
Finally, Kodiak Sciences (KOD), despite more than doubling in 2019, still has only a $535 million market cap. It focuses on retinal diseases, such as wet AMD, diabetic retinopathy, and retinal vein occlusion. The standard of care in these markets generated more than $10 billion of sales in 2018, which makes Kodiak’s market cap cheap. Kodiak’s lead product is engineered to maintain the key attributes of standard-of-care products (Eylea, Lucentis, and Avastin), but optimized to address the biggest issue with standard of care—namely, the need for monthly or bimonthly injections into the eye. Data this year suggest that Kodiak is heading in the right direction. The stock is around $14. My price target is $22.50.
Q: Thanks for sharing those ideas. David, give us the venture capitalist’s view of the biotech world.
A: Schenkein: GV has a broad remit in health care, from pure therapeutics to delivery solutions to the payer-provider arena. We look for therapies that have the ability to change medicine, not make incremental advances. I will discuss three recent investments in private companies that are looking to have a big impact.
The first, Verve Therapeutics, was launched this year. Gene editing, or the ability to edit DNA, still needs to be proved as a therapeutic solution. It is very early on. While most gene-editing therapies are going after rare diseases, Verve is going after cardiovascular disease. GV led the Series A financing round. We’re really excited about the company. It is creating the first therapy that could be able to correct a gene in a rare subset of patients whose cholesterol is off the charts. Conventional therapies aren’t going to work. Imagine being able to correct this condition with a one-time editing of the responsible gene.
We have also invested in Beam Therapeutics, which launched last year and is working on a gene therapy developed in partnership with the Broad Institute and others. Beam is developing a more precise form of CRISPR gene editing than exists now. CRISPR is a molecule that acts like a scissor. It cuts your DNA and can insert a new strand. Sometimes, however, there are errors in the cutting. Beam has developed a therapy best thought of as a pencil with an eraser. It allows us to change a single genetic code without cutting the patient’s DNA. It just erases one that’s problematic and inserts a replacement. The company isn’t in the clinic yet, but it will be a disruptive technology if it plays out.
Q: What is your third name?
A: Schenkein: Verana Health is aggregating huge amounts of clinical data from around the country in ophthalmology, neurologic diseases, and potentially other diseases. Aggregating this data will be useful for physicians, payers, and pharma companies to help them better understand how their drugs are working. One area that this kind of data can impact is clinical trials, by creating synthetic control arms for clinical trials. Instead of randomizing patients in a trial to either receive a new drug or a placebo (sugar pill), you can compare your new drug to the expected data from a virtual control arm, based on data from large numbers of patients in Verana’s database. This is potentially much better for patients.
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