February 19, 2015
The most recent reading of the CNN/Money Fear and Greed Indicator has entered the “Extreme Greed” range. While very short-term in nature, it represents the level of expectations investors have in stocks and today that level is quite high. It all suggests that while stocks may still move higher, they are likely to experience some pullback soon. At the MTSL, our portfolio of recommended stocks is anything but traditional. In fact, historically it is made up of companies that were either very early-stage and/or out of favor or downright disliked. On the Fear and Greed Indicator, the respective ratings of many of our stocks when we initially recommended them would fall into the “Fear” range. And we love that. In addition to our fundamental analysis, true outsized returns are achievable by identifying such contrarian investment opportunities.
Since its inception, MTSL recommended many platform companies at their respective inceptions. For a long time, almost no one believed in gene therapy, antisense or antibody drug conjugates – yet today they are among the hottest segments in biotech. Despite being early, we always selected what we thought were the pioneers and leaders in the fields; those with the dominant patent positions. At the time, however, the majority fell into the “Fear” category as these were largely unproven technologies. In many instances, those long-term fundamentals take time to play out – sometimes longer than we expect. But we remain loyal as long as either the technology platforms or R&D pipelines remain viable, and in times of distress often create even better risk/reward scenarios. In many cases, few of our stocks were widely covered by Wall Street when we started our recommendation and/or may have hit a major roadblock causing the stocks to drop. Our initial recommendations of BMRN and CELG, for example, were made at times when these now Top-Tier companies were way out of favor.
We also bet on managements that often think out-of-the-box and/or were hardly favorites of analysts, bankers or investors. One of the most important if not the single most important reason to invest in any company is the management team, led by the CEO. Most biotech CEOs have the necessary resumes – education, experience, leadership savvy and charisma. In most “story stocks,” the CEO’s ability to convince investors that their story is investable is often the number one criteria. Interestingly, the majority of MTSL companies are run by Chief Executives that, for whatever reason, are or have not been that admired by Wall Street. For a long time, Paul Friedman – who recently retired after a wonderful tenure at Incyte – was not given much credit by investors. One of the best managers we have ever met, Paul’s experience was second to none, but he wouldn’t kowtow to the bankers and analysts. He knew if he ran his Company correctly, focusing on the genius chemists he’d amassed and that were loyal to him, then Jakafi would become the steppingstone to catapult INCY to a highly successful company. From 2010 to mid-2013, INCY’s stock vacillated between 10 and 20 dollars per share. While they built the pipeline, Jakafi data in pancreatic cancer was the trigger that led to the realization of Paul’s decade-plus long work. With a market cap approaching $14 billion and its stock closing today at an all-time high, INCY’s R&D pipeline is one of the most well-admired in biotech.
The fact that the Street discounted Friedman’s ability gave our subscribers the ability to buy INCY stock at incredibly attractive levels for a long period of time. For some reason, that seems to be the case with many of the MTSL Portfolio companies. ISIS’s Stan Crooke, MDCO’s Clive Meanwell, PCYC’s Bob Duggan, NVAX’s Stan Erck, SMGO’s Edward Lanphier and even ALKS’ Rich Pops have all had love/hate relationships with The Street. To us, this “CEO discount” often provides phenomenal entry points at attractive valuations. Then once the stories begin to become reality, we hope our subscribers are already invested at lower stock prices.
Until the past year or two, there may have not been a more vilified CEO than PCYC’s Bob Duggan, nor a blockbuster drug attacked as much as Imbruvica. In Duggan’s case, his personal history has been well documented by short-sellers, naysayers and even irresponsible journalists alike despite their inaccurate portrayals. In addition, there was a revolving door of superstars joining and leaving PCYC in a short time frame. GILD’s (and ABBV’s and even CELG’s) attempt to compete with Imbruvica with inferior compounds dominate the doubters discussions and, we believe, continue to lead to a discounted value of PCYC shares. Miraculously, even the “hot” CAR-T supporters believe they will be competitive to Imbruvica someday. In our view, PCYC has just recently joined INCY as a company that the Street has finally come around to one in which they respect.
ISIS and SGMO are companies that, for a very long time, have been dogged by investors’ inability to believe in their leaders, technologies or compounds. Even today, in our view, ISIS is doubted by most despite a 36-compound R&D program. Multiple and sizable corporate partnerships with leading companies (e.g., BIIB) plus recent exceptional clinical data (e.g., ISIS-FXIRx) have gone a long way in alleviating some investors concerns. Until there are more ISIS anti-sense drugs approved, we believe it is likely they will trade at a discount to the other RNAi leader ALNY, whose CEO Maraganore has tremendous goodwill with investors.
SGMO’s relative value to newcomer BLUE is even more dramatic in our opinion. Notwithstanding the latter company’s stellar beta-thallasemia data, investors have all but written off SMGO despite their second-generation gene therapy technology showing significant advantages over BLUE’s. The BIIB partnership in beta thal is also a significant validation as they chose to partner with SGMO over BLUE. In our view, SGMO’s broad R&D pipeline based on next-generation gene therapy technology protected by a dominant patent position remains significantly undervalued.
MDCO’s hiccups over the past few years have kept the upcoming Angiomax patent decision (March-May) remain a major overhang. Despite a number of strategic acquisitions and pipeline additions, CEO Clive Meanwell, who we know and have been fond of since MDCO was a private company in 1998, remains under investors’ gun. Therein lies the value.
Another good example is our current recommendation of ANTH.XXWestarted this recommendation back in 2012 based upon the initial PEARL studies for blisibimod (“b-mod”). After the disappointment of those trials, we stepped aside but continued to monitor the company’s post-PEARL execution. Hence, there is baggage there. It has taken a few years, but we are again optimistic based upon our belief in the potential of b-mod – a proven target with an FDA approved drug out there (GSK’s Benlysta) and the strategy employed post-PEARL. Another encouraging sign for us is the fact that both CEO Paul Treux and Chief Scientific Officer Colin Hislop remain at the company since its inception in 2004 (despite the PEARL failures, the huge drop in the stock price and the fact that the Company is based in San Francisco where there are a plethora of new opportunities for biotech executives). At just a $100 million market cap, with two Phase III trials underway plus another well-tested compound about to enter registration studies, in our view, there is very little (or maybe negative) management credibility built into ANTH shares. Virtually no one believes b-mod will work.
We start every Issue of MTSL with a SENTIMENT check, as the psychology of biotech stocks remains incredibly important to monitor how stock prices reflect investors’ expectations. For an individual company, stock sentiment is even more important. MTSL takes a completely independent stance with regards to our recommendations. We are not investment bankers and/or paid consultants, and therefore our opinions of senior managements are entirely based upon sound fundamental analysis that we have amassed during our 50+ years of researching biotech stocks. As with any risky, volatile sector, we have had our share of disappointments and stock declines. Over time, however, many of them have recovered and the majority of our recommendations have been rewarding. As stated in our website www.bioinvest.com, our investment philosophy is buying carefully selected biotech stocks at attractive prices and holding them for the long-term. In most of our recommendations, the psychology of sentiment plays a major part. (Full disclosure: As stated in our legal disclaimer, attached to every Issue of MTSL and/or e-mail updates provided to our subscribers, at any time we may hold positions in some or all of the portfolio companies).