December 23, 2013

Profits in Pain Prevention

The Medical Technology Stock Letter had one of the best performing stocks in this past year’s Top Picks special; here, Jay Silverman updates his view on this biotech winner and highlights some potential new leaders for the coming year.

Steve Halpern: We’re here today with biotech expert Jay Silverman of the Medical Technology Stock Letter. How are you doing today, Jay?

Jay Silverman: Very well, Steve, thank you.

Steve Halpern: At the end of every year, we survey the nation’s leading newsletter advisors, asking for their favorite stock for the year ahead, and today we’re beginning a series of interviews with those advisors who had the best performing stock picks from last year.

So, first off Jay, congratulations. Among the 81 top picks in the 2013 report, The Medical Technology Stock Letter had the second best performing stock, Pacira Pharmaceuticals (PCRX), which was up 180%. Could you tell us a little about the company and the reasoning behind that original recommendation?

Jay Silverman: Sure. Pacira sells a drug called Exparel. Exparel is a long-acting, patented version of bupivacaine, which is a hospital-based analgesic for surgical procedures. The drug was approved about 18 months ago, and after about two quarters, we realized that the potential for this drug was substantial.

And, over the last year, the sales of Exparel began on a quarterly basis at $5 million, and they’re now over $20 million per quarter, and that is continuing to accelerate, based on a number of surgical procedures that the drug can be used in.

Steve Halpern: Now, can you share your current view of this stock, and what you would suggest for those who followed your original recommendation and now own the shares?

Jay Silverman: Yes, well, it’s a very well-managed company, and when you’re introducing a new drug in a hospital-based market, that experience is incredibly valuable.

Coming up in 2014, the company has additional clinical trials using Exparel, in, what’s called, nerve block surgeries.

When people are undergoing knee replacements and other spinal block conditions, you would rather use Exparel to control pain over several days, versus a short-acting version, and then have the patient take much less opiates, so the nerve block trial looks excellent for 2014.

In addition, the company has just filed with the FDA to expand manufacturing to a new process, which is going to significantly reduce the cost of goods sold in the future, beginning in the second half of 2014.

So, you’re getting the clinical data for this year coming up, you’re getting expansion of manufacturing, which improves gross margins, and this drug is still just scratching the surface in the number of surgical procedures it can be used in.

The stock is above, what we call, our buy limit, it’s had that good a year. It’s slightly below our recently-revised upwards price target of $50. We would definitely hold the stock and we would look for weakness to add, at any significant weakness.

Steve Halpern: Now, biotechnology, in general, has been very strong over the past year. Do you expect this trend to continue in 2014, and are there any particular sectors within biotechnology that you feel deserve and warrant extra attention from investors?

Jay Silverman: Sure. Well, over the course of the 25 years John McCamant and I have been covering this industry, the greatest driver of biotech rallies, or sustainable rallies, has been new product introduction.

Over the past year, including the end of this year, we’ve had new blockbuster drugs for hepatitis C, which is Gilead’s (GILD) drug, and also for B-cell lymphomas, which is Pharmacyclics’ (PCYC) drug. Those are looking to be two of the biggest drugs ever.

Usually, those attract a lot of capital to biotech, and, of course, have returned excellent appreciation for investors, so we think that trend will continue, but we’re going to watch those launches carefully. As long as they meet or exceed the consensus forecast on Wall Street, these stocks and the sector should do well.

There are a number of other factors that always contribute to biotech stock performance, such as the FDA, clinical trial outcomes, the availability of capital, and, of course, the mergers and acquisitions that occurred this year.

But the main driver is always the successful, or better than expected, launch in the sales and earnings of the new blockbusters.

Steve Halpern: Now, I know you’re already thinking about your new top picks for the coming year report. Could you give us a hint about which companies you might be considering?

Jay Silverman: Well, one of the areas that I didn’t mention in your last question was vaccines, and we’ve had the beginnings of success with our Novavax (NVAX) recommendation. I can’t say it’s going to be the Top Pick for 2014, because we haven’t really discussed that and agreed upon those names yet.

But for people who know our newsletter—hopefully a lot of people are subscribers—if they look at the difference between the current price and those that are under our buy limits and the target prices, those are the ones that we believe we have some competitive advantage or some non-consensus opinion on the stock for next year.

So, I think, right now, there are a couple of names that fall into that category. They are under our buy limit, they’re far from their target price, and we have a non-consensus opinion right now.

Steve Halpern: Well, in a couple of weeks we’ll have the new Top Picks out, and we want to thank you for joining us.

Jay Silverman: Oh, by the way, if you wanted me to throw a few of those names that might be considered, Novavax would be one of them, and Nektar (NKTR), and the Medicines Company (MDCO) and Pharmacyclics, which has been a great stock, but has come under pressure of late.

These stocks moved so rapidly, Steve, that we, hopefully, can get the ones we like the most at the best prices, so, I think there are a couple of them that are offering us some very good entry points going into the new year.

Steve Halpern: Great. Thanks again for joining us.

Jay Silverman: You’re welcome.