3 Biotech Breakthroughs to Bank On
By Hilary Kramer
IN THIS REPORT:
- Introduction: How We Mitigate the Risk in Biotech, and Pile on the Profits
- Biotech Beauty #1: BioMarin Pharmaceutical (BMRN)
- Biotech Beauty #2: GW Pharmaceuticals (GWPH)
- Biotech Beauty #3: Kaleido Biosciences (KLDO)
- Bonus Biotech Beauty: Precision Biosciences (DTIL)
- About Hilary Kramer
Three Biotech Breakthroughs to Bank On
We love biotechnology here at Kramer Capital.
While individual research programs can get a little speculative, the odds of a successful cure for cancer, Alzheimer’s disease, diabetes or any of the other pandemic conditions that literally plague modern humanity have never been higher.
The impact on suffering populations will be enormous. And for investors in the right place at the right time, the financial rewards will be transformational.
As we say around here, this is where world-changing products are created out of nothing but insight, dedication and the drive to improve human lives.
It takes insight to discover or synthesize an attractive molecule. Then it takes dedication to determine the right dosage, plan the commercial manufacturing process and prove to the regulators that your drug’s benefits outweigh any side effects.
The route can be precarious, with plenty of opportunities to lose years of hard-won progress and billions of shareholder dollars if the clinical data don’t line up with your best-laid plans.
People wouldn’t do it if they didn’t want to cure the sick.
But when everything works, it’s almost miraculous.
And right now, we see the stocks working hardest toward transformational therapies factoring in more negativity than hope.
The iShares Nasdaq Biotechnology ETF (IBB) is still down about 22% from its peak in 2015, completely missing the S&P 500’s 35% surge over the same period.
Part of the challenge here, of course, is that the top 10 components of the IBB, which make up 53% of the ETF, are large companies that have maturing products or are facing competition or patent expirations.
Every day they go between breakthroughs brings them closer to that “patent cliff.”
And only half of them are profitable. That’s why we look behind the index for smaller opportunities where a little good news can transform a balance sheet that’s otherwise built out of little more than hope.
We love the smaller companies in developmental stages with little to no sales or earnings.
They’re speculative, forcing Wall Street to evaluate them on the probability that their science will one day turn into money and a sustainable business. We buy these companies based on the odds that they’ll change the world.
And remember, mergers and acquisitions are a fact of life in this industry as large players facing that patent cliff buy out their more innovative counterparts before they can grow into bona fide competitors.
We’ve seen a lot of favorite biotech stocks taken out for cash over the years. That’s going to continue.
Right now these names are at the top of my screen and, we suspect, Big Biotech’s shopping list as well:
Biotech Beauty #1:
BioMarin Pharmaceutical (BMRN)
BioMarin Pharmaceutical (BMRN) gives you a sense of the scale even the “giants” of the industry have achieved so far, which means bigger and better things are yet to come.
BMRN is the sixth-largest pure biotech company and is on track to book $1.7 billion in sales on FDA-approved therapies this year.
Yet at under $13 billion in market capitalization, it isn’t even 1/10 the size of Netflix, which in turn is barely a rounding error compared to true giants like Apple, Amazon and Microsoft.
If shareholders here go anywhere near that far, I’ll be satisfied.
And BMRN has that kind of potential. While the existing commercial portfolio isn’t full of blockbusters, managing rare enzyme disorders remains an extremely lucrative niche business, with some of the company’s treatments costing close to $10,000 a month for the rest of each patient’s natural life.
Even if only a few hundred people around the world suffer from a given disorder, there are tens of millions of dollars a year here to create a base for the next generation of value drivers.
That means transitioning from extremely rare inherited conditions to hemophilia, which affects 1 in 10,000 people and could ultimately become a $90 billion target. Existing drugs start coming off patent as early as 2024, creating a significant competitive opening for any company that creates a cure instead of simply treating the symptoms.
BMRN thinks they have the ability to restore the gene that produces blood clotting factor with a single shot.
And they’re extremely close. The first real data release from the company’s Phase II clinical trial is right around the corner. If the numbers are good enough, we could even get accelerated FDA review and a commercial launch as early as next year.
Admittedly, the shot may end up costing $1 million or more, but restoring long-term control over bleeding is worth it.
Meanwhile, BMRN’s existing niche therapies should get big enough to stop the company’s cash bleed in the next year. Initial profits will be small but they’ll ramp up fast.
By 2022, this could be a stock earning close to $3 per share. I suspect it will have climbed beyond $120 in that timeframe. Better-than-expected results on hemophilia can add $40 to that target.
Biotech Beauty #2:
GW Pharmaceuticals (GWPH)
GW Pharmaceuticals (GWPH) is familiar to people who’ve seen me on television, at investment conferences or if they simply follow the evolution of cannabis deregulation from gray-market recreational products to FDA-certified therapies.
GWPH has the first cannabis-derived drug on the market that uses molecules found in the raw plant to fight rare epilepsy-like conditions.
It’s the shape of things to come and is already off to a great start with over 1,700 prescriptions coming every quarter. That’s enough to start the revenue flowing at a healthy rate of $72 million in 2Q19 and ultimately $250 million for FY 2019.
Naturally, GWPH isn’t done yet. Forget about the giggle factor around “Mile High” stores in Denver or the haze around the West Coast. The plant is a storehouse of biotech factors that naturally interact with the brain and other bodily systems.
I wouldn’t be surprised to see new programs keep making their way all the way to the FDA in the next few years, which can ultimately make GWPH one of the biggest pure biotech companies on Wall Street.
Remember, most of these companies are small and speculative. Simply having any revenue beyond the occasional handout from a Big Pharma partner is extraordinary. And GWPH runs lean enough that it could even generate a significant profit as early as next year.
After all, these aren’t extremely esoteric targets that push the boundaries of our understanding of how the body works. All GWPH is exploring is a plant that generations of researchers were forbidden to investigate except in extremely controlled (and non-commercial) contexts.
Think of buying into Big Pharma in the golden age of turning natural botanical extracts into science. That’s what this company is all about. They have all the tools and insights of modern drug discovery and a completely virgin field to farm.
This could be a $260 stock one of these days.
Biotech Beauty #3:
Kaleido Biosciences (KLDO)
Kaleido Biosciences (KLDO) takes us a little closer to the traditional biotech promise of pushing those boundaries.
Instead of manipulating the chemistry of the body itself, KLDO has created an entirely new drug platform that considers the body as the habitat for various symbiotic and antagonistic microorganisms, what the company calls the “microbiome.”
Think of it as an extremely sophisticated version of drinking kombucha or eating yogurt for their natural “probiotic” properties.
It’s a staggeringly big field, theoretically as revolutionary as the initial shift from purely plant-based medicine to standardized pills formulated to reliably treat specific conditions.
Management has taken a pragmatic approach by focusing early efforts on complex syndromes only its science can address: diseases accompanied or caused by too much ammonia building up in the body.
Microorganisms can either produce or consume ammonia, breaking it down into harmless chemical byproducts while coincidentally doing much of the kidney’s work.
Feeding those microbes KLDO pills effectively programs them to regulate their role within the body, replacing a failing kidney or liver without forcing dramatic diet changes. While current trials are small, they’re enough to test the theory.
I’m looking for clinical milestones over the course of the year. Any of them can transform this stock, which has struggled a little after its $15 IPO as Wall Street’s mood swings from long-term high-impact names back to the tried and true. When that mood swings the other way, KLDO can soar to $20 in the near term. Accumulate the dips.
Bonus Biotech Beauty:
Precision Biosciences (DTIL)
Precision Biosciences (DTIL) also had a rough post-IPO period. It went public in late March at $16 and as I write this the stock is available below $9.
This is an ultra-long-haul investment built around the potential of editing not only the human genome to eliminate diseases (now a familiar albeit still speculative theme) but other organisms as well.
I think of DTIL as mirroring the recent combination of Bayer in the medical space with Monsanto in genomic seeds, albeit at a much earlier stage in its evolution and at a deep discount to historical levels.
The company is working simultaneously to cure cancer and create a variety of the canola plant that produces an oil that not just replaces fossil fuel but actively reduces greenhouse emissions. Either can change the world. Both together may even be a little too ambitious, but that’s what partnering with bigger companies or accepting a buyout offer is for.
Both together may even be a little too ambitious, but that’s what partnering with bigger companies or accepting a buyout offer is for.
DTIL is a true moon shot. If it hits, shareholders will cheer. And while the story remains speculative for now (leukemia trials just started dosing and the canola project is at the proof-of-concept stage), aiming for the moon is what biotech is all about. Under the right conditions, this can easily be a $24 stock a year from now.
P.S. Every investor knows biotech companies are high-risk, high-reward. But what if I told you there’s a portfolio that’s winning on more than 80% of its positions?
That’s what my readers are seeing with my GameChangers portfolio, and I couldn’t be happier about it. To learn more about my wealth-building approach — and to see if it’s right for you — simply follow this link. I think you’ll be surprised with my findings.
About Hilary Kramer
Hilary Kramer is an investment analyst and portfolio manager with 30 years of experience on Wall Street. The Financial Times describes Ms. Kramer as “A one-woman financial investment powerhouse” and The Economist distinguishes her as “one of the best-known investors in America”. Ms. Kramer is often quoted in publications such as the Wall Street Journal, New York Post, Bloomberg, and Reuters. She is a frequent guest commentator on CNBC, CBS, Fox News and Bloomberg, providing investment insight and economic analysis.
Ms. Kramer was an analyst and investment banker at Morgan Stanley and Lehman Brothers. Ms. Kramer founded and ran a long-short hedge fund and served as chief investment officer overseeing debt and equity portfolios. Since 2010, Ms. Kramer’s financial publications have provided stock analysis and investment advice to her subscribers. Her products include GameChangers, Value Authority, High Octane Trader, Turbo Trader and Inner Circle.
Ms. Kramer, a Certified Fraud Examiner, has also testified as an expert in investment suitability, risk management, compliance, executive compensation, and corporate governance.
Ms. Kramer received her MBA from the Wharton School at the University of Pennsylvania and her BA with honors from Wellesley College. Ms. Kramer has provided testimony regarding investment policy to the U.S. Senate and is a frequent speaker on the markets, portfolio management and securities fraud and compliance. Ms. Kramer is also the author of “Ahead of the Curve” (Simon & Schuster 2007) and “The Little Book of Big Profits from Small Stocks” (Wiley 2012).