Biotech has hit a rough spot of late. Some of the most popular biotech exchange-traded funds are seeing record outflows as investors flee on disappointing merger & acquisition activity in the sector. The $9.3 billion SPDR S&P Biotech ETF (NYSEARCA:XBI) saw investors cash out $365 million last week. Investors have also fled from the iShares Nasdaq Biotech ETF (NASDAQ:IBB). The M&A-fueled growth many biotech investors hoped for hasn’t materialized, as rising valuations in the sector, particularly among small- and mid-cap names, have deterred takeovers.
Biotech investors’ M&A doldrums and the resulting decline in a few of the sector’s flagship ETFs may be due, in part, to emotion and failed expectations – two things Clover Biotech Research doesn’t buy into. His approach to biotech investing is more disciplined, and the names he invests in must meet an objective set of criteria, which he outlines in more detail in the following Roundtable interview. Clover Biotech is the author of The Formula, launched on Marketplace earlier this month, where he draws on his background as a Registered Nurse to spot cutting-edge opportunities that fill a real need in the market. In so doing, he and his members also reap the rewards of the “feel-good” side of biotech investing, because in many instances, they support companies that are helping people by developing real-world therapeutic solutions that truly make a difference in the treatment of disease. He elaborates on all of that and more below, so without further ado, let’s get into the interview.
Seeking Alpha: Let’s start with your approach to investing in biotech. Can you talk a bit about your investment philosophy and what drives it? How have you arrived at your current approach?
Clover Biotech Research: First and foremost, my approach to biotechnology investing involves searching for assets that appear undervalued. Once an asset reaches my valuation, then I sell. This keeps my investing objective. Second, I like to associate an investment with a thesis. Let me expound on that that. I give each investment a goal, such as, “This drug will become the standard-of-care for this disease.” As long as the thesis remains intact and the asset remains undervalued, I remain invested. This keeps my mind at peace, whereas someone else may get rattled over meaningless day-to-day price fluctuations. Now, in the event a substantial risk is presented to the thesis (e.g., a drug becomes plagued with serious safety issues), I reexamine my thesis and weigh the pros and cons in deciding whether or not I should remain invested.
SA: You’re a registered nurse (RN), right? How does your day job help you to be a better biotech investor?
CBR: Being a Registered Nurse gives me an opportunity to see and experience, firsthand, the impact both disease and medicine have on people. It also provides me with valuable insight into where treatment is lacking for a population. Finally, it serves as a reminder that we, as investors, are making a difference by investing in companies developing much-needed therapeutics. I find this to be most rewarding from biotechnology investing. Not only is it profitable for us when a drug is revealed to be a game changer in a disease, but it also feels good to be a part of something that will help other people.
SA: Big picture, what do you see as the themes to focus on in the biotech sector? What factors are influencing your views on this?
CBR: I believe drug development for orphan diseases will continue to be an important theme in biotechnology investing that deserves our focus. Many advances have been made since the Orphan Drug Act of 1983 was enacted, but many opportunities still persist.
One orphan disease that has, arguably, been neglected in drug development is sickle cell disease. Sickle cell disease is characterized by an abnormal formation of red blood cells, which are primarily responsible for transporting oxygen throughout our body. The disease is characterized by painful vasoocclusive crises and chronic anemia. Patients with sickle cell disease are far more at risk for stroke, organ damage and premature death. Despite the seriousness of the disease, only two drugs (Endari and hydroxyurea) are FDA-approved. While both are very helpful in treating certain aspects of the disease, it is painfully obvious there is an unmet need for additional therapeutics.
A San Francisco biotech, Global Blood Therapeutics (NASDAQ:GBT), is in a phase 3 clinical trial for sickle cell disease. Their drug, Voxelotor, an oral, once-daily pill, has shown promise in reducing both anemia and vasoocclusive crises. Voxelotor works by increasing hemoglobin’s (a crucial component of red blood cells) affinity to oxygen. This action is theorized to allow more oxygen to reach tissues and prevent an important underlying mechanism that causes red blood cells to become “sickle-shaped” in the first place. Voxelotor is an exciting development because it actually addresses a root cause of sickle cell disease. After an encouraging Phase 3, Part A trial, Global Blood Therapeutics is hoping the FDA will give a thumbs-up to an accelerated approval pathway. If achieved, Voxelotor could hit the market as soon as next year. If not, the company will begin Part B of the pivotal Phase 3 trial and seek regulatory approval after confirmatory data.
SA: What are some names that currently interest you?
CBR: Besides Global Blood Therapeutics, there are some other names and events in biotechnology that I am watching very closely. I am particularly interested in drug development for neuropsychiatric conditions because there are many gaping holes in the treatment paradigm. For one, valbenazine, a drug of Neurocrine Biosciences (NASDAQ:NBIX), was recently approved for tardive dyskinesia. It was the first drug to become approved for this orphan condition. The condition results from chronic use of antipsychotic medications. It is characterized by uncontrollable, repetitive movements of the face, tongue and neck that impair a person’s ability to function. I am watching valbenazine closely because the company is also trialing the same drug for Tourette syndrome. If successful, this would provide valbenazine and Neurocrine Biosciences with another blockbuster market opportunity. More importantly, it would fill an additional unmet need in Tourette syndrome.
A smaller and under-the-radar company, Minerva Neurosciences (NASDAQ:NERV), is developing Roluperidone for the treatment of negative symptoms (apathy, poor social functioning, diminished speech) associated with schizophrenia. Much attention in drug development had been focused only on the positive symptoms (hallucinations, delusions, racing thoughts) of schizophrenia. However, there are no approved products for negative symptoms. Minerva believes that schizophrenic patients who have well-controlled positive symptoms are able to safely transition to Roluperidone to improve the unwavering negative symptoms. So far, Roluperidone has shown promise and may become first-to-market for this unmet need. By doing so, Minerva will change the treatment landscape of schizophrenia.
SA: What “big ideas” in biotech are you particularly excited about now, and what’s the story?
CBR: One “big idea” I like to discuss is what NovoCure (NASDAQ:NVCR) is doing with their revolutionary Tumor Treating Fields (TTFields) platform for the treatment of solid-based, localized cancers. TTFields utilizes electric fields to disrupt the proliferation of cancerous cells. Its proof of concept was glioblastoma, an aggressive and difficult-to-treat brain cancer. The results of the trial demonstrated that TTFields significantly improves overall survival in these patients. TTFields is currently approved for recurrent and newly diagnosed glioblastoma. Additionally, NovoCure recently announced positive data for mesothelioma and plans to hit the market next year for this indication. What is most exciting about NovoCure is that the opportunities are seemingly endless. Over the next few years, they will release data for lung, ovarian, pancreatic and liver cancer (to name a few). Importantly, TTFields can be used in combination with other cancer modalities (radiation, surgery, chemotherapy, immunotherapy) without causing any apparent systemic toxicity. There is no relevant competitor to NovoCure on the horizon.
Thanks to Clover Biotech Research for joining the Roundtable. To read more of his public work on NovoCure, MannKind (NASDAQ:MNKD), and other biotech names, visit his author page. For more coverage on undervalued biotech names and to “nerd out” with a community of passionate biotech investors who love to analyze data, read peer-reviewed articles and sift through SEC filings (or if you want to learn how to do that), check out his Marketplace service, The Formula. Due to unprecedented demand, he has extended the introductory discount rate of $30/month or $300/year until Friday, September 21, 2018, at 9 am ET. Sign up today to lock in the low introductory rate, as The Formula may never be offered at this deep a discount again.
And be sure to follow the SA Marketplace account for more author interviews and to keep up with the latest news and developments on the platform. There’s lots more to “fall” in love with coming soon. (Pardon the pun, it’s a corny season.)
Coming soon: A panel-style Marketplace Roundtable on technology.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Clover Biotech Research is long GBT.