JPMorgan Healthcare Conference 2014: Biotechnology Front and Center
By all metrics 2013 was a spectacular year for biotechnology. The NASDAQ Biotechnology Index (investable through the (IBB)) was up 65.6 percent, topping the already impressive S&P 500 total return of 32.4 percent and last year's solid 31.9 percent. The sector also had 42 IPOs, representing more than the last five years combined.
When 2014 started, biotech stocks wasted no time continuing the momentum. On January 9, 2014 Intercept Pharmaceuticals (ICPT) reported that their Phase 2 FLINT trial for nonalcoholic steatohepatitis (NASH) was stopped early for efficacy sending the stock soaring 281 percent, from $72.39 to $275.87.
Therefore as one could imagine, spirits entering JPMorgan's 32nd Annual Healthcare Conference in San Francisco, CA from January 13-16, 2014, could not have been higher.
There were approximately 445 presenting companies, including 38 emerging and 131 private companies. Furthermore, per usual custom, lunch speakers and panels complemented the company specific sessions. Notable speakers included General Michael Hayden, former Director NSA and CIA, Delos "Toby" Cosgrove, MD, CEO and President of Cleveland Clinic and Jamie Dimon, Chairman and CEO of JPMorgan Chase & Co. (JPM).
Consistent with last year's article, the emphasis here will be on the key pieces of information gained from the conference. This data is meant to capture the thinking of the biggest investment managers and serve as a supplement to publicly available materials. Here are themes that developed from attending 24 presentations and 23 breakout sessions:
- Right in Front of Your Eyes
- Worth the Wait?
- Emerging Healthcare Celebrities
Right in Front of Your Eyes:
With so many companies presenting and releasing fresh news it can be hard to stand out. Every half hour investors diligently move from one meeting to another, gathering as much information as possible in this short amount of time. Even when a company is well known, hyped, and/or loved by all it can still be easily passed over. The cynical voice inside us often says, "To achieve 65.6 percent plus returns requires searching through every nook and cranny. If a company is widely recognized there are no valuable nuggets of information left to find." But here's a little secret. In 2013, had an investor held an equal weighting of the top four U.S. biotech companies by market cap, Amgen (AMGN), Biogen (BIIB), Celgene (CELG) and Gilead (GILD), the portfolio would have returned 86.4 percent and topped the NASDAQ Biotechnology Index.
So the next time the "already missed it" or "everyone knows it" thought pops into your head, it might warrant a second look. There are often good reasons why certain companies are in the limelight. Don't let that be a deterrent to due diligence, as ignoring what is right in front of your eyes could be a lost opportunity.
The candidates are:
Celgene
Market Cap: $61.9bn
Consensus 2014E Revenues: $7.6bn (+16.7 percent y/y)
Consensus 2014E EPS: $7.30 (+22.5 percent y/y)
Key Products: Revlimid for multiple myeloma, del 5q myelodysplastic syndrome and mantle cell lymphoma, Abraxane for metastatic pancreatic, metastatic breast and non-small cell lung cancer, Pomalystfor multiple myeloma and Otezla for psoriatic arthritis and psoriasis (pending 2014 FDA approval).
Company Background:
- Revlimid, the company's lead product, had 2013 sales of $4.3bn representing +14 percent y/y and 66 percent of total company revenues.
- Abraxane had 2013 sales of $649mm representing +52 percent y/y led by 2H 2013 U.S. and EU approval for metastatic pancreatic cancer.
- Otezla expected to be approved for psoriatic arthritis in Q1 2014 and psoriasis in Q3 2014
- More than 30 Phase 3 trials underway or to be designed in 2014.
- Raised 2017 sales and EPS guidance from $12bn+ to $13-14bn and $13.00-14.00 to $15.00, respectively
- $2.1bn left on share repurchase agreement.
Conclusion: In 2009, the company made its debut as the opening act for the JPMorgan Healthcare Conference. Fast forward five years, the company (now 3x larger on a revenue basis and the stock up 200 percent) still packed them in first thing on a Monday morning. If it is not obvious by now, JPMorgan has been accurately shouting, "pay attention to this one" for some time.
Nonetheless, investors have come to expect repeated success with CELG, almost to the extent that the company has become "uninteresting." This year when CELG increased 2017E revenues and EPS by 10 percent from the prior year the reaction was rather lackluster -- the stock has slowly trickled down 11 percent since. However, this jaded attitude may be misguided. A four year CAGR for revenues and EPS of 21 percent and 26 percent, respectively, is far from boring. This guidance also only takes into consideration Celgene's existing and pending therapies (Phase 3 completed), and not the new drugs that could come from the greater than 30 Phase 3 studies underway or to be planned in 2014. CELG also has $2.1bn left in its stock repurchase plan after purchasing more than $2.8bn in 2013. Overall, it appears that Celgene's management has given themselves room for further upside and that the raises to 2017E revenues and EPS are probably just starting.
Intercept Pharmaceuticals
Market Cap: $5.8bn
Consensus 2014E Revenues: $6mm (+162 percent y/y)
Consensus 2014E EPS: -$2.59
Key Product: Obeticholic Acid (OCA) for primary biliary cirrhosis, nonalcoholic steatohepatitis, portal hypertension and bile acid diarrhea.
Company Background:
- OCA, the company's lead product, is a modified version of naturally occurring bile acid with 100x more potency on the farnesoid X receptor, or FXR.
- Phase 3 POISE topline results for primary biliary cirrhosis expected 2Q 2014. Given that the Phase 3 trial design is very similar to the Phase 2 trial, management expectations are high.
- Jan 2014 reported Phase 2 FLINT trial for NASH stopped early for efficacy based on improvement in liver histology. Of note there was some talk regarding accelerated approval in Sept. 2013 at a joint FDA/AASLD NASH clinical endpoints workshop.
- Phase 2b for portal hypertension and bile acid diarrhea to begin in 2H 2014.
- 43 percent of shares held by insiders.
- $157mm in cash and cash equivalents as of Sept. 2013.
Conclusion: It's not every day that a stock (even in biotech) jumps 281 percent in hours and maintains that level. If an investor was uncertain of the movement's cause, attending Intercept's Wednesday 7:30am presentation and its line-out-the-door breakout session made it very clear. Before January 9, OCA's prospects were highly dependent upon its Phase 3 trial for primary biliary cirrhosis. With the early stoppage of its Phase 2 FLINT trial, OCA showed itself to be potentially effective in not just one, but two liver diseases. It was a boon for a company with no revenue or other therapies in late stage development. Intercept's lead product had been significantly de-risked, and it is looking more and more like management's big bet on activating FXR to cure liver diseases could work out in a big way. With OCA already showing effectiveness in late stage trials for two liver indications, perhaps it would also work in ICPT's two other pending Phase 2 trials. Promoting liver regeneration (what activation of FXR does) may just be the secret sauce to curing most liver illnesses.
The meteoric rise from $72.39 to $275.87 in one day was not an accident. Behind this hoopla is a company that has a strong probability of having Obeticholic Acid FDA approved for two high unmet medical indications by 2015, which may result in one of the strongest liver therapy franchises in biotech.
Worth the Wait?:
After a year where the NASDAQ Biotechnology Index was up 65.6 percent optimism is certainly still high. The question investors are asking is, "what can the sector do for an encore?" The easiest answer is for hardcore biotech investors to do what they have always done -- look for the next big winners. And fortunately, in this industry the "potential" homeruns are often easy to identify because they are usually companies associated with known binary events like the announcement of clinical trial data or FDA approval. The difficult part is trying to accurately predict the result of one of those binary events. Of course this is no easy task and even those with advanced medical degrees still struggle to deliver consistent prognostications. Nevertheless, in this game where it is difficult to gain an edge, many continue to play and are not deterred by the possibility of losing 50-80 percent of their capital as long as the potential upside is double or triple that. So true to the culture of biotechnology investing, let's see what is in on the radar for 2014.
The candidates are:
InterMune (ITMN)
Market Cap: $954mm
Consensus 2014E Revenues: $136mm (+97 percent y/y)
Consensus 2014E EPS: -$2.35
Key Product: Esbriet (generic name pirfenidone) for idiopathic pulmonary fibrosis (IPF) -- $33,000-45,000/year in EU and Canada.
Company Background:
- Esbriet is the only approved medicine for IPF in the EU and Canada, and the U.S. has none approved.
- Esbriet is listed as standard of care in seven European countries for IPF, and has been launched in 13 of 15 target European countries.
- Nov 2009 submitted pirfenidone NDA for FDA approval. In May 2010 received complete response letter requesting an additional clinical trial despite FDA advisory panel voting 9-3 in favor.
- Phase 3 ASCEND trial results expected 2Q 2014. To date, patient retention rate is more than 90 percent and over 90 percent of eligible patients have rolled over into RECAP, the open-label follow up study.
- Daniel Welch, Chairman and CEO has also been very open about his belief that ASCEND has a high probability of success.
Conclusion: About four years ago expectations were very high for InterMune. Those hopes were then quickly dashed with FDA rejection. The stock (currently more than 75 percent below those highs) and optimism still have not recovered. This time investors are not so quick to follow Mr. Welch, and seeing him defend pirfenidone and the ASCEND trial design has become an everyday occurrence. Short interest is high and questions regarding competition from Boehringer Ingelheim GmbH persist.
Nonetheless, ITMN spoke to a jam-packed room. Despite all the negativity the company still has a chance to return to glory, and therefore investors want to be ready to take action if and when the tide turns. Key data necessary for U.S. approval of pirfenidone is just a few months away. If ASCEND turns out as Mr. Welch predicts pirfenidone's market opportunity could triple -- Esbriet is selling well in Europe, and the U.S. patient pool equals Europe's but pricing would likely be double.
Vertex Pharmaceuticals (VRTX)
Market Cap: $18.1bn
Consensus 2014E Revenues: $592mm (-51 percent y/y)
Consensus 2014E EPS: -$2.33
Key Products: Kalydeco for cystic fibrosis (CF) -- $294,000/year andIncivek for hepatitis C.
Company Background:
- Kalydeco is the only approved medicine to treat the root cause of cystic fibrosis. It is approved for patients with the G551D mutation age 6 and older, which equates to a little over 2,000 patients.
- Potential to submit Kalydeco sNDA for patients with R117H mutation age 18 and older.
- VX-809, a CFTR corrector in Phase 3 for patients with F508del mutation. Data from TRAFFIC and TRANSPORT studies to be reported in mid-2014.
- VX-661, a CFTR corrector planned for Phase 3 for patients with F508del mutation.
- Nov 2013 sold Incivo (called Incivek in U.S.) product royalty rights for $152mm.
Conclusion: At the end of Mar 2012, Vertex had just finished the most successful drug launch in history -- selling $1.3bn of Incivek (at the time considered a revolutionary treatment for hepatitis C) in its first year. Yet, six months later investors were already anticipating competition, which sent the stock down 50 percent. Fortunately, the company also had a budding CF franchise, and with the release of VX-809 Phase 2 results the stock recovered 100 percent from its lows by mid-2012. Since then the stock has continued to be volatile, exhibiting four 30 percent plus up and down moves.
The explanation for these wild swings is that VRTX is predominantly a niche company treating less than five percent of CF patients. Its stock is largely affected by investors' belief of whether the company can become more than this. VX-809 and VX-661 are two therapies that have shown promise in early stage studies to treat cystic fibrosis F508del homozygous patients. If either are successful, the number of patients eligible for Vertex's medication would expand to 30,000, thereby increasing the company's market opportunity by 14x. Given the magnitude of stock price changes from the previously announced Phase 2 results involving VX-809 and VX-661 to date, it is almost certain that investors are gearing up for another one when VX-809 Phase 3 results are released in mid-2014.
Emerging Healthcare Celebrities:
In many sectors of the economy it is common for there to be someone the broader public typically associates as a foremost expert of that specific field. In alternative energy it is Elon Musk, CEO of Tesla (TSLA), in banking it is Jamie Dimon, in industrials it is Jack Welch, former Chairman and CEO of General Electric (GE), in investing it is Warren Buffett, CEO of Berkshire Hathaway (BRK.A), and in technology it was Bill Gates, founder of Microsoft (MSFT), then the late, Steve Jobs, founder, chairman and CEO of Apple (AAPL) and now Mark Zuckerberg, founder, chairman and CEO of Facebook (FB).
For all the good that biotechnology and the healthcare sector at large have contributed to the economy and society, the industry has continually lacked a public champion. Biotech and pharmaceuticals particularly have been viewed as an esoteric field only to be understood by medical doctors, PhDs and scientists.
Times are changing though. Medicine is becoming more consumer oriented. Drug companies are marketing to potential customers directly, the web and personal technology devices are helping individuals take care of themselves, and providers are introducing services to enhance the patient experience. As a result, healthcare companies and their CEOs are gaining recognition. But it takes more than success and prominence to become the voice of an industry. Leaders need to be evangelists for their visions and products, creating hope and inspiration and in the process build a cult-like following.
Big changes have been happening in healthcare whether through science, technology or regulation. With change breeds opportunity and thus new individuals to lead the way.
The candidates are:
athenahealth (ATHN)
Market Cap: $5.3bn
Consensus 2014E Revenues: $744mm (26 percent y/y)
Consensus 2014E EPS: $1.04 (1 percent y/y)
Key Products: Cloud-based services for electronic health records, physician practice management, patient communication, care coordination and network insight -- athenaClinicals, athenaCollector, athenaCommunicator, athenaCoordinator, athenaClarity and Epocrates.
Company Background:
- Led by Jonathan Bush, Co-Founder, Chairman and CEO.
- Most popular product is athenaCollector. Used by > 47,000 providers representing about five percent market share.
- Jan 2014 announced three new large customers (defined by > 75 physicians), including Medical Professional Services, one of Connecticut's largest multi-specialty Independent Physician Associations with over 450 physicians.
- Physician awareness of the company rose from 31 percent in 2012 to 39 percent in 2013.
- Awarded 2013 Best in KLAS #1 Overall Software Vendor, displacing Epic, the previous #1 of the last eight years. KLAS is an independent medical technology research company that measures vendor performance.
Conclusion: There is no bigger champion for improving healthcare through technology than Jonathan Bush. He has been described as, "more passionate than perhaps any executive I've ever run across," and "the provocateur of healthcare IT". But his outspoken nature and company's successes could only carry ATHN so far. At the end of 2012 athenahealth was still a niche electronic medical records company catering to small physician groups. If the company was to change the industry from its high cost, archaic technology to a more nimble architecture it would ultimately have to challenge health IT's two largest players, Epic and Cerner (CERN). Last January Mr. Bush and Co. set out to make this happen. ATHN bought Epocrates and its 340,000 physician customers (roughly half of the doctors in the U.S.) to address the company's biggest weakness -name recognition.
The early results are promising. In 2013 physician awareness improved 25 percent and large customer wins followed. This has emboldened investors to believe that ATHN's business model of moving from small physician groups to large practices and later to enterprises (hospitals) is proving out. By moving up market, the company would be able to sustain its sector leading 20 to 30 percent long-term revenue growth rate, and as a result, the stock is up more than 60 percent since the Epocrates acquisition announcement.
Jonathan Bush is aware of the expertise and execution necessary to supplant the incumbents. He speaks fondly of how much easier it is to implement and use ATHN's solutions and revels for the day where the phrase, "no hospital CIO ever got fired for choosing Epic" ceases to exist. Recently the company unseated Epic for the #1 slot for 'Best in KLAS Overall Software Vendor' and has stated plans to be enterprise ready within 2 years. Jonathan and athenahealth's dream may soon come true.
Intrexon (XON)
Market Cap: $3.0bn
Consensus 2014E Revenues: $59mm (+129 percent y/y)
Consensus 2014E EPS: -$0.29
Key Products: Synthetic biology tools - UltraVector, RheoSwitch, Cell Systems Informatics, Laser-Enabled Analysis and Processing, andmAbLogix.
Company Background:
- Led by Randal J. Kirk, CEO and Chairman. Also, Founder and CEO of Third Security, LLC, former Chairman of Clinical Data (acquired by Forest Laboratories (FRX) for $1.2bn) and former Chairman of New River Pharmaceuticals (acquired by Shire (SHPG) for $2.6bn).
- Provide companies with proprietary synthetic biology technology to enable the development of new or improved products in health, food, energy and environment on an industrial scale. Partners are responsible for product development, marketing, sales and regulatory approvals.
- Revenues generated through exclusive channel collaborations, or ECCs. ECCs often include technology access fees, equity ownership, cost reimbursements, milestone payments and/or royalties.
- Notable collaborations: AquaBounty's AquAdvantage Salmon, Johnson & Johnson's (JNJ) consumer division for development of skin and hair products.
- IPO Aug 2013.
- Approximately 60 percent insider ownership.
- $279mm in cash and cash equivalents as of Sep 2013 with stated goal of turning EBITDA positive by 4Q 2014.
Conclusion: According to Sand Hill Econometrics, only about six percent of venture capital exits since 2003 are IPOs and 26 percent profitable acquisitions. Even more rare is the CEO and/or Chairman that is able to repeat any of these two feats. R.J. Kirk is that guy, having a hand in three multi-billion dollar acquisitions and two IPOs, including his current company, Intrexon. In Feb 2011 Forbes wrote an article, "Is Randal J. Kirk Biotech's Best Investor?" It goes without saying that Mr. Kirk has built a substantial following, similar to that of Warren Buffett or Carl Icahn, Chairman of Icahn Enterprises L.P (IEP). Professional and retail investors have come to expect nothing but greatness.
Intrexon represents Mr. Kirk's biggest venture to date as he has already invested more than $300mm of his own capital. It is his belief that for the human race to not run out of resources, genetically modified products need to be present in Monsanto's (MON) corn and soybean seeds, as well as in live animals, energy sources, daily consumables, etc. If XON is successful, given that Monsanto is currently a $15bn revenue company in agriculture alone, investors can easily understand the company's very large market opportunity. Still, with only one commercial product using the company's technology (AquaBounty salmon eggs approved in Canada) XON is still a concept stock. However, given Mr. Kirk's devout fan base this is one situation where fundamentals, numbers and valuation have little bearing. XON will get a free pass in the short-term on the belief that R.J. will make synthetic biology a reality. Modifying genes in order to create better products such as GMOs and medical therapies has already made its way into society in small amounts. The big unknown is whether society is ready to adopt more of these types of products; note General Mills (GIS) recently announced that Cheerioswould be GMO-free.
Closing Thought: As investors continue to remain skittish regarding the global economy, healthcare should remain a prime focus in 2014. More specifically, the biotechnology industry with its relentless focus on innovation has built a strong foundation for the long-term. The emphasis on more targeted therapies has increased efficacy, and what were once considered "pie in the sky" theories are moving closer to reality. Who knew that when Provenge by Dendreon (DNDN) became the first ever immunotherapy to be approved by the FDA in April 2010 that this was just the beginning of a huge technological wave. Now large amounts of capital are investing in gene therapy and RNAi. For example, on January 13, 2014 Sanofi (SNY) announced a $700mm investment in Alnylam Pharmaceuticals (ALNY), a leader in RNAi therapeutics.
2013's biotechnology stock performance was not an aberration, but a signal of more great innovations to come.
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