Excellent Science + Unmet Need Equal Great Returns

By Streetwise Reports - May 21, 2012 | Tickers: CRIS, GHDX, ISIS, MAKO, NXTM | 0 Comments

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By George S. Mack, The Life Sciences Report

Short-term gains come with pipeline products in mid-stage development.

It is satisfying on those rare occasions when I get a straight answer to my first question in an interview for The Life Sciences Report. "Our theme is to focus on the markets with the most profit potential," answers Chief Investment Strategist Alex Daley of Casey's Extraordinary Technology. Daley has had some big wins in the past two years with MAKO Surgical Corp. (NASDAQ: MAKO), NxStage Medical Inc. (NASDAQ: NXTM) and Genomic Health Inc. (NASDAQ: GHDX). Odds favor continuance of a great run if he sticks with his modus operandi of searching out the excellent science first and then making sure there is an unmet need that someone will pay for.

Daley prefers mid-stage companies that are off the lab bench and being tested in humans, but the trick is to make sure all good news and high expectations are not yet baked into the share price. There must be a certain amount of risk remaining in the stock, or there is just no upside. Among his favored areas is the cancer landscape. The main reason for that is that Daley believes there has been incredible progress in the lab that has just not yet been translated into clinical utility. Indeed, that makes sense because it takes 1–2 decades to move from test tube and Petri dish to mouse and all the way through human development to approval. So it's not hard to visualize lagging clinical success. Moreover, Daley notes that cancers represent approximately 140 different disease states, and "We see it as a huge market with a lot of potential for multiple successful players."

Daley wants to see his stocks move in a reasonable period of time, not a decade from now. His list of must-haves begins with Isis Pharmaceuticals Inc. (NASDAQ: ISIS), which is still a development stage company after two decades of being public. The Isis platform represents a totally new technology called antisense where a protein is not just engaged and inhibited, but rather where protein synthesis is blocked by stopping the gene. This is still a brand new concept as there have been no drugs approved in the antisense or closely related RNA interference (RNAi) category. The Isis platform represents a new paradigm in drug development, and the stock has suffered over the years because of the extraordinary challenges of breaking into a new frontier. The Isis pipeline is loaded with proposed cancer therapies, but the company's lead product is its non-statin cholesterol drug Kynamro (mipomersen sodium) for high risk patients, which was filed with the European Medicines Agency (EMA) last July and the U.S. Food and Drug Administration (FDA) in March of this year. I ask Daley if mipomersen approval would prove the platform. "Absolutely," he says. "Mipomersen is the sacrificial lamb at some level. It's the first infantry going in head first."

Even with his big gains in the stock, Daley is still bullish on Genomic Health. "We like it because it's involved in cancer, but not actually in treatment. It helps to treat patients with an assay of genetic tests that help guide the oncologist in choosing the appropriate therapies," he says. "It is moving quickly and taking advantage of the fact that it is the first in this business, and it is getting a good return for shareholders at this point." As to the considerable share gains already realized, "Obviously, when we picked up Genomic Health, it was significantly cheaper than it is today, but we still think that there's a lot of growth ahead of the company."

He refers to Curis Inc as "One of our favorite companies." The company's platform is focused on inhibiting the hedgehog pathway, which is instrumental in making cancers aggressive and metastatic. The company's most advanced product is Erivedge (vismodegib) for advanced basal cell carcinoma (BCC). It was approved in January of this year, and it's partnered with Genentech [a unit of Roche Holding Ltd. (RHHBY: OTCPK). Curis earned a $10M milestone from Genentech on approval, and now the company will receive a royalty that flows smoothly from top line to bottom line untouched by cost of sales or selling and general administrative expenses. The company's CUDC-101 is in phase 1 cancer trials with its multi-targeting mechanism [against histone deacetylase (HDAC) and epidermal growth factor receptor (EGFR) and epidermal growth factor 2 (Her2)] where the theory is to target several cancer-causing proteins with a single molecule that can be taken orally. If it works, it will be a powerful revenue generator.

Daley still loves his winning play NxStage Medical Inc. which is transitioning its business from dialysis center operation to home dialysis where patients are much happier and can have their blood filtered daily instead of twice a week. "Patients are healthier, there are less complications and the cost of caring for them is significantly reduced," he says. "Thus, payers have every reason in the world to support it, and they have enthusiastically done so over the last few years. The company has really exploded in growth from that side of the business.

Owning a racetrack is a bet on all the horses. That's how Daley thinks about Techne Corp. which sells biologics to nearly all the big pharmas involved in research around proteins. It's a 15% annual grower which provides some stability in an otherwise unstable sector.

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