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Jan 30

New Position in MYnd Analytics

Well we are less than a month into the new year and I am already breaking a rule. Rule #2, stay away from illiquid stocks. So what do I do? Two days later I buy a stock that trades 20,000 shares most days.

That said the stock has had a lot of volume the last few days. So it’s not illiquid at the moment. And I am keeping my promise to write more. So there’s that.

Here’s the scoop.

Mynd Analytics (MYND) has a not-so-interesting legacy business of providing psychiatric help via video conference to patients in remote areas. They have a second not-so-interesting business of offering a platform (called PEER) that helps doctors prescribe for psychiatric conditions.

Two not-so-interesting businesses are not a good reason to buy a stock. What is interesting here is a merger that was announced a few weeks ago. Mynd Analytics is merging with a private biotech firm called Emmaus.

Emmaus has a much more interesting business than anything Mynd has, so this is more of a reverse takeover kind of merger where the new company is going to be Emmaus, not Mynd. In fact, exiting Mynd shareholders are going to get about 5.9% of Emmaus. They are also going to get a spin-out of the two not-so-interesting businesseses into a separate company.

So while those businesses are not very interesting to me, the market was still saying they were worth up to $1.50 a few months ago. So basically as a shareholder I get what I already had, plus now I get a piece of Emmaus.

Getting a piece of Emmaus is interesting. Emmaus is in the early stages of marketing a drug called Endari. Endari is approved to treat sickle cell disease.

Sickle cell disease (SCD) is an awful sounding inherited disease where your blood hardens, which can cause stroke. There are 100,000 patients in the U.S, another 80,000 in Europe, and over 400,000 in Africa and the Mideast.

There is only one treatment on the market for SCD. It’s called hydroxyurea and its been on the market for over 20 years. It helps in most cases but it’s not a cure and it produces a lot of adverse side effects in patients.

Endari has went through FDA approval trials and its efficacy has been demonstrated. It provides improvement in adverse events over the placebo, both on its own and when used with hydroxurea. Importantly it is well tolerated by patients.

That last clause in the sentence is important, because physicians can prescribe hydroxurea and Endari together.

While it’s expensive to prescribe, insurance companies have been very willing to add Endari to their list. Why? Because adverse events for sickle cell patients are severe. They require ambulances, hospital stays and are extremely expensive. Endari comes at an ASP of $30,000 ($20,000 net to Emmaus after rebates and coupons). All it takes is a couple less hospital visits and Endari pays for itself.

Okay, so the drug is effective. What’s the stock worth?

Well Emmaus just started their ramp with Endari in January. The CEO, Dr. Niihara, who is also the founder and inventor of the drug, gave us an indication of the sales ramp in a PiperJaffrey presentation they gave in November. This is gross revenue.

They also said there was about 1,200 patients on Endari at the time (so November). That roughly lines up with the gross ASP of $30,000/year.

Niihara also forecasted 10,000 patients on Endari by the end of 2019.

So the math on that is 10,000 patients at $20,000 net ASP is $200 million of annual revenue.

The math on the post merger valuation is that there will be about 160 million shares of Mynd Analytics outstanding. I bought the stock at $1.40 so that gave it a market cap of about $225 million. Now the market cap is around $280 million. I actually added a little at the open this morning after I wrote this up because it made more sense to me once I put it down on paper. Sometimes writing clarifies the mind.

Somehow under 2x revenue for a biotech with a new drug ramping and an orphan drug designation seems too low to me.

Endari is on patent in the US for another 6 years. There is a 10+2 patent in Europe that doesn’t begin until its approved. There is another patent in Japan.

The $200 million should be just a start. It’s basically a 10% market share in the US, but market share isn’t really the right term here because it can be used at the same time as its competition. Europe has a TAM of another $1.2 billion (the ASP is Europe is expected to be a bit lower). ROW TAM is another $3.4 billion.

So the TAM is reasonably big. It’s not like Endari is going to top out in a few months and stop growing its market.

Given that I think the stock isn’t pricing this in.

On the risk side, I have lot’s of questions. First, why is Emmaus doing this? They said they don’t need capital and its cheaper to merge than an IPO, which is fair. They also get the $60 million or so of net operating losses, so that’s a reason. But I have to think that after the lock-up (120 days) some of these early investors will want out.

Second is the risk that Endari falls flat. I have no reason to think that from what I’ve read, but the drug is an improvement, not a cure. I am also no biotech expert. There are also a bunch of drugs in the pipeline that are a few years from approval and will be competition.

Third, I’m not sure how far off that competition is. Both Global Blood Therapeutics and Novartis have recently received fast track designation for their drugs. It’s not completely clear to me what that means for approval.

Fourth, the spin-off of the psychiatric business is likely to get sold hard when it happens. Everyone now is buying for the interesting business and the not-so-interesting business is an afterthought.

Fifth, I don’t know much about Emmaus beyond what is on their website and what is in the disclosure documents.

Sixth, if the government shuts down again god knows when this will close. I’ve been waiting on Eclipse and Blue Ridge to close for like 8 months now.

Seventh, prior to the merger it seems like there was quite a bit of management deals on shares and related party transactions from the not-so-interesting businesses they operated.

There are others, but that’s a few to ponder.

Nevertheless it seem like a decent speculation at this price. And it let’s me write something up quickly and keep new years resolution #4.

Jan 25

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Week 394: New Years Resolutions

Portfolio Performance

Thoughts and Review

Here are a few investment resolutions for the new year:

After a stock has a good run, I will sell a decent amount of it, no matter how much I like it.
I’ll stay away from illiquid stocks that will be hard to get out of in a bad market
I will stay away from stocks with high levels of debt
I will be very thoughtful before purchasing any stock not generating free cash flow
Be selective
Post more!

These resolutions could also be described as Lane Sigurd’s investment strategy for a bear market.

Some of them are at odds to how I have invested over the long bull market we’ve been in. Over that time I held my winners and watched them turn into two, three or five baggers. I didn’t worry about debt. In fact I coveted levered stocks that would really run if the tide turned. I didn’t give a second thought to liquidity because I was always able to get out.

I think we are still in a bear market. Maybe we’ll top out soon, maybe we’ll run back up near the highs, I don’t know. But I am positioning myself based on the expectation that in the next few months there will be another leg down.

Having said that, there is a bit of good news. The Weekly Leading Index looks like it might be putting in a bottom.

Is it possible this is just another 2016-like blip? Possibly but I’m still going with the bear market view. Maybe I’ll have to change my mind on it. But not yet.

Looking back, December was a tough month, but I had a lot of cash and that helped cushion the blow. And while I was not lucky enough to go all in at the bottom I did pick at a few positions in December, and the positions I held onto had big runs in January. So I sit here now at (somewhat shockingly) new portfolio highs.

I’m a bit surprised by that. My portfolio still has some 70% cash after all. The market still isn’t great. It’s really just a bit of luck and timing really. A number of my remaining positions had big runs. Liqtech took off. Gran Colombia took off. Vicor, Golden Star and Wesdome all had nice moves. UQM Technologies got taken over. I bottom fed on a few small positions (Identiv, UQM and a few oil names) that all had really nice bounces off the bottom. Meanwhile I went a few weeks where none of my positions went down.

Having had good performance while not owning very many stocks makes me think that in this market I would be better off being selective than to go with my more usual shot-gun like approach. In the past I’ve taken small positions in a bunch of stocks, even if I wasn’t completely sold on them all, and watched whether they would develop. A few would become big winners and I’d add to those as they went up.

I’m not going to do that in this market. Instead I’ll hold cash and wait for stocks that I have a lot of conviction with. We’ll see how it works.

So it was a pretty good month. But I am not overstaying my welcome.

True to my first resolution, I have been selling my winners. I sold out of three of my trades entirely already (Identiv, Tetra Technologies and Lone Star). I reduced my Liqtech position by half. I reduced Gran Colombia and Vicor as well.

I sold some losers too. I got rid of Roxgold, Gear Energy and reduced my position in Empire Industries.

One stock I’m not selling is Wesdome. As much as I love my other gold names, the more I dig into what Wesdome is onto at Kiena, the more I love it the best. It’s not cheap I know, but its got so much going for it. It’s in Canada and not in an area with questionable politics. There are two mines with great potential for expansion. But what I really love about the story is just how cheap the growth from Kiena will come for. Something I had overlooked in the past were comments by Wesdome management that the mill at Kiena is worth $100 million. That is basically a $100 million asset that was useless that is now an integral piece of their development plans. That they can bring Kiena on-stream (and I’m seeing estimates from anywhere between 90,000 oz to 130,000 oz from brokerage for the project) for $50 million is about the most efficient gold development project I’ve seen.

As for my last resolution, I have been lax about posting. It’s harder to post in a bear market. Even when I get up the courage to buy a stock, I have weak conviction because of the market. I find that it takes a lot of conviction to write about something because mentally it kind of ties you to the idea. That makes me reluctant to lay out a thesis when I might get scared and sell a week or two later. Or worse, I might hold it because I wrote about when I really should be selling.

UQM Technologies is a good example. I bought it in November, sold it, then bought it again in December. I didn’t write about it either time, even though it was a great story. I was just worried the market might keep falling and I would be doing another round of selling if it did. UQM would be a stock I would cut. Fortunately the market turned around and I didn’t.

I’ll try to put aside those fears in the new year and write about my positions more. Even if I look at all of them right now as having the time frame of a pin-pulled hand grenade.