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Shifting Some (more) Dollars to Biotech

I made a sorta of shift in my portfolio last week. I sold a lot of the commodity stocks that I’ve been holding for the last couple months and used the cash I raised to buy biotechs and a couple of other special situation-y ideas (CALM, PCYO).

This is far from a new foray into biotechs. But until last week I have mostly been buying biotechs that have nearly or more cash on hand than their market cap and that have a low burn rate.

This week I waded into a few more expensive names. I added CRISPR Therapeutics, Intellia Therapeutics and I added back to Caribou Biosciences. All are CRISPR names and all I’ve talked about before. Both CRSP and NTLA are trading far from cash. These are multi-billion market cap companies. So this is a different idea than what I’ve been going after in biotech over the last few months.

Why buy more biotechs? Perhaps I am a degenerate gambler. But there has to be a point where you just say enough is enough. The funny thing is that the biotech names with approved drugs generating revenue are actually doing quite well. I have owned Vertex for a little while here and its been great (I sold it this week). I also owned Incyte for a time and it was doing well too. Others like Bristol Myers, Eli Lilly and Merck have done great and mostly avoided the downdraft in the market.

So it just seems like a real disconnect. If you have a revenue producing drug the market is valuing you highly. If you don’t the market is sending your stock to the trash heap.

That sure seems like the kind of situation that would lead to some takeovers. And that is what led me to buy these CRISPR names. They seem like reasonable takeover targets.

Second, I’ve been following biotechs closely enough to notice a slight change in their trading the last few days. They have gone down but I’d swear they are going down reluctantly. We’ll see.

In addition to these two stocks, I added to a few of the names I already own. I added a new negative enterprise value biotech Graphite Bio. With an EV of negative $120 million I think this might be the most negative EV I’ve seen. It doesn’t seem like a very good company, the drug pipeline keeps running into road bumps, but nevertheless, it only takes a little change in sentiment with these names.

There is the chance with a name like Graphite and a few others I own that a hedge fund steps in and pushes for strategic alternatives. This happened with one name I own already, Arca Biopharma. Arca had some bad COVID trial results a few weeks back and I was like, oh boy here we go, back to $1.50. While the stock did hit $1.50 in after-hours that night it also mysteriously recovered back to flat the next day.

Something was up and that something was that Cable Car Capital stepped in a bought a lot of shares and then pushed for the company to do strategic alternatives.

I wonder if, in the absence of takeovers, we see other hedge funds do this as well?

It just seems like in a crappy market like this, owning stocks that trade at less than cash, especially if there is some sort of readout in the near-ish term that could give the stock some enthusiasm, is not a terrible thing. Biotech also has nothing do to with COVID in China or inflation or the US economy really, so even though the sector has been a disaster, its not really in the middle the maelstrom in most ways.

We’ll see. I’ll keep these purchases on a short leash.

3 Comments Post a comment
  1. cmmacniv #

    Lane – you made an interesting comment recently about a bidding war on VWTR.What would make you think this might be a possibility? Is it because it traded up over 17 on the announcement?

    April 26, 2022
    • I just think the assets are worth more. Look where we are at with Lake mead, we barely got a bump up this winter: . Same with Powell. They are talking about issues with generating electricity at Powell. I just can’t see how those AZ credits aren’t going to be worth more in 6 months than today.

      And last week VWTR announced that the courts in Nevada had rescinded an order on their southern properties, near LV, that would have made it difficult to extract water from those properties. Vidler has a lot of water on those properties. Its more water than they have at the Fish Springs Ranch up at Reno. And none of that water is priced in the stock in any way.

      I’m not sure why they took the offer they took. It seems way too low to me. Maybe there is a piece of this I don’t understand. Or maybe they think this is a good time to take an offer and force the hand of other potential acquirers. That’s my hope anyway. If this is a good asset for DR Horton it should be equally interesting for KB and other home builders.

      So when I weigh that against being able to buy the stock 5-10c above the offer price like I could on Friday, I just think its a good risk reward. I said to my uncle last week I think its $500 of downside for every $10-20k of upside. And I don’t really view it as an opportunity risk in this market because what else am I going to put these dollars into?

      So those are my thoughts.

      April 26, 2022
  2. Matthew Chamberlain #

    As a mostly biotech guy, the past year + has been hard.

    Longtime lurker (years), but first reply for anyone reading. Here’s everything I have going on worth noting:

    SGMO continues to be my largest position and has been for some time. Adding below $5. Given their past performance as a company (their in-vivo gene-editing for MPS did fail) and the market’s sentiment towards them, I wouldn’t recommend anyone purchase them without extensive DD, but it seems like things are coming together, finally, with internal programs and external validation.
    Their Hem A phase 3 partnership with PFE is on voluntary hold for factor levels *ABOVE* normal. To keep it simple, their gene therapy is causing hemophiliacs to produce too much factor, and Pfizer (imo) wisely chose to put the trial on hold, I’m assuming to develop a management algorithm for these supratherapeutic patients at risk of clot.
    They recently showed best-in-class Fabry data (Phase ½ STAAR trial), and competitor AVRO discontinuing their trial was a definite tailwind.
    Biogen has an ongoing CNS collaboration and owns about 18% of SGMO from a share purchase when the deal was struck. They have identified 2 of 18 targets they are focusing on (ST-501 and ST-502), and with one being Alzheimer’s I’m assuming BIIB will be placing greater emphasis and allocating more resources here following the Aduhelm disaster.
    They have also dosed the first ever human patient with CAR-Tregs (named Tx200) in March. CAR-Tregs are intended to suppress (more like prevent activation of) the immune system in kidney transplant patients with mismatches donors. This has a massive read through to other autoimmune conditions if successful. Imagine replacing an autoimmune immune disease requiring chronic steroids, immune suppressive drugs or antibodies with a one-time gene therapy…
    They also have an allogenic cell therapy collaboration with GILD that, until a recent GILD slide set, I assumed was dead in the water. Not attributing any value here until more news.
    Sanofi is returning the SCD program to SGMO, and it is unknown if SGMO will re-partner or discontinue it. They have made allusions that they can produce more benefit with refined cell processing techniques, but at this stage they need to focus and maintain cash, which is the biggest issue at the moment- the need for a new partner or raise.
    Year end they had $464mm in cash, and currently they have a $689mm market cap, but as we’ve seen lots of bios have gone negative EV recently, and they are churning 200mm per year, so financing is the biggest issue here.
    They also mentioned some more base editing information to be presented soon in their most recent proxy. Aside from the delivery expertise in AAV they are touting (including the new moniker SIFTER for the system for refining tissue-trophic viral vectors), from what I can tell ZFPs have shown greater sensitivity/specificity than most CRSPR constructs and editing tools. I am not an expert in the area, but it is only one component of the SGMO investment thesis, the rest outlined above.

    PDSB- I’m hoping for some good data to be presented at ASCO by PDSB, abstracts (meaning titles only) are to be released this Wednesday (tomorrow). They already showed good efficacy vs SOC in HPV(+) H&N. They are using a vaccine in combination with immune therapy, and at one point their trial design was misinterpreted by the market when their HPV(-) arm showed no response, but that was intentional as a proof-of-concept; the vaccine component is meant to cause the immune system to target only HPV (+) cells. We have the trial in the phase 1 clinical trials unit where I work (PharmD, BCOP), but it affords me no special knowledge on the efficacy, I only dispense the drugs occasionally. Market cap is very small for potential market share if they can become 1st line HPV+ H&N.

    XAIR has shown relative strength the last couple days since positive data for NO (nitric oxide) in covid patients. They are waiting on an FDA approval (and have been a loooong time) for their nitric oxide generator medical device (LungFit). CEO has bought a very large number of share sin the past at much higher prices. PMA response expected 1H22, per XAIR website. I believe that date has been moved back a couple times.

    AFMD had good NK cell therapy data but they immediately did a cash raise. In a rare move, I actually sold all the gains (pure luck). NKTR, which I do not own, had a great run up on positive data using a similar therapy, but like everything in biotech right now, the price is reverting.

    ATNM recently had a new deal and a nice pop, but gave a lot of it back. Their isotope-linked antibody therapies may be a major contender for SOC in certain types of BMT transplant conditioning (SOC currently is intensive chemotherapy). Seems to have greater response rates and eligibility to proceed to transplant, and better long-term outcomes. They have an approved drug but it is an outpatient treatment that requires hospital administration, so barely any traction- most community oncologists have no incentives to refer patients to larger outpatient centers, and billing/administration is difficult. A therapy which is effective and meant to be given inpatient in a large institution from the outset may circumvent those issues.

    PAVM and DMTK had huge runs and dumps, but I think they are both viable medical devices, despite Fintwit “gurus” pumping them. DMTK is a patch that replaces biopsy for diagnosing melanoma, and PAVM Esocheck is a short outpatient procedure using a “balloon” to capture esophageal cells to test for Barretts esophagitis/malignancy.

    Should be home runs, but a better mousetrap can be ruined by a bad CEO, and they unfortunately have chosen implementation paths that seem at odds with gaining prescriber traction.

    For DMTK, dermatologists are not realizing as much revenue as they would from biopsy and encountering some billing issues (firsthand knowledge of this- my cousin in law is a derm drug rep). DMTK is combatting with telemedicine efforts and a potential direct-to-consumer push with yet-to-be-approved Luminate patch (kind of like the food sensitivity tests, but here a predisposition to sun damage/melanoma). Per cousin in law, some derm offices love it, though, and are prescribing the patch then doing a confirmatory biopsy follow-up.

    PAVM spun off Esocheck into Lucid diagnostics (but still maintained majority ownership) resulting in an unbelievable crash in PAVM price. Not sure what they were thinking, but my guess is the CEO Aklog wanted the market to “recognize” the value of the rest of the pipeline, and it turned out to be close to zero! Luckily I sold ITM calls all the way down and came out close to even. Overall down a bit, but controlling a lot more shares than I started with (was using ITM call premiums to buy shares and buying-to-close as the price continued to tank, rolling down as much as possible). I also believe LUCD is trying to tightly control revenues by having a limited number of proprietary testing centers. In theory, Esocheck should have already replaced a much more costly, time intensive, and risky endoscopies…in theory.

    AXCP Lotto ticket position for c. diff data, but they will surely need to do a raise before approval.

    CDTX Lotto ticket in for rezafungin extended release data.

    XERS Lotto ticket for Merck collaboration- I think they are going to make some mabs self-injectible using their Xeriject technology, which would grant a patent extension to Merck on one of their biggest cash cows and ludicrous royalties for XERS. Although I morally despise “me-too” reformulations, they seem to result in revenue, and I’ve learned the market doesn’t care what soapbox I choose to stand on. They currently have approved product revenue.

    CMRX small position for (admittedly shaky) glioblastoma data (ONC201) and anticipation of BARDA contract for TEMBEXA.

    FSTX small position given how cheap it is and the large number of partners.

    April 26, 2022

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