Reminiscences of a Stockblogger

Research: 3 Biotechs

I mentioned a few posts ago that there were a few biotech microcap stocks that I had been looking at. Below I have reproduced my notes on 3 of them (NTEC, ABIO and ETTX).

These are all interesting ideas I think, though with the market where it is I cringe a little to post about them. The XBI has had quite a move. But as I’ve said before, I’m inclined to believe that the XBI is just beginning a new bull market, finally breaking out of a long consolidation. So maybe we have further to go.

More generally though, this has to be a speculative mania right? One that is, in many ways, the opposite of what the Mike Green et al passive is king proponents have professed would happen.

Many of the stocks that are going truly bonkers have very little ETF exposure. The best way to profit lately has been by chasing small individual names in the right sector and actually looking for illiquidity (ie. a low float). Another tactic has been to chase an active ETF manager – ARK. This doesn’t seem like a passive tidal wave to me. It seems like a return to active, albeit active speculation.

But it is crazy. I wrote in the comments of the last post about OEG. The only thing that stock has going for it is that it gets lumped in as “solar”. That is enough for a 4-bagger in 2 months.

I am trying to keep my exposure fairly low (though its hard when you see trains leaving the station and you are compelled to jump on – I did this with FSRV yesterday) but I am purposely leaving some speculative positions in my portfolio because, like it or not, that is what is working.

With that said, the three biotechs below have not participated much in the market run, but I think that each could pop under the right circumstances.

I mentioned in my prior post that I liked NTEC and I still do. But it is far from a perfect stock.

In fact it is mostly a failed stock – they have a drug-delivery platform (called the Accordian Platform) that has failed at pretty much every turn. This was a pick from Marc Cohodes a couple of years ago (as a long). It performed miserably after they failed their Ph3 trial for Parkinsons (though if you read the details it is more complicated than just that – they did not fail completely).

Since then NTEC and their Accordian Platform have had a go with a Novartis compound, a go with a cannabinoid compound and a go with a Merck compound. None of these have stuck.

But what is curious is that the partners keep coming – Merck signed up for another compound in the fall and GW Pharma signed up in December.

So you wonder, what exactly is so promising here? It rings a bit with a story I read about another biotech, the name of which I can’t remember, that toiled in these sort of failures but was eventually bought out at a significant premium – for its platform. So even though every indication it targeted failed, someone realized that the platform was sound, that it would eventually succeed, and that it was worth owning it before that happened.

NTEC trades at just under cash.

ABIO is another biotech laggard. This one is even more straight forward.

They have a COVID drug, which drove a crazy spike in the summer when they announced a trial. But the COVID drug angle is not really important going forward IMO.

More interesting is that before COVID, ABIO had another drug, called Gencaro, that was about to go into a Ph3 trial against chronic heart failure (HF).

HF is a huge market ($10 billion+) and ABIO is trading at less than cash.

Now this is not a perfect story. Because of COVID the Gencaro Ph3 trial, called Precision-AF, has been postponed. And you could argue, quite rightly, that Gencaro didn’t actually work that well in the Ph2 trial.

So what was the point of doing a Ph3 study on a drug that didn’t work in Ph2? Well ABIO is adept at genetically targeting their therapies, and the Ph2 study did not do that kind of targeting. But those patients who did have a specific genetic biomarker, which are a subset of high-risk patients, performed very well in Ph2. So those patients will be targeted in Ph3.

Those patients are as much as ~1/10th the market. While not as large as the whole HF market, that is still very large for a company trading at less than cash. What’s more, there is no approved alternative right now.

So those are their stories. In both cases, and to a lessor extent with CLBS and ETTX (the other two names I’ve added over the last few weeks), these are names that could have a speculative pop. Take a look at the charts. They seem quite bullish and we’ve had a couple false starts already (including yesterday). Each has a fairly low float. For NTEC in particular there is only about 4 million shares outstanding and there seems to be a couple of institutions that hold a fair number of those.

I don’t like to think that way. About spikes and floats and silly moves. But that is what this market is. You have to take what you can get.

Entasis Therapeutics

• this was a $5 stock back in March
• $61mm of cash
• 35.5mm shares so $75mm market cap at $2.10
• was a 2015 spinoff of AZN
• focus is on precision antibiotics
• they go after infections caused by multidrug resistance Gram-negative bacteria
• it’s a platform! Has produced a pipeline of product candidates
• has 2 ph3 trials against high-priority pathogens
• SUL-DUR – sulbactum-durlobactum
• will have Ph3 readout on SUL-DUR in 20201 – targets Acinetobacter – also called CRAB
• resistant CRAB rates in US are 40-50% and 90% in parts of Europe/Asia
• really high mortality of 50%
• SUL-DUR is a beta-lactamase inhibitor
• has broad Class D beta-lactamase coverage, essential for CRAB
• well tolerated in Ph2 and in three Ph1 trials
• Ph3 trial ongoing – called ATTACK
• can market SUL-DUR with 15-20 rep salesforce because CRAB is found in targeted settings:
• 300 large ICUs, 200 transplant/burn/cancer centers, outpatient LTACSs and Infusion centers
• would replace colistin and polypharmacy in CRAB
• can point to better efficacy, lower cost, safety
• CRAB TAM is $1b
• also have royalty and milestones that offset cost – so they don’t own 100%?
• Ph3 data on zoliflodacin in 2022 – targets N. gonorrhoeae
• oral application
• is resistance to existing drug called Intramuscular ceftriaxone
• 87mm cases a year, grows at 10%
• Ph2 showed efficacy in 47/47 patients
• they started Ph3 in Sept 2019
• two other early stage programs – ETX0282CPDP against MDR UTIs and ETX0462 against pseudomonas aeruginosa
• cheap compared to competition:

• iterum has actually come up a lot since this – it trades at $1.23 for $60mm market cap, $90mm EV

Intec Pharma

• $17mm of cash
• 4mm shares at $4 for $16mm market cap
• seems to be burning $3-4mm of cash a quarter
• its a platform!
• they develop drugs based on their accordian pill platform
• this is an oral drug delivery system
• they expect it to A. improve efficacy, B. improve safety of existing drugs via “efficient gastric retention” – so it is digested better, gets in the system better
• it uses a sort of folding structure that lets the drug be released as the accordian structure unfolds:

• then the accordian goes into small intestine and degrades
• AP-CD/LD:
• most advanced drug is Carbidopa/Levodopa – developed for Parkinsons
• so this is where the shit hit the fan
• announced Ph3 results in July 2019 – Accordance Study
• did not meet endpoints
• they call it numerically superior but not statistically superior – “not a statistically significant reduction of OFF time)
• they also say this, which I’m not sure what to make of:
  • In preliminary review, AP-CD/LD provided meaningful reduction in OFF time for those patients who were dosed at 1.6 to 2.0X IR-CD/LD dose
• I believe though that they are attributing it to sub-optimal dosing, but sounds like they are saying dosing comp has to be close to 2:1
• did provide treatment, did not demonstrate statistical significance over the existing CD/LD formulation – an immediate release pill
• also wasn’t any better tolerated
• so it basically didn’t work any better
• it did meet endpoint in Ph2 trial back in Feb 2019
• they are looking for a partner here to redo (??) the ph3
• Cannabinoids
  • initiated 2 clinical development programs
  • formulating and testing THC and CBD for various pain indications
  • their AP-cannabinoids should A. extend absoroption phase, give more consistent level of cannabinoid
  • will address problems with cannabinoid delivery such as: A. short duration, delayed onset, variable dose
  • did Ph1 trial in March 2017 – showed that it was safe and did show better exposure
  • but follow-up in Dec 2018 did not meet their expectations
• Novartis
  • developed AP version of proprietary Novartis compound
  • they went thru invitro with this, then a human PK study
  • In Dec 2019 Novartis dropped them
• Merck
  • in May they announced collaboration with Merck – this one went thru in vitro, met endpoint but is not going further
  • in Oct entered second research agreement with Merck for new compound
• GW Pharma
  • entered into agreement in Dec
  • explore AP with undisclosed partner
  • basically no details disclosed here

Arca Biopharma

• $51mm of cash
• no debt
• 9.3mm shares outstanding at $4.50 for market cap of $42mm
• they aren’t burning much cash, $1.5mm a quarter
• develops genetically targeted therapies for cardiovascular disease
• its a platform!
• they have a COVID treatment called AB201
• initiating Ph2 trial in Q420
• is an inhibitor of something called tissue factor
• tissue factor is a receptor, it is a coagulation pathway
• in COVID you get overactivation of coagulation and immune response
• the idea is that this is related to the TF pathways, so if you can restrict those you can stop the response
• not just COVID – it has shown to prevent coagulation disorder from Ebola and Marburg virus
• could be used with other antivirals
• they think it would have a broader spectrum for other coronoaviruses and RNA viruses beyond just COVID
• the Ph2 will be on 100 patients, then do a Ph3 with 450 patients (if there are that many by that time?)
• was originally developed as a anticoagulant
• they did a Ph1 and Ph2 study using it in thrombosis and it was safe and had efficacy
• also have a molecule called Gencaro, used for chronic heart failure
• have a trial on hold because of COVID – called Precision-AF
• they had Gencaro in a Ph3 with HF patients – say that it improved mortality, hospitalization
• published the Ph2b trial, called Genetic-AF in Journal of American Cardiology in May 2019
• the result of the Ph2b was for them to target a subset of patients with high “left ventricular ejection fraction” and specific genotype in the Ph3, would enroll 400 patients
• it seems like what happened is the drug didn’t really work any better over the broad population, but it did over a subset with genetically-defined HF and a severe case of it
• so they can move forward with Ph3 targeting those patients
• HF is a huge market – $12.5b in total, while for the subset for Gencaro would be $500mm to $800mm
• third drug is AB171, genetically targeted treatment of chronic heart failure and peripheral arterial disease

How I know this is a bubble

Last night our family was about to sit down to dinner and just as we did I was struck by fear.

An hour before I had read this zerohedge tweet about Tesla:

After I read the tweet I looked at the after hours price of Tesla. It was up about 2%. After being up about 8% during regular trading hours.

I began to panic. Complete, pure, irrational panic.

Here’s the thing. I was short Tesla.

I’m not a TSLAQ guy. I think I shorted it briefly once in the past. But I had put on a short at the beginning of the week.

This was not a large position. It would not even qualify as a small position. It added up to 0.27% of my portfolio. And that’s after losing on it for 3 straight days.

Yet before I sat down for dinner last night, I was panicked enough about this tiny, little Tesla short that I had to run and close it out in after hours before I could sit down to eat.

Its not just Tesla.

I have had hedges on in my portfolio, in one form or another, since about 2016. During that time I’ve never really worried about them. If the market goes up, then my stocks go up. The hedges go down but that is part of the deal.

But right now, I have become actively worried about my hedges. So much so that before the market closed Thursday I went through all my inverse index positions and calculated how much my portfolio would lose from them if the market was up 2%, 3% or 4% on Friday. And then I adjusted their size to make sure each was at a level I could live with.

This is not normal.

It is not normal for me to be so uncertain. It is not normal for me to be thinking that the market could be up multiple-percent for no particular reason.

To be so unsure of what the market might do that a 0.3% short in Tesla feels dangerous? That it makes me start calculating the damage if this is the next Volkswagen and the stock flies up 2x, 4x or 10x in a few hours on some bizarre index inclusion short squeeze (which I have to say doesn’t really make any sense to me, not that such reason mattered at the time).

And this isn’t some fear bred from a string of bad trades. I know that fear. I’ve been wrong about a bunch, I’ve had bad luck streaks, and I know the feeling when you get to a point where you don’t trust your own judgement.

That isn’t what this is.

I’ve done quite well the last couple of months. Yet I can’t shake the feeling…

I have not been as skittish as I felt this week since… well I don’t know when.

I certainly have never felt this skittish at a time that my portfolio was going up.

I was not even this skittish in March. After all, that made some sense. This does not make sense. So anything seems possible.

It could be passive or options or $2,000 checks. Or some combination of all of the above. I look at Twitter and I see all these guys calling out their big returns on portfolios that look like they are all identical with the same SaaS and EV and momentum names (or they are just 100% Tesla or something crazy like that). And these guys don’t look like the guys that usually get rich on stocks.

Meanwhile many of the guys that I know from years on Twitter that are good at stocks are either silent or incredulous.

Apart from taking off my Tesla short (which I replaced with an even tinier option position where at least I know my downside if something bizarre happens), today I did the only thing I could do given my unease. I sold. Both longs, shorts and hedges. I am now very small.

That will mean I don’t fully participate in what could very well be the blow-off top. But I am just not comfortable with what is happening right now.

What the market is doing doesn’t make sense. I doesn’t feel right. So I had to get small enough that it doesn’t matter.

Research: Biorem

These guys are opaque and not very concerned with shareholder relations. They have no presentation and their press releases are dull.

This is also not a business with an impressive history. Annual revenue is unexciting.

Quarterly revenue growth has not been any better.

Exciting stuff so far.

But the quarterly backlog has been growing. Backlog was $21 million at YE 2018.

• Q3 backlog of $34mm and bookings of $8.7mm
• Q2 backlog was $30.9mm and bookings were $7.7mm
• Q1 backlog was $31mm and bookings were $5.5mm

There is $9.3mm of cash on the balance sheet and no debt. Biorem has 38.7mm shares at $.60 for a market cap of $23mm.

Business

Biorem makes systems to remove hazardous pollutants from industrial and commercial emissions. These systems eliminate odors, VOCs, hazardous air pollutants from air streams. They use microbes that eat the pollutants and turn them into harmless byproducts. In their portfolio there are 3 different grades of air filtration systems and a biogas H2S removal system.

BASYS and BiofiltAIR

• smallest biofiltration system
• removes VOCs and contaminants from the air

Here is how it works:

Odiferous compounds or hazardous air pollutants are transferred into the biofilm where they are used by the microbes as a food source and converted to harmless byproducts such as carbon dioxide and water vapor.

MYTILUS Biotrickling Filter

• fixed film biological reactors
• air this is air cleaning system
• circulating air in “biological reactor” where there are microbial cultures that eat the contaminants
• used for the removal of hydrogen sulfide at waste water treatment facilities or ethanol from industrial processes

SYNERGY

• this is the high end filtration system (“where failure is not an option” – the website)
• several stage system
• can include several biological reactors in series and stages with specific chemicals to address specific contaminants
• designed to handle the most difficult air stream applications
• used by municipalities for sustainable wastewater treatment

BIOGAS

• uses sulfur degrading bacteria that eat the H2S
• removes H2S from landfill gas and other methane gas mixtures

Recent Wins/Engagements

• Dec 14 – NYC to examine using their biological processes for mitigating odours and air pollutants from wastewater treatment facilities
• Nov 16: 2 contracts for $2.4mm with Miami, $2.5mm win with Montreal, $2.3mm win with Loudoun County in Virginia, 2 orders from China for $2.2mm
• Jan- announced JV in China
• Dec 19 – order for $6mm air emission abatement project in Montreal, they are modernizing, constructing new organics facility, will produce soil amendments and natgas

I’m of the mind that even though the clean energy names have had a good run, they may have further to go with this Democratic win. Most are too expensive for my tastes. This is one I accumulated over the last week of the year and does not seem expensive.

In addition to Biorem I added a couple of solar installer small cap trades: OEG and PECK, to try to capitalize on the Democratic senate. We’ll see if those pan out and they really are just trades. I’ve also bought a number of small biotecths over the last few days: BNTC, CLBS, ETTX, and NTEC. Of the 4 I think NTEC is most interesting. This is an old Marc Cohodes pick that didn’t pan out, but they have a platform that doesn’t seem like its dead to me and yet the stock trades at a level that suggests it is.

The banks are rocking and gold is not. I like that these two sectors provide a bit of a hedge to one another on a daily basis while both seem to be on an uptrend in the long run.

I have to take some profits

Sometimes I reluctantly reduce my positions, having regret that I will miss out on future gains. But this is not one of those times.

Over the last 3 trading days, I sold across the board except for my community bank and gold stock positions. Everything else I either reduced or removed entirely. I am much reduced on most of my speculative plays. I also added to my index shorts, which I believe will make me roughly hedged (its hard to say). I took a position in PSQ to go along with RWM, HIX, and HIU.

I am also fully unhedged on my US dollars.

I don’t know if this is the top or whether the market keeps going for another month. But its been a very good 30 days and it would just be bad management to not take the gains I think. Pigs get slaughtered right?

Gold is up a lot today and looks to be breaking out, and it hasn’t really participated in this move, so I will hold those positions and have added a couple more (I added back ROXG for one).

The community banks have done well, but other than Silvergate, which has gone stratospheric (I sold the rest this morning), they aren’t particularly expensive. They certainly aren’t in a bubble, which cannot be said for some other sectors. So I have kept the banks as well.

The truth is, I am pretty darn lucky with the timing here. As is my usual tact, I would have been selling all the way up if it hadn’t been December. But because I knew that if I held on just a little bit longer I could defer tax gains for a year, I waited it out. That I made it all the way to the 30th (last day for tax selling was the 29th) is sheer luck.

So it turned out well. No need to overstay my welcome. We’ll see what the market does next.