Dear Steem Reader,
In recent months, ive been fortunate to book double- and triple-digit gains in Blackbaud Inc. (NASDAQ:BLKB), Cognex Corp. (NASDAQ:CGNX), Control4 Corp. (NASDAQ:CTRL), Digital Realty Trust Inc. (NYSE:DLR), STMicroelectronics NV (NYSE:STM) and Visteon Corp. (NYSE:VC). And my portfolio
I don’t plan on sitting around bragging about my successes, though. Instead, I’m convinced that my time is much better spent finding new opportunities to reinvest our hard-earned capital — and do it all over again. (Can I get an “Amen”?)
And as I survey the market, I can’t find a better place to redeploy our cash right now than the biotech sector.
Why, you ask? It’s simple, really…
First off, we’re woefully underweighted to the sector. In fact, as it stands right now, we no longer have any active biotech recommendations.
Second, we’re on the cusp of a potentially massive rally. And if we don’t get positioned quickly, we could miss out entirely.
Consider: In the last week, the iShares Nasdaq Biotechnology ETF (NASDAQ: IBB) hit a fresh 52-week high. the index is at a key level. In the coming weeks, it’s either going to retreat from the resistance level — or bust through it.
I’m betting it’s the latter. For three key reasons:
Reason #1: Nothing but positive news from Washington, DC…
That’s not a typo. The political circus is settling down and working in biotech’s favor for the foreseeable future.
How so? Well, the drug-pricing controversies that dented valuations in 2016 have settled down. While they will never disappear, it’s become obvious that Congress isn’t going to act anytime soon (no surprise!).
This is effectively sounding the all-clear to investors, showing that when politicians drag their feet, they can positively impact biotechs.
At the same time, however, politicians promising to act swiftly on tax reform will likewise prove to be a boon for biotechs.
You see, health care and technology companies account for a staggering 86% of the $2.6 trillion in cash parked overseas. The proposed reforms will clear the way to bring that cash home, which promises to boost dividends, buybacks, capital expenditures, research and development, and mergers and acquisitions. Just like it did the last time Congress passed a tax holiday, in 2004.
Reason #2: Major acquisition resets the tone…
When market leader Gilead Sciences Inc. (NASDAQ: GILD) offered $12 billion for Kite Pharma Inc. (NASDAQ: KITE) in late August, it reignited interest in the sector and sent investors scrambling to find the “next Kite.”
Later in the issue, we’ll reveal the companies that are most likely to be the next takeover targets.
For right now, all you need to know is this: The Gilead-Kite deal is an extreme vote of confidence in the future of biotech. It’s guaranteed to generate fresh investor interest in biotech stocks, as well as encourage more strategic deal making.
Reason #3: Surging venture capital interest…
Cue up the President Trump meme, because private biotech funding numbers are in for the third quarter… and they’re “huge!”
A staggering $3.6 billion flowed into private biotechs. That’s the largest quarter of venture capital funding for the sector ever, according to PitchBook Data.
The massive jump in private financings underscores a surging appetite for biotech investments. It’s only a matter of time before that extreme bullishness flows into the public markets, too.
Add it all up, and the fourth quarter of 2017 is shaping up to be a banner quarter for biotech stocks as the flood of fresh capital pushes up valuations. Make no mistake — there’s certainly room to run, too.
biotech valuations on a forward price-earnings ratio are still well below the levels witnessed during the last boom in early 2015. And this month, we have not one but two timely ways to play the inevitable breakout for maximum profits…
Shortlist: The Next Billion-Dollar Biotech
On the heels of Gilead’s takeover announcement of Kite, Raymond James & Associates Inc. analyst Reni Benjamin wrote…
[The deal] is a boon for the cell therapy space in general [and] heralds Big Biotech’s view regarding the promise of cell therapy, opening the door for more favorable deals going forward as companies evaluate how to position themselves in the oncology space.
And he’s spot-on!
As I’ve long argued, deal-making begets more deal-making within any industry or sector, as companies need to make acquisitions to stay competitive. But I’d argue that takeovers aren’t simply a strategic need for giant drug companies. They’re an absolute necessity right now.
Why? Because upward of $30 billion of branded drugs are coming off patent in the next 12–18 months. And there’s no way to replace those sales fast enough by developing new drugs in-house.
Instead, the only way to replenish the pipeline is by buying other companies that have completed the drug discovery work and are in the process of clinical studies.
Of course, this obvious reality means competition is fierce for the most promising companies — which, in turn, forces major pharmaceutical and biotech companies to make moves sooner and pay up, just like Gilead did.
The good news is these companies can easily afford it. Many of the largest companies in the sector enjoy solid free cash flow, plus cash-heavy balance sheets to fund an M&A boom.
With that in mind, here’s a rundown on the most likely takeover targets in biotech, in addition to Molecular:
Adaptimmune Therapeutics Plc (NASDAQ:ADAP)
Bellicum Pharmaceuticals Inc. (NASDAQ:BLCM)
bluebird bio Inc. (NASDAQ:BLUE)
Clovis Oncology Inc. (NASDAQ:CLVS)
Fate Therapeutics Inc. (NASDAQ:FATE)
Juno Therapeutics Inc. (NASDAQ:JUNO)
Miragen Therapeutics, Inc. (NASDAQ:MGEN)
NantKwest Inc. (NASDAQ:NK)
Puma Biotechnology Inc. (NASDAQ:PBYI)
Ziopharm Oncology Inc. (NASDAQ:ZIOP)
If we dig into the recent outperformance of biotechs, another obvious trend becomes evident. That is the fact that the smallest biotechs are rallying by the largest amount.
Case in point: The SPDR S&P Biotech ETF (NYSE:XBI), which is equal-weighted — and therefore better reflects the moves of smaller biotechs — is up an impressive 46% year to date. In comparison, the more top-heavy, large-cap-focused iShares Nasdaq Biotechnology ETF is only up about half as much.
Not to mention smaller biotech firms are often the most compelling takeover targets for larger biotech firms. Especially now that large-cap firms have so much cash sitting on corporate balance sheets — yet have dwindling pipelines and revenue streams.
Translation? If we really want to score a massive payday, we need to find the under-the-radar companies destined to be tomorrow’s next billion-dollar buyout.
And that’s where Molecular Templates Inc. (NASDAQ: MTEM) comes in.
Even Better Than CAR-T?
The hoopla surrounding the Gilead deal for Kite wasn’t simply because of the staggering purchase price. The deal also served as a key validation of the next big drug platform.
For those unaware, Kite is one of a handful of biotechs developing a unique class of cancer drugs known as CAR-T. These drugs use a patient’s immune system, specifically T cells, to actively fight the disease.
In clinical trials, remission rates for particularly nasty cancers have checked in as high as 80%. That’s an unheard-of success rate, which underscores why Gilead was willing to pay up to own Kite.
It also means that it’s too late to find the next small-cap CAR-T player. None exists anymore. Instead, we need to invest in the next big platform. Enter Molecular.
Founded in 2009, Molecular is a clinical-stage oncology company focused on a platform called engineered toxin bodies (ETBs), which are used to treat B cell malignancies, multiple myeloma, breast cancer and melanoma.
In scientific terms, ETBs use genetically engineered versions of the Shiga-like Toxin A subunit (SLTA) to trigger cell destruction. Subsequent generations of ETBs reduce immunogenicity and deliver payloads into the cell.
In layman’s terms, the company’s platform activates the patient’s own immune system to attack and destroy cancer cells. Whereas CAR-T therapies are all the rage right now, ETBs represent a potentially more effective platform, especially because of their ability to treat solid tumors.
If a promising CAR-T therapy company like Kite fetched $12 billion in a buyout, it stands to reason that a superior approach warrants an even higher valuation. In this case, there’s an opportunity for us to get involved before too many other investors figure that out. And that’s because Molecular went public via a reverse merger in early August.
Reverse Mergers Back in Vogue
There’s no denying the stigma attached to reverse mergers. But it’s unjustified, particularly in the biotech sector.
As Atlas Venture Partner Bruce Booth observed, “There are about 20–25% of IPO companies over the last wave of IPOs that went public and then blew up.”
That wave he’s referencing? It’s the 2014 biotech boom when one of out every four IPOs in the U.S. was for a biotech company. That many publicly traded “shells” sitting around with cash are too tempting to pass up.
After all, money (like water) often flows via the path of least resistance. And it’s much quicker, easier and cheaper to reverse into a publicly traded shell then to endure the drawn-out, costly process of a fully marketed IPO.
While going the reverse merger route means forgoing analyst coverage right out of the gates, the results speak for themselves.
Take Tobira, for example, which went public via a reverse merger in 2015. Last year, Allergan paid $1.7 billion for the company.
There are countless other reverse merger success stories, too.
As Wende Hutton of Canaan Partners says, “There was a time when a reverse merger was seen as a last resort, but those times have changed. If you do a lot of work and have fundamental value, it’s a reasonable option to consider.”
In other words, reverse mergers for biotechs are becoming more commonplace and acceptable. Molecular happens to be one of the latest examples. Especially since the traditional IPO market has been relatively soft.
If the reverse merger route to the markets doesn’t bother some of the best-performing investors in the biotech space, it shouldn’t bother us, either. And it clearly doesn’t.
In addition to Molecular, many top institutional investors recently invested in another reverse merger biotech (hint, hint) — Miragen Therapeutics Inc. (NASDAQ: MGEN).
For those unaware, a reverse merger usually involves a private company merging with a public company that has cash but no longer has any viable programs or products. At the time of the merger, additional cash is typically raised and the company’s name is changed.
In this case, Molecular was private and merged with San Francisco-based Threshold Pharmaceuticals, which suffered a midstage failure for its cancer drug, tarloxotinib.
Since Molecular chose this more obscure path to market versus a traditional and heavily marketed IPO, few everyday investors even know it exists. But the same can’t be said about well-heeled institutional and industry investors.
Invest Alongside Biotech’s “Warren Buffetts”
At the same time as its reverse merger, Molecular raised $40 million from a “Who’s Who” list of institutions — including Longitude Capital, Perceptive Advisors and the Baker Bros.
As a frame of reference, Perceptive routinely delivers 40–50% annual gains by investing mostly in small- and midcap biotechs. We’d be hard-pressed to find a more qualified and accomplished investment partner. Ditto for the other institutions that participated in the recent funding.
If nothing else, their participation validates Molecular’s technological approach and the potential of the investment. And most importantly, it de-risks the opportunity for us. After all, these institutions undoubtedly performed countless hours of diligence before pulling the trigger.
But the validation doesn’t stop there.
Molecular also bagged a $20 million investment — and a partnership deal worth almost $550 million in milestone payments — from Japan’s largest pharmaceutical company, Takeda Pharmaceutical Co. Ltd.
“Takeda’s oncology expertise and drug development capabilities represent unique assets for combination with our approach to targeting and destroying cancer cells, and we look forward to developing products via this new avenue of oncology research,” said Molecular’s chief scientific officer, Eric Poma.
Talk about an understatement!
Many late-stage biotechs can’t attract as strong a partner as Takeda — let alone on such potentially lucrative terms.
Again, since few investors pay attention to the reverse merger market, we’re able to piggyback off the expertise and diligence of well-heeled institutions and industry insiders for our ultimate profit.
If more investors knew about the specifics behind the company, I’m convinced that shares would be trading considerably higher.
After all, Molecular’s current market cap checks in at about $250 million. So not only is it well funded into 2020, but the company already has deals in place that could easily generate revenue equal to roughly double
its current market cap.
This disconnect isn’t the only reason the opportunity is so urgent.
Multiple Catalysts Ahead
Molecular’s lead candidate, MT-3724, has proven safe in Phase 1 clinical trials. And it’s expected to enter Phase 2 trials before the end of the year.
The company’s second-generation ETBs will go into clinical trials in 2018.
Each represents an important catalyst for shares.
At any time, the company could ink another partnership deal like it did with Takeda, which would also be a catalyst.
Not to mention favorable price action for biotechs in general (which we expect in the months ahead) promise to boost share prices. Remember, a rising tide lifts all boats. And that’s particularly true in the bio-tech sector.
More urgently, Molecular’s chart is suggesting that a massive move higher could be in store, and I don’t want us to miss out.
As you can see, shares surged above the 50-day and 200-day moving average price levels on the heels of the Gilead-Kite deal. More recently, they surged to fresh 52-week highs.
A couple more points higher and we’ll blast through all resistance levels and the sky will be the theoretical limit.
Don’t let the recent outperformance dissuade you, though. Biotech stocks routinely soar four- to fivefold before they attract genuine mainstream interest. As the crowd piles in, shares routinely double again. And any takeover offers only magnify the gains from there.
Yet at current prices, we’re still able to purchase Molecular for about $2–3 more than the institutions paid back in August. So we’re practically investing right alongside them with plenty more room to run. That is, if we act quickly.
You see, by my calculations, four single investors control upward of 60% of outstanding shares and are locked up until early February.
That leaves very few shares in the float, meaning any of the positive catalysts mentioned above promise to amplify the stock price moves in the near term. So don’t delay!
Action to take: Buy half your typical position size in Molecular Templates (NASDAQ: MTEM) up to $10. We’ll look to use any unexpected market volatility to our advantage by entering the second half of our position at a later date.
Biotech Breakout #2: Profiting From a Sudden Shift in Sentiment
Once upon a not-so-long time ago, Gilead Sciences was the hottest biotech in the market. For the last two years, though, it was anything but hot, dropping nearly 50%.
What happened?
In a nutshell, the company was a victim of its own success. Surging sales and market cap gains for its key hepatitis C and HIV drugs fizzled out.
With no obvious blockbusters in the pipeline — and a massive cash pile that management seemed reluctant to put to work to buy a new blockbuster — investors grew weary and bailed.
I can’t say I blame them. No one wants to own a boring value biotech. They want above-average growth. And that’s something Gilead could no longer offer. That is, until management splashed out with a $12 billion deal for Kite Pharma.
In a single move, the company opened a new runway for growth in the red-hot oncology sector. Kite is at the forefront of innovation in the CAR-T space, which is arguably the hottest niche in the $160 billion-plus cancer market.
To be fair, Kite isn’t alone. In August, Novartis secured the first FDA approval for a CAR-T drug, Kymriah. But Novartis’ win increases the odds of a positive outcome for Kite’s first CAR-T drug, axi-cel. The FDA is expected to provide a decision on or before Nov. 29. (Mark your calendars.)
In other words, Gilead’s investment could pay off quickly.
Rest assured, the Kite acquisition isn’t simply about a quick hit, though. Importantly, the deal gives Gilead two platforms, not a single drug. So the growth potential is multifaceted.
Or as CEO John Milligan said, “[Cancer] cellular therapy is going to be really the cornerstone of what we’re doing going forward.”
At the end of the day, the potential exists for Gilead to transform into a “triple threat,” with major revenue streams coming from HIV/AIDS, hepatitis C and now oncology treatments.
It Pays to Be a Contrarian
“A bright future isn’t priced into Gilead’s stock currently,” writes The Wall Street Journal’s Charley Grant. And he’s right.
In the immediate aftermath of the Kite acquisition, Mizuho Securities did a quick survey and concluded that “60% of respondents believe Gilead overpaid for Kite,” according to StreetInsider.
Clearly, the masses don’t recognize the significance of the Kite deal. It shifts Gilead from a boring value stock into a serious growth machine in the massive oncology market. Especially since management is not opposed to making more acquisitions to cement its leadership position in the space.
Nor are they familiar with Gilead’s track record of success with other major acquisitions.
In 2011, Gilead paid an eye-popping 90% premium to buy Pharmasset. Again, investors worried that management overpaid. But the deal gave Gilead key hepatitis C drugs. And the rest is history.
You’ll recall those same drugs are what propelled Gilead’s stock to all-time highs in 2015 and prompted Grant to dub the acquisition “one of the most successful biotech deals of all time.”
At 11 times forward earnings, Gilead’s stock is simply trading too cheaply. Fair value for the company is closer to $105 per share, or about 30% higher than current prices. And if we consider Gilead’s strong cash flow, continued profitability and hefty cash balance, there’s little downside risk involved at these levels.
Of course, with a gargantuan $108 billion market cap and the stock trading around $82, it would require a hefty capital outlay to buy a meaningful position. Likewise, it would take a massive increase in earnings to drive the share price high enough to warrant tying up that much capital.
That makes no sense. So instead, we’re going to turn Gilead back into a small-cap stock by investing in long-dated options.
Doing so will minimize our capital outlay to about 10% of the current share price. It will also multiply and accelerate our upside potential, thanks to the power of leverage.
If you find this helpful leave comment and upvotes are always good
Hint invest in options for max profit