Bullish For Biotech: Two Sizable Bets On Emerging Leaders
By M.E. Garza
We can't help but notice that more bankers and growth fund managers are placing bigger bets in biotech, where earnings results are not correlated with the macro environment.
Certainly, we have seen a broad range of small-, mid- and large-cap biotech companies raising money recently, but the past couple of weeks, have shown us two sizeable and well executed financings within the healthcare sector that point to the fact that a growing number of bulls are alive and well in healthcare.
On Tuesday morning, Neptune Technologies & Bioressources Inc. (TSX: NTB) (NASDAQ: NEPT) announced a $30 million financing which the company plans to use fuel its core growth in the development, manufacture and commercialization of Antarctic krill oil which is principally sold to Neptune's distributors who commercialize them under their private label primarily in the U.S., European and Australian nutraceutical markets.
The Canadian firm said they expect to use the new funding to:
- Support sales, marketing, and krill inventory purchases for NKO(TM) and EKO(TM)
- Support Acasti Pharma's (TSX-V:APO)development and validation of CaPre® and other biotechnology product candidates
- Support NeuroBio in the development and validation of its biotech product candidates
- Fund expansion of its Sherbrooke plant to increase annual production capacity to 500,000 kg.
It is expected that the remainder will be used to fund further product development, IP protection, and working capital.
The financing was at $4.10 per share with no warrants attached and was lead by RBC Capital Markets and JMP Securities. Byron Capital Markets and John Thomas Financing are acting as Co-Managers.
Shares, which traded as low as $4.18 on the news bounced up to $4.31 and began to trade higher as the market appreciated the event for what it was-a positive development that transforms Neptune and carries it to the next level.
Speaking off the record, managers at several big institutional funds told us that they have taken positions in the firm, believing that the developments are not only positive, but could also spell returns benefiting from the growth strategy and future potential as shareholders in the Neptune partial spin-off, NeuroBio. A distribution of Dividend shares in NeuroBioPharm Inc. which was announced earlier this month and is still in play. Smart firm like Perceptive Life Advisors, which has four PhDs on their staff, is rumored to have taken an even bigger position in the company.
Who can blame them if the next round of filings proves the rumors to be true? Unlike most other biotechs with developing pipeline programs, Neptune called for record 2nd quarter revenues; announcing that they expect to generate $7.5 million to $8 million, which represents an increase of 72% to 84% from the same quarter last year.
Recently, even as the firm was excited to announce that their plant expansion was on schedule and expected by the first quarter of calendar 2013 to double annual production capacity to 300,000kg of krill oil from 150,000kg, investors should now consider that Neptune now has all the cash it needs to hit future targets of over 500,000 Kg/year (which opens up the possibility of $110M or more in revenues at 30% earnings before interest, taxes, depreciation, and amortization).
All the while, Neptune also now manages to maintain their stake in Acasti Pharma above 50%, and hit some of the $10+ price targets even sooner than most analysts could have predicted. And no, we aren't even adding or considering the highly anticipated big "coming out party" for Acasti and CaPre® in the U.S. on the pharmaceutical side to the equation yet.
Analysts have previously highlighted the potential differentiation of krill oil based Omega-3s compared to Amarin's (NASDAQ: AMRN) Vascepa and GlaxoSmithKline's (NYSE: GSK) Lovaza by pointing to a thesis that:
Neptune Krill Oil and CaPre® (pharmaceutical grade) > Vascepa > Lovaza with regard to potential clinical benefit.
So traders and investors still have results of an open label study of CaPre® to look forward to by year end 2012 and a randomized Canadian Phase II study of CaPre® could read out in 1H13.
Another emerging biotech which has been tearing up the charts during the past few months and recently raised $32M in a secondary offering is Pluristem Therapeutics (NASDAQ: PSTI).
That firm now has approximately $80M in cash without debt and shares are starting to appear undervalued considering the number of important catalysts the stock has coming up in the short term.
First, PSTI is expecting to hear back from the FDA in regards to their filed request for Orphan Drug Status. Having successfully received orphan drug status from the FDA for their PLX cell therapy in the treatment of Buerger's disease, the company announced a couple of weeks ago that the use of their PLX Cell platform for the treatment of Aplastic Anemia (bone marrow failure) was also under review by U.S. regulators. Should this status be granted, we expect that PSTI could be in position to begin marketing that treatment by the end of 2013.
We are especially encouraged by the recent examples of recovery in various compassionate use patients that were given the PLX cells. The work in saving lives has prompted recognition for the company in the Israeli media and given their execution and news flow it appears that the firm is focused on making these effective, life-saving treatments available to patients as quickly as possible. We would not be surprised to hear about more successful compassionate use cases in the weeks ahead. Disclosing those would also expedite the regulatory process for approval, not to mention further orphan drug status designations.
Close Pluristem observers are certainly expecting Big Pharma to partner up with PSTI on some of their promising indications in the near-term. Already this past summer, United Therapeutics Corporation (NASDQ: UTHR) entered into an exclusive licensing agreement with Pluristem for the use of Pluristem's PLacental eXpanded (PLX) cells for the development and commercialization of a cell-based product for the treatment of pulmonary hypertension. Per the published terms of that agreement, United Therapeutics will gain exclusive global rights for the development and commercialization of the candidate while, Pluristem will retain manufacturing rights. That pairing works given that UTHR has three approved products (Remodulin, Adcirca and Tyvaso) in its portfolio targeting the pulmonary hypertension market, but others could follow soon.
Given the healthy cash levels, we now expect to see further expansion and or enrollment in clinical trials for additional indications using Pluristem's PLX Cell platform. As it was disclosed in August when the company announced that they would initiate Phase II clinical trials in the United States at Duke University Medical Center . The company stated that it expected that other sites would "become active in the weeks following" the September 5th initiation at that site.
Make no mistake. There is a reason why investors, fund managers and bankers are attracted to these two stocks in particular and why they were able to land such large favorable financings. For one thing, they have effectively outperformed the composite of common stocks and similar securities listed on the NASDAQ. An impressive feat considering that the index is made up of over 3,000 components and that it is highly followed as an indicator of the performance of stocks of technology companies and growth companies.
So what can go wrong?
As with most biotechs, the likelihood of profitability depends on these firm's ability to successfully license and commercialize the products they are developing. If they are unable to complete the development and commercialization of these ground-breaking cell therapies successfully, all the smart investors placing the big bets on these technologies will be out their monies.
To obtain marketing approvals in the United States and Europe for any of their products- be it for maintaining healthier cholesterol levels, improving joint and brain functioning or a cell therapy product candidate these firms must complete carefully controlled and well-designed clinical trials sufficient to demonstrate to regulators that these product candidates are not only safe but effective for each disease for which they seek approval.
Even if after granting regulatory approval, the FDA or other regulatory agencies in other countries could create additional regulatory burdens or discover previously unknown problems with a product, manufacturer or facility. We have certainly seen a fair share of these types of issues within the healthcare sector. None of these companies are immune to that type of risk.
In Neptune's case, specifically, any potential delays in the timelines in building out their plant expansion could have a deleterious effect on the company's business model.
As buy and hold investors, one must be cautious of these risks. As traders, we love the upcoming catalysts and new level of "safety" that the cash on hand provides.
What we are seeing here is what happens when emerging biotechs grow up.
Furthermore, we love that big, smart money is jumping off the sidelines and joining the party that has seen biotech outperforming the rest of the market for all the right reasons.
Disclosure: Long NEPT, PSTI
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