Profile cover photo
Profile photo
Streetwise Reports
Where experts speak & investors prosper.
Where experts speak & investors prosper.


Seven Biotech Options that Buck Tradition: Christian Glennie

Edison Investment Research assesses the value of emerging companies with a model that assumes revenues and earnings are years away. Then again, every investor does that. What's unusual is that Edison looks for tomorrow's upside in companies still small enough to double, triple and quadruple in value down the line. In this interview with The Life Sciences Report, Edison Biotechnology Analyst Christian Glennie applies his valuation skills to seven innovative biotech and specialty pharma companies and discusses the share-moving catalysts that investors need to know about now.

The Life Sciences Report: Let me ask you to go ahead and talk about some of your names. Would you choose a company to start with?

Christian Glennie: Thanks, George. Sucampo Pharmaceuticals Inc. (SCMP:NASDAQ) has had a good run starting from the very solid base it has built over a number of years. The company is founded on a novel technology—prostone-based compounds, which are essentially derivatives of natural fatty acids. It is the only company we know of that is working in this area. The key product so far is Amitiza (lubiprostone), which has been developed to treat a range of constipation disorders. It first launched in 2006, and Takeda Pharmaceutical Co. Ltd. (TKPYY:OTCPK) has been the company's long-term marketing partner for Amitiza in the U.S.

On April 23 the company announced U.S. Food and Drug Administration (FDA) approval of Amitiza for opioid-induced constipation (OIC), which is a very significant market opportunity. We estimate that approximately 2.5 million (2.5M) patients taking opioids chronically for non-cancer pain will suffer from OIC. The approval puts the product in a strong position, given there are very few competitors in this space, certainly in terms of prescription drugs. We model U.S. peak sales for the product at $665M, of which the opioid-induced constipation application is approximately $200M.

TLSR: Christian, to be clear, that $665M represents the total of peak sales in the U.S., and that figure is partnered with Takeda. Is that right?

CG: Yes. The drug is sold by Takeda, Sucampo's U.S. partner. Takeda has an opportunity to invigorate the brand. Sales have been solid but not spectacular. Revenues have been increasing year over year, but not at huge growth rates. I see an opportunity for the company to reposition and reinvigorate Amitiza with a new marketing effort.

The approval also distinguishes the product from a new competitor on the scene, Linzess (linaclotide) from Ironwood Pharmaceuticals Inc. (IRWD:NASDAQ) and Forest Laboratories Inc. (FRX:NYSE), which was launched at the end of last year. So far, in our analysis, it looks like prescriptions of Amitiza are holding up. Our theory has always been that the entrance of Linzess would actually help grow the market for use of prescription drugs for constipation disorders. The cascade of treatment protocols for constipation starts with dietary and lifestyle changes, followed by regular over-the-counter laxatives and prescription-type laxatives before patients and physicians move on to targeted agents.

TLSR: So what is Amitiza's advantage in OIC over its pipeline competitors?

CG: The advantage of Amitiza is that it acts directly on the epithelial secretory glands to stimulate mucosal secretion of water and sodium chloride. This increases liquidity in the gut to help soften stools and aid motility. By acting directly, Amitiza bypasses the negative secretory actions of opioids on receptors in the gut, which causes the constipation. In contrast, mu-opioid antagonists block these receptors. But the real issue for this class at the moment is FDA concern over cardiovascular safety associated with the chronic use of these drugs. The approvability of these agents are in doubt until the FDA completes its review of the field.

TLSR: How do you value this company?

CG: We currently have a valuation of $420M, which is $10/share. It's not a price target. It's rather a valuation as of discounted cash flow (DCF) to where we believe the shares should be trading today. Once Amitiza rolls out commercially in Europe there will be upside, as we don't currently include European sales in our DCF model. But this is more of a 2014 story.

TLSR: Let's go ahead to your next idea.

CG: Biotie Therapies Corp. (OTCMKTS:BIOZF), based in Finland, is interesting on two levels. First, it has just introduced a drug into Europe called Selincro (nalmefene), an opioid antagonist, which is intended for alcohol dependence. Selincro was launched through Biotie's Danish pharma partner H. Lundbeck A/S (HLUKY:OTCPK; LUN:OMX).

The drug is an alternative approach to alcohol dependence. Current therapy is targeted at complete abstinence from alcohol consumption, which presents obvious challenges since abstinence may not be a realistic or attainable treatment goal. The difference with Selincro is that it actually helps moderate consumption, and that over a period of time—months and years—it has significant long-term health benefits.

TLSR: I'm sure there are social implications to this newer thinking. How much support is there for this kind of shift from such an old, entrenched model?

CG: There are huge implications on both the social and health levels. Acceptance of the therapy is going to require a paradigm shift in the treatment of alcohol independence in Europe, where the overriding theme is still very much about abstinence, just as it is in the U.S. A lot of data about the drug's benefits is emerging from clinical trials and supportive work by key opinion leaders, talking about how more realistic treatment goals should have significant benefits. Initial uptake of the product is likely to be fairly slow. A significant education and awareness program is required from Lundbeck, but in the long run we see peak annual sales in Europe in excess of €300M ($392M).

TLSR: Because of the educational component and the paradigm shift required, what period of time are you talking about for peak sales?

CG: That peak would be about 10 years out—in 2023 or so—and the product has a 10-year exclusivity. The peak is at the end of that period.

TLSR: Is there any prospect of getting the product approved in the U.S.? Is a new drug application (NDA) or supplemental NDA anticipated?

CG: No, not at this stage. The company simply wouldn't have the intellectual property (IP) protection to make it worthwhile at this stage. The product itself, nalmefene, has been available in other forms in the U.S. If Selincro were to launch in the U.S., it might only have three years of new product exclusivity, and three years is probably not worth the investment.

The key is establishing the therapy in Europe, because of the potential for approval in eastern European countries outside the European Union, as well as in places like Russia, which could be a significant market. There are plans to develop a market in Japan as well.

TLSR: I understand why a slow uptake is anticipated. You would be fighting a lot of tradition. But I'm wondering, who are the clinicians being targeted in Europe? Psychiatrists? Treatment centers? Where do you start?

CG: The drug will be targeted at the specialists, but also general practitioners in Europe. Selincro does have to be part of a broader treatment program that includes psychosocial support. Some clinicians will still focus on complete abstinence as the ultimate endgame, but a product like Selincro should help patients along that path. Abstinence is not the explicit initial treatment aim for the product, but ultimately any product that helps patients reduce alcohol consumption should bring them farther down the path to complete abstinence.

TLSR: You said you liked Biotie on two levels. Is the Parkinson's disease product, the selective adenosine 2a receptor (A2A) antagonist tozadenant (SYN115), driving any value here?

CG: Yes. Because Selincro is licensed to Lundbeck, the key operational focus of Biotie is tozadenant, which is, as you say, an A2A antagonist. It has a partner in UCB S.A. (UCB:BSE) for that program, but the deal has been structured such that Biotie is responsible for development of the pivotal phase 3 program. UCB will pay milestones as the drug goes through the various stages. Although UCB is helping fund the trials, it is Biotie's responsibility to conduct them.

Biotie had the phase 2b data readout earlier this year, and we are very encouraged by the data. When we compare tozadenant to other A2A receptor antagonist candidates, Merck & Co. Inc.'s (MRK:NYSE) preladenant and Kyowa Hakko Kirin Co. Ltd.'s (4151:TYO) istradefylline (KW-6002), in terms of phase 2 data, efficacy and reducing Parkinson's "off" time, the benefits of Biotie's therapy were more significant. We view Merck's recent decision to abandon development of preladenant after the failure to demonstrate efficacy in three phase 3 trials as a potential positive for Biotie in the long run, given that tozadenant is now the leading A2A candidate in development.

The benefits of tozadenant were also evident in the actual disease score. When you score Parkinson's patients on the extent of the severity of their disease, tozadenant presented significant improvements in that measure. That was encouragement to proceed to phase 3.

TLSR: What's the next story you wanted to talk about?

CG: Turning to a near-term catalyst story, NovaBay Pharmaceuticals Inc. (NBY:NYSE) should get readouts from three phase 2 trials on its aganocide technology in H2/13. Aganocides are synthetic, stable analogs of N-chlorotaurine, which are produced by white blood cells as an endogenous antiseptic to kill foreign microbes. NovaBay has produced a lot of data to show that its agent, NVC-422 (auriclosene), has the ability to overcome bacterial resistance, which is a key issue for the healthcare industry as a whole.

TLSR: What about the trials getting ready to give a readout?

CG: The trials are in viral conjunctivitis, impetigo and urinary catheter blockage and encrustation. They all will report in H2/13. The company has a significant partner for its impetigo program in Galderma Pharma SA, a private Swiss company specializing in dermatology products. We currently have NovaBay valued at about $1.90/share. But if all of the trials read out strongly positive, I've put the valuation in the region of $3.50/share, which would justify phase 3 probabilities.

TLSR: Christian, NovaBay has a $50M market cap. The company's lead compound, NVC-422, will not be used internally but on mucous membranes, sclera or/and the eardrum. But even with those limitations, it still can mitigate or even prevent the use of antibiotics in so many indications. For instance, children with conjunctivitis could be treated and sent back to school without having antibiotic eye drops. Clinicians all over the globe are looking for antibiotic substitutes. Is this product and platform seen as not being very sophisticated, in part because it is a topical medication?

CG: Ultimately it comes down to data. That's why these trials are so key. They are, by far, the most extensive trials that NVC-422 has undergone. The previous trial in viral conjunctivitis was mixed. It was a phase 2-type study, not as well designed or powered as the current study, and it produced mixed data. The back story is that Alcon Laboratories (a subsidiary of Novartis AG [NVS:NYSE]) was a partner of NovaBay in the eye disorders setting, and terminated the agreement after those results came out. That was obviously disappointing. But if the phase 3 data is positive, then, yes, the stock is significantly lower than where it could be.

TLSR: What's the next name you'd like to visit?

CG: Another catalyst story for 2013 is Cleveland BioLabs (CBLI:NASDAQ). This is a very different story. In the near term it's a biodefense play, but its longer-term potential is in oncology. The company's compound, entolimod (CBLB502) is a medical countermeasure to radiation. It is going through the U.S. government's Biomedical Advanced Research and Development Authority (BARDA) to fund development and for potential supply contracts for stockpiles. It's critical to understand that the regulatory pathway is very different. The FDA created the Animal Efficacy Rule for these kinds of biodefense products; companies need to demonstrate the efficacy of a product in animal studies, but only need to demonstrate safety in humans.

The key catalyst for Cleveland BioLabs in the near term is the award of a development contract from BARDA, which is due any time now. It could be worth up to $50M, but it is not an upfront payment. BARDA will reimburse the company for further studies on entolimod.

TLSR: What is entolimod? What is the mechanism that makes it both potentially efficacious in radiation injury and in oncology?

CG: It's being classified as a TLR5 (toll-like receptor 5) agonist, which is fairly unique within the TLR class of potential anticancer agents. Two opposite therapeutic concepts are at work here. One is that entolimod can suppress apoptosis (cell death) in normal cells, which helps protect against damage induced by radiation. The second is that it also helps activate apoptosis in tumor cells, specifically in TLR5+ tumors, by mobilizing an innate immune response.

TLSR: I understand that the near-term catalyst is getting the development contract from BARDA, but then what does Cleveland have to do? What are the next events?

CG: The company has done a number of studies demonstrating the efficacy of entolimod in nonhuman primates, but the company needs to do another set of animal studies, and another set of clinical human safety studies. The target would be to file a biologic license application (BLA) toward the end of 2014. The other major potential catalyst would be a procurement contract, whereby BARDA would commit to buying X number of doses from Cleveland BioLabs over a certain number of years. Looking at previous contracts that have been handed out by BARDA for products targeting anthrax or smallpox, I estimate an order in the region of 300,000 (300K) doses, which would equate to a contract of more than $200M to Cleveland.

But timing that kind of contract is uncertain. I provisionally have an estimate that it might come in 2015, which might coincide with an FDA approval on the biologic license. However, FDA approval is not a prerequisite for a supply contract with the U.S. government. A number of other products—again, for anthrax and smallpox—have already been delivered to the U.S. government but have not gotten formal FDA approval. The procurement agreement would be a significant event.

TLSR: What's the next name you'd like to mention?

CG: Medigene AG (OTCMKTS:MDGEF) is a German company with a longer-term play in terms of catalysts. It is focused on the development of a product called RhuDex, a CD80 antagonist to treat autoimmune disorders. RhuDex is an immunomodulator that potentially blocks the interaction between CD80 on antigen-presenting cells and CD28 on T cells, preventing the overstimulation of T-cells that is often involved in autoimmune disorders. The company has done initial studies in rheumatoid arthritis (RA)—mainly safety studies—but it has decided to focus on primary biliary cirrhosis (PBC), a rare autoimmune disease of the liver. This is very much of an orphan disease indication, with the key market for PBC in the 200–300K patient range across the U.S., Europe and Japan.

Developing RhuDex for PBC could be very lucrative compared to trying to develop it for RA. The clinical timelines are significantly shortened. Also, the company has approximately $22.2M in cash at the moment, which is sufficient to get a phase 2 study in PBC going.

In looking at Medigene, investors will find a big valuation discrepancy versus another company also targeting PBC, Intercept Pharmaceuticals Inc. (ICPT:NASDAQ), which did a $75M initial public offering (IPO) in H2/12. It has more than just a PBC opportunity, but Intercept's value has been underscored by the potential in PBC. It has done significant subsequent fundraisings, and now has a market valuation of about $530M, versus Medigene with a $37M valuation.

Intercept is in the middle of a pivotal study for its PBC candidate. The phase 2 that Medigene is running is of a similar design to Intercept's phase 2 trial. It will start in H1/14, and we hope to get some data by the end of 2015.

TLSR: Medigene also has a phase 2 candidate, a newer version of an old cytotoxic agent. Could this drive any value?

CG: Yes. In fact, Medigene has just secured SynCore Biotechnology Co. Ltd. (a member of the Sinphar Pharmaceutical Group) as its global development partner for EndoTAG, a novel lipid-based formulation of paclitaxel. The theory here is that the positively charged lipid formulation targets the negatively charged endothelial cells lining the blood vessels that feed tumor cells. Phase 2 data suggests an overall survival benefit when EndoTAG is added to paclitaxel in patients with triple-negative breast (HER2/neu-negative, estrogen receptor-negative and progesterone receptor-negative) cancer, compared to paclitaxel alone. The SynCore deal ends uncertainty about the drug's future after a long search for a partner, and a global phase 3 trial is now targeted to start in H2/14. We estimate a potential market launch in 2019.

TLSR: So the primary value driver is RhuDex, followed by EndoTag, is that right?

CG: EndoTag probably accounts for about one-third of the valuation. But in the longer term, the story is very much about RhuDex in PBC.

TLSR: Staying with EndoTag for a moment, I saw a note that five out of a total six patients had a complete response in triple-negative breast cancer. That was certainly a very small number of patients, but it makes me want to see what happens with further development. Triple-negative breast cancer is a truly unmet need in oncology.

CG: Yes, very much so. A number of products are being developed for the setting, but, as you say, it's a tough form of cancer that does not respond to standard hormonal therapies or targeted agents, with chemotherapy being the only treatment option.

TLSR: Did you have another name you could share?

CG: Mast Therapeutics Inc. (MSTX:NYSE.A) is in a completely different area of disease. It used to be called Adventrx Pharmaceuticals, but changed its name in March of this year. It is currently developing MST-188 (purified poloxamer 188), which is in a phase 3 pivotal trial for sickle-cell disease.

Poloxamer 188 is essentially a polymer surfactant that helps to improve blood flow. The drug binds to hydrophobic surfaces of damaged cell membranes and restores these surfaces to a more natural and healthier hydrated state. This is particularly important for sickled blood cells because they block small blood vessels, which leads to a number of complications, one of which is vaso-occlusive crisis, an acute episode that causes immense pain. Many patients experience these crises frequently through a year, and severe cases may require hospitalization for five to seven days. At the moment, the only available therapies are analgesics and fluids. MST-188 could apply to a number of disease indications involving impaired blood flow.

TLSR: Peripheral artery disease perhaps?

CG: Yes. At the moment Mast has plans to do a proof of concept-type study in acute limb ischemia in combination with standard thrombolytic agents. The concept is that MST-188 could be a positive addition to a number of therapies in a number of settings. By helping restore blood flow, clinicians could reduce the duration of crisis episodes in sickle cell patients, a huge benefit because the more often patients have these events, the greater the cumulative effect, causing gradual massive damage to various organs.

TLSR: What about a catalyst? When and what?

CG: The sickle cell study has just gotten underway this year. In terms of completion of the study and getting the data, we're looking at 2015. Similar to Medigene, data for MST-188 in sickle cell are a little way off, but the company does have a number of potential proof-of-concept studies to run, which hopefully will be supportive of MST-188. Ultimately, the key valuation driver would be the sickle cell study.

TLSR: What about staying power? Mast is a small company with a $32M market cap. Is it funded well enough to complete a lengthy study?

CG: It is reasonably well funded, with $32M in cash as of Q1/13. Sickle cell is not an area that has attracted huge investment or interest from big pharma, but it's interesting that within the last couple of years, the likes of Pfizer Inc. (PFE:NYSE) and Novartis AG have gotten involved in the sickle-cell space by licensing a couple of mid-stage development products for the disease. That provides reasonable validation of the interest in the space.

TLSR: MST-188 is not proposed as a chronic therapy, is it? It may be used for a few days—two to three days, correct?

CG: Exactly. The drug would be used in conjunction with intravenous analgesics and fluid drips. The idea is to reduce the duration of crisis, but hopefully there would be other benefits—reduction in pain, reduction in time to hospital discharge and the like.

TLSR: Christian, I know you follow Athersys Inc. (ATHX:NASDAQ). Could you speak to it?

CG: We've certainly been interested in Athersys, but we have not initiated full coverage. I'm interested and excited by the MultiStem (multipotent adult progenitor cell) technology it is developing. It has Pfizer as a partner in ulcerative colitis. The real big ticket item, potentially, is the outcome of its phase 2 trial in ischemic stroke trial, with results expected in 2014. This could be transformational for the company. It's an exciting story and definitely a company to watch.

TLSR: Many thanks to you. I've enjoyed this very much.

CG: Yes, I have enjoyed it as well. Thank you too.

Christian Glennie joined the healthcare team at Edison Investment Research in January 2012 and has 11 years' experience covering the global biotech/pharmaceutical sector as an analyst and a journalist. He came to Edison having held senior analyst and editorial roles at EvaluatePharma and EP Vantage. Glennie also has prior experience as a marketing analyst at Zeneca Agrochemicals.

Want to read more Life Sciences Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

1) George S. Mack conducted this interview for The Life Sciences Report and provides services to The Life Sciences Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Life Sciences Report: Athersys Inc., Merck & Co. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment. Merck & Co. Inc. is not affiliated with Streetwise Reports.
3) Christian Glennie: I or my family own shares of the following companies mentioned in this interview: None. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: Sucampo Pharmaceuticals Inc., Biotie Therapies Corp., Novabay Pharmaceuticals Inc., Cleveland BioLabs Inc., Medigene AG, Mast Therapeutics Inc., Athersys Inc. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview. 
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent. 
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
Add a comment...

How to Play the Invest-for-Tomorrow Game in Medtech: Alan Brochstein

Alan Brochstein of AB Analytical Services blogs, publishes and creates model portfolios for retail investors and consults with institutional investors. He leans heavily toward medical technology because he sees the industry's devices, instrumentation and molecular diagnostics as huge efficiency creators and money savers for hospitals. He never pulls the trigger on a stock unless it has adequate insider ownership and superb management—two ingredients that almost always lead to success. In this interview with The Life Sciences Report, Brochstein highlights several turnaround stories that he believes can create real shareholder value and make money for investors.

The Life Sciences Report: Alan, you hold a multitude of advisory positions both internally and externally. Please connect all those dots for me and explain your business model.

Alan Brochstein: I was working at Piedra Capital Ltd., then a $500 million ($500M) assets-under-management equity firm, and left in 2006 to start my own firm, AB Analytical Services. The original plan was to work almost exclusively with small investment advisers, and I continue to do that to this day. But the business has evolved along the way. I currently work with a few registered investment advisers, and I sit on the investment committee at Friedberg Investment Management Inc.

I've stuck with those original parts of my business model, but in early 2007, I started blogging for Seeking Alpha. I really enjoy connecting with the public through that interaction. I started a model portfolio service in 2008, and have three different models. One of the stock models is called Top 20. It's very eclectic and represents my best ideas. My Conservative Growth/Balanced portfolio is more disciplined, and contains 60% stocks and 40% bonds. The goal of the latter is income and capital growth, and also capital preservation. I just hit the five-year anniversary of Top 20; it has returned approximately 133%.

Yet another part of my business has had a huge impact on everything I do. For four years I've been working with Bethesda, Maryland-based Management CV. This independent research firm provides an analytical framework for evaluating management teams, and I've contributed hundreds of due diligence reports on management teams to the business.

TLSR: Management CV helps investors determine the quality of management. Is this a proprietary product that's offered to institutional investors?

AB: Yes. It's an institutionally oriented service focused on larger, publicly traded companies.

TLSR: You're a chartered financial analyst (CFA). Do you create discounted cash flow (DCF) models on companies you follow?

AB: I do some modeling, but my approach is mainly to review other people's models instead of building my own. Building models is not the best use of my time. It's more important to me to understand what's driving the numbers in a model.

TLSR: I know you follow medtech, which is what we are going to talk about today. What other industries do you follow?

AB: I'm a generalist, but a lot of my companies are in healthcare. I have a disproportionate number of stocks in medtech, which is an area that has fascinated me for years, and I've been able to find a lot of interesting names in that space. I tend to be focused, but not exclusively, on smaller companies. Some of them might even be considered micro-cap.

I have a watch list of 100 stocks that I follow. These 100 stocks aren't the same every week; they are rather a living, breathing group of companies. If a company on my list is acquired, I have to find a replacement. Though I focus on 100 stocks at any one time, I like to think that I focus on more.

TLSR: My understanding is that you have been exploring the idea that insurance companies like medical technology companies because they save money on drugs. Would you expand on that idea for me?

AB: One specific example of this phenomenon is a new technology called renal denervation (RDN). It's a device-based technology for treating hypertension that has been resistant or unresponsive to conventional or first-line therapies. The therapy represents a huge opportunity, and it's not going to be a monopoly. Medtronic Inc. (MDT:NYSE) will be first to market, and St. Jude Medical Inc. (STJ:NYSE) will be a fast follower. Medtronic's Symplicity, available in some markets already, could be available in the U.S. later this year, while St. Jude's EnligHTN received the CE mark in Europe a year ago and could be available in 2014. A lot of smaller companies involved in this technology have been acquired, but there are still several other players. Patients can go in for a quick, minimally invasive procedure, and then they may not have to take blood pressure medications for years. The benefit goes beyond comparing the cost of the medicine to the procedure; it is also about patient compliance issues and the side effects of the medications, as well as mitigating complications that may arise from unmanaged hypertension.

TLSR: These are large companies. St. Jude has a $12 billion ($12B) market cap, and Medtronic is more than four times that size, with a $52B market valuation. Can RDN technology actually move shares of these companies?

AB: St. Jude called out the market as a $25B opportunity a little over a year ago. I don't know if that's true or not, but optimism rules when you're talking about the future. I have seen estimates that 25% of hypertensives fail to respond to conventional drug therapy, and St. Jude suggests that 4% penetration of the 250M global patients that fall into this category would yield a ($25B) market opportunity. I have also seen estimates that the market could be $2-3B per year within the next decade. According to government data, we spend more than $20B per year on prescription medicine to treat hypertension in the U.S. alone. Unfortunately for these companies, trying to get a lot of growth when so much of the business is exposed to the cardiac rhythm management market (CRM) market is challenging. I don't follow Medtronic, but given that it's larger, I would imagine it will be more difficult for RDN to affect share price. On St. Jude, I think RDN can definitely move the needle. But, is it enough to double the value of the company? No.

TLSR: Alan, I'm thinking that even as a minimally invasive therapy, RDN is going to be a difficult sale when there are alternatives. Nevertheless, it's certainly going to be a valuable service for many patients.

AB: You are right. It's not a first-line treatment; that's for sure. But perhaps it could become first-line once safety and efficacy are better proven.

TLSR: You follow some surgical robotics names. Hasn't hospital consolidation been a problem for this industry? Can you address this?

AB: I'm not sure we've reached the point where hospital consolidation is an issue with surgical robotics. I don't think that's been a problem for Intuitive Surgical Inc. (ISRG:NASDAQ) and its da Vinci Surgical Systems, which are used for prostatectomy, hysterectomy and many other procedures.

The other surgical play I'm following closely is MAKO Surgical Corp. (MAKO:NAS). Its challenge hasn't been a macro issue with consolidation or other big-picture issues, but rather one of getting early adopters to its system, the RIO Robotic Arm Interactive Orthopedic System, which is used to perform minimally invasive MAKOplasty procedures for partial knee resurfacing and hip replacements. The company has been able to get surgeons to use the system, but it has tapped out that pool of single users and has had to move up to the executive or CFO levels at hospitals to get sales. Hospitals are saying the system is good, but they must get more surgeons to use it to achieve economies of scale. The selling process takes time, and that has been the problem with MAKO. It's not as far along on the adoption curve as it would like to be.

TLSR: Could you address some other names and their value propositions?

AB: I have mentioned St. Jude Medical. The value proposition there is the great franchise. St. Jude does a lot of research and development (R&D), but it's never the one that invents a new product or procedure. Instead, the company comes up with a better version, a better mousetrap.

Management is a very important consideration for me. Chairman and CEO Dan Starks is very passionate about cardiac health, which is most of St. Jude's business. Dan and his former CFO John Heinmiller, who now serves as executive vice president, own tons of stock in the company. St. Jude's is very well run. For years, it stood out from Medtronic and Boston Scientific Corp. (BSX:NYSE) for its quality, but then ran into quality issues with the Riata Silicone Defibrillation Leads for its CRM devices. The company voluntarily stopped selling the Riata leads in December 2010. That was a disaster, but it's mostly behind the company now. There were residual questions about the Riata replacement technology, the Durata lead system, which has come under attack. But data released by Population Health Research Institute at Heart Rhythm 2013 seemed to refute the reported problems.

CRM has been a tough area for all the players because of changes in the market. Defibrillation products may have been overused. Cardiologists, like all physicians, want to do procedures—that's what they do. People were getting CRM devices when they might not have needed them. In any event, that market has been very sluggish recently. We're starting to see it come back now, just like the hip and knee market. Especially with recent information about Durata not having the feared flaws, St. Jude can get its premium valuation back.

TLSR: You mentioned MAKO before.

AB: People who have been successful in the past are more likely to be successful in the future. I knew about MAKO because Management CV had done a profile on the company and its CEO, Maurice Ferre, who has a history of building and selling companies. I was very familiar with MAKO as a good management story.

Well, that kind of fell apart last year. By the time I looked more closely at it, MAKO had missed two straight quarters, and went on to miss another. I think MAKO is a high-growth story where people's expectations were probably too high. The stock was decimated after the company had to reduce RIO placement guidance in Q2/12 and Q3/12 and then its procedure expectations in Q4/12. The company's procedure growth has slowed from about 50% to 30%. But it seems like the management team has now figured out what the challenges are.

TLSR: MAKO is up 14% over the past four weeks, but is down 48% from a year ago. Do you like it now? Do you see it as a value play?

AB: I do, but value is a tough word to use for this company. I have it in my Top 20 model portfolio. It has high gross margins, but it is not profitable right now. I think the stock could double to $23 per share or so, but the company has to hit its numbers. That's been the problem.

TLSR: No company is going to continue to grow revenues at 50%.

AB: That's probably true, but I think the decline happened a little quicker than people thought.

TLSR: Go to your next idea, please.

AB: Masimo Corporation (MASI:NASDAQ), based in Irvine, is interesting. I was charged by my clients to find a replacement for one of my stocks, Synovis Life Technologies, which was acquired by Baxter International Inc. (BAX:NYSE) at the end of 2011. I needed to find another Synovis. That meant I was looking for a rapidly growing company that investors didn't appreciate for whatever reason.

Masimo struck me as a similar opportunity. It was hurt by declining earnings after it settled with Covidien Ltd. (COV:NYSE) and accepted lower royalties for its pulse oximetry technology. The idea was that as Masimo progressed, investors would realize the core underlying growth was pretty high and that vanishing royalties from Covidien were a one-time hit. Again to management: The company's CEO, Joe Kiani, is an entrepreneur and a brilliant guy who invests for the future. A lot of investors like that, but other investors want to see earnings today, right now. Kiani has done some dilutive acquisitions—technology buys—that have chipped away at earnings. However, he has a better appreciation now for the balance between investing for the future and letting some drop to the bottom line today. He has made some large open-market purchases, too, at great prices, including a purchase of 50K shares near the lows at $18.47 a year ago.

TLSR: What's the growth driver at Masimo?

AB: The main opportunity that I see for this company is its ability revolutionize the way hemoglobin is monitored. Right now, it is guesswork, meaning early transfusions on a preemptive basis. The current standard is to draw blood, run it to the lab and then wait for an answer, which is time-consuming. Masimo can monitor hemoglobin in real time, allowing surgeons to avoid early transfusions. Transfusions are dangerous and expensive, but Masimo's noninvasive Total Hemoglobin monitoring system, based on its Rainbow technology, has been clinically proven. If cost-benefit analyses are performed, hospitals see that a lot of money is saved by using the system. In fact, Masimo guarantees it.

TLSR: I note that you have a small cardiovascular play in coverage where investors may be able to get a significant bump.

AB: I have followed Volcano Corp. (VOLC:NASDAQ) for years, and the stock has always been pretty expensive. The company has alliances with many companies, except for Boston Scientific, which is its competitor in intravascular ultrasound (IVUS), and St. Jude, which competes in fractional flow reserve (FFR). Volcano is focused on percutaneous coronary intervention (PCI), which is a minimally invasive or nonsurgical method of dilating narrowed coronary arteries to place stents.

Volcano's original technology is IVUS, which aids the interventional cardiologist in placement of a stent. The company grew market share in that area; it was a big growth business. All of a sudden the company's PCI business hasn't been quite as good. Medicare and insurance companies have questioned potentially excessive stenting, which has been a problem for Volcano as procedures have actually declined. On the other hand, the company has developed its FFR technology, which helps determine if the PCI should even be done. The company has both angles covered. The company also has been very heavily focused on Japan, and recently that's been a problem because of the currency moves between Japan and the U.S.

Volcano seems to compete very well with the giants in the field. The bottom line is that Volcano is a company that saves the healthcare system money, which addresses a theme of mine. FFR can prevent unnecessary surgeries.

TLSR: The medtech category also includes a lot of diagnostics and prognostics technology. Can you mention something in this realm?

AB: That gets me to the final company I want to talk about, Luminex Corporation (LMNX:NASDAQ), which is based in Austin, Texas. One of the things that attracted me to Luminex is its CEO, Patrick Balthrop, who has been running the company for nine years. He spent 20 years at Abbott Laboratories (ABT:NYSE), mostly in its diagnostics division. This guy really knows how a molecular diagnostic company should work. I can't tell you I understand all the technology, but what I can tell you is it has a lot of royalty revenue coming from a total of 40 paying partners.

The company is known for its respiratory test panel, and has recently introduced a gastrointestinal pathogen panel that allows rapid diagnosis of bacteria, viruses and parasites. Molecular diagnostics allow for quicker diagnosis, which is a money saver and potentially saves lives as well.

TLSR: Diagnostics seem to have a short shelf life. They lose market share rapidly when another test appears on the market. What about the future?

AB: Luminex is investing 20% of its revenue in R&D, and that goes to the problem of obsolescence. Like Masimo, this is a company with a vision for the future. I imagine it could show more profit now, but it is investing for 5–10 years out, not next year. Unlike a biotech company, which needs U.S. Food and Drug Administration (FDA) approval—if it doesn't get it, lights out—Luminex has revenue and is growing that revenue at 15–20% per year.

Unfortunately, from an earnings standpoint, Luminex is reinvesting everything it makes, so it ends up with a sky-high price/earnings ratio, and that scares off investors. But I'm very happy with what it's doing. I feel like it's a great story.

TLSR: The invest-for-tomorrow game is very difficult for most smaller companies. Are investors just afraid that they can't pull it off?

AB: Investors are often focused on the short term, unfortunately. In this market, investors are focused on mature, dividend-paying companies, not growth and not speculation. There's just not a lot of interest in small-cap medical device companies in general. The other issue for these companies is the 2.3% medical device tax. Because it's an excise tax, it hurts a small company more than a big company.

TLSR: Thank you for these insights, Alan.

AB: I really appreciate it, George.

Alan Brochstein, CFA, has worked in the securities industry since 1986. He managed investments in institutional environments until he founded AB Analytical Services in 2007, and now provides independent research and consulting services to registered investment advisors. In addition to advising several hedge funds and investment managers, including Friedberg Investment Management, where he participates as a member of the investment management committee, Brochstein is also a senior analyst for the independent research firm Management CV. Brochstein also offers the Analytical Trader service at Marketfy, where he uses fundamental and technical analysis to offer specific trade ideas geared toward swing traders.

Want to read more Life Sciences Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

1) George S. Mack conducted this interview for The Life Sciences Report and provides services to The Life Sciences Report as an independent contractor. He or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Life Sciences Report: None. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Alan Brochstein: I or my family own shares of the following companies mentioned in this interview:None. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview. 
4) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent.
5) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer.
6) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
Add a comment...

Post has shared content
BMO Advisor Coxe: "This Is the Worst Trading Situation I Have Ever Seen"

Taking inspiration from George Orwell's "1984," renowned BMO advisor Don Coxe has coined the expression "Weakness is Strength" to describe the current economic situation. In a far-ranging interview with The Gold Report, Coxe explains how an international regime of weak currencies has set the scene for an upsurge in the price of gold shares. He believes that gold will return as a preferred hedge against loss of value because inflation is inevitable.

The Gold Report: Your investors' report last week was entitled, "Orwellian Currencies: Weakness is Strength." Could you please explain?

Don Coxe: In his classic book, "1984," George Orwell's Big Brother rules society with three slogans: "War is peace. Freedom is slavery. Ignorance is strength." I coined the slogan "Weakness is Strength" to sum up the idea that a weak currency creates a strong economy. But it has to be weak like Goldilocks' porridge: Weak enough so that domestic industries can still sell products abroad, but not so weak that people dump government bonds and cause a financial crisis, which is the situation that threatened the Eurozone when the euro went south 18 months ago.

After the fall of the Berlin Wall and the implosion of Communism, there was a general consensus that capitalism had become triumphant. At the end of the last decade, a Democratic president proclaimed the end of the welfare state and the end of big government. The idea was that central banks would only be temporarily needed in the face of a crisis, because the basic economy is strong enough to stand on its own. But in 2008, the financial collapse was blamed on the private sector. Actually, it was the intersection of corrupt politics with bad banking practices that caused the crisis, but that was the way the media narrative was played out.

TGR: Who is in charge?

DC: An elite group of central bankers are in weekly communication with each other on a first-name basis. That's why when the crisis came, everybody knew whom to phone. This elite group of international bankers puts up with politicians, whom they regard as a mixed blessing at best, and a curse at worst, and certainly not as smart as the bankers. This elite is comparable to the great 19th-century diplomats who ran global affairs prior to World War I, managing things pretty well until it all blew up in the war.

Now the central bankers are saying, "Don't let currencies get too strong." It started with Japan. The yen reached an all-time high last summer. It was after the nuclear crisis, and Japan was in deep recession. It has the worst demography of any country on earth, and it's being harassed by the Chinese. A new premier decided to drive down the value of the yen by printing more money. Consequently, hedge funds got rich by shorting the yen, further driving down its value. The Nikkei rallied and Japanese companies started reporting bigger profits, with great expectations ahead. In Japan, weakness is strength.

Weakening currency works as monetary policy until it kicks off runaway inflation, which is what happened after Venezuela devalued the bolivar by 47%. Inflation shot into double digits. It is hard to use monetary policy to cook the not-too-hot, not-too-cold porridge. The goal of the central banks is to manipulate interest rates to make sure that weakened currencies do not become too expensive inflation-wise. And it is this dilemma that moves gold.

TGR: Why hasn't inflation shown up in the Western economies?

DC: Advanced technology means that the supply of consumer goods can keep expanding as prices fall. We've had technological booms before, but nothing as powerful as the current boom, in which the improvement in technical performance is exponential.

The North American demography is deteriorating as the baby boomers age. Older people have most of the stuff that they need and are just trying to hang on to their savings.

Also, we have the freest trade since the glory days of the British Empire. We are still benefiting from the opening of free trade with the creation of the World Trade Organization, although the low hanging fruit has been harvested. In other words, this could have been the best of all times for the global economy.

TGR: What is going on?

DC: Milton Friedman said that proper monetary policy will guarantee reasonable economic growth without inflation, for which he won the Nobel Prize, which shocked the Keynesians. But at some point, printing money is going to lead to inflation. It was frustrating for gold enthusiasts when the Bank of Switzerland expanded its monetary base by 700% in a mere two years. At the moment, the Swiss are applauding their central bank for weakening the currency. It makes the Swiss watchmakers more competitive, and the Swiss consumers are not traveling to France to go shopping.

TGR: How are the devaluations affecting the dollar?

DC: The dollar is benefiting, because the United States is importing less energy. Energy prices are strong everywhere in the world, except in the United States and in Qatar, where oil and natural gas are cheap.

The dollar is still the world's No. 1 currency. The euro, somewhat surprisingly, is No. 2. But there is an election coming up in Italy in a week, and talk that Silvio Berlusconi could come back shows that Italian politics are unstable.

The dollar has long been the international currency of first resort and last resort. Some 85% of currency trades are done with the dollar on one side of the trade. Of course, the euro is a currency backed by no country, no tax system, no army and no navy. It's backed by theory, a theory that Europe has been violating virtually every month for the last five years by creating deficits. And the dollar benefits. We were told in the last election campaign that the Chinese are financing the U.S. deficit. That is a myth. In fact, the Federal Reserve has purchased about two-thirds of the increase in the national debt.

TGR: Does that mean that central banks around the world are not holding their reserves in dollar denominations as much as they were previously?

DC: As a percentage of their assets, the answer is absolutely yes. But because central banks are expanding their monetary bases, the dollar's share of the total pile of accumulating paper money is shrinking. That does not yet mean that there is net liquidation of dollars, and central banks are dramatically increasing their consumption of gold. Of course, as a percentage of the total monetary supply, the rise in gold consumption is tiny.

TGR: So when you say central banks are increasing their gold holdings, how does that impact the exploration and development sector for gold?

DC: The appetite for gold exploration and development is a complete contrast to five years ago—years in which the price of gold rose every year. Investors do not believe that companies will be able to find and develop gold mines at a reasonable cost because the gold milling return is often less than 1 gram per ton (1 g/t) of ore. There is a growing fear that if the miners develop technology to extract more gold, governments will jump in and make life miserable for them. Or that radicals will stop production because of alleged pollution, destruction of water or just plain because the miners are capitalists. The flow of capital for developing new gold mines has been choked off over unprecedented price increases. The situation is a total disconnect.

TGR: Are you saying that there's a perception that gold has reached a price ceiling?

DC: People are wondering where the next price floor is, which is a different type of concern. When gold was moving up, the debate was about how high it might go. Now investors are afraid that gold will collapse. Investors who believed that gold was doomed to collapse back in 2005, 2006 and 2007 were totally destroyed because gold soared to new, all-time peaks. Is gold an animal that has to keep growing or die? I don't believe that, but we have no record of a stock market that's gone up 12 straight years. And if a stock market that had gone up for 12 straight years sagged back by 15%, would it be reasonable to believe that equities are bad investments and we should all move into treasury bonds?

TGR: Typically, gold was treated as a hedge against inflation and uncertainty. Is it still reasonable to look at it as a hedge?

DC: It's a hedge against inflation for reasons that in the past we were told were inevitable, but which have not yet happened. You would think that a person who drinks a fifth of whiskey a day and smokes three packs of cigarettes a day is not going to live as long as a normal person. But, suddenly, he is blowing out the candles on his 75 birthday cake. And you say, "This is not medically possible!" It is beating the odds, but at some point, it is going to catch up with the smoker. There simply is no record of huge expansions of the monetary base, huge expansions of government deficits, the inability of politicians to manage and the inability of economies to grow fast and mop it up that don't lead to inflation.

The supply of money relative to the total GDP is now the greatest in human history, and it keeps expanding relative to our actual output. This will lead to inflation. Will it be next year? In five years? Who knows? If you hand out free tickets to a rock concert, you may not drive down the price of the best seats, but if fans believe more than half the seats will be given away at the door, you can bet the promoters will have trouble selling tickets. And that's eventually what's going to happen to paper money.

TGR: The corporate sector is sitting on trillions of dollars and mostly non interest-earning reserves. So why isn't some of that trickling down to the junior gold explorers?

DC: There are not trillions of dollars sitting in the accounts of gold mining companies. The big gold mining companies who have cash need it because they've committed themselves to building expensive, new mines, which when completed will add an exiguous supply of new gold relative to the current supply. Unlike every other commodity, the amount of new gold produced is virtually irrelevant to the price because it only adds about 2–3% to the total existing supply of gold.

The "excess" corporate cash is an argument for buying gold, because that cash is land-locked. It cannot be brought back into the country without being taxed. Big hedge fund managers with assets in the Caribbean do not have to pay taxes on their income as long as they do not repatriate the money back to the U.S. This is one of the ways George Soros got so rich. He does not lead an extravagant lifestyle, and he became a billionaire by leaving his money offshore in the Caribbean where it could grow uninhibited. Most of Apple's cash is in foreign domains. But after adjusting for the tax basis, there is not much loose cash in Cupertino. And after adjusting the corporations' balance sheets for their real pension fund liabilities, the corporate sector is not really awash in extra financial resources.

TGR: What should gold investors do?

DC: As a director of a small-cap gold mining company, I understand the plight of the small exploration companies. This is the worst trading situation I have ever seen at a time of rising gold prices. Something is wrong with this story. Either it's going to turn out to be a sensational buying opportunity, or there will be a deflationary depression and even printing money will not work. I do not really believe that deflation is in the cards, but I also didn't know that we were going to get a man on the moon.

TGR: What is the significance of the current situation with the debt ceiling?

DC: After adjusting the U.S. national debt to account for all the bonds held in trust accounts, our debt/gross domestic product (GDP) ratio is close to that of the scary European countries. Our debt is growing much faster than Europe's relative to our GDP. If the euro doesn't bomb out in the next couple of years, it may turn out to be a strong currency relative to the U.S. dollar. By the end of this decade, the U.S. fiscal situation could degenerate to Spanish or Italian proportions, although certainly not to Greek proportions. By the way, financial experts who harp on Greece in their oratory destroy their own credibility. It is best to compare the U.S. economy with real economies not built on fraud, and that is Spain and Italy, both of which are models of where the U.S. will be at within five years. The Spaniards and Italians are doing a better job of dealing with their debt by far than the United States is.

TGR: Is international capital fleeing from North America?

DC: I don't think international capital is so much fleeing from North America as it is trying to find some places where it can get a better return. There's no question that in some cases, it's buying assets in emerging countries. "The Scream" is not one of the world's greatest pieces of art and yet it recently sold for an all-time record price at auction: buying art is just a place to bury cash.

TGR: Maybe "The Scream" will appreciate! Thanks for your time.

DC: You are welcome.

Don Coxe has 40 years of institutional investment experience in Canada and the U.S. As a strategist and investor, he has been engaged at the senior level in global capital markets through every recession and boom since the onset of stagflation in 1972. He has worked on the buy side and the sell side in many capacities and has managed both bond and equity portfolios and served as CEO, CIO and research director. From his office in Chicago, Coxe heads up the Global Commodity Strategy investment management team, a collaboration of Coxe Advisors and BMO Global Asset Management. He is advisor to the Coxe Commodity Strategy Fund and the Coxe Global Agribusiness Income Fund in Canada, and to the Virtus Global Commodities Stock Fund in the U.S. Coxe has consistently been named as a top portfolio strategist by Brendan Wood International; in 2011, he was awarded a lifetime achievement award and was ranked number one in the 2007, 2008 and 2009 surveys.

Want to read more Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

1) Don Coxe: I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview. 
2) Interviews are edited for clarity. Streetwise Reports does not make editorial comments or change experts' statements without their consent. 
3) The interview does not constitute investment advice. Each reader is encouraged to consult with his or her individual financial professional and any action a reader takes as a result of information presented here is his or her own responsibility. By opening this page, each reader accepts and agrees to Streetwise Reports' terms of use and full legal disclaimer. 
4) From time to time, Streetwise Reports LLC and its directors, officers, employees or members of their families, as well as persons interviewed for articles and interviews on the site, may have a long or short position in securities mentioned and may make purchases and/or sales of those securities in the open market or otherwise.
Add a comment...

Zacks Analyst Jason Napodano's Seven Biotech Picks Will Keep Your Profits on Solid Ground

Low valuation in biotech can be like quicksand under a mirage of low-hanging fruit. That's because the market is inhabited by growth investors who think cheap stocks are cheap for a reason. Zacks Investment Research Senior Biotechnology Analyst Jason Napodano operates with this in mind as he evaluates biotech companies. He also understands that while value can be a good friend, an investor's best buddy is momentum powered by vital market-moving events. Napodano shares his best stock ideas in this Life Sciences Report interview. 

The Life Sciences Report: Jason, you do very detailed research on micro- and small-cap stocks that, almost by definition, don't get a lot of attention from the investment community. This realm is something like a halfway house, where stocks could drift into obscurity and never be heard from again or miraculously arise on news, deal-making and data. I wonder how an analyst justifies the time spent on research in this space, when the odds are so stacked against success?

Jason Napodano: Many of the names that we focus on at Zacks—and a lot of the names that I specifically cover—have drifted down to the obscurity level. But our mission is to follow underfollowed or undervalued stocks that have catalysts in their future. Oftentimes these stories have received limited investor attention because they became public without a lot of fanfare, or via reverse merger, or perhaps they had one big drug failure and the market wrote them off. I look for small- and micro-cap stocks that have drifted down, and I ask what could bring these guys back.

How do I justify the time spent? These stocks often have one or maybe two drugs that drive them. It may take a couple of weeks—or even a couple of months—to do the work on one lead drug in a clinical trial, or on a drug that is waiting on a U.S. Food and Drug Administration (FDA) decision. Once the work is done, there's not a whole lot to update because the focus is on that one drug. We cover many more stocks than analysts that follow the big caps. That's how we can justify spending time on some of these names.

TLSR: What do you look for in a stock?

JN: One of the things we look for, specifically in small caps and specifically in biotech, are catalysts. Valuation alone is never a reason to buy a stock. I've found that cheap stocks tend to get cheaper. Expensive stocks tend to get more expensive. So the buy-low, sell-high phenomenon doesn't necessarily work in biotech. Most of the time it's buy high and sell higher. . .and try not to catch falling knives. 

It all goes back to catalysts. You have to have a reason for a share price change. If a company is in obscurity or is being ignored by Wall Street, what changes that? Not valuation alone. There has to be something coming up that I, as an analyst, can hang my hat on. I want to be able to say, "Here's a name that most people are not paying attention to, but in six months this event will occur." It could be a release of new data, an upcoming FDA decision, or we may think the company is going to get a partnership. 

Meanwhile, biotech companies burn cash. A biotech company that doesn't have catalysts and is burning cash is a recipe for a bad investment. Does a company have a catalyst before it runs out of money, or before it needs to go out and raise new capital? Investors have to take all these things into consideration.

TLSR: As you say, cash burn can be a special problem in biotechs, and dilution is a problem we always talk about in these small stocks. How do you deal with cash burn that results in dilution?

JN: One of the things I consider is whether a company can self-fund. Can it get to where it needs to be, and can it run its business model without the need to go back to the capital market repeatedly? I point investors to names like Pozen Inc. (POZN:NASDAQ) or Depomed Inc. (DEPO:NASDAQ), which have innovative technologies and have been able to bring molecules not necessarily to the goal line of commercialization, but close enough to attract interest from larger pharmaceutical companies and partnerships. That puts these companies in position to attract nondilutive cash through up-front payments, licensing deals and the like. 

Depomed does an excellent job of out-licensing its drug delivery technology, Acuform, which creates an extended-release formulation of generic molecules, and it has excellent patent protection. It turned this technology into an ATM machine, which has allowed it to push its pipeline forward without having to go back to the market constantly to raise cash.

Another example is Pozen, which has developed several drugs and entered into pharmaceutical partnerships with GlaxoSmithKline (GSK:NYSE) and recently Johnson & Johnson (JNJ:NYSE). These blue-chip partnerships provide the company with nondilutive cash that allows it to continue to develop drugs without constantly having to go back to the capital markets, sell new shares, give warrants and the like, which biotech investors don't like to see.

TLSR: We see micro-cap companies, or even small-cap companies, struggle to get through phase 2a clinical trials to get a big pharma or biopharma to make deals with them. If pharma is not interested in a molecule or technology platform, can you assume that it's going to be a dud?

JN: I don't think so. Pharma tends to be very risk-averse, and it also tends to focus on what it can get to the market in the next two to three years. It wants to see a return sooner rather than later. That doesn't necessarily mean the drug is a dud. The drugs that pharmas were passing up in phase 1 and 2 in 2008 and 2009 are the drugs that they are now looking to partner on in 2012 and 2013.

TLSR: You have spoken at length about how important it is to have catalysts in stocks you intend to cover. At least one company in your coverage that I'm aware of came to the public market without a clinical asset. Would that model work in the current environment?

JN: Probably not. Not unless the company had a new, revolutionary platform that big pharma was dying to get ahold of. Big pharma was interested in RNA interference (RNAi) platforms a couple of years ago, but stem cells never seemed to attract the big pharma partners that investors thought they would attract. In fact, big pharma still shies away from new technology platforms like stem cells, gene therapy and others. If you're a biotech company today, and you don't have any clinical stage assets, you will probably struggle to get a partnership—or even to secure enough capital to bring a new molecule to the market. Big pharmas are still pretty stuck on small molecules, and they are only slowly making their way into monoclonal antibodies. 

To the point of having catalysts, when small companies get in front of investors, they really need to map out the next 6–18 months like a staircase, with milestones they can hit to create new inflection points. However, taking a molecule from preclinical to phase 1 and through a single ascending dose safety study is not exciting enough for investors. A company doing this is likely to be ignored.

TLSR: Jason, you have a couple of companies under coverage that are doing development from the ground up. Neuralstem Inc. (CUR:NYSE.MKT) is one of these. It has a dual platform of stem cells and small molecules that tie in together. Can we start with Neuralstem?

JN: Neuralstem is very interesting because it is trying to do something that's never been done before. That is what attracted me to the stock. It's still early stage compared to most of what we go after at Zacks. It has two phase 1 assets, which tend to be too early in development for investors, but the company was worth digging into and initiating coverage on. Neuralstem is taking human neuronal stem cells and injecting them directly into the spinal cord to improve outcomes in patients with amyotrophic lateral sclerosis (ALS), a highly debilitating and always fatal disease for which there is no cure.

The phase 1 study is, of course, primarily about safety, but the data generated so far represents a pretty big milestone because no one has ever done this kind of work before. Just the fact that the company has developed a device and system to perform that procedure safely creates a platform for additional applications in the future, potentially in multiple sclerosis (MS) and spinal cord injury. We know it is still very early stage, but it is interesting. If Neuralstem can develop a therapy for ALS, it would be sitting on a blockbuster. 

TLSR: Back on June 16, the company treated its 16th patient with stem cell injections in both the cervical and the lumbar region. This was the first patient ever to receive stem cells in two locations. Although this study is about safety, are we learning anything about efficacy? 

JN: Because this study is powered as a safety analysis one must be hesitant about making hard efficacy conclusions. But there are some measures. ALS is a highly degenerative disease. Patients rarely, if ever, spontaneously stabilize or improve, but there have been signs that some patients have stabilized or even improved in this phase 1 study. That alone is encouraging and warrants further analysis. The goal now is to establish safety, and then go into a phase 2 study and start to establish proof of concept. 

I would mention that Neuralstem has tested both ambulatory and nonambulatory patients. The company says patients need to have some living spinal cord tissue to see improvement. So some patients' diseases may be too advanced for neural stem cell therapy to work. That's the kind of thing you parse out in phase 1 studies.

TLSR: Back in early September, news that Neuralstem had licensed out its spinal cord delivery platform and floating cannula (SCDP-FC) system for cell implantation, which you referenced, pushed the stock upward. Although the company has now dosed 18 patients with cells, why did the stock react so favorably not on patients receiving cells, but rather on licensure of that system?

JN: Let me go back to what I said about companies finding a way to self-fund. I referenced Depomed, which has an extended-release technology called Acuform that it licenses to big pharma companies. The technology has turned into an ATM for Depomed. Neuralstem has created a way to safely inject drugs or cells directly into the spinal cord with its floating cannula. Potentially, this could turn into an ATM for the company. 

TLSR: Neuralstem has about $35 million ($35M) left in a shelf registration right now, but I understand that it does have enough cash to operate into Q4/13. Is it your feeling that the company will have partnered by that time?

JN: Beyond its revolutionary stem cell technology and platform for ALS or spinal cord injury, Neuralstem also has a traditional small molecule platform, and is testing a drug specifically for major depressive disorder (MDD). It is designed to reduce hippocampal atrophy, which is a new hypothetical cause for diseases like Alzheimer's and MDD. The drug, NSI-189 phosphate, is in phase 1b, and I believe data are expected shortly—probably in the first quarter of 2013.

To your question, I think the company's goal is to partner its small molecule platform after this data is released. The cash from this deal should allow management to put off having to partner the stem cell platform until after phase 2 proof-of-concept data has been generated. This will create significantly more value for investors.

TLSR: What are the next catalysts for Neuralstem? The reason I'm asking is that this stock is up 143% over the past 12 weeks. It would be nice to know whether it has more upside or if investors are ready to take profits on the next catalyst.

JN: Neuralstem will present additional safety data from the ALS trial at the Motor Neurone Disease Association conference on Dec. 6. Data on NSI-189 is expected in Q1/13. Management's goal is to partner after the NSI-189 data come out. You have three potential catalysts over the next two to three months. I don't know how much the additional safety data on the ALS program is going to move the stock, but preliminary signs of efficacy seen so far in the phase 1 trial certainly warrant attention.

TLSR: How about another company?

JN: Acadia Pharmaceuticals Inc. (ACAD:NASDAQ) is an interesting name. It was up dramatically—almost 150%—on Nov. 27 when data were reported and Acadia hit what I would call a home run. Just a bit of background: The company actually had two clinical-stage assets at one point, one of which failed a few years ago, after which the stock got hit pretty hard. The other one, pimavanserin, also failed a phase 3 trial a few years ago, and the market wrote this company off. Many sellside analysts dropped coverage, and it got down to a point where only I, and maybe one or two other analysts, were even talking about it.

We initiated coverage at Zacks and told investors that a huge potential catalyst would be coming on a second attempt at a phase 3 trial with pimavanserin for Parkinson's disease psychosis. We looked at the original trial design to understand why it failed the first time, and we've been trying to educate investors as to why we believe this trial might succeed. It's been a long process. The trial has been going on for almost two years. Pimavanserin is now a phase 3 asset with clear proof of concept, efficacy and safety demonstrated. Acadia needs to do one more phase 3 trial, and then it can file for approval. This is the kind of success that big pharma is interested in right now.

TLSR: Considering this big move up, which seems to be holding steady, what are the next potential catalysts for Acadia?

JN: There are not a lot of derisked phase 3 central nervous system (CNS) assets out there. This is a CNS asset that just popped up on every business development manager's desk in big pharma. I think investors need to take a look at Acadia, especially if the stock pulls back from its highs.

TLSR: Another company?

JN: Trius Therapeutics Inc. (TSRX:NASDAQ) is another company with a phase 3 asset—an antibiotic—that looks to compete with Pfizer Inc.'s (PFE:NYSE) Zyvox (linezolid), a $1.5 billion ($1.5B) revenue drug. Trius is developing an improved, next-generation version of the drug called tedizolid. It has generated positive data in one phase 3 trial already. The second phase 3 trial is similar to the first, except that the patients will start on an injectable formulation of the drug and then transition to oral. Oral antibiotics tend to be prescribed for outpatients; if a patient is in the hospital she will tend to get an injection. The FDA wants to see whether there are any differences between the injection and the oral dose, but I don't see a big risk here. The company has done bioequivalence and bioavailability studies to show that the dose in transition is the same for its molecule. Based on the improved characteristics of the drug versus Pfizer's drug, this could potentially be a $500M or maybe even $750M product. At about $5/share today, we think Trius is pretty attractive based on that market opportunity.

TLSR: Jason, Trius is trading at about a $200M market cap currently, which is rather small relative to the peak potential sales you mention. Do you have any idea why this stock has been weak?

JN: Biotech had a pretty good Q3/12, but the last month or two have been rough. It's always hard for me to say why a good stock has been weak. The company has cash. It has proof of concept and proof of efficacy, as demonstrated in the first phase 3 trial. The only thing that I can think of is that its drug is going up against a Pfizer drug, which is already established in this market. Tedizolid will also compete with Cubist Pharmaceuticals Inc.'s (CBST:NASDAQ) drug Cubicin (daptomycin), which has close to $1B in revenue. 

TLSR: Another one, please?

JN: The next 30 days could be very interesting for Titan Pharmaceuticals Inc. (TTNP:OTC). Its subdermal, slow-release formulation, Probuphine (buprenorphine), is for opioid addiction. The treatment is injected under the skin and the drug is released for six months. The drug on the market now for the same indication is called Suboxone (buprenorphine + naloxone, manufactured by Reckitt Benckiser Pharmaceuticals Inc. (RBGPY:OTCPK)). Suboxone is available as a sublingual tablet or a film. Compliance can be a problem in a population of heroin-addicted patients, and an implant could be a huge asset in helping improve compliance and outcomes.

The company says it has an undisclosed pharmaceutical company interested in commercializing the drug. This particular company has made an equity investment, and so Titan has cash to negotiate the best deal for investors. The company is continuing its due diligence and expects to make a decision on whether or not to acquire the drug by the end of December. I think this drug represents a $300M opportunity, and if you look at Titan's current market cap of about $70M, you can see that its share price will be closely tied to the success of this product. I think Titan presents investors with some upside over the next month or so. Signing a partnership and then getting a new drug application (NDA) accepted by the FDA for priority review are two things that should drive the stock higher. All this will happen in December.

TLSR: I know you want to mention Pozen and Depomed, since you've already talked about them and indicated that you liked them. Go ahead.

JN: I'll talk about them together because they both are companies that have done a very good job of self-funding and of bringing products to the market without diluting shareholders.

Pozen is getting ready to file for approval of its safer aspirin product, PA32540. The drug combines aspirin and a proton pump inhibitor (PPI) (omeprazole, branded Prilosec), into one pill. Daily aspirin therapy is a staple for many Americans for secondary prevention of cardiovascular disease, and the cardiovascular benefits of aspirin have been well documented. Unfortunately, the gastrointestinal (GI) toxicity of aspirin is also well documented, especially in those patients at risk for aspirin-related stomach ulcers. Again, this is a compliance issue. If patients would take aspirin and a PPI at the same time—all the time—they would get the cardiovascular benefits of aspirin without any of the GI toxicity. But compliance is low because patients must remember to take the two pills. The combination in a single pill makes it much easier.

It's not a home-run indication, but it's a simple concept, and it should see FDA approval in the first half of 2014. Pozen is looking for a marketing partner now, and we think a deal may be coming after the NDA filing in the second quarter 2013. Pozen has plenty of cash, so there is low risk on the financing front. We also see low risk on the regulatory front as well. I think this stock is a good, safe investment.

TLSR: Pozen has a $160M market cap, with $92M on the balance sheet. What is it going to do with all that cash?

JN: That is interesting—and there is potentially more cash coming when it partners its drug. Who knows what it is going to do with all that cash. Maybe a bid distribution to shareholders? Wouldn't that be a refreshing turn of events!

TLSR: Go ahead with Depomed.

JN: Depomed, again, has a good amount of cash. It has done an outstanding job in turning its technology into an ATM. It is commercializing two drugs right now, and it collects a royalty on another drug. Gralise is an extended release gabapentin product developed for postherpetic neuralgia (PHN). It competes with generic gabapentin and branded Lyrica (pregabalin, marketed by Pfizer), which makes this a tough, competitive market. But it is also a pretty large market. The indications for gabapentin are numerous.

TLSR: Depomed also has Serada under FDA review for hot flashes.

JN: It is the same formulation as Gralise—an extended-release formulation of gabapentin. The company changed the name of the drug so as not to create confusion at the pharmacy or at the doctor's office. 

TLSR: This has been wonderful. Thank you for all the information.

JN: Absolutely. This has been great. Thank you.

Jason Napodano currently works for Zacks Investment Research as the company's senior biotechnology analyst. In 2009, Napodano was promoted to managing director of research for Zacks' Small-Cap Research division, which focuses on writing high-quality institutional research on underfollowed or undervalued small-cap stocks. Prior to his tenure at Zacks, Napodano spent three years on the buyside with Eastover Capital in Charlotte, N.C., where he focused on large-cap equities and specialized in healthcare, energy, and technology. Prior to joining Eastover, Napodano worked as a research scientist for TechLab Inc., a biotechnology company focused on developing diagnostic kits and vaccines for infectious diseases. He also spent a year working in a lab at the Fralin Biotechnology Center, and a year working for a cancer researcher in Virginia. 

Napodano has a bachelor's degree in biochemistry from Virginia Tech, with an additional bachelor's degree in chemistry and a minor in math. He has a master's degree in business administration and finance, with a concentration in securities analysis, from Wake Forest University. Napodano is also a Chartered Financial Analyst (CFA).

Want to read more Life Sciences Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

1) George S. Mack of The Life Sciences Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Life Sciences Report: Neuralstem Inc. Johnson & Johnson is not affiliated with Streetwise Reports. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Jason Napodano: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this story.
Add a comment...

Do You Have the Guts to Take On Cutting-Edge Biotech Like This VC?

With the odds stacked against a drug entering clinical trials, investors need to be assured that the upside will be momentous when success does come. Burrill & Co. Managing Director Elemer Piros leverages science and the unmet needs of patients with his extensive knowledge of the capital markets to bring lower-risk, higher-return ideas to investors. In this interview with The Life Sciences Report, Piros explains his investment thesis and zeroes in on best bets. 

The Life Sciences Report: Burrill & Co. is known as a biotech venture capital firm. Now you have a boutique research franchise to shine some light on very small public companies that might have excellent technology but are ignored by the Street. Would you tell me about that?

Elemer Piros: The core philosophy of Steve Burrill, for the last 25 years, has been to embrace unrecognized technologies on the cutting edge in therapeutic areas such as regenerative medicine and personalized medicine. We have expanded on that by adding the research function. It's not just about the companies that are ignored; we also look at companies that have been loved in the past but have been forgotten. Perhaps there was a failure, or a series of failures in a company's history. But if we find a promising pipeline, we are willing to be open-minded.

TLSR: Are there special areas of focus?

EP: Our research encompasses these two categories: First, we look at early-stage companies where the scientific groundwork has been laid down and is solid, and second, we look at companies embracing human testing for the first time and demonstrating some indication of efficacy in treatment of a disease. Wherever we look the upside needs to be significant, because, as everyone knows, there is only a 10% chance that a drug will make it to the market once it enters a phase 1 trial. That means a 90% failure rate, unfortunately.

TLSR: Even small-cap funds can't buy micro caps in a lot of cases. Are any of the major institutional investors beginning to look at micro-cap companies as viable entities for some of their qualified investors? And what about venture capitalists (VCs) investing in micro-cap public companies?

EP: This happens on a selective basis, and usually involves specialist investors in biotech. Let me cite one very recent transaction—an investment in an oncology company called MethylGene Inc. (MGY:TSX). It just closed a $26 million ($26M) round, which essentially recapitalized the company. The financing was led by Baker Bros. Advisors LLC, OrbiMed Advisors LLC, Tang Capital Partners LP, Biotechnology Value Fund and Ouray Capital. These are specialist investors in biotechnology, and they are definitely investing, even at early stages: MethylGene has a couple of compounds in phase 1/2 development for oncology indications.

You asked whether VC firms or some of the larger funds would embrace a slice of investment in the early stages of public biotech companies. Actually, there is an interesting trend. They are not moving en masse, but there are signs of activity, with some VC firms hiring portfolio managers whose sole focus will be on publicly traded, early-stage biotechnology. They invest $5–20M per company with a VC-like three- to five-year time horizon.

TLSR: Back on April 5, 2012, President Obama signed the Jumpstart Our Business Startups (JOBS) Act into law. Your firm is attempting to leverage some of the benefits of this JOBS Act. What does it mean in practice? How will it affect a startup company? More to the point, how does Burrill help companies with these new rules of eased regulatory encumbrances, restrictions and costs on small businesses?

EP: Whether we are dealing with a startup or a restart, the reduced burden of regulations, such as Sarbanes-Oxley compliance requirements, for at least a five-year period, allows these companies to invest the money they save in research and development (R&D). That is a very nice trade-off. The legislation also allows companies to enter the public markets at an earlier stage, opening access to capital from a more diversified investor base, especially when money is less available. For listed companies, liquidity is a factor for investors who don't necessarily want to stay with an investment until a trade sale or initial public offering. How can Burrill help? We have extended our scope of services to already public or newly listed companies via the JOBS Act.

TLSR: What are you looking for today in emerging life sciences companies? What features get your attention and tip you to a bullish persuasion?

EP: A solid scientific foundation is a must, a given. Also, there has to be a clearly defined, unmet medical need. In the biotech world, there are very few examples of an Apple Inc. (AAPL:NASDAQ), where we really didn't know we needed an iPad or iPad mini until the company presented one. We don't often find examples where need was actually created by a biotech company.

I also like areas that are currently ignored. It could be because of historical setbacks, an example being Novelos Therapeutics Inc. (NVLT:OTCBB) in the field of radiopharmaceuticals. Titan Pharmaceuticals Inc. (TTNP:OTC) is another example, in that the field of drug addiction is not yet recognized as a meaningful market for drug development. 

TLSR: You seem to have embraced the U.S. Food and Drug Administration's (FDA) 505(b)(2) regulatory pathway, which enables companies to leverage drugs that are already in the public domain.

EP: Yes. It certainly is an easier path to follow, and companies can leverage data that were collected in phase 1, 2 and 3 trials by a previous sponsor. A specific example of a company that has been able to do this is Titan Pharmaceuticals. 

TLSR: Do you get the impression that investors don't take 505(b)(2) pathway development projects quite as seriously as you think they should? Do they overlook them because these drugs seem old to them? 

EP: There could be that myth or misunderstanding. At times, the difference in formulation of a drug allows for such a minute advantage that it is difficult to handicap how it would translate into a competitive edge in the marketplace. However, sometimes a reformulated product can make a dramatic difference. For instance, the opioid-addiction pill Suboxone (buprenorphine + naloxone), originally sponsored by Reckitt Benckiser Pharmaceuticals Inc. (RBGPY:OTCPK), only works if patients take it every day. If a patient takes a drug holiday, he or she relapses back into addiction. But Titan's Probuphine (buprenorphine) is reformulated in a subdermal implant. Patients can forget about it for six months and still be protected. Even if patients choose to abuse heroin during treatment, the illegal substance will not have the same impact because the protective drug is in the patient's system at all times. Here, the difference in formulation is quite vast. The new formulation addresses a key problem in addiction, which is compliance. 

TLSR: Who would be the buyers of Probuphine? Would it be clinics, state health departments, departments of correction? 

EP: Interestingly, the clinician would need to learn a minor surgical procedure to administer the treatment. It takes about seven to 10 minutes to implant Probuphine, a matchstick-like rod made of a flexible plastic, and it takes about five minutes to take it out after six months. Not every clinician will be willing to learn this procedure, at least at first. However, about 25–30% of clinicians, according to some surveys, have indicated willingness to learn.

TLSR: You have a $4 target price on Titan, which represents an implied grand slam, a near quadruple from current levels. Is it possible that institutional buyers might negotiate the price down so far that the margins would be too thin?

EP: I think institutional buyers for the product would be in the minority, as opposed to clinicians who deal with these patients on an individual basis. Also, we haven't witnessed a large degree of price erosion with the original product, Suboxone. To many investors it appears to be a nonexistent market, but this drug actually brought in $1.2 billion ($1.2B) last year. It is far from nonexistent.

TLSR: When might we expect approval of Probuphine?

EP: Titan submitted a new drug application (NDA) at the end of October, and the FDA has 60 days to assign a Prescription Drug User Fee Act (PDUFA) date, which would be either six or 10 months from the date of submission. We should hear a decision on the drug sometime in mid-2013. 

TLSR: We know this implantable technology is used in contraception. But are there other opportunities for unmet needs?

EP: Parkinson's disease is perhaps its second indication. Some encouraging animal data shows the technique is a reliable delivery mechanism for L-dopa (dihydroxyphenylalanine). Again, it's not only a convenience but also a compliance-enhancing solution. The potentials are essentially limitless. The only thing Titan needs is access to additional capital to move these programs into the clinic. The source of that capital could be a potential partnership for the commercialization of Probuphine. Just before the NDA was submitted, an unnamed partner made a down payment in the form of buying stock at a 25% premium—about $4M worth—just to extend an option to negotiate for commercialization rights of Probuphine until Dec. 31. We should hear about the fate of that partnership before year-end.

TLSR: If you could go ahead and mention another stock that you like, I'd love to hear it. 

EP: One of them is very easy to understand. Ohr Pharmaceutical Inc. (OHRP:OTCBB) is developing a squalamine eye drop for wet age-related macular degeneration (AMD). The only solutions we have right now are intravitreal injections, meaning injections into the eye, every month to two months. Those drugs are Avastin (bevacizumab; Genentech/Roche Holding AG [RHHBY:OTCQX]) (used off-label), Lucentis (ranibizumab; Genentech/Roche AG) and a newcomer, Eylea (aflibercept). This market is $4B worldwide and the new entrant, Eylea, from Regeneron Pharmaceuticals Inc. (REGN:NASDAQ), is anticipated to do $800M in sales in 2012, which will be the first full year after launch. The advantage of Eylea versus Lucentis is that it requires slightly less-frequent injections. Obviously, patients just hate the injections, as well as the time they must spend in eye exams before the very painful treatments actually occur.

Ohr's squalamine is in phase 2 testing, and so, on paper, we don't yet have clinical proof of concept. But that is not entirely true. An intravenous (IV) formulation of the drug was developed by a predecessor company, Geneara Corp., and it went through phase 2 clinical testing in about 200 patients. It has shown very similar efficacy as observed with Avastin and Lucentis, but is slightly less robust. However, having a weekly IV infusion at a physician's office is much more onerous for patients than a once-every-two-months injection. The predecessor company had to give up because it was in a noncompetitive situation, and it wasn't able to raise money for a phase 3 trial.

What we know now, after preclinical animal studies with squalamine as an eye drop, is that the patient is getting about six times as much drug into the retina than the dose required to inhibit neovascularization (the formation of abnormal, leaky blood vessels). This allows us to speculate that the phase 2 trial in progress will be successful. The design is very interesting. A patient is started on Lucentis and then every day, twice a day, the eye drop is given. 

TLSR: Sounds like an ideal maintenance therapy.

EP: Yes. And eventually, if evidence shows Lucentis injections do not need to be given because improvement with the drops is as remarkable as it is with Lucentis, patients could start with the eye drop. But that's farther down the road.

TLSR: Squalamine is a small molecule. Could it be synthesized?

EP: Yes, the synthesis has been worked out. It's not coming from a natural source, which was the shark liver. 

TLSR: Another stock you could mention?

EP: Another interesting stock is Neptune Technologies & Bioressources (NTB:TSX; NEPT:NASDAQ) and its majority-owned pharmaceutical subsidiary, Acasti Pharma Inc. (APO:TSX). This omega-3 fatty acid manufacturer up in Canada suffered a very unfortunate occurrence in early November. Its manufacturing plant in Sherbrooke, Québec, actually exploded. Acetone (highly flammable) is used to purify the omega-3s from a natural source: krill, an Antarctic crustacean. The plant was a complete loss. 

It is a tragedy because lives were lost. But the company was planning to double or triple capacity over the next two to three years, and a new plant is under construction right next to the one that exploded. The company is six to nine months away from completing the new plant, so it will likely take time off from manufacturing krill oil. In the meantime, Neptune is making an attempt to find third-party manufacturing partners to continue to supply distributors with krill oil, at least to some extent. Once the plant is completed, Neptune can get back to the same level of production, which was about 150,000 kilograms per year. Its krill oil is sold as a nutraceutical (Neptune Krill Oil, or NKO). 

But what's more interesting to me is a purified version of Neptune's krill oil that is being developed as a drug for hypertriglyceridemia by Acasti, a majority-owned company of Neptune's. Early clinical data indicates that this drug could potentially be as good as, if not better than, two precedent omega-3s that are already approved by the FDA. One is Lovaza (omega-3-acid ethyl esters), sold by GlaxoSmithKline (GSK:NYSE). It sells about $1B/year. The other drug is Vascepa (icosapent ethyl), which received approval during the summer and was developed by Amarin Corp. (AMRN:NASDAQ). Each of these omega-3 products has a slightly differentiated profile.

All three products—Lovaza, Vascepa and the Acasti/Neptune drug CaPre (a purified extract from krill oil)—lower triglycerides. Lovaza, unfortunately, produces a slight elevation of the bad cholesterol, low-density lipoprotein (LDL). That is not ideal, yet it is still a $1B drug. Vascepa, on the other hand, not only lowers triglycerides but also doesn't increase LDL. A perfect trifecta would be a drug that could lower triglycerides, increase high-density lipoprotein (HDL/good cholesterol) and decrease LDL. Early data on CaPre indicates that this might be the case.

TLSR: So the preliminary thought is that CaPre would lower LDL, in addition to lowering triglycerides and increasing HDL. 

EP: That was seen in early phase 2a trials. We have to wait for additional results to underscore the effect. 

It is also interesting to note that people tend to equate all omega-3s to fish oil. There was an experiment comparing regular fish oil with Neptune Krill Oil. NKO, on all parameters, was far superior to ordinary fish oil (Bunea, R. et al., Alternative Medicine Review [2004] 9:420-428; described in detail on pages 19-20 of our initiation report on Neptune). Krill oil appears to have additional ingredients, including phospholipids and an antioxidant. These are all naturally occurring; Acasti doesn't add anything to the product. It simply purifies the good stuff from the krill, which appears to make it superior to ordinary fish oil. Lovaza and Vascepa are not derived from krill. 

TLSR: Is your target price still $7, following the explosion? 

EP: The initiation report contained the $7 target price. We lowered the target to $6 after the company did a financing, to factor in the dilution. On Nov. 12, we updated our research and went to a Neutral rating with no target price. We have a Market Perform (Neutral) rating right now on Neptune. On the manufacturing side of the business, I would like to see more specificity and tighter timelines. I would also like to see how much of the existing customer base the company would lose if it is not able to provide product for the next six to nine months.

TLSR: Neptune says it has business interruption, property and casualty, and civil liability insurance. But this explosion and fire occurred on the afternoon of Nov. 8. I did not see anything on the company's website for days following. It was not until Nov. 12 that there was a press release from the company. I think that's a long time not to say anything about a tragedy. Three people died, and 18 people had to be hospitalized. Even if all that human tragedy didn't occur, this is still the kind of thing that you need to report as a public company. What do you think?

EP: I would have wanted to hear more earlier, because we had to rely on the media for information. It was quite obvious from pictures following the incident that the plant was gone. We didn't know whether inventory was also stored at the site, and whether this would result in a complete halt of production or if there would be some material that Neptune could sell while it was working on completing the new plant. We didn't know the extent of the damage. There were a lot of questions. 

The company defended its communication policy, saying that first and foremost it wanted to deal with the human element—the people who perished, the 18 who were injured and their families. Between Nov. 8 and 12 the stock was halted. Since it started communicating on the 12th, and the stock finally resumed trading, Neptune has provided updates on its assessment of the damage. 

I would add that, fortunately, these occurrences do not happen very frequently, and management teams just don't have the working experience to address everything on time and optimally. But I agreed with Neptune when it took care of the human element first.

TLSR: Can you mention another company?

EP: That would be Novelos Therapeutics, the radiopharmaceuticals company that I mentioned earlier. It is developing radioactive drugs, which is not a very popular sector because of a couple of commercial failures, Zevalin (ibritumomab tiuxetan; Spectrum Pharmaceuticals Inc. [SPPI:NASDAQ]) and Bexxar (tositumomab; GlaxoSmithKline). These two drugs were developed for a very narrow indication, non-Hodgkin's lymphoma (NHL). 

TLSR: Zevalin and Bexxar are radioactive conjugated antibodies.

EP: Yes, and their biggest problem was Roche's Rituxan (rituximab), a non-radioactive drug that treats NHL really well. That's why the radioactive therapies never got off the ground. 

As opposed to Zevalin and Bexxar, the Novelos drugs are not specific for a type of cancer. When examined in preclinical models, 52 out of 54 of those models demonstrated uptake of the company's radioactively labeled targeting vehicle, as opposed to healthy cells, which were largely immune to the uptake of this iodine-131 (I-131) labeled drug. It is also interesting that the company can swap out the I-131 isotope for a lesser or gentler energy-emitting isotope, the 124 version of iodine (I-124), using the same targeting vehicle. That could be a diagnostic agent. We are dealing with a personalized medicine concept here, whereby the patient would be imaged. If the drug is taken up by the lung tumor or the brain tumor, then the same patient could be treated with the same targeting vehicle, but with the much more powerful, I-131 version of the isotope attached to it. I like I-131 because it has been used on its own in thyroid cancer for the last 20–25 years, and it works. It gets into the thyroid cancer cells and actually destroys the cells from within. 

There is a third leg to this story. If one swaps out the radioactive isotope for a fluorescent one, then this drug could be used as a surgical tool to differentiate between healthy and tumoral tissues. When a surgeon removes a glioblastoma from the brain, or a breast tumor, by shining light on the surgical site, he or she would be able to see where to cut with a safe margin in real time. 

Novelos has developed one concept but three different approaches. Actually, all three could coexist in the same setting. I can envision a glioblastoma patient diagnosed with the light version of the company's drug. If a resection is warranted, then the tumor could be resected using the fluorescent version of the molecule. If the resection is not feasible because of the invasiveness of the tumor, then the hot version, the I-131-labeled version, could be applied to treat the patient.

TLSR: Where is it in development?

EP: The company is in phase 1/2 testing in the first two aspects, the imaging and the radiotherapy components. Like Ohr Pharmaceutical, Novelos already has some clinical proof-of-concept because we know that I-131 works in thyroid cancer. If the drug gets into a brain tumor or a pancreatic tumor, we know that I-131 would selectively destroy the tumoral tissue.

TLSR: I know you follow Omeros Corp. (OMER:NASDAQ). Would you speak to that?

EP: Omeros Corp. is a diversified biotechnology and a specialty pharma company under the same roof. The company has two phase 3 assets nearing FDA submission, along with a deep drug pipeline and a discovery engine that has been able to achieve unparalleled success. I would categorize the leading assets as specialty pharma products. They represent an improvement for patient management in the surgical setting. Patients are normally treated with anti-inflammatory drugs and/or painkillers right after surgery. However, inflammation occurs during surgery. Omeros has formulated existing drugs to be applied during surgery via the irrigation solution that is applied normally during procedures. The company has shown, in two phase 3 eye surgery trials, that the concept works: Patients recover faster. A phase 3 trial in the knee surgery setting is expected to be announced this month. I don't think we are dealing with blockbuster drugs here, but if approved, cash flows from these drugs could be reinvested in the company's burgeoning pipeline. 

I would also like to mention what I believe is an unprecedented achievement in the field of drug discovery. It pertains to drugs that target G-protein-coupled receptors (GPCRs). GPCRs were favorite targets for drug discovery. About 30–40% of all marketed drugs target GPCRs; these include well-known brands such as Claritin, Imitrex, Zantac, Zyprexa, Vicodin and OxyContin. All together these and other drugs in the class address 46 GPCRs. Before Omeros entered the field, there were ~120 so-called orphan GPCRs. Scientists knew that they might be important in various diseases, but no drug leads were developed from them, including at big pharma. 

Omeros has developed a universal "cracking" mechanism that yields drug leads for the orphan receptors. Here is the unprecedented part: Omeros has unlocked (or found drug candidates for) 46 of the orphan GPCRs in little over a year. The field was at a standstill for years, but now this relatively small company is ready to supply the pharma world with a treasure trove of drug candidates. The company has initiated business development activities to license most of these assets, with perhaps the exception of a few that they would develop on their own. These programs are preclinical—they are many years away from the market—but the sheer number and the unprecedented value (no one has been able to do it), makes me excited about the GPCR platform at Omeros.

Omeros has one last drug moving to clinical development early next year. People aren't usually excited about late preclinical assets, but this one is an exception. Before describing the asset, let me mention Alexion Pharmaceuticals Inc.'s (ALXN:NASDAQ) Soliris (eculizumab), a drug for two ultra-orphan indications. Both indications (paroxysmal nocturnal hemoglobinuria and atypical hemolytic uremic syndrome) are a result of the malfunction of the immune system's so-called complement arm. The immune system attacks blood components. Both indications are, fortunately, extremely rare. However, Alexion was able to create a market with Soliris, which this year would be worth $1.2B. How? The cost of Soliris is more than $400,000 per patient per year. 

Enter Omeros. The company is developing an upstream inhibitor of the complement system—upstream in the biochemical cascade, where Soliris interferes. Based on animal experiments, there could be a number of advantages to the Omeros solution (OMS721), including a much lower dose given as an injection, as opposed to an infusion (Soliris). Furthermore, because of the point of the intervention in the complement cascade, it is thought that patients would not have to use anticoagulants, as they do with the Soliris treatment. The early clinical experiments with OMS721 could indicate whether the Omeros drug would be a serious contender against blockbuster Soliris. We will know within 6–12 months. 

TLSR: I enjoyed this so much. Thank you, Elemer.

EP: Thank you. It was nice meeting you.

Elemer Piros joined Burrill & Co. from Rodman & Renshaw, where he served as a managing director and senior biotechnology analyst since 2002. He has ranked among the top analysts in various surveys, including ranking as the top biotechnology analyst by The Wall Street Journal in 2006 and by the Financial Times in 2010, based on stock portfolio performance. Prior to that, he served as a senior biotechnology analyst at Ladenburg Thalmann, and as a biotechnology research analyst with Spear, Leeds & Kellogg/Goldman Sachs. Before serving as an analyst, Piros spent eight years conducting research in biophysics, biochemistry and molecular biology at Cornell University and the University of California, Los Angeles. He holds a doctorate in neurosciences from UCLA, a bachelor's degree in biology from UCLA, and a bachelor's degree in mathematics and technology from Eotvos Lorand University in Budapest.

Want to read more Life Sciences Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

1) George S. Mack of The Life Sciences Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Life Sciences Report: None. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Elemer Piros: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this story.
Add a comment...

Miners Downsizing Capital Expenses for Smart Growth: Ralph Aldis and Brian Hicks

Smart companies are beginning to ignore analysts' insistence that production growth is always good, and to focus instead on growing their margins by lowering capital expenses. This is good news to U.S. Global Investors Inc.'s Brian Hicks, co-manager of the Global Resources Fund, and Ralph Aldis, senior mining analyst and portfolio manager of the Gold and Precious Metals Fund and World Precious Minerals Fund. Learn what kinds of companies attract the interest of these active managers in this Gold Report interview.

The Gold Report: The Nov. 1 edition of Frank Talk suggested that gold equities generally perform poorly in a U.S. election year but rebound strongly the following year. Do you expect a better year for gold and gold equities in 2013?

Ralph Aldis: This year has not been a stellar year for gold equities. Most of the gold equity funds have negative returns for the year.

Brian Hicks: We believe gold equities will do well next year, largely due to macroeconomic factors that have been in place for some time, but which will become even more pronounced in 2013. Those factors include central banks expanding their balance sheets and increased concern over deficit spending here in the U.S. Looking at how cheap gold equities are relative to the bullion price, that spread will continue to be arbitraged in 2013.

TGR: Every media outlet in the country is talking about the fiscal cliff. If the U.S. goes over the fiscal cliff, what effect would that have on the gold price and on gold equities?

RA: No one has the stomach to let the country fall off the cliff. A compromise will be reached. The most likely scenario is that the government will have to print money in flight. That will be a very clear signal to own gold bullion, and gold equities will be handed their marching papers to go higher.

BH: Whether we get a compromise or go over the cliff, which is the less likely event, gold will do well. Either way, there will be a lot of uncertainty and concern about financial assets. That will prompt people to see gold as a hedge.

TGR: Gold equity investors have seen more volatility than gains in recent years. Should they expect more of the same over the next four to five years?

BH: The volatility has held true for the markets in general; it has not been specific to gold equities. On a relative basis, gold equities have outperformed the broader market since 2008.

To prepare for volatility, investors should be balanced, not overweight in any particular sector. You want to be able to capitalize on the volatility—to the upside or the downside. Gold equities are somewhat countercyclical; they can diversify a portfolio and be additive to overall risk-adjusted returns.

RA: When silver was hitting close to $50/ounce (oz), the regulators raised margin requirements something like five times in five days. That knocked silver for probably its biggest correction ever in a single week. If you live through that type of correction once, you become gun shy about going long on equities when the metal prices are going up.

More generally, the tech bubble, the credit crisis, the real estate crash and the large number of baby boomers approaching retirement are all causing people to sell equities. They are turning to fixed-income or structured interest-rate products. That provides a great buying opportunity for equities.

BH: Generalists talk about gold being in a bubble, but I agree with Warren Buffett that the real bubble is government bonds. At some point, that money will have to come out. When it does, it will be looking for returns and for yield. Gold stocks will be poised to capitalize on that.

TGR: How should gold equity investors handle common market corrections?

RA: One strategy, if you are certain that you are in a bull market, is to stay long the entire time.

I would say you stick with it.

However, in managing our funds, we always keep some cash on hand so we can buy stocks on these dips. For example, a company releases a good news story and the stock starts moving twice as much as any other stock that day. It is probably prudent to sell perhaps 1% of your position because you will be able to replace it later at a cheaper price.

TGR: Another edition of Frank Talk discussed how companies' margins are being compromised and growing thinner. What must gold companies do to boost investor confidence?

RA: The industry's mantra has been "grow production." That is what the analysts look for and what companies are trying to do, but it is difficult to grow production.

You can grow production through your own organic discovery or through acquisition. Too often, companies overpay or size up a marginal project from say, 30,000 tons (30 Kt)/day to 60 Kt/day. They have tried to grow production at the expense of lowering margins. If they lower their margins, they can no longer pay a dividend. If the gold price corrects, the project may no longer be economic.

Management needs to focus on return on capital, on making a sound investment in something that you can make money on.

For example, Randgold Resources Ltd. (GOLD:NASDAQ; RRS:LSE) models all of its projects on $1,000/oz gold. Its cutoff is a 20% return on $1,000/oz gold. That focus on delivering a return is why Randgold's share price has done so much better than everybody else's.

BH: Randgold's success also is a function of having its CEO, Mark Bristow, as such a sizable owner of its common stock.

We looked at stocks with high insider ownership versus those with low insider ownership. By a wide margin, precious metals companies with significant management ownership have outperformed companies that do not have much participation from their management teams.

TGR: What will drive up the value of gold equities over the next five years?

RA: Gold prices will go higher. Central banks around the world are hedging by buying gold in lieu of currency for their reserve holdings. Also, investor demand will push values higher.

Companies need to focus on growing their returns and not on growing the company or the production profile. Focusing on returns will allow them to pay a dividend.

TGR: Do you own any companies with a market cap over $300 million (M) that do not pay a dividend?

RA: Yes. There are companies in the growth phase, in the capital phase where they are not cash-flow positive in the sense of having sufficient free cash flow to start writing checks to shareholders.

While some companies are paying modest dividends of 1–2%, paying a dividend is more the exception than the rule. The only high-price dividend payers are companies whose share price has been knocked down, like Gold Fields Ltd. (GFI:NYSE).

TGR: Given gold companies' heavy capital expense (capex) demands, do you see the major players getting to dividends in the 4–5% range?

RA: Rather than increasing dividends, companies have been upsizing their projects to grow their production profile. The only people making money are the consultants earning fees by telling the mining companies what to do with their project and the companies building the actual mines.

Gold companies are making profits but they are not yielding exceptional returns. The majors are all trying to push upside of the project in the false belief that if they move all the cash flow forward, they will get a higher multiple.

TGR: If the companies in your funds are making less money than their consultants, why are you in this sector?

RA: Our funds are weighted differently from indexes that focus on the big four: Goldcorp Inc. (G:TSX; GG:NYSE), Barrick Gold Corp. (ABX:TSX; ABX:NYSE), Newmont Mining Corp. (NEM:NYSE) and Newcrest Mining Ltd. (NCM:ASX).

As active managers, we are trying to scope out the companies that are doing the right things to achieve the top returns we want for our shareholders.

BH: Ralph and I agree that Randgold would be the bellwether and it has been a core holding for many years. It has created shareholder value throughout the cycle. It is defensive in that it has high grades; its projects are stress tested at $1,000/oz gold. It has done very well since 2000, much better than the price of bullion. That is the type of company we look for.

RA: Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) is another company that got severely punished earlier in the year for a couple of missteps, but management knows what it is doing.

TGR: Were you disappointed to see President and COO Ebe Sherkus step down?

RA: Agnico-Eagle's culture is strong enough to survive that. The company has a deep pipeline of talent to fill the voids when they come up.

TGR: What is your investment thesis?

BH: Our view is that gold stocks have been derated since the introduction of the SPDR Gold Trust (GLD) exchange-traded fund. That derating is reflected in lower multiples to cash flow and earnings, because returns on capital have not been sufficiently higher than their cost of capital. However, lower oil prices and fuel costs, as well as the delay or outright cancellation of many capital projects, could provide some relief in the cost of labor and raw materials. From that standpoint, over the intermediate term, margins could start to expand. That would be good for gold equities.

We also think money will continue to flow into the sector because we are bullish on gold. Historically, if you pick the right stocks, you get 2:1 leverage by owning the stock versus the commodity. Our job as active money managers is to sift through the large universe of companies and pick stocks that will exhibit that leverage in a rising gold market.

RA: George Topping, an analyst at Stifel Nicolaus, caught the gist of what needs to happen in his report, "Don't Build It and They Will Come." Since that report, companies like Rainy River Resources Ltd. (RR:TSX.V) have started looking at how to downsize projects. That may be the catalyst that will take some of the pressure off the margins.

The other thing that has hurt gold companies in this cycle is understating their cash costs. Only government officials really believe a cash cost of $700 to produce an ounce of gold. Governments look at those numbers and say, you guys are making windfall profits, so we need to raise your taxes. To combat that, companies need to talk about the cost to produce an ounce of gold in total cost terms.

That is beginning to happen. The World Gold Council met at the Denver Gold Show to talk about how to transition from a cash-cost definition to a total-cost definition. This would make the industry more transparent and the companies more accountable.

TGR: Can you name some companies with projects that have downsized capex to mine more efficiently and more intelligently?

RA: Rainy River and Keegan Resources Inc. (KGN:TSX; KGN:NYSE.MKT) just announced downsizings. Kinross Gold Corp. (K:TSX; KGC:NYSE) has talked about rethinking its development process.

We will see a trend of companies taking the foot off the pedal and thinking about what makes sense. If you can develop a project at a higher margin, that is the smarter choice.

TGR: What equities are you bullish on?

RA: You have to give the royalty companies some serious thought. They are insulated from capital cost increases, at least on the cost-structure side.

Franco-Nevada Corp. (FNV:TSX; FNV:NYSE), Silver Wheaton Corp. (SLW:TSX; SLW:NYSE) and Royal Gold Inc. (RGLD:NASDAQ; RGL:TSX) have done very well. Sandstorm Gold Ltd. (SSL:TSX.V), an up-and-comer, has created good returns.

These companies have to be careful about buying a royalty on a project that has margins that may be too thin and getting in too deep. The royalty company may not be on the hook for more capital, but it has a lot of costs if that project is not built.

BH: Several silver companies look interesting. The price of silver is high enough for some of the lower-cost silver companies to generate free cash flow and superior returns on capital compared to their precious metal peers.

Tahoe Resources Inc. (THO:TSX; TAHO:NYSE) is run by Kevin McArthur, former CEO of Goldcorp. A proven mine builder, and we particularly like that he owns 4M shares of that stock, so he has a vested interest in the company's success, which may translate into a substantial dividend yield.

TGR: Would now be a good time to look at Tahoe, after its stock prices have come off its high?

BH: Yes. Tahoe is entering a sweet spot in the lifecycle of a mine. It is far along in development and is poised to start production. If you look at the earnings power Tahoe has at current silver prices, it looks cheap to us.

RA: Kevin McArthur has a vision for taking Tahoe forward. If anybody can build it in Guatemala, he's the man to do it. I recently attended one of Kevin's presentations in Panama, where he talked about paying a $2/share dividend. But he understands this is a cash cow.

BH: The Escobal project in Guatemala is a world-class deposit. The further along it gets in development, the more derisked Tahoe becomes and the higher the share price.

TGR: Silver Wheaton CEO Randy Smallwood expects a strong Q4/12. What is underpinning that optimism? Is there a new stream about to start up?

RA: I am not aware of a new stream coming on-line. It may be related to a timing delay in ounces sold, or to production setbacks over water issues at Peñasquito. If those issues are cleaned up, production can return to normal.

BH: The important thing with Silver Wheaton is that it is a large-cap company now but it can still grow its attributable production via silver stream north of 10% between now and 2016 with no ongoing capital expenditures. It also has a dividend policy of 20% of its cash flow. Plus Silver Wheaton has over $500M in cash that could be used to make further investments that would be accretive to earnings and operating cash flow.

TGR: Are you buying companies now in the expectation of more merger and acquisition (M&A) activity as the gold price rises?

RA: Not really. I think M&A activity is on hold as companies figure out how to optimize their existing projects and increase their margins. Stupid acquisitions are one of the best ways to destroy capital. I do not believe M&A is the way to go right now.

However, a couple of companies could be in play just on valuation. Dundee Precious Metals Inc. (DPM:TSX) gets penalized for being in Eastern Europe and for having a smelter in Namibia that was recently attacked by the environmental minister without any evidence for his allegations. Dundee Precious Metals is looking at putting a pyrite recovery circuit at its main mine, Chelopech. It would not cost much to do, but would probably boost gold production by half. With that circuit in place, it may be a good purchase for Eldorado Gold Corp. (ELD:TSX; EGO:NYSE). Dundee Precious Metals probably has 50% upside from where it is at right now.

Another company, Gran Colombia Gold Corp. (GCM:TSX.V), was taken over two years ago and the assets were bought out of bankruptcy. It has hired new people on the ground who are really doing first-class work. I visited last week with the new mining engineer in charge of the underground work at its Segovia operation. We reviewed every stope model and the pay yields on everything needed to turn the asset around.

Gran Colombia also has its Marmato operation, a high-grade underground operation that never had a mine plan. Its new consultant, Lee Hill, has worked all over the world and he loves this project. Marmato has probably 17 Moz gold, with an official number around 13 Moz. But when you look at the four holes already drilled, you can see substantial amounts of gold. Then, you start thinking that this may be an underground mine, not an open pit.

Its share price is in the $0.35 range and if it shows the asset can be turned around, that stock is very cheap and is a potential takeout.

TGR: You place a premium on communication. Why is that?

RA: We try to keep the lines of shareholder communication open because that signals to people how engaged we are in what we are trying to do. Shareholder education builds shareholder loyalty.

We cover a lot of topics. Frank Holmes travels the world and talks to thousands of people. Brian and I visit projects and have regularly scheduled calls with analysts three and four times a week. We try to synthesize our view and share it. The overall market seems to be highly depressed, and everybody just wants to talk about the negatives, but there is opportunity.

BH: As analysts and portfolio managers, summarizing what happened over a week's time, help us put events in perspective. When you have to write about it, you have to think clearly about the issues. It's a good tool for us as well.

TGR: What is a good rule of thumb for precious metals equities investors?

RA: On the gold and precious metals side, at a minimum they should keep 5–10% of their overall portfolio in gold and gold stocks and rebalance it annually.

The good thing about gold and gold stocks is that they are not as positively correlated to the overall market. When your gold equities are down, your other stocks tend to be up; if other stocks are down, the gold equities are probably making up the losses. We find that to be a great portfolio diversifier over time. If you do the efficient frontiers, gold equities not only lower the overall volatility, they also raise the average return.

TGR: And you, Brian?

BH: The precious metals market is surprisingly inefficient. There are opportunities to trade around core positions when you have dislocations in the market, whether it is a geopolitical event or a change in government policy.

On an individual basis, it can be daunting to navigate that on your own. We add value by having the resources and the time to be active managers and to capitalize on these dislocations and inefficiencies. I would say let professionals manage your gold portfolio for optimal risk-adjusted returns.

TGR: Brian and Ralph, thanks for your time and insights.

Ralph Aldis, CFA, rejoined U.S. Global Investors as senior mining analyst in November 2001. He is responsible for analyzing gold and precious metals stocks for the World Precious Minerals Fund (UNWPX) and the Gold and Precious Metals Fund (USERX). Aldis also works with the portfolio management team of the Global Resources Fund (PSPFX) to provide tactical analyses of base metal, paper, chemical, steel and non-ferrous industries. Previously, Aldis worked for Eisner Securities, where he was an investment analyst for its high net worth group and oversaw its mutual fund operations. Before joining Eisner Securities, Aldis worked for 10 years as director of research for U.S. Global Investors, where he applied quantitative skills toward stocks, portfolio tilting, cash optimization and performance attribution analysis. Aldis received a master's degree in energy and mineral resources from the University of Texas at Austin in 1988 and a Bachelor of Science in geology, cum laude, in 1981, from Stephen F. Austin University. Aldis is a member of the CFA Society of San Antonio.

Brian Hicks joined U.S. Global Investors Inc. in 2004 as a co-manager of the company's Global Resources Fund (PSPFX). He is responsible for portfolio allocation, stock selection and research coverage for the energy and basic materials sectors. Prior to joining U.S. Global Investors, Hicks was an associate oil and gas analyst for A.G. Edwards Inc. He also worked previously as an institutional equity/options trader and liaison to the foreign equity desk at Charles Schwab & Co., and at Invesco Funds Group, Inc. as an industry research and product development analyst. Hicks holds a Master of Science degree in finance and a bachelor's degree in business administration from the University of Colorado.

Want to read more Gold Report interviews like this? Sign up for our free e-newsletter, and you'll learn when new articles have been published. To see a list of recent interviews with industry analysts and commentators, visit our Streetwise Interviews page.

1) Brian Sylvester of The Gold Report conducted this interview. He personally and/or his family own shares of the following companies mentioned in this interview: None. 
2) The following companies mentioned in the interview are sponsors of The Gold Report: Goldcorp Inc., Franco-Nevada Corp., Royal Gold Inc. and Tahoe Resources Inc. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Ralph Aldis: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.
4) Brian Hicks: I personally and/or my family own shares of the following companies mentioned in this interview: None. I personally and/or my family am paid by the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview.
Add a comment...

Post has attachment
The early registration discount on the "Geo Tips for Tenbaggers" seminar ends tomorrow!
Use code EM1SWM for 33% off:
Add a comment...

Post has attachment
Wait while more posts are being loaded