Small Cap Biotech and Analyst Stock Picks

- February 6th, 2017

In part two of our interview, Singh talks about why quants do not trade biotech stocks, what he thinks about small cap biotech companies, and companies he is excited about in 2017.

In this second part of our interview about investing in biotech, Oppenheimer & Co. Senior Analyst and Managing Director Hartaj Singh discusses why quants do not trade biotech stocks, what he thinks about small cap biotech companies, and companies he is excited about in 2017.
In case you missed it, Singh talked about the future of investing in biotech, what types of companies to invest in, and other thoughts on the biotech space in the first part of our interview.
Continue reading below for the full transcript of part two of our conversation with Singh. It has been edited for clarity and brevity.
Investing News Network: I find, as an investor, that presentations are not geared to me. They’re geared to someone very technical.. they’re geared to another doctor. I find it very difficult to feel comfortable or inspired because they’re showing me charts, they’re showing me dots, things that are moving and I think it’s difficult for me, so it must be difficult for others.
Hartaj Singh: I’m very happy to hear that because the thing is, if it was easy for you, that means I wouldn’t have a job.
That means the machines, the quants, or you will be able to trade biotech. One of the reasons why even the machines can’t trade biotech–quants don’t trade biotech at all, is because it’s so idiosyncratic. That’s why people like me have a job and why we add value to the system. The sell side actually in biotech does actually add value.

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INN: Yes. One of the big analysts in mining was telling me just last week that of mining stocks valued at two hundred and fifty million or greater, he reckons that 70 percent of the trading is quants. 
HS: Yes, the machines trading and that trend’s going to accelerate. Any sector where there isn’t idiosyncrasy is going to become dominated by quantitative trading, and that’s just going to accelerate over the next few years. We’re already seeing that trend.
I tell people the NBI index, if I remember correctly, that was up 25 percent in 2013, it was up 16 percent in 2014, it was up 25 percent in 2015. But basically the point being that on January 1st, if you put one dollar into the NBI index, on August 2015 that would be five dollars, and today it’s three point five dollars.
It will be the same thing for the next five, ten years. Like I told you about tech, biotech as an industry is growing and the trajectory of it is actually very similar to how tech grew.
The thing with us is, once you take the time and you develop that drug, then for the life of the patent it’s an annuity stream. It’s a very fast growing annuity stream that drops very rapidly to the bottom line. So which is why I tell people that I’m not going to waste your time by telling you how to invest in small cap biotech because it would be a waste of your time. Unless you want to become a sell side analyst or get a PhD or an MD in it. What I tell them is buy the index, the worst that you can do is what I’m just against, that’s the worst you can do.
INN: Are there any specific companies that you’re really excited about this year or some particular wins, probably looking back, you say well I picked that one, that one was great?
HS: Let me go from large caps to small caps here. I think Vertex Pharmaceuticals (NASDAQ:VRTX) is very interesting, this is a company–again if you just look at their sales and earnings profile over the next three to about five years, they’re going to double, triple, quadruple on the top line and like anywhere from five times to eight times over the next three to five years. That’s just amazing and our thought on that is not if it’s going to happen, it’s a question of when, because their drug is already approved. There is some risk there, we’ve got some pipeline that could blow up, it’s going to add to that. I think Vertex is a great company. It’s still fairly liquid, it’s not too big. Vertex has the potential to still have 20, 30, 40 percent returns for investors in a given year.
The next one after that is 1.5 billion market cap, a company called Sarepta Therapeutics (NASDAQ:SRPT), which is very, very controversial. They were approved by the FDA when a lot of people thought they would not get approved because their data was off. They just released their first update to investors… they’ve got 250 patients on the drug. We were expecting 150, Street was expecting about 120, 150. This is a company that’s in the rare diseases. Sarepta will basically own Duchenne muscular dystrophy, a people muscle wasting away disease. It’s mostly given to boys, and their drug actually is active and the uptake has been phenomenal.
So that’s about 1.5 billion market cap stock, it’s about 30 bucks right now, 35. The more I get to meet management the more I believe that there’s going to be very rapid uptake for this company. And because it’s a new company that’s being launched in the space where they’re going to own the space, I think the potential is actually very, very high. 1.5 billion right now for some you pay 4 billion for it, that’s nothing for most biotech and pharma companies.
This is around the time that most biotech companies tend to get bought — think of it as in athletes — the people who are just in high school but showing potential, that’s when the football agency comes — ok, let’s pick this guy up, he looks great.
Same thing with biotech, it’s at that early stage because the drug’s been approved so the regulatory risk is off. Now it’s just a matter of how quickly we can get it to wrap.
And the smallest one’s a 460 million market cap company called uniQure (NASDAQ:QURE). They’re in the hemophilia B space, and they have a direct competitor called Spark Therapeutics (NASDAQ:ONCE) that everybody thinks is going to win in hemophilia B and gene therapy. Why I like Uniqure is because I like frameworks. People think Spark’s going to win because their data is actually better. What people don’t understand is that essentially both Spark and uniQure have the same—put it this way, they get more of effect into the bloodstream, Spark does this about three, four times more than Uniqure. But, the essential thing in hemophilia, imagine that you had a son or daughter that had hemophilia, what you would really care about is, do I have to get transfusions everyday?
And how many bleeds, as they are called, happens. Both uniQure and Spark in that terms, what’s called a hard end point, they have the same exact result. Even though Spark has elevated levels of their therapy in the bloodstream, they both have, basically, reduction of transfusions completely and very few bleeds. This means that the drugs are essentially the same in terms of hard outcomes and what we’ve seen is that if you actually look at the history of pharmaceutical and biotech launches in the last 50 years, when you have two very similar therapies launched into a market, they basically tend to segment the market 50/50. Spark, right now, is trading as if it’s going to own the entire market,uniQure is trading as if it’s going to own nothing. And they’ll go into their little trial and start with the FDA later this year.

Don’t forget to follow us @INN_LifeScience for real-time news updates!
Securities Disclosure: I, Pia Rivera, hold no direct investment interest in any company mentioned in this article.
Securities Disclosure: Oppenheimer & Co. Inc. expects to receive or intends to seek compensation for investment banking services in the next 3 months from Sarepta Therapeutics and uniQure. 

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