The following was originally published, along with this companion article, in late February. Louis Navellier is again pushing exactly the same ad teasing the same three biotech stocks, over the last three months two of them are down and one of them has popped up by about 30% (it was, of course, the one that least impressed me that did the best). We reprint this here for those who are asking about the teaser pitch, the companies are still similar with little in the way of dramatic news in the interim, but the following article has not been updated or revised in any way since February 26.
Yesterday I promised to follow up on Louis Navellier’s biotech picks — these are three stocks teased and hinted at in the latest promo for his Emerging Growth newsletter.
The first one, covered yesterday, was a Chinese vaccine company called Sinovac (SVA) — no stranger to the world of Gumshoe, but not a favorite of mine personally, despite their pretty solid and presumably recurring business in some core vaccines in their home country (influenza and Hepatitis A and B, mostly).
So what else is he pitching? Well, I already let the cat out of the bag on number two, but we’ll run through the clues anyway …
“Our #2 Biotech Winner of 2014 is a royalty powerhouse with one of the largest and most diversified portfolios in the industry.
“Last year was its ‘break-out’ year—two approvals, 6 Phase III results filed, two orphan designations and a whopping 20 net assets added to its portfolio.
“And 2014 is going to be even better—with revenue generating drugs expected to double over the next year.
“Not to mention that this company has a whopping $700 million in milestone payments from existing deals… Plus, another $800 million in projected R&D investment by its partners over the next year… With more than 80 clinical trials to be run in 2014… And royalties for its current assets are projected to exceed $2.2 billion over the next three years.
“That’s a whole lot of big numbers for an overlooked stock that still trades at just a $1.3 billion market cap.
“This may be our next 600%+ winner, just like Santarus last year, particularly since it keeps taking shots on goal.
“Its latest drug is a novel new diabetes treatment with blockbuster potential. Before that, curing hot flashes. Before that, a treatment that cleans the toxic ‘plaque’ that causes Alzheimer’s disease….
“So with the company’s revenue doubling and its stunning earnings numbers, I expect it will keep racking up the regulatory approvals and handing us smooth and steady gains through the year ahead.”
So that one, which may have come quickly to mind for Gumshoe readers if only because Navellier borrowed the company’s “shots on goal” phrasing, is Ligand Pharmaceuticals (LGND). That was our “Idea of the Month” for the Irregulars back in June, and it does indeed seem like the kind of stock newsletters would love to tease — it’s shareholder-friendly, with big margins and few employees, it uses other peoples money to advance its own business, and it has catalysts for potential growth.
That doesn’t make them stand out among royalty companies — that’s the basic idea of a royalty business, after all — but there aren’t really any other strong, decent-sized pharmaceutical royalty companies that are publicly traded (at least, not that I’m aware of). Ligand has built a large portfolio of compounds that are partnered with big pharma and biotech companies for development, and those compounds require no further investment from Ligand. If they get through to approval after lengthy and expensive clinical trials (yes, LGND partners really are expected to spend $800 million advancing those compounds this year, in 80 different clinical trials), then Ligand gets a royalty on the sales of that product. The royalties vary greatly, some are down around 1%, a few are much higher — including Ligand’s most valuable product, Promacta, which is marketed by GlaxoSmithKline (GSK is also actively trying to expand the label for Promacta, with several clinical trials). The second most valuable product, Kyprolis, a cancer drug marketed by Amgen now, is also the fastest growing — but has a lower royalty rate.
The reliance on Promacta is slowly declining, though it will be the biggest revenue chunk for a while, and the “shots on goal” strategy at Ligand reflects the fact that they really consider themselves a financial company — they put some R&D investment in, including on their diabetes drug that Navellier mentions, but their goal is to partner off everything and make new deals to bring in royalties or other programs that they can use to build their partnered drug portfolio and their future royalty stream. They get these new deals largely from acquisition, including the big deal to acquire Selexis last year and expand into biologics, but they also build them by using their targeting and delivery materials to buy a piece of a drug — their biggest is Captisol, which is a drug delivery platform for intravenous drugs, and their sales of Captisol are growing substantially but also creating future royalties (since they often acquire a small royalty for the use of Captisol with an existing or developing drug, or develop a drug by simply combining it with Captisol).
At this point, Ligand’s big drivers are Promacta and Kyprolis, with a half-dozen other small products producing royalties as well, and the near-term hope is that Duavee from Pfizer will generate substantial royalties after launch this month (that’s a controversial menopause drug that has been in development for more than a decade), or that Merck’s work with the partnered MRK-8931 BACE inhibitor for Alzheimer’s will show promising results in current trials, or that Ligand will be able to soon partner their largest current drug program, their Type 2 Diabetes drug that’s expected to have some results this Summer. But there are dozens more that could provide future revenue, their “shots on goal” strategy is to not invest heavily in any of them but to advance many potential products and let the odds work for them — they say that if the historical averages for success rates in drug approval at each stage apply to their portfolio they would have about 20 revenue-generating assets by 2020.
What I really like about Ligand is that their cash expenses don’t change much — which means that their projected increases in revenue hit the bottom line very nicely, they project that they’ll have non-GAAP earnings per share of well over $3. (That excludes stock-based compensation, particularly, as well as some possible incentives from past deals (CVRs) that would presumably be largely stock-based). It’s more likely to be a little less than $1.50 this year, so the stock is NOT cheap at $70+, but it is growing rapidly. Personally, I would have a hard time even nibbling at $75 but you might be able to talk me into it if I didn’t own the stock … my last buy was a small reinvestment of covered call sales in the mid-$60s a while back, and LGND has grown up to become one of my top-five holdings on the strength of its huge move in the last six months. I got nervous about my LGND holdings for a while last fall, given their incredibly rapid rise, but as I’ve continued to follow their progress I’ve become more comfortable with the relatively lofty valuation.
I’d still be happy to add a bit more on dips, but I don’t want to jump up and down and yell that people should buy it at any price — biotech has been on a tear, this is a company that had a huge breakout year with everything working perfectly in 2013, and there seems a strong likelihood that we’ll see negative analyst comments or disappointments at some point in the next few months that provide a cheaper buy price, or a failure or setback for one of their larger products or one of their “high potential” pipeline “shots on goal”. That said, analysts could give up and pile back on, too — the average price target for the shares is down in the $60 neighborhood, and they could continue to do very appealing acquisitions now that they have a nice strong stock as a currency — I think the biggest likely risk to Ligand’s stock, absent surprising bad news about Kyprolis or Promacta or Captisol, is probably a rerating of the biotech space in general and a loss of investor enthusiasm for the sector, so I’ll hope for that and look to buy some more when it happens.
Wishy washy enough for you? Let’s move on and try to identify Navellier’s third pick:
“Finally, our #3 Biotech Winner of 2014 has a unique claim to fame—it’s immune from scrutiny by the Food and Drug Administration.
“This company solves the manufacturing challenges as drug-making shifts—from traditional pharmaceutical synthesis via everyday chemicals to bio-compounds that are purified from living organisms like bacteria.
“I’m especially excited about its ‘Factory of the Future’ rollout as biomanufacturing moves from permanent glass-and-steel production facilities to ones that can use disposable products that drastically reduce the time needed for purification, ups efficiency and lowers cost.
“We’re already enjoying 100%+ gains in this stock, and there’s plenty more upside to go as the company continues to blow out earnings and raise its forward guidance.”
Well, this is not a 100% match for the Thinkolator — not enough clues of the precise or calculable variety — but after running the clues through our favorite machine I have a high degree of certainty that he’s teasing Repligen (RGEN).
RGEN is a top-rated stock in Navellier’s PortfolioGrader system, though the area of future growth and earnings momentum is the one where the grade probably gets depressed a bit. The stock is not seeing analyst upgrades or increases in analyst estimates, despite the fact that it has indeed beat analyst estimates for the past two quarters, and that’s largely because their “Factory of the Future” business is not going to grow fast enough to replace the high-margin royalties that they received in a deal that ended on December 31 (that’s the royalty on Orencia from Bristol Myers, which ended last year and supplied a big chunk of RGEN’s revenue). Given even steady growth in the rest of their business, which is mostly bioprocessing equipment and materials sales (including Protein A, used in manufacturing monoclonal antibody drugs, and the OPUS disposable plastic column — more on that in a moment), they’ll probably have earnings per share in 2014 that are about half of what they were in 2013… though that’s all very much in the price, one would expect, since this is not a surprise event and investors have been actively prepared for it by the company for several quarters now, and then they’re expected to grow the bioprocessing business organically from that new, lower base.
Any qualm about this being the match comes from the notion that the company is continuing to “blow out earnings and raise its forward guidance.” Technically that’s true, I guess, at least until the end of next week when their fourth quarter will be released (don’t know if they’ll “blow out” that number or not … and they have been raising their forward guidance over the last couple of quarters, but the increases in forward guidance have been tepid — generally things like narrowing the expected revenue from $20-24 million to $22-24 million (that’s just an example, not their actual numbers). Increasing guidance is a good thing, sure, but it’s not on a scale that makes you think the company is experiencing fabulous and surprising earnings momentum.
This looks to me like a solid small growth stock, on the back of their expanding OPUS and decent growth in the bioprocessing and Protein A business, and they’ve partnered a couple of small drugs off now and made a decent-sounding deal with Pfizer for another so that they can really focus on growing that part of the equipment business, a transition that’s been underway for them for about three years. This is a $500 million company that’s about to have earnings cut in half, which would normally scare off a growth investor, but if you look forward it’s not all that bad — reset your expectations for earnings growth of perhaps 15%, with potential boosts coming from future milestones if the drugs they sold off ever amount to anything, and perhaps from acquiring more capacity or potential with acquisitions that could expand their bioprocessing business (that’s what most investors think they’ll do with the $70 million or so in cash they have on hand, partly because it was a series of acquisitions that built and consolidated the core business they now rely on).
The OPUS is that “factory of the future” stuff, a tool for making biotech drugs more flexibly and cheaply than current (glass and steel) manufacturing technology — here’s how they describe it:
“Repligen’s pre-packed disposable column technology enables user specified inputs tailored to specific applications. This means end-users are easily able to replace self-packed glass columns with OPUS pre-packed columns for disposable manufacturing processes….
“Combined with the largest range of internal diameters available on the market, OPUS is the only pre-packed column platform which can accommodate the chromatography needs of a disposable manufacturing facility.”
Gosh, don’t you just want to run out and buy one? Well, from what I’ve read so far they do seem to be getting customers — from something like this you’d expect growth to come first from experiments by big manufacturers or by emerging products like a new biotech drug in clinical trials, not from large-volume existing drugs where they wouldn’t want to mess around with the manufacturing process… so presumably there won’t be massive spikes in earnings or overwhelming order volatility. But there are new drugs being developed every day, and perhaps if you develop a drug using this equipment you’ll want to stick with it and use the same equipment when you scale up … presumably the risk of switching would counteract any cost savings of switching to competitors, which is both a challenge for them as they build the business and a competitive advantage once they have some business.
I know almost nothing about biotech manufacturing, so I’ll leave it to you to go forth, researchify some on Repligen, and let us know what you think. From here, it looks like a small and fairly expensive growth stock, probably pretty predictable and with very good margins and a solid record of cost cutting and increasing focus and efficiency in recent years … but it’s trading at about 75 times the expected earnings for 2014, so if you want to buy the stock you’ll have to get yourself comfortable with whatever you think their earnings growth rate might be. I’d have to guess that the shares will likely get cheaper as the “new” Repligen is reflected in their earnings this year (without Orencia royalties), but they might not — particularly if they make good use of their cash to expand quickly or make an acquisition that investors love.
Good luck to you, and please share your thoughts on either Ligand or Repligen, or whatever else seems relevant, with a comment below. And now, I need to take a break from biotech for a couple days and write about something else — off to prospect in the email mines and see what I can find that might be of interest to share with you tomorrow.
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