Three more “Secret” Stocks for this “50X” opportunity

Part two of our look at Matt McCall's Chinese biotech stock pitch

By Travis Johnson, Stock Gumshoe, November 13, 2019

Yesterday I started digging in to Matt McCall’s tease about a huge opportunity in Chinese biotech… and, as promised, today I’m finishing the job.

The basic premise is that China is pushing to make biopharma a bigger part of its economy in both the current five-year plan and the “made in China 2025” plan, and that will keep pushing a lot of money into companies who are both licensing in drugs to treat serious health issues in China, and those who are doing their own R&D to try to build up a pipeline of China-created treatments. You can click here for part one and the “#1 Biotech” pitched by McCall, but today we’re digging in to try to identify the other three stocks he dangles.

Ready? OK, let’s just jump right in with the first clues…

“Biotech Firm #2

“This next opportunity is LITERALLY the first biotech company to go public 14 months ago under the new exchange laws….

“… they struck a deal with pharmaceutical giant Roche for exclusive rights to sell and market several drugs to mainland China.

“Why all the attention?

“Because this company’s area of expertise is developing groundbreaking treatments for hepatitis.”

And apparently Hepatitis is a huge problem in China…

“In 2018, just 3.5% of infected people in the country were treated, which means 96.5% of the entire population received NO medical attention for this completely manageable disease!

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“That spells massive upside for this little-known stock…

“It has already successfully developed and launched innovative drugs that combat hepatitis B, hepatitis C and HIV.

“Right now, this company trades for just a few dollars per share.

“And you can bet all that will change if the Chinese government gets behind it to tackle this nationwide pandemic.

“Just a tiny stake today could mean massive upside potential over the next six to 12 months.”

That’s Ascletis Pharma (1672 in Hong Kong, there’s an OTC ticker at ASCLF OTC in the US but it does not actually have any trading volume, so it would be much better to buy in Hong Kong if you’re interested), which did indeed go public last August in Hong Kong, under the new guidelines that were put into place a few months earlier to encourage fundraising for earlier stage companies (before the new rules, the Hong Kong Stock Exchange didn’t list unprofitable companies who have no revenue — which would almost always mean “no biotechs”).

And yes, they do focus on liver diseases, with their initial drugs licensed in from Roche and a pipeline that also includes early stage clinical trials for NASH and liver cancer, almost all of which are also licensed in from other companies. The stock has not done well so far, it’s down about 60% from the IPO.

There was a good story on Ascletis’ ambitions (and challenges) in July from the FT, and the sharp drop in the share price immediately after the IPO last year caught some attention.

Their licensed-in drugs from Roche do not yet generate much revenue, I have no idea what the potential might be of those or their other drugs… but, thanks to the IPO last year, they are at least well-funded to move forward with their R&D (as of June, about CNY 2.70 per share in cash) — that makes it seem like a relatively low-risk bet, since the share price is about HK$4, which translates to CNY 3.59, though it’s dangerous to think about “book value” of biotech companies since they are, of course, going to be spending all that money and more before (if) they really become sustainably profitable. But well-funded is good, these Chinese biotechs do seem to trade at a discount to their US peers, perhaps partly because Asian investors aren’t used to putting a rich valuation on R&D companies, and you can make your own call on whether or not the pipeline and potential is appealing to you.

You can see the interim report for the first half of 2019 here for more detail (like many overseas firms, they report twice a year instead of quarterly). There was also a little insider buying from the founder last week, though it was a relatively small purchase and the executives already own more than 50% of the company.

Next?

“Biotech Firm #3

“The third company I’m excited about shares a lot of the same aspects as the first two…

“They have a world-class management team and the founder basically pioneered biopharmaceutical innovation in China for autoimmune and infectious diseases.

“And it too has signed exclusive partnerships with massive U.S. biotech companies like Bristol-Myers Squibb.

“It might have the most impressive pipeline out of the bunch and it currently has seven different drugs in phase 3 trials.”

OK, that’s probably not quite enough clues… anything else?

“But what makes this company truly unique is its focus on licensing drugs.

“Even though it creates its own innovative drugs, it has also secured license agreements and exclusive selling rights in China for some of the biggest household name drugs in the world….

“Big financial research firms are already calling this company the gateway to treating China’s massive 1.4 billion people.

“Again, this stock is another screaming buy as the government funnels BILLIONS towards tiny startups like this company.”

A focus on in-licensing drugs does not make a Chinese biotech unique, for sure, that seems to be the general strategy of most of these companies — license in “western” drugs that are either commercial or are near approval, to help with unmet needs in China and generate some revenue to keep early investors happy, and also develop your own drugs on a longer timeline.

And the Thinkolator doesn’t have a clean answer here, but I can tell you that the best candidate of the bunch I reviewed is Zai Labs (ZLAB), the only one of the bunch today that has an easy-to-trade US listing… they do indeed have seven different drugs in phase 3 trials right now, most in cancer (and a couple approved for marketing in Hong Kong or China). Brivanib is the drug they have licensed in from Bristol-Myers, and that one’s in Phase 2.

And yes, founder Samanthu Du is a big figure in Chinese biotech, there was a nice story about her last year at Forbes.com and she was instrumental in building Chi-Med, the earlier Chinese biotech funded by Li Ka-shing.

Zai Labs pretty quickly jumped to a billion+ valuation and went public pretty early on, largely on the strength of Du’s reputation and their portfolio of in-licensed drugs, and now it’s a $2.5 billion company. They don’t have much in the way of revenue just yet, but there is some analyst coverage and they anticipate a big jump in sales next year and in 2021 — the company still won’t be profitable, particularly with their heavy spending on clinical trials, but it is widely expected to grow.

And that’s about all I know about this one — you can see their pipeline here, and they do have a slightly out of date (from August) investor presentation here if you’d like a quick overview.

And one more for you…

“Biotech Firm #4

“The fourth opportunity is nothing like the other three….

“You see, the other three companies are directly involved with creating new, innovative medicines, but this company innovates in a different way.

“It provides the vital infrastructure for these small companies to quickly grow and flourish while allowing them to focus on their drugs.

“This leads to a better and cheaper way to research and develop new drugs.

“This model has already proved lucrative in America, with similar companies already up 280%, 480% and even 5,662%.

“The only difference is that this company is the only one tailored to meet China’s biotech massive-growth needs.”

OK, so some kind of service provider for biotech companies — maybe a contract research organization? What other clues do we get?

“It just IPO’ed this year and it was one of the most in-demand stocks in recent history.

“It is truly a one-of-a-kind company and this stock alone could soar thousands of percent over the years.”

There have been quite a few Chinese biotechs going public this year, so that narrows it down a bit — but, again, I can’t be 100% certain of this one given the limited clues… the Thinkolator’s best answer here is Viva Biotech (1873 in Hong Kong, also has an OTC ticker at VBIZF but, again, no actual trading so don’t count on that), which had a massively oversubscribed IPO in Hong Kong about six months ago. The best piece I’ve seen explaining this one is a South China Morning Post article titled “Investors pile into Viva Biotech’s Hong Kong IPO as they are confident of the R&D services provider’s business model.”

Here’s how the company describes itself:

“Viva Biotech ‘s mission is to become a cradle for innovative biotechnology companies around the world. Viva Biotech has developed a scalable business model combing the conventional cash-for-service (CFS) model and its unique equity-for-service (EFS) model. Under the CFS model, the Group provides structure-based drug discovery services to its biotechnology and pharmaceutical customers worldwide for their pre-clinical stage innovative drug development, covering the full spectrum of the customers’ needs for early stage drug discovery, including target protein expression and structure research, hit screening, lead optimization and drug candidate determination. Viva Biotech also provides drug discovery and incubation services to biotechnology start-up companies with high potential under its EFS model. As of June 30, 2019, Viva Biotech had provided drug discovery services to 388 biotechnology and pharmaceutical customers worldwide, worked on over 1,000 independent drug targets, delivered over 11,000 independent protein structures, and incubated a total of 37 early stage R&D projects.”

The “home run” potential is that Viva provides its services to biotech developers both on a cash for service basis and, sometimes, in exchange for equity in their drug developers, that “Equity for service” model … so they do have cash flow and are actually profitable, and they also have that portfolio of “just maybe” investments in (usually extremely early stage) drug developers, though you’ll have to decide whether the business is growing fast enough to justify the current valuation. As of the latest interim results, they have a PE ratio of about 50 and do have order flow growth in their core business of about 59%, and they also paid a small dividend in this first period since going public (half a HK cent, so don’t get too excited — if annualized to a penny a year, that would be a little less than a quarter of a percent dividend yield). They probably won’t report again for three or four months.

There has been some early indication that the business is scalable, they roughly doubled their revenue from 2016 to 2018 and that led to a quadrupling of net income… so that’s interesting, and the fact that they’re holding equity in lots of little startups provides some hope of future growth, but I can’t say that I know enough about this one to get excited just yet, and their website is down at the moment so I’m a bit stunted in my efforts to dig deeper… if you want to dig in a bit, their Hong Kong Stock Exchange page is here,

So, as I was thinking yesterday when I looked at BeiGene, the first stock of the four teased by McCall, I still think it’s an interesting area… though it’s not really a “new” notion that Chinese biotech has a lot of potential over the next few years. Hedge funds and venture capitalists have been spending heavily in this area for several years, and it’s definitely a mainstream topic in the Chinese press (there was a piece in the South China Morning Post about a year ago that gives some pretty good background).

That doesn’t mean you can’t invest, we’re almost never really discovering brand new ideas as individual investors, and you don’t have to be first… but it does mean you probably have time to think it over and can push that FOMO generated by the newsletter teasers to the back of your mind. This is not a sector that’s going to double in a week, most of these companies are pretty new to the public markets and have had their ups and downs this year so far, and none of them seem to be on the verge of releasing earthshaking news (other than BeiGene, whose big news came out a few weeks ago on that Amgen investment)… so I’d just suggest that you take your time, do your research, see which stocks seem appealing, and, since these are pre-revenue biotechs, keep your bets small and try to listen to that devil’s advocate in your head who’s telling you that many (or most) of these companies fail.

And, of course, come back and let us know where you’re putting your money, so we can all get a wee bit wiser. Thanks for reading!



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dahaduspjwapatchesHugoTheImpalerSir L'Nois Recent comment authors

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encodoc
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👍4
encodoc

Are you nuts, in no way is Terminator 2 better than Terminator 1.

FlyOnTheWall
Irregular
👍51
FlyOnTheWall

Terminator 2 was the movie that set the gold standard for special effects and lead to Jurassic Park (and sadly, the Star Wars prequels). I agree with Travis, it was better.

JackInTheBox
Irregular
👍111

The issue I take with $CHNA is that it has $7 Million in assets. If it closes down (which it might) you receive a check with forced capital gains (assuming there were gains, and it was in a taxable account).

dahadus
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👍0
dahadus

but the fund just started last year, so I expect more money to flow in in the coming years

Jay
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Jay

I wouldn’t touch anything from China with a 10 foot pole!
They have no standards like the USA or Europe has.
They also lie like a rug…trust me…I’ve done business in China several times.
You would think after so many people got burned by Chinese companies going IPO…taking their money(and Wall Streets) and then going belly up and burning everyone in sight, that people would have learned by now.
Oh…this time it’s different. Sure.

big tuna
Member
👍96

You would surprised the amount of generic Rx and OTC meds made in China, plus new epidemic of problems stemming from those being substandard and with controversial inert (filler) ingredients. OTC read label, if it doesn’t say where it is actually manufactured you can bet China. Rx call your pharmacy and ask manufacturer name generic and country of origin. Different pharmacies buy from different generic manufacturers.

vivian
Guest

I think that the Chinese licensees are going to pay the real drug developers which are majors both US and foreign. Given the size of China they should do well out of the licensing business. so why go nuts trying to buy a barely traded overpriced outfit in Shanghai, Shezhen, or Hong Kong?

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FlyOnTheWall
Irregular
👍51
FlyOnTheWall

I read that the Chinese middle class has more wealth than middle class Americans, but they have not been able to invest in most Chinese stocks. That is changing in November, and they will now be able to invest within the country rather than through the NYSE or by buying foreign properties (California real estate). If this is true, we could see a massive transfer of wealth out of American stocks and into the new Chinese exchange, which could even crush the DOW and NASDAQ in 2020. If that happens, I would imagine that a rising tide would lift all… Read more »

Matthew Athauda
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Matthew Athauda

Can you provide a source or other evidence for this please?

HugoTheImpaler
Guest
HugoTheImpaler

You can research it yourself.

FlyOnTheWall
Irregular
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FlyOnTheWall

I’m glad you asked me about it, it was an article from Stansberry’s China Opportunities. I went back and re-read it more carefully, and it has more to do with the MCSI index and that quite a few index funds are going to be forced to move money into Chinese A-shares over the next few years. My mistake, I’d better read more carefully before I post.

pjwa
Member
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pjwa

You are correct about MSCI which is going through its third stage of inception and increased inclusion of China large cap stocks in the Emerging market index. That will give a modest weighting of just 3.3%, which does not reflect the size of the A share market yet. But it will likely draw in $80bn to the A share market. Chinese have been able to invest in their own market throughout, and the stock-connect system has created an inflow and outflow to Hong Kong, so Chinese can invest in HK listed stocks. Getting money offshore to foreign markets has been… Read more »

Sir L'Nois
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Sir L'Nois

It would be encouraging if these present day descendants of Chittam held similar moral operating values as Western world culture. Experience has proved that this is not the case.

pjwa
Member
👍82
pjwa

Viva Biotech certainly makes a good fit. It is the 3rd largest holding in the Open Door China Healthcare Fund (after 3S Bio and CSPC Pharmaceutical), which is a professionally managed option for investing in China Health sector, at least for institutions and HNWs. Ascletis Pharma is also in their portfolio, who had a postive open day to-day. emphsizing the size of the hepatatis market. ZLabs , they have avoided because of its lack of earnings and future visibility thereof, albeit that has not held back stock performance. Viva itself is a mini ETF for early stage bio- development company,… Read more »