What’s Oxford Club’s $25 Billion “Miracle Molecule?”

By Travis Johnson, Stock Gumshoe, October 14, 2015

This pitch is not all that tough to decipher for those who are seasoned biotech investors, but it’s generating a lot of questions for us today so I thought we’d get a quick answer out for you — it’s certainly a stock that gets plenty of attention, so you won’t need much of a head start on your research from yours truly on this one.

The pitch is that there’s a “Miracle Molecule” which will save millions of lives, and that one company has “exclusive patent rights” — which doesn’t narrow it down all that much, that’s the promise of “miracle molecules” from hundreds of biotech companies… but the Oxford Club folks are claiming that this one is “an easy triple,” so let’s narrow it down for yo.

The ad starts with a comparison to arguably the biggest lifesaver in medical history…

“Penicillin completely reshaped human history…

“There was hardly a condition it couldn’t treat….

“That fateful day in the lab single-handedly launched billion-dollar biotech giants we know today as Pfizer (up 3,550%), Merck (up 3,456%) and Bristol-Myers Squibb (up 2,929%).

“Yet the discovery of penicillin pales in comparison to what you’re about to see…

“An elite group of scientists has recently uncovered something exponentially bigger… the profit potential is immense.

“I call it the ‘miracle molecule’…”

We even get a look at the chemical formula for this “miracle molecule” … as if the chemical formula will mean anything to most of us (though it can help to confirm the drug they’re talking about, for those of us who like to dot our i’s).

More on that “miracle” …

“How This $25 Billion “Miracle Molecule” Came Into Existence…

“This is not some one-in-a-million biotech that’s hinging on FDA approval or hoping to get lucky.

“This molecule is proven to work… and the cure rates on the first disease it’s treating get better and better by the day.

“In Baltimore, Johns Hopkins researchers at the Division of Infectious Diseases discovered a cure rate of 98%.

“The next set of clinical trials in New Haven, Connecticut, used the “miracle molecule” in a two-part therapy process… it cured 100% of its patients in an average of seven weeks.

“The company itself has confirmed a 100% cure rate in trials.”

And they include lots of little diagrams and images to try to explain now this company’s “miracle molecules” work to destroy viruses.

“Infected cells are constantly on “seek and destroy missions.” They attack your cells and replicate throughout the day….

“However, the “miracle molecule” stops the replication process.

“It acts like a double agent, concealing itself as though it’s already been infected.

“Camouflaged, it can slip past the virus, and stop the infected cells from replicating….

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“In as little as 30 days, people are seeing diseases completely disappear from their blood…”

And we’re told that this company is a “sleeping giant” — and an “easy triple” … some more clues for you:

“First of all, insurance companies love the ‘miracle molecule.’

“You see, they pay billions of dollars per year treating chronic diseases like cancer, hepatitis C, cardiovascular disease and HIV.

“But often the treatments only manage the diseases.

“So the treatments essentially go on forever. And the bills never stop piling up.

“But a true cure like the “miracle molecule” can actually help people become truly healthy again.

“And healthy people are cheap for insurance companies.

“So although the ‘miracle molecule’ is expensive upfront, insurance companies are happy to pay for it.

“When you add up the medical expenses for 30,000 NEW patients a month… insurance companies are paying quite a bit to the one company behind it.

“It comes out to $30.2 billion in new revenue for the company I’m talking about today.

“That alone could double the stock.

“But with 36 drugs in its pipeline, we could easily see this sort of revenue explosion again and again… even if just a handful of those 36 drugs pass FDA approval.

“That’s why we believe this stock is an easy triple.”

I know what you’re thinking — $30.2 billion in new revenue, and the stock only doubles because of that? This must be a gigantic company. And it is, here Oxford Club is teasing: Gilead Sciences (GILD), maker of Sovaldi (which is the Hepatitis C drug whose chemical formula matches the “miracle molecule”) and Harvoni.

GILD is indeed, as teased, on track to maybe having the best-selling drug in the world as the needs of millions of HCV sufferers are finally met, and is expanding quickly across the globe — though I don’t know that it’s gospel that “insurance companies love the ‘miracle molecule.'” There is obviously a strong argument to be made for stopping Hepatitis C before it becomes even more expensive for insurers, but governments and some insurance companies are also balking at the high cost of Sovaldi and Harvoni and the other new HCV drugs from Gilead and others. Often, these drugs — solely because of their very high cost — are available only with preapproval, or are being restricted to patients who are already in desperate straits with cirrhosis or other serious HCV complications or symptoms (many of the people who have Hepatitis C have lived with it for decades and are arguably not yet in crisis, and millions likely don’t yet know that they have the virus). The big price tag for these drugs, which are widely acknowledged to be fantastically (or miraculously, if you prefer) effective, has also really primed the pump for the more recent debates about drug profiteering and price controls, helping to bring down stocks throughout the biotech sector.

So it’s not an easy answer like “miracle cure equals huge payday” — Gilead has grown to this point largely because of the huge HCV market and the promise of Sovaldi and Harvoni, and they are indeed generating huge revenue numbers right now. The market cap is now, after a bit of a dip along with most biotechs over the last couple months, down to about $145 billion after peaking at $175 billion back in June. Sales hit about $25 billion last year and are expected to be $31 billion this year, with analysts forecasting $31 billion in 2016… so while they have a couple hot drugs that are selling hugely well, and ramping up sales perhaps faster than any other drug in history, they’re a substantial amount of skepticism, it appears, about whether or not they’ll be able to turn that into more growth.

Which is why GILD looks awfully cheap on a PE basis, particularly for an exciting, headline-generating biotech stock — it’s only trading for 10X earnings, and they don’t have any debt to speak of… and they also have a fully-stocked pipeline of other drugs in development. The worry, really, is that once you’ve got your huge payday from curing HCV in this giant wave of sales for Sovaldi and Harvoni, what’s next? And if insurers really use the huge ticket price of those drugs (and the rage over the much less justifiable prices of many drugs from other companies) to play hardball on pricing, or the government ends up actually getting involved and instituting drug price controls for Medicaid or Medicare patients, then the profits could be substantially lower than expected.

I don’t know much about Gilead’s pipeline, and I can rarely offer any wisdom on biotech stocks in general — Dr. KSS, who leads biotech discussions for the Irregulars, has spoken kindly of Gilead in the past, partly because of the promise of their pipeline. They do have the luxury of funding the pipeline with the huge revenue spikes from their Hepatitis C drugs in recent years, and probably for at least the next few years, so if their compounds for cancer, other liver diseases, etc., do continue to show promise they’ll have some potential to grow — it’s hard, though, to build on a blockbuster without there being a bit of a letdown if and when the initial sales surge falters, either because the pent-up demand for the treatment has been sated or because the pricing is unsustainable.

The big cash surge from Sovaldi and Harvoni has investors speculating about what Gilead will do to keep moving the ball down the field — will they just invest in their current pipeline, or buy some small biotechs to create more potential growth avenues, or do some sort of large, transformative deal? I have no idea, but GILD is likely to be quite volatile — especially for a company of this size — as we watch and wonder what they’ll do with this Hepatitis C cash windfall, and as the drug pricing debate percolates in the leadup to next year’s elections. Should be interesting to watch, and you certainly could see GILD shares triple — you could justify that by comparing it to most any profitable biotech stock, just using price/sales numbers or PE ratios. I’d be surprised if that happened anytime soon, particularly given the heebie-jeebies torturing the biotech market these days, but, well, damned if I know.

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October 14, 2015 5:10 pm

Travis: Am a bit puzzled by the performance of GiLD stock, Bought in June of this year and am down approximately 14% so far. So when did your “buddies” at Oxford Club say this wonderful stock would at least have a valuation where it was bought in June? It does not seem that all of this speculation has done much for the stock price.

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October 14, 2015 5:40 pm

Chuck: I will try to speak to that. It is by any means of reckoning a wonderful company, and yet has underperformed for the last 12 months by any traditional metric: P/E, P/E/G. One reason for this is that despite the pretty penny its HCV treatments command, these bother the market because each successful treatment dereplenishes the pool: it’s one less patient who will need treatment. Second, although it’s HCV medicines have been good, in fact ledipasvir is not an excellent NS5A inhibitor. Though it has a better one coming to market, others, particularly Merck, have caught up. Merck’s HCV drugs are very very good, and BMY’s daclatasvir may be the best in class NS5A. Its HBV program has been fatuously weak.

I am long GILD for these reasons: it has serious firepower in its pipeline. Its agent simtuzumab will be an anti-fibrotic blockbuster, I believe. Also, clearly it intends to make a big footprint in cancer, and is likely to do landscape-upsetting acquisitions in that space. Three, it has the best management in biotech. Mgmt are admittedly quite arrogant, I agree, and sometimes hubris sets you up for a fall, but thus far they have avoided that.

Biotech markets are badly spooked now, such that all news good or bad moves share prices down. Things were not helped by Mrs. Clinton’s excellent performance last night in the debates, which revealed her to be the sole credible Dem candidate. But I feel that in 1Q16 we’ll see share price return to form. I regard it as among the safest biotech investments, and that says a lot in the present environment.

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October 14, 2015 6:47 pm