It’s New Year’s Eve. This year flew past – and so did biotech. The NASDAQ Biotechnology Index (NBI) will end the year up 60%, while the S&P 500 will close the year at a 25% gain. Healthcare investors reaped the rewards of a year that certainly couldn’t be considered a “stock picker’s” market. Nevertheless, it was generalist investors revisiting biotech after nearly a decade of skittishness (remember the genomics bubble and burst of ’00?) that contributed to the impressive performance of many healthcare equities. PropThink.com landed on the healthcare scene late in 2012, launching our Premium newsletter early in 2013. With this, the 31st of December, bringing closure to our first full year in operation, we revisited some of our top picks from the year.
Questcor Pharmaceuticals (QCOR) continues to face scrutiny from government agencies regarding promotion of its legacy drug, H.P. Acthar Gel. PropThink suggested owning QCOR when the stock took a dive in 2012 on concerns over insurance providers continuing to cover the expensive Acthar Gel. QCOR is an easy moral target given the premium pricing placed on Acthar in the years since it changed up marketing of the drug, but QCOR climbed from our entrance price around $20.00 last fall to a high of $75 within a year.
Investors had known about inquiries by the US Attorney’s office in the Eastern District of Pennsylvania for more than a year, but news this October that the Southern District of New York and the Los Angeles offices were joining the investigation simply didn’t bode well for Questcor – or its investors. Both Pfizer (PFE) and Novartis (NVS) paid fines of about $400 million each after they illegally promoted Trileptal and Bextra a few years ago. A similar fine of $400 million works out to about $5 per share for QCOR.
All indications are that Acthar is successful, but the fact that investigations are not winding down but are in fact ramping up, suggests that there may be more to this story than attractive economics. At the end of October, we suggested taking profits from an enormously successful run – a 275% return.
DiaDexus (DDXS) was one of PropThink’s more interesting positions this year. DiaDexus develops and markets the PLAC Test—the only FDA-approved diagnostic for measuring Lp-PLA2. Darapladib, a drug being tested by GlaxoSmithKline’s (GSK) in two phase 3 trials, is an Lp-PLA2 inhibitor that the company believed could reduce the chances of cardiovascular events such as heart attack or stroke in patients with cardiovascular disease. We took a flier on diaDexus as a derivative play on the darapladib trials, which were completed this Fall. Although the trials were a failure, DDXS climbed from $0.75 in the summer when we first recommended buying the stock, to a high of $2.23 – a 200% return in less than four months. Our original thesis – that down-side was limited with a position at $0.75 given the existing business – panned out to a “T”. DDXS will close the year at $0.89.
Also in the contrarian vein, we began covering Endo Health Solutions just before January when the company announced that it may not even make the low end of its 2012 earnings guidance, and that it no longer expected to achieve its 2013 revenue or EPS guidance. The company also announced that its CEO would retire about a year and a half prior to his contract expiring. A complete lack of 2013 guidance left investors hanging in the dark and the stock made new lows.
It was the reset we were looking for. We suggested going long ENDP, and with new, aggressive management in 2013 and an evolving strategy to improve the bottom-line, ENDP continues to make new highs. Since we first recommended ENDP, the stock is at an all-time high of $67.00 – a 168% return. We’ve recently took a similar stance on Hologic (HOLX), which saw activist investor Carl Icahn get involved this Winter. Read why we think this could be a quality turn-around story within the next two years, here.
Ilumina (ILMN) touched a new all-time high in the final week of the year – $115.00. Since PropThink launched and Mr. Deryugin first wrote about the sequencing giant, the stock is up almost 200%. Most recently, Illumina announced the acquisition NextBio, a leader in clinical and genomic informatics. NextBio’s data platforms aggregate and analyze large quantities of phenotypic and genomic data for research and clinical applications. The economics went undisclosed. Neuralstem (CUR) touched a new 52-week high of $3.02 on New Year’s Eve – and nearly a 190% return since contributor Jason Napodano first covered the stock for PropThink. Napodano remains quite bullish on CUR into the new year and last week opined on the company receiving Breakthrough Therapy Designation for its stem cell treatment NSI-566 in ALS. In our view, Neuralstem is one of the top contenders in a difficult space – regenerative medicine.
Enanta Pharmaceuticals (ENTA), which we began following this July about four months after its IPO, climbed to an all-time high of $38 in December – a 120% return for those who bought the stock alongside our recommendation. Enanta and partner AbbVie (ABBV) released this month the first phase 3 results for their investigational three direct-acting-antiviral (3D) regimen plus ribavirin in patients chronically infected with genotype 1 (GT1) hepatitis C virus (HCV). The study, SAPPHIRE-I, was the first of six phase 3 trials that will read out in the coming months. The stock has since come back from its highs and we’re actually interested in repurchasing stock at these lower levels. Regardless, ENTA proved a quality trade in 2013.
Among PropThink’s winners this year were Onyx Pharmaceuticals (ONXX) and Pharmacyclics (PCYC). We first covered Onyx in March 2013, arguing that Celgene (CELG) is less of a threat than investors believe, and that Kyprolis is poised for meaningful success. In less than 6 months, investors who followed us into Onyx saw returns of almost 50% as Onyx was acquired by Amgen for $125 per share, up from $83. Pharmacyclics was another solid performer for PropThink subscribers in 2013, with shares rising around 50% since our initial February 11 report. Ibrutinib is now approved to treat MCL (under the trade name Imbruvica), and is under review for the treatment of CLL. Pharmacyclics’ rally in 2013 was driven by continued clarity regarding Imbruvica’s blockbuster potential in CLL, MCL, and other indications, and as Pharmacyclics and partner Johnson & Johnson (JNJ) move to begin commercializing the drug, we see much more upside for long-term investors. We will have a new report on Pharmacyclics early in the coming year. We’d be remiss not to mention Keryx Biopharmaceuticals (KERX), which has become a bit of a lightning rod in 2013 due to a contentious IP situation. Regardless, KERX has been good for more than 300% from when we first began covering the developer of anemia treatments for patients with chronic kidney disease.
Our biggest losers and learning experiences in 2013? ChemoCentryx (CCXI) lost a whopping 60% from when we picked up shares this past August. We stepped in front of two major binary events that went the wrong way. GlaxoSmithKline recruited patients in the phase 3 trials of vercirnon with a history of failure to respond to anti-TNF therapies – just 12% of patients were non-responsive in successful Phase II trials. As we outlined in our original coverage of ChemoCentryx, one of the key strategic strengths of the drug was its lack of broad immunosuppressive side effects, a facet of existing anti-TNF therapies, chief among them Humira and Remicade. If Glaxo had structured the vercirnon phase 3 program around a wider set of patients, then it’s possible that efficacy in the program would have paralleled previous results. Mr. Deryugin discussed the failures, and why he’s still tracking this name, in September.
Navidea Biosciences (NAVB), on which we began the year bullish, has been a flop, and we’ve largely given up tracking this small-cap name. We based our bullish sentiment, clearly the out-of-favor view at the time, on NAVB’s ability to incentivize prescribers of Lymphoseek with improved economics. We didn’t appreciate fully the poor marketability of the imaging agent. NAVB is getting traction again as traders play the volatility associated with upcoming events, but fundamentally, NAVB should be avoided. The stock closed the year down 30%.
We remain optimistic about Onconova Therapeutics (ONTX), which will have data from a phase 3 trial of rigosertib in myelodysplastic syndrome shortly. Nevertheless, the stock is down more than 50% from our first purchase.
Clinical failures are a nature of investing in the volatile biotechnology sector, which is why it’s always prudent for fundamental investors to have a well-rounded portfolio. We provide intelligence on small-cap and emerging growth companies in the healthcare space, and while much of our content is disseminated free-of-charge, it’s PropThink Premium that gives you the edge on all of PropThink’s trades and ideas. We’re excited for new opportunities in 2014, which we believe will be a stock-picker’s market unlike what we’ve seen of late – that’s good news for the deep diligence crowd
Happy New Year from PropThink!
In connection with ONTX, ILMN, ENTA, PCYC, KERX PropThink has taken a long position.
