August 1 Biotech Update

The sector recovered a little yesterday from last week’s sell-off but ideally we would need to see the sector break into new highs. It seems highly likely that the sector tests the recent highs and the price action at that point is likely to be a strong signal of underlying strength. Given the fundamentals and valuations, I lean towards breaking out to new highs but sometimes price action does not follow fundamentals.
1. CELG was one of the companies with the cleanest beat and raise. There was really no area that was weak underneath the surface. Revlimid is just a beast and the continued increases in duration of therapy will continue that trend and now we will likely see an uptick in NHL revenues over the next couple of years. The real commercial drags have been otezla and Abraxane and both now seem on much firmer footing. Abraxane will not be a growth driver but the recent IO-chemo data all but guarantees that it will put in a solid $1B in revenues per year. Otezla also seems in a much better position. Last year saw a step down in pricing to increase access and while the increased sales took some time to appear, it now seems to have come through. This has always been a bear thesis on CELG. They never thought Otezla would sell over $500M/year given the efficacy gap with the biologics but now it is on pace to sell $1.5B this year.

2. So the established commercial franchises all appear to be set up for continued growth, which makes it a pretty clean story. You also have ozanimod and luspatercept launching in 2019, which will be another growth story and then shortly after those launches you will see two CELG CARTs coming to market (BCMA and CD19). There is not another large cap biotech with such a clear growth pattern in its established drugs and four potential blockbusters launching in the next 12-24 months. While I doubt all four will be blockbusters, it seems quite likely that at least 3 will be. On top of the positive fundamentals, the company still has some cash left in its accelerated share repurchase that needs to be finishing by the end of August and even after the recent run it is still trading at below market multiples with well above market growth.

3. I will talk about some other large caps this week but I also want to turn to more recent earnings reports. NBIX crushed it again. There was some fear that ingrezza would miss the $84M consensus but it clearly beat at $97M. This company is doing a stellar job with this launch and now all of the dosing switching are completed removing any overhang. In addition, ABBV will launch Orilissa this month adding a second source of revenues. With some ABBV milestones, it seems like NBIX will be cash flow positive next quarter but even without those milestones they only loss $6M this quarter. As such, it would only take a little bit more growth from ingrezza or small royalties from orilissa to make NBIX cash flow positive. It seems to me that NBIX has likely seen its last quarter of cash flow losses. In addition, it seems like the NDA for opicapone is on track for next year and should add a third commercial asset to NBIX within the next 12-18 months.

4. BPMC is another one that has been pretty weak but is seeing some strength after the earnings report. In general, there is nothing new in the report but I think it served to remind people that this company has a number of strong drugs and ones that are close to the market. BPMC has been a sentiment sell-off on the back of LOXO and DCPH data but apparently investors remembered today that avapritinib will soon be on the market (filing an NDA in 1H19). In addition, BPMC reiterated that it has cash until 2H2020, which would cover the building up of a commercial salesforce for avapritinib. I suspect they do another raise in late 2018 or early 2019 to increase runway but they also have a number of un-partnered assets, which could be a source of non-dilutive funds. In any case, there is nothing new with BPMC and I see this price action as a sentiment shift from overly negative to less negative.
I will end it here and hope that everyone is having a good week.

Disclosure: Long CELG, NBIX, LOXO, and BPMC

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