Friday, March 3, 2017

Insiders And The New Medicine

Biotech was the big outperformer for years up until mid 2015. After a big cool down, it looks to be reigniting.

There is a new medicine slowly taking hold over the years. To see it, you should be aware of the little project that, in 1990, the Department of Energy, The National Institutes of Health, and some international organizations began - The Human Genome Project. It was to be a 15 year globally coordinated effort that would map and sequence the human genome completely so that we could begin practicing this medicine.

And they did it. It was pretty much completed around 2003, two years ahead of the 15 year schedule and under budget. It was worth every penny of the roughly $3 billion the US government spent on it (in 1991 money). By the tabulations of FasterCures every $1 spent on the Project has triggered $178 in US economic activity. "An investment in knowledge always pays the best interest" they quote from Ben Franklin. They conclude that "As the largest, single undertaking in the history of life sciences, the Human Genome Project has paid back extraordinary dividends on the U.S. government’s investment." That total investment of $3 billion has produced, in 2012 alone, genomic endeavors resulting in $31 billion in US GDP, $19 billion in personal income, at a cost of about $2 a year for each US resident. Now that's a stimulus package.

The Project was pronounced done in 2003, and genomic medicine was eagerly anticipated. But practical, disease killing applications have not exactly been sprinkled on us like magical fairy dust. There is a kind of Moore's Law at work in getting genomic medicine into our every day life. In the early 2000s it cost about $50 million to get your genome mapped. That has steadily declined to less than $1000 now - something akin to getting a tooth pulled, but less painful. Getting your genome mapped is rapidly becoming a common part of good healthcare.

Investing In Modern Medicine

The approach in "modern" medicine has been to introduce chemicals concocted for a mass audience into your particular body to stop some bad thing it is doing. Because we're all different, that typically is done at the expense of upsetting the body's intricate chemical balances, producing a new set of problems. The era of side effects has resulted. The old school drug industry profits, and it's a whole new wing of the legal profession. Have you noticed that about every third commercial on TV now is a disclaimer that drones on ad nauseam about every bad thing some drug has ever done to anyone? From bleeding, pain with or without vomiting, to other unseemly discussions, it's getting so you can't even enjoy a meal while watching your TV. You don't take two aspirin and call in the morning anymore, you call 1-800-BAD DRUG. A hundred years from now, all this will seem like applying leeches.

Genomic medicine has a basically new approach in that it seeks to fix problems by having our body just do what it was designed to do - genetically. And this can now be tailored to each of our individual genomes. It uses the body's own processes to fix problems. "Immunotherapy" is all the rage now in biotech and it uses the body's own immune system to search and destroy disease. A genetically correct body would never get most of our debilitating disorders. It is only when genes are damaged or not working right that we are programmed to problems. As they say in this science, we will stop endlessly treating symptoms, and simply fix the programs.

Unless you're a doctor, probably the best way is to analyze, not these stocks, but the insiders buying the stocks. There are, of course, the officers of the company; and a sudden rash of buying or selling by them is often a good tell. But I like to focus on another type of buyer - the cross company career buyer. These are the very few who are often highly educated in the medical field and also are 10% owners and/or sit on the boards of several of these companies, and do massive, informed buying.

They also like to run biotech hedge funds and, because they know not only medicine, but the business of medicine, they tend to have dazzling track records of performance. There funds are not for everyone as the downdrafts are huge and the sector risk is extreme. But the buying by these very smart people should command your attention. Kevin Tang is one of those people. He founded Tang Capital Management in 2002. My personal favorite for medical insiders to watch is the Fabulous Baker Brothers (no relation to the 1989 musical). Felix Baker owns a Phd in Immunology and is the most massive inside buyer I know of. Julian Baker holds an A.B. Magna Cum Laude from Harvard (social studies) and this blend of intelligence founded Baker Brothers Investments in 2000, which offers their hedge fund, Baker Brothers Advisors, among a family of funds for institutional investing. Together, they are on the boards of several medical companies.

The Bakers' fund tends to run just a handful of heavy-weighted positions although they spread the money out over nearly a hundred names. What strikes me about the names they buy heavily is the high buyout rate. For example, as tabulated by J3 Information Services, the fund's holdings, in heavy positions at the end of 2013 were : ACAD, SLXP, XOMA, GHDX, SGEN, PCYC, INCY, and GEVA. Of those eight, four have been bought out at fat premiums. That's a .500 batting average for takeout homeruns in just three years.

The Bakers' Personal Shopping

These funds do well, but I find it more helpful to look at the yearly progression of the personal buying by the Bakers as they seem to not only know what to buy but when to buy it. When total yearly buying goes over around $20 million, the Bakers tend to do massive personal buying of select stocks, and very big climbs tend to start within three years or so. This only happens with about a half dozen stocks, but when it does, you should pay attention. As an example, let's look at Incyte Corp.
(click images to view)

After declining to flat stock action for many years, the Bakers began $30 M plus yearly buying in '07, '08, and '11, accumulating something like a $10 cost basis before the run to over $100. They apparently think the run is far from over with Julian buying an astonishing $260 million worth in '16, not to mention 10.6 million shares in non open market buys in February, 2017 per Morningstar, worth roughly $1.4 billion.

The Bakers seem to gravitate to the new genetic medicine. Incyte was a groundbreaking leader in the genomic revolution as Incyte Genomics, Inc. and was going about selling its library of mapping until the Moore's Law effect mentioned above made this an impractical business model. So they morphed into one of the best disease fighters after 2004, currently ranked  #4 on Forbes The World's Most Innovative Companies list.

Synageva BioPharma Corp. (GEVA) does recombinant genetics, and it also caught the attention of the Bakers. The company was formed when a Genzyme executive "was approached in early 2008 by Baker Bros. Investments to be the CEO of privately held Avigenics, Inc." according to the Wikipedia account, and this later went public as GEVA. If you construct a chart as above for the Bakers' buying, you find that after a decade of declining to flat stock performance, they bought $75 M of GEVA in '12, $200M in '13, and $267 M in '14 at an average stock price ranging from roughly $110 to $150. I bought GEVA based on this Baker activity and was rewarded with a $230 buyout of GEVA in May, 2015 by Alexion Pharmaceuticals. It "was the one of the largest premiums paid to any company over $5 billion in market cap since 1995" (Wikipedia).

Another rare case of Baker yearly buying going over the $20 M mark was Pharmacyclics (PCYC) where, after a decade of slumber, they bought a little over $15 M in '11 followed by about $24 M in '12 at prices ranging roughly between $10 and $60. PCYC was bought out in early 2015 at $261. And in mid 2013, Felix forked over $58 M at about $14 to buy some ACAD; it's now worth over twice that. Of course the Bakers are human, and they can buy losers as well, especially in the funds they operate. But when they go much over $20 M in personal yearly purchases, the success rate is extraordinary.

The Current Favorite Of The Bakers

There is one stock that has received the most intense Baker insider buying I have ever seen, and they operate squarely in the new medicine area. Genomic medicine is crossing an important threshold as noted in an article "Casey Analyst Forecasts Explosive Biotech Growth", from late 2012. In this interview with Casey's Research, they were asked about breakthroughs in the concept of using the body's immune system to deliver engineered cancer killers. Two were discussed:
The first is the recently approved use of antibody-drug conjugates (ADCs). Seattle Genetics (SGEN:NASDAQ) is the leader in this space, and its ADCs are created by bonding traditional chemo with antibodies selected from our own bodies that target very specific cancer cells. Chemotherapy, which is known as the "poison" in the oncological lingua franca "slash, burn, and poison," does precisely that to the entire body, causing horrific side effects in many patients. By piggybacking on the body's own mechanism for targeted immune response, chemotherapy can be rendered basically inert except when it comes in contact with cancer cells. This means more chemo can be delivered safely, working wonders on metastatic cancers and other difficult-to-target, small, multiple-growth cancers.
From the SGEN site, we see that genomic science is facilitating all this as they:
:... have also formed a strategic collaboration with Oxford BioTherapeutics to jointly discover novel ADCs for cancer. Under the collaboration, OBT will generate panels of monoclonal antibodies against novel tumor-specific antigens identified using its proprietary Oxford Genome Anatomy Project database
Seattle Genetics is a small speculation enamored with science, not profits. But a development in 2010 could change that. From an Xconomy article in 2011 "Seattle Genetics, On The Verge Of Going Commercial, Seeks To Keep Its Scientific Soul":
A little science background is required to see why this matters. Other biotech companies have had a lot of success with targeted therapies over the past decade, making genetically engineered antibodies that specifically zero in on markers on tumor cells, while mostly sparing healthy cells - unlike typical chemotherapy. Seattle Genetics has gone a step further, by turning genetically engineered antibodies into what amounts to a “smart bomb” against cancer. The company’s technology links the targeting antibody to a potent toxin, which gets unleashed on the tumor.
This idea of putting a cancer poison warhead on a genetically crafted antibody missile isn't new. As the article explains:
Most of these efforts to soup-up antibodies have failed over the years, but Seattle Genetics proved it had solved the puzzle last year in a pair of clinical trials.
So this 2011 piece claimed that Seattle Genetics "proved it had solved the puzzle last year" inducing the company to "start putting together a commercial plan." This was 2010, which interestingly enough was the year the Bakers began their massive buying of the stock in earnest:

You have to wonder what's up with that. This is the most intensive buying I have seen from the Bakers, or anyone. That's about $1 billion of one person's personal bank account invested in one dangerous stock.

Since the Bakers began buying up shares of INCY and SGEN hand over fist, INCY has not only been placed in the top five World's Most Innovative Companies list by Forbes, they have been added to the Standard and Poor's 500 index as announced on Feb 24, 2017. This will dictate some index fund buying. The Motley Fool announcement went on to say:
Incyte will be a fine addition to the S&P 500. It has a fast-growing drug franchise in Jakafi, a decent pipeline, and after a string of high-profile pipeline failures from competitors, faces close to zero competition for the drug's market opportunity. The company has staying power -- and so does today's move.
And the "going commercial" plans of SGEN have been proceeding with a Feb 10, 2017 announcement of a major deal with Immunomedics to license one of the cancer "smart bombs" that has received Breakthrough Therapy Designation from the FDA. According to Cynthia Sullivan, CEO of Immumomedics:
"After a long and robust process, we concluded that licensing our lead asset, sacituzumab govitecan, to Seattle Genetics, the leading ADC company, would give us the best opportunity to advance this product on behalf of advanced stage cancer patients."
Looking at the massive buying figures like those above may prompt one to sell the kids and bet the farm on whatever people like Tang and Baker are buying heavily. But as in the '90s with the revolutionary internet, genetic medicine is here to stay, but most of the stocks will go away. The key insiders will likely be our best guess for the stocks that will be the mega winners.

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