Source: George S. Mack of The Life Sciences Report (10/30/14)
Institutional investors are, by and large, unable to own shares in companies with market valuations of less than $100 million, which means most sellside analysts don't write research on very small companies. The paradox: The micro-cap space is where investors can find the tenbaggers. That disconnect and its attendant irony are not lost on SeeThruEquity's Ajay Tandon and Brandon Primack. In this interview with The Life Sciences Report, Tandon and Primack discuss four companies nurturing seeds of dramatic growth that could materialize in the wake of upcoming catalysts.
The Life Sciences Report: Ajay, could you tell me the three most important characteristics of a micro-cap growth company—a company with a market cap under $200 million ($200M)?
Ajay Tandon: If I were to single out three characteristics, the first would be that we are looking for undervalued situations where a company has a niche or a compelling technology. Second, we're looking for companies that have management with a proven track record. In micro-cap situations, you need quality management that can execute. A very small company's success depends on that. Finally, as we all know, micro-cap situations vary in terms of liquidity and exposure, so we're looking for companies that are very serious about being in the public markets and can deliver a consistent, solid message to the market, at least on a quarterly basis.
TLSR: You have some very small companies in your universe of coverage. I'm sure small hedge fund managers, or possibly small-cap mutual fund managers, sometimes tell you that a company looks interesting, but that they are unable to buy it because it's too small. Do you ever see these money managers buy very small equities for their own accounts?
AT: I can tell you anecdotally that when we initiate coverage on a company, we're always approached by small hedge fund managers who have personal accounts. Because of their funds' guidelines, they may not be able buy micro-caps, or their holdings have to have market caps closer to $1B. We can't say for sure that they buy, but it seems like they have the interest.
TLSR: Is SeeThruEquity an investment bank? Do you structure deals, join syndicates and find financing for companies?
AT: We are not a broker/dealer or investment bank—we're an independent research firm. There are two main aspects to our platform. The research we produce is not paid for by the companies, and therefore is unbiased. We currently have 105 companies under coverage across a variety of sectors. We cover companies on the New York Stock Exchange and the NASDAQ, as well as companies on the over-the-counter markets. We are an approved contributor on the three major research aggregators: Thomson ONE, FactSet and S&P Capital IQ. Our research is completely open source.
We also do investor conferences, one each quarter here in New York City, showcasing micro-cap and small-cap companies. Our next conference is on Nov. 12, and will offer a good mix of companies from a variety of sectors. That begs the question: What is our revenue model? It's quite simple: We charge companies to present at our conferences. We write on companies in the micro-cap and small-cap space, and offer exposure and visibility at the conferences and via other service offerings.
TLSR: Brandon, you and Ajay like to think in terms of personalized medicine. For more than seven decades, clinicians have been trying to blast tumors away using shotgun-chemotherapy approaches. Surgery will remain an indispensible modality in dealing with many solid tumors, but do you believe that we will ultimately see the end of these broad-spectrum lines of attack? Will we see personalized or targeted approaches become the overwhelming primary method of treating genetically identified cancers?
Brandon Primack: We will certainly continue to see expanded use of targeted therapeutics, but it's very difficult to say that they will become the primary oncology therapies. We can say that targeted therapies have significant utility, and the research community clearly believes that precision medicine is the future. This is demonstrated by the number of targeted therapies that are available now, and the fact that many more are being developed.
It's difficult to say targeted therapies will become the overwhelming primary treatment option for a couple of reasons. One is that cancer cells have shown resistance to targeted therapies when the target itself changes through mutation, which reduces the effectiveness of these therapies. Tumor cells find new pathways to achieve growth, and they may no longer depend on the initial pathway that was being targeted. In addition, the use of many targeted therapies will be restricted to patients whose tumors have a specific gene mutation. Patients without that mutation would not be candidates for that particular therapy. That's why targeted therapies are often used in combination with chemotherapy drugs.
TLSR: There's one market in the world where biologic and drug makers definitely want to sell their products—here in the U.S., where the margins are wide. It seems that 60 Minutesdoes one show each year on how expensive medications are in the U.S., versus in Canada or Europe. People are angry because the same medications are much cheaper elsewhere. Will our system buckle under the pressure of personalized therapies?
BP: Let me point you to some research from the University of California San Francisco, led by Dr. Dhruv Kazi and reported in February 2014 in the Annals of Internal Medicine. Counter to common thinking, Kazi and colleagues demonstrated that genetically guided personalized medicine can lower costs and increase the quality of healthcare.
Now, this is not an apples-to-apples comparison to a targeted cancer therapy, but the Kazi group built a computer simulation that tested the cost effectiveness of anticoagulant therapies that would be administered after a patient receives a coronary artery stent. A large question facing interventional cardiologists is whether to give Plavix (clopidogrel), which is the current standard of care and is now sold as a generic drug, or much more expensive targeted therapies. Plavix is a prodrug and requires activation by a specific liver enzyme called CYP2C19, which 28% of the patient population has a genetic variation to. In this minority—but large—group of patients, Plavix will be less effective. The Kazi group ran the simulation for a variety of factors, including efficacy, side effects and the costs of genotyping, as well as the costs of the drugs and other factors. What they found was that by determining a patient's genotype for loss of CYP2C19 function before prescribing the anticoagulant, and using the more expensive drugs for the patients with the gene variant, costs would actually be reduced.
TLSR: Give me an example of a targeted therapy platform from your own coverage.
BP: TapImmune Inc. (TPIV:OTCBB) is developing gene-based immunotherapeutics and vaccines for the oncology and infectious diseases space. Its vaccines restore gene expression within cancerous cells, making them immunogenic and providing a signal to the immune system to attack the cancer.
One of the company's trials involves developing an immunotherapy for breast cancers that overexpress HER2/neu, which has been shown to play an important role in the development and progression of certain aggressive types of breast cancer. Herceptin (trastuzumab) from Genenetch/Roche Holding AG (RHHBY:OTCQX) is the current standard of care for tumors that overexpress HER2/neu. However, Herceptin only slows tumor growth, and is effective for only a year or so because patients develop resistance pretty rapidly. In fact, 70% of HER2/neu-positive breast cancer patients don't experience efficacy due to acquired resistance to Herceptin, according to a paper called "Herceptin Resistance Database for Understanding Mechanism of Resistance in Breast Cancer Patients," which was published earlier this year in Nature. Even with these limitations, Herceptin still brought in $6B in 2013.
TapImmune believes its therapy, TPIV100 (multi-epitope HER-2/neu peptide vaccine), is applicable in close to 50% of the population of HER2/neu-positive breast cancers. Its 24-patient Phase 1 trial (NCT01632332) is being conducted at the Mayo Clinic, which is the sponsor of the study. The patients in the trial have previously been treated for HER2/neu-positive disease. We expect TPIV100 to advance to Phase 2 over the next couple of quarters, but we have to wait for word from the company on that.
TLSR: Is TPIV100 intended to treat patients who have failed Herceptin, or is it intended to prevent recurrence in patients who have been treated for HER2/neu-positive breast cancer?
BP: TPIV100 is being tested in patients who have failed Herceptin. But in time, the company believes it could be used earlier in the treatment chain. It is intended to be a therapeutic, not a prophylactic agent. Patients receive the TPIV100 immunization every 28 days for up to six courses, as long as there is no recurrence or serious adverse event.
TLSR: Could we talk about other companies?
BP: Manhattan Scientifics Inc. (MHTX:OTCMKTS) is a good segue to your question about the costs of personalized therapies. One way to lower costs is with better detection methods. Manhattan Scientifics is developing magnetic relaxometry (MRX) technology, which uses iron oxide nanoparticles that can be programmed to bind to specific cancer cells. Low-strength magnetic sensors are used to detect these cancer cells at an incredibly sensitive level.
Manhattan Scientifics has placed one of its MRX machines at the University of Texas MD Anderson Cancer Center, which recently presented unpublished data at the World Molecular Imaging Conference in Seoul, South Korea, that showed the technology to be up to 200 times more sensitive than current imaging technologies. We believe the technology will prove far more sensitive than that. We believe the MRX technology will lead to earlier detection, fewer false positives, fewer PET and CT scans, fewer biopsies and fewer unnecessary surgeries. We believe something like this technology could be a huge cost-fighting mechanism in the battle against cancer. The collaboration with MD Anderson will generate a lot of data over the next 12–18 months, as the technology progresses through animal trials and, hopefully, moves into human clinical trials.
Additionally, the technology could be a wonderful low-cost tool to track the progression of cancer. For instance, if you're a prostate cancer patient, you would be able to go to your physician every three to six months and see how quickly your tumor is growing, just by taking the nanoparticles and using the sensor. This could be a tremendous cost-saver. We have a $0.25/share price target on Manhattan, and it's currently trading around $0.12/share.
TLSR: What is the regulatory pathway for this device? Will it be a 510(k) premarket notification, or will it be a premarket approval application, like a new drug application? Or do we know?
BP: We do not know at this point. But since these nanoparticles, which pass through patients like a multivitamin, are used in other medical devices, it's not a revolutionary technology. We do not anticipate a long, onerous process. I would anticipate the 510(k).
TLSR: Will data be emanating from the human trials when they begin at MD Anderson? Will these data act as catalysts for the stock?
BP: Manhattan is a dual thesis play. Its nanotechnology platform is also being applied to structured metals. The company has a deal with Carpenter Technology Corp. (CRS:NYSE) in nanostructured titanium. The near-term catalyst for the stock is the development of this project, which should generate sufficient revenue to carry the company to its longer-term thesis, which is the development of the MRX technology.
At this point, it's difficult to say what the timeline might be for hearing additional news. We would love to see some major guidance on when the human trials might begin next year, but again, we don't know at this point.
TLSR: I'm noting that Senior Scientific LLC is the MRX subsidiary of Manhattan Scientifics. Is Senior Scientific a candidate for spinout?
BP: I don't believe so. The company has not talked about that at all. Manhattan's two businesses have a lot of interrelated pieces within nanotechnology.
TLSR: Another name, please?
BP: Sticking with the oncology theme, DelMar Pharmaceuticals Inc. (DMPI:OTCQB) is another company in our coverage. It is developing a novel small molecule therapeutic agent, VAL-083 (dianhydrogalactitol) for glioblastoma multiforme (GBM), which is the most aggressive and common form of brain cancer.
Currently, the standard of care is Merck & Co. Inc.'s (MRK:NYSE) Temodar (temozolomide) and Roche's Avastin (bevacizumab), which are used in conjunction with radiation therapy. However, 60% of patients treated with Temodar experience tumor progression within a year. In studies where Avastin was used as a second-line therapeutic, those patients demonstrated a 20–26% response rate. These data imply that more than half of GBM patients will fail both front- and second-line therapy.
VAL-083 is DelMar's lead candidate, and it has a differentiated mechanism of action. In separate trials, the combination of VAL-083 and radiation therapy showed an immediate survival benefit, comparable to or superior to that of Temodar plus radiation. DelMar is currently conducting dose-escalation studies.
In August, DelMar reported from cohort 7, its most recent cohort of patients receiving 40 milligrams per meter squared (40 mg/m2). VAL-083 still has not had any drug-related side effects, and a maximum tolerated dose has not been reached. The company is now evaluating patients in cohort 8, who are receiving 50 mg/m2. The company has opened three clinical trial sites in the U.S., and has filed a protocol amendment to allow dosing beyond 50 mg/m2. DelMar feels that as long as it can keep increasing the dose, it has a much better chance of hitting the tumors harder and hitting them earlier, and it hopes that will be a significant advantage. The company will be presenting additional data at the Society for Neuro-Oncology meeting in November. DelMar is on track to progress to phase 2b clinical trials in GBM in 2015.
TLSR: VAL-083 is approved in China for chronic myelogenous leukemia and for lung cancer. Don't investigators know by now what the maximum tolerated dose is?
BP: Not only is it approved in China, but this drug was also tested by the National Cancer Institute back in the 1960s. Those old studies only got up to 25 mg/m2 over a 33-day cycle, but DelMar has doubled that.
I don't think there is an easy answer to the question of whether we should know the maximum dose by now. VAL-083 is a small molecule that has been tested and used but was left at the side of the road. It's taken a company like DelMar to put some investment behind it to see where we can take the drug. The company that markets the drug in China has never really prioritized it.
Speaking of China, DelMar presented at the American Association for Cancer Research's (AACR) New Horizons in Cancer Research meeting earlier this month in Shanghai. Using in vivo models, the company reported that a significant survival benefit was observed with VAL-083 in non-small cell lung cancer (NSCLC) patients, compared to platinum-based chemotherapy in both tyrosine kinase inhibitor (TKI)-susceptible and TKI-resistant models of NSCLC.
TLSR: Your price target is an interesting $4.53/share. The stock was recently trading $0.85/share, giving the company a market cap of about $25M. Your target represents an implied return of more than 500%. How do you get there from here?
BP: At the beginning of this conversation, Ajay discussed company visibility and exposure to investors. If you look at comparable companies on the NASDAQ that have more exposure, you'll see a tremendous valuation gap between them and DelMar. DelMar has been taking steps toward a NASDAQ listing. It changed its fiscal year-end to accelerate the filings required for that. We believe that an uplisting to NASDAQ over the next few quarters would be a significant boost in terms of investor awareness, and might help bridge some of that valuation gap.
TLSR: Could you mention another name?
BP: Cynapsus Therapeutics Inc. (CTH:TSX.V; CYNAF:OTCQX) is developing APL-130277 (sublingual apomorphine strips) for under-the-tongue delivery of apomorphine, which is the only drug approved for the "off-episode" symptoms of Parkinson's disease. These episodes are motor-nerve disturbances, with muscle stiffness and sluggish movement, and they affect quality of life for 25–50% of Parkinson's patients.
Apomorphine has had its issues, because in its approved form its administration involves a multistep process, including an injection, for people who are physically impaired and suffering when they need the drug. It's difficult to give yourself a shot when you are in a state of stiffness and hypomobility. It's much easier to put a thin film strip under your tongue. APL-130277 is now in Phase 2 development.
TLSR: Cynapsus is a Canadian company with a market cap of about $54M. What is the value proposition for investors?
BP: We recently did a valuation note on Cynapsus because Acorda Therapeutics Inc. (ACOR:NASDAQ) has agreed to buy Civitas Therapeutics (private), which is developing a Phase 3 Parkinson's drug contained in a blister pack and an inhaler. Acorda purchased Civitas for $525M, which is almost 10 times Cynapsus' market cap in U.S. dollars. And here's Cynapsus, with a Phase 2 product using a formulation of an approved drug and putting it into an easy-to-administer film strip, trading at one-tenth the price just paid for a competitive product. We find that to be a very compelling story.
Furthermore, the Michael J. Fox Foundation for Parkinson's Research (MJFF) has a history of investing in winners. In the last six months, four companies that MJFF has invested in have either been sold or have conducted licensing agreements, including Civitas. The foundation has been funding Cynapsus along the way as well.
TLSR: What are the nearer-term milestones for Cynapsus?
BP: The company has three upcoming studies, which we expect to be completed over the next two quarters—a pilot study (study ID CTH-105), a bioavailability study (study ID CTH-200), as well as an efficacy study in patients who have never taken apomorphine (study ID CTH-300a). The studies are critical as they are going to be the first studies of the drug APL-130277 in actual Parkinson's patients. Prior to these studies, the drug has been tested only in healthy humans.
TLSR: The Phase 2 pilot study (NCT02228590; CTH-105), with actual Parkinson's patients, will enroll only 20 people. We should know pretty quickly if these patients are getting relief from their off episodes, shouldn't we?
BP: Based on everything Cynapsus has said, it is going to be reporting data very shortly. We expect numerous catalysts for Cynapsus in the upcoming quarters.
TLSR: The CTH-300a study is an efficacy study. When will we hear these data?
BP: We're thinking very late 2014, maybe Q1/15. This study is in the apomorphine-naïve patient group.
TLSR: It would be wonderful to see Parkinson's patients able to manage off episodes by themselves. The difficulty level with injections is daunting.
BP: Apomorphine sales have been disappointing. How is someone who's experiencing impaired motor function supposed to go through a multiprocess injection? It defies logic. Imagine, instead, keeping your sublingual film strips by your bed; you have an episode and can just pull a strip out and put it under your tongue. We're very excited about the upcoming trial data. We anticipate that the results of the CTH-105 study will be the next major catalyst moving these shares.
TLSR: Thank you both. It's been a pleasure.
Ajay Tandon, chief executive officer and director of research with SeeThruEquity, brings more than 12 years of experience in the financial service industry to his role. Previously, Tandon cofounded Emissary Capital LLC, a private investment firm focused on micro-cap investment banking. Tandon also served as vice president of equity capital markets at Maxim Group LLC, a New York City-based, full-service investment banking firm. Tandon also served as an executive for Dealogic plc, an analytics platform used by global and regional investment banks worldwide to help optimize performance and improve competitiveness. Tandon began his career in financial services as a management consultant with IBM Global Services and earned his bachelor's degree from Cornell University.
Brandon Primack, senior equity research analyst and associate director of research with SeeThruEquity, has more than 15 years of experience in the asset management business, with a focus on equity research and portfolio management. Prior to joining SeeThruEquity, he founded Primack Capital LLC, where he ran a structured derivative product and provided asset allocation consulting services to high net worth individuals. Prior to that, Primack spent seven years at Allianz Global Investors, where he served as senior equity research analyst covering healthcare and industrials for large- and mid-cap growth-oriented products. He also served as a quantitative analyst in Allianz's Structured Product Group, which focused on enhanced derivative products. Primack received his master's degree in business administration (finance) from New York University's Stern School of Business, and his bachelor's degree in economics from the University of Michigan. He has been a CFA charterholder since 2004.
SeeThruEquity's research is available on the company website.
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1) George S. Mack conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and he provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
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