Trade Alert: Two New Stock Picks For The Biotech Basket

Here are two stocks that I have started buying to put into what I’m going to call my “Biotech Revolution Basket” in both my personal account and the hedge fund. I’m keeping these positions small. And remember that we don’t all have to rush into these names all at once as the collective buying power of Trading With Cody community can make these things jump when I send out a Trade Alert like this on names that don’t have giant market caps. Be patient and give yourself room to nibble more on each of these names over time, as usual. My friend, mentor and colleague, Paul Boni, who used to run a biotech hedge fund in a former life wrote this analysis up for us.

I want to thank Cody for the opportunity to connect with you and share some investment ideas.  I know he has, over the years, given you great advice and guidance in the technology space.  These are tough shoes to fill.

I’ve spent most of my 30+ year career in the biotechnology industry, and I thought I would start with a few things to remember when you invest in this space – 1) most drugs fail, 2) drug development is enormously expensive and slow, and 3) winners are rewarded handsomely.  In my mind, you have to play biotech a little differently than you might play technology because no matter how smart you are, how many resources and experts you bring to the table to evaluate an investment, in the end we are looking at new science where nobody knows how things will work out.

In short, size accordingly – be prepared to lose most of your investment and spread your bets across multiple opportunities, especially for earlier stage programs where there is an awful lot of scientific risk.

However, I believe that there are situations where the risk/reward is especially good which is what I look for. In particular, these days there are a lot of investors new to biotech, and because it is a complicated industry I feel that sometimes the ”common wisdom” misses the point and creates opportunity. Here, I’m recommending two biotech names – one large and diverse, one small and focused – which gives you some options and also encourages you to spread out your investments in this space to mitigate the risks we can’t get away from.

Codexis (CDXS – trading around $37 at the time of this report).  Codexis is part of a growing field often referred to as Synthetic Biology and I see it as a relatively cheap, low-risk, diversified company that I prefer over some of the peer companies in this space such as Ginkgo (DNA), Zymergen (ZY), and Amyris (AMRS).

Synthetic Biology is revolutionary as it promises a sustainable, cost-effective, and reliable way to produce all kinds of things we use in our daily lives, from flavors and fragrances, to materials and chemical building blocks, to medicines.  The field has had its ups and downs, including a disastrous start in the biofuel space several years ago, but I believe the technology has evolved and companies are now picking business models that can/will work.

Still, many companies trade more on future promises than actual results and can therefore be extremely volatile – see recent moves in DNA, ZY and AMRS.  Codexis focuses on one important part of Synthetic Biology, which is the design and optimization of enzymes.

The company is well-diversified, has significant revenues, and has named several name-brand customers for their services including GSK, Novartis, Merck, Tate & Lyle, Allergan and Pfizer.  Beyond validation through partnerships, we know that they have “delivered the goods” for their customers – which is even more rare in the Synthetic Biology space.  In particular, we know that Codexis developed an enzyme which is used in the manufacture of Pfizer’s new COVID pill, and have already booked around $30m in sales of their enzyme even before the most recent clinical data were released showing it reduced the risk of COVID hospitalization or death by nearly 90% (i.e. before large-scale production and launch of the product).

Given their solid performance and diverse customer/revenue base, their ~$2.6B market cap seems like great value compared to its peers, in particular compared to DNA with a market cap of ~$30B who it can be argued has a similar profile of customers and revenues in this space.

Provention (PRVB – $6.32).  Provention is focused on preventing autoimmune diseases, with their lead product focused on Type I Diabetes (T1D).  If you follow healthcare closely, that sentence might give you pause – there are drugs to treat diabetes, not prevent diabetes, if this works it is a major development in medicine.

To understand how this works, we need to understand how these autoimmune diseases come about in the first place.  In T1D, the immune system somehow gets out of sync and starts to attack the its own body, in the case of T1D it attacks the insulin producing cells in the pancreas.  After a while, these cells all get destroyed and for the rest of your life you need to inject insulin because your body no longer makes it.

Early in this process, however, Provention has shown in a Phase III study that a single course of therapy with their drug Teplizumab can tamp down that autoimmune response and delay the onset of Type I diabetes by around 3 years.  T1D usually starts in children, so these three years buy time for children to have a more normal childhood, and it makes sense that in the future they may find ways to provide further treatment and further delay T1D.

In terms of timing and status, the company finished their Phase III trial of Teplizumab, submitted their package to the FDA, and even has had an FDA Advisory Committee meeting review the safety and efficacy and vote to have the drug approved (this is a major de-risk item to me, often the skeletons come out of the closet at FDA Advisory Committee meetings).  After that, though, the company got a Complete Response Letter (CRL) – e.g. rejection – from the FDA in July 2021 and we understand that the CRL focused on a manufacturing/characterization issue which the company hopes to address later this year.

Investors punished the stock on the CRL news, but the bet here is that this was an over-reaction and the company can address the FDA’s questions. Because of the CRL, we have the opportunity to get shares at a ~$400 million market cap instead of something potentially 3-5x that.

A few other things I like – the company has a decent cash hoard of around $150m as of 3Q so they have an OK runway (although would probably finance on good news/stock strength).  Beyond T1D, Provention is doing earlier work on Lupus and Celiac disease with a similar goal of preventing the disease with early immune modulation.

+++++

Cody back now. Thank you Paul. Let’s all be patient, be cool, don’t be greedy as we build new positions. Rocket Lab reported a quarter of beauty by the way.

We’ll do this week’s Live Q&A Chat at noon ET on Friday in the TWC Chat Room or just email us your question to support@tradingwithcody.com.

See you then.