|Exceptional Management and Disruptive Products Top the Investment Checklist for Vista Partners' Ross Silver|
|By George S. Mack of The Life Sciences Report|
|Wednesday, 20 May 2015 15:16|
Investing in micro- and small-cap biotech companies carries great risk, but for investors who take the time to dig out the value proposition, the upside can be phenomenal. Enter Ross Silver of Vista Partners, who publishes research and owns many of the stocks he writes about. In this interview with The Life Sciences Report, Silver puts two biotech names on the table for investors to consider.
The Life Sciences Report: Ross, you have a micro-cap theme in your coverage. Nearly all the companies in your current coverage universe have a market cap below $100 million ($100M), and some are under $50M. These offer tremendous opportunity for growth. The risk in companies this small is obviously magnified, and the downside can be a near complete loss. How do you mitigate risk when you invest in these very small names? Could you narrow down your criteria when evaluating opportunities?
Ross Silver: When we evaluate an investment opportunity, we primarily focus on three subjects: management, product(s) and capital structure.
The first thing we look at is the management team. We want to know what success, if any, management has had historically within the applicable industry.
Second is the product. How is it differentiated? Is it a me-too product? Is it used in conjunction with an existing product? Is it similar to another product? Could it be truly disruptive? Finding something that's highly disruptive is what we're most focused on, because we believe that's where the most upside could possibly be realized.
"Soligenix Inc. is an exciting company; it is rare to find a micro cap with such a diverse and broad clinical pipeline."
The third is evaluating the capital structure. How much cash and how much debt does a company have on its balance sheet? How long will the existing cash last? Who are the shareholders, and how long have they been shareholders? How much capital has the company raised historically and what has that cash spend resulted in?
We go into considerably more detail on each of the subjects I've outlined, and I don't want to take up all of your time going through the specifics on each subject. But I believe you get the idea conceptually.
TLSR: Can you elaborate on what you look for in management?
RS: Yes. If we're speaking of a biotech company, we want to see a management team—and a scientific advisory board as well as a board of directors—with some level of success. We prefer to invest in a management team that has successfully navigated from concept to approval. We would like to see people in management who understand the intricacies of the regulatory process and know how to deal with the FDA from concept through approval.
TLSR: You also want to understand a company's balance sheet. Do you mind if a company has debt?
RS: We don't mind if a company has debt. We actually prefer some leverage. Ultimately, we like companies to be as levered as reasonably as possible—that way they have all options open. To use a football analogy, having debt is the equivalent of a five-wide, no-huddle offense. Companies are aggressive and attacking their industry with all tools available to them. If you have a considerable amount of leverage, it can also be dangerous, and as such, we are hopeful management is prudent with any leverage utilized. You can enhance your optionality considerably by utilizing debt properly.
TLSR: Would you rather see a company issue debt than issue more shares and dilute existing shareholders?
RS: It depends on the situation. Equity or debt can be reasonable means of funding the growth of the company if used wisely when needed or justified and the terms are beneficial to existing shareholders.
TLSR: Ross, one of the major problems in the micro-cap realm is the inability of institutions to own these names. Because of this, these companies don't have a lot of diligence performed on them by the sharpest minds on the Street, and most micro-cap investors are not molecular biologists. Where and how does an investor find validation in these very small names?
RS: Not to take anything away from my large- and mid-cap colleagues, but you would be surprised to learn that some of the sharpest minds on the Street are actually in small caps. They are the ones who are willing to do the diligence all by themselves, without the assistance of any sort of sellside or third-party research.
"Inovio Pharmaceuticals Inc. has had a number of successes clinically and marquee collaborations that have led to its market cap being what it is today."
These investors get up to speed on a company, come up with an investment thesis, and then take the risk at an early stage in a company's development. As long as that thesis remains intact, those investors will stay with that company, and if they are right, they may make transformative returns on their investments. That's the way we approach the micro-cap world. We perform an extensive amount of diligence on each company we invest in, focusing on management, the product(s) and capital structure, as I mentioned earlier.
TLSR: Do you prefer names that don't have sellside research? Do you think that gives you a leg up in an underfollowed and unknown stock?
RS: When we go into an opportunity, there could be a number of sellside analysts on the company, and that company could still be incredibly undervalued and underfollowed. That said, if there is no sellside coverage, it makes our job a bit more difficult, because we then have to start from scratch—review industry reports, speak with industry specialists and participants, read through the 10-Ks, read through the 10-Qs and all the footnotes that are included in those—to ensure that we know everything about a particular company, conduct channel checks, etc. We also may meet with management multiple times and speak with the board members if possible. There is a lot more work to do if there isn't an analyst covering a company, because that analyst can essentially give you the CliffsNotes, or a summary, in advance to get you started.
It doesn't really matter to us if there is sellside research. I say that because the model of sellside research today is very different than it was, let's say, 20 years ago, when there was a call each morning with an analyst on the squawk box, and both the institutional and retail desks, which were significantly larger in number, would hear the analyst give bullet points on the name. After that, everyone on the call was motivated to jump on the phone to call a large number of clients to let them know that the firm had just initiated on a new company, or that they had updated on an existing company. That model doesn't exist so much today, and as a result, sellside research does not always elicit the response it used to.
TLSR: Let's go ahead and talk about the companies.
RS: I'll give you an example of some of the traction we are seeing in immunotherapies right now. At the end of April, Amgen Inc. (AMGN:NASDAQ) had a nice success with its talimogene laherparepvec (T-VEC) immunotherapy for metastatic melanoma, which received a 22:1 vote from the advisory panel in favor of approval. This is exciting. It seems as though we are moving into a new immunotherapy frontier, and we believe that OncoSec Medical Inc. (ONCS:OTCBB), which is slated to uplist to the NASDAQ shortly, may be on the forefront of that revolution.
"We prefer to invest in a management team that has successfully navigated from concept to approval."
We updated coverage on OncoSec on May 6. Its technology proposes to be able to make a therapeutic option more effective using a DNA vaccine encoding interleukin-12 (IL-12; an immune activator), and electroporation (the application of short electrical pulses to the skin at the injection site).
TLSR: Did you maintain your $1.20/share target price on OncoSec when you updated your coverage—which, since the recent Financial Industry Regulatory Authority (FINRA)-approved 1-for-20 reverse stock split, equates to a $24/share target?
RS: Yes, we did. The company has stated it has sufficient capital through 2017. It has $30.7M in cash as of its most recent quarter. OncoSec has stated it will have a number of trials that will begin enrolling this quarter—three specifically—and the company anticipates enrollment will be completed for all three within 12 months. We look forward to data from those trials as soon as they're available.
TLSR: OncoSec has a relationship with Inovio Pharmaceuticals Inc. (INO:NASDAQ), and both companies use a similar electroporation platform to enhance delivery of their DNA immunizations. Inovio also uses IL-12 as an immune activator to simulate T-cell production. Inovio is six or seven times larger in market valuation than OncoSec, which makes for a compelling comparable. Can you take me through the difference between these companies? Why Inovio is valued so much higher? Is OncoSec just still an undiscovered name?
RS: I used to follow Inovio five or six years ago; the company has changed dramatically since. I understand Inovio is using active DNA vaccines. Inovio and OncoSec are both seemingly following a similar theme, and the growing acceptance and excitement around immunotherapies in general may help them both. Inovio has had a number of successes clinically and marquee collaborations that have led to its market cap being what it is today. Thus, it has a market cap of about $590M today, versus OncoSec's $57M.
As an aside, OncoSec announced this week that it has entered a sponsored research agreement (SRA) with Massachusetts General Hospital, an affiliate of Harvard Medical School. The release states: "Under the agreement, researchers will evaluate the immunologic mechanisms underlying the anti-tumor effects of OncoSec's clinical stage platform, ImmunoPulse IL-12, in a human papillomavirus (HPV) tumor mouse model. HPV-associated tumors include oropharyngeal and certain genitourinary cancers (e.g., cervical cancer)."
TLSR: The catalysts going forward for OncoSec are enrollment of the three trials, correct?
RS: We believe potential catalysts are the initiation of enrollment in three Phase 2 trials. We also view the company's planned uplisting to NASDAQ as a potential catalyst, given that the number of investors that may participate in, or consider investing in, OncoSec could be significantly greater on the NASDAQ versus the OTC.
TLSR: Will we get data on any of the trials this year?
RS: The company has stated it may release data later this year.
TLSR: Go to the next name, please.
RS: Soligenix Inc. (SNGX:OTCQB) is an exciting company led by CEO Chris Schaber, who has been with Soligenix now for nine years. It has two parts to its development program. The first is a vaccine program that is currently funded by the U.S. government. The company has received close to $60M in grants for these vaccines, and has been able to push the vaccines forward in its pipeline.
The second part of the company's pipeline contains a number of late-stage clinical candidates, one of which is SGX203 (oral beclomethasone 17,21-dipropionate or BDP), in the treatment of pediatric Crohn's disease. SGX203 has previously been granted both orphan drug and fast-track designations by the FDA for the treatment of Crohn's disease in the pediatric population. The company also plans to initiate a Phase 3 trial addressing cutaneous T-cell lymphoma. SGX301 (synthetic hypericin), a potent photosensitizer activated by fluorescent light, has both orphan drug and fast-track status with the FDA.
"One of the things that may help build valuation in the small-cap world is validation."
The company has a Phase 2 program studying SGX942 (a 5-amino acid peptide) for oral mucositis in patients with head-and-neck cancers. This study is one that many people are focusing on because there is no known cure or adequate therapy for oral mucositis. SGX942 is now in a dose-escalation study, wherein the company is trying to identify the appropriate dose levels to use in a Phase 3 study. Three dose levels are currently being given to patients in the study. The data safety monitoring board has recently told Soligenix that it wants to see 10 additional patients dosed with SGX942 at a specific dose, and also 10 patients receiving placebo. That was very encouraging news, because it seems as though the company has achieved some form of response at a specific dose level—but this is purely speculation on my part. The company has stated the Phase 2 data could be published in early Q4/15. If a specific dosing level shows efficacy, this could be a very exciting compound. There are seemingly a considerable number of large companies looking at oral mucositis as an area in which they would like to have some sort of treatment option.
TLSR: Do you expect Soligenix to try to partner SGX942?
RS: This is seemingly a partnerable product. If you look at the mucositis-affected population, it's approximately 500,000 people in the U.S. per year. It occurs in 40% of patients receiving chemotherapy, and it almost always occurs in patients with head-and-neck cancers treated with radiation therapy.
TLSR: Ross, this sounds like a lot of activity for a company with a $40M market cap, doesn't it?
RS: Yes, it is rare to find a micro cap with such a diverse and broad clinical pipeline. That's one reason this story is so compelling to us. Another reason is that, just in general terms, if you look at the level of success that the management team, scientific advisory board and board of directors has had, it is one of the most established that you will find in a company of this size. It is also rare to find a company of this size that has been able to garner as much government funding as Soligenix has.
TLSR: Earlier you said a company's capital structure was an important factor for you. Soligenix has an interesting investor base, doesn't it?
RS: We think it is interesting to point out that the largest shareholder of Intrexon Corp. (XON:NYSE), which has nearly a $4.5B market cap, is Third Security LLC, which owns more than 60% of Intrexon. Upon visiting the Third Security LLC website, you will find that Randal J. Kirk is the CEO of the fund, and Mr. Kirk is also the CEO of Intrexon. Note that R.J. Kirk's investment in Intrexon, which engineers living cells into drug factories, has been a significant winner for his portfolio. Kirk took Intrexon public in 2013, and it moved up sharply, to the tune of +50%, in its first day of trading. Kirk's stake alone is worth more than $1B. Kirk previously sold his drug company, Clinical Data Inc., to Forest Laboratories Inc. (FRX:NYSE) for $1.2B in 2011, and he sold New River Pharmaceuticals Inc. to Shire Plc (SHPGY:NASDAQ; SHP:LSE) for $2.6B in 2007. He is currently ranked #183 on the Forbes 400 List. Mr. Kirk's beneficial ownership position is approximately 26% of Soligenix.
Another Soligenix investor is Sigma-Tau Pharmaceuticals Inc. (private), which focuses specifically on orphan drugs. These two investors account for close to 40% ownership of Soligenix. This kind of high-quality ownership is a form of validation. One of the things that may help build valuation in the small-cap world is validation.
TLSR: Ross, it has been a pleasure.