This is Part I of our special report on the state of companies operating in central nervous system disease in the public markets. In Part I, we identify catalysts and trends that have driven investors toward the space, despite a history of hesitance. We look at two microcap companies with promising technology and growth opportunity, as well as analyze the recent failures by big pharma in the space. In Part II, we look at one of the most promising nanocap companies Amarantus BioSciences, which we believe is ready to skyrocket.
Historically, the biotech sector has found it difficult to navigate CNS. These maladies have incurred massive costs and headaches to patients and caregivers worldwide, and medical science has not had the opportunity or technology working together to produce tangible results.
It also has affected shareholders in numerous enterprises, with the perception that billions of investor dollars have already been wasted on overreaching and misunderstood technologies that do not pan out, and the medical community is not closer to finding effective, viable treatments.
However, the past few years have bucked the trend, with medical science starting to catch up with the demand for solutions to this vastly underserved market with new technologies and therapies. Science is advancing at unprecedented levels, and ultimately unlocking the potential of what medicine and technology can do for some of the most vital parts of the bodies.
With the prospects of growth in CNS therapies, in this multi-billion dollar industry, there is no doubt that public and emerging private companies in this sector are abuzz.
While shares of companies in the sector continue to trade thinly or flat in the past few years, there exist far more partnership opportunities – M&As – with larger medical companies, as well as with other larger institutional investors such as private equity, hedge funds, or even crowdfunding cooperatives.
Such companies in the sector stand out due to their therapeutic merits, as well as their financial and operational management. Taking a look at the CNS index trading on the public markets, we see a handful of promising companies.
One example is Anika Pharmaceuticals (NASDAQ:ANIK), which focuses on the utilization of biopolymers in order to aid in post-surgical tissue recovery for peripheral nerves, among other uses. The company’s stock has surged 96% in the last year as a result of their strong sales forecast, which calls for biopolymer therapy to be a regimen in treating other ailments along with CNS disorders.
Another strong performer utilizing the biopolymer therapy is InVivo Therapeutics (NASDAQ: NVIV), which utilizes a biopolymer “scaffold” to aid in not only surgical recovery but for drug injections and preventive care. InVivo successfully tested their biopolymer technology for paralyzed primates and rodents, with data showing partial mobility in primates. InVivo plans to enter live human FDA testing later this year. The company’s oversubscribed $20 million equity in February is evidence enough that this company’s technology has caught up with medical needs – and that investors are aware of it.
InVivo CEO Frank Reynolds spoke to OneMedRadio in June about the oversubscribed offering, as well as InVivo’s stock returning over 100% since inception in 2005. That milestone certainly reflects the biotech industry’s resurgence over the last few years. The biotech sector has returned 116% in the past year and bodes of healthy prospects for growth. It also reflects a reality that with a growing population and a desperate need for CNS therapies, companies like InVivo do warrant a place in many investment portfolios.
During the interview, Reynolds spoke about how this fact was not lost on institutional investors – such as Fidelity and Magellan – during their equity offering. Further, Reynolds spoke about the diverse opportunities – from partnership to acquisition – that a powerful technology within a rebounding sector can brings.
“It was very powerful for us”, Reynolds said of the backing from institutional investors such as Fidelity, which acts as a big plus for investor interest for the industry. “We obviously have the interest from suitors at all times…I see we’re going to be maximizing shareholder value.”
From a fundamental investment standpoint the company looks to be attractive. InVivo’s technology has not been duplicated. In addition, their patents are locked up for 7 years, giving the company plenty of time to build a brand and build new therapies. The company’s lead candidate for Spinal Cord Injury operates in an area of significant unmet need. Furthermore, however, their platform technology is broad and their pipeline diverse: their technology has applications in CNS therapeutics and other areas of the human body.
The company’s financial situation has improved, with EPS going from a $0.67 loss in Q4 of 2011 to a $0.05 gain in Q1 of 2012, reflecting a better financial picture and even with more shares outstanding, more promise that if the company’s human trials later this year do pan out successfully.
It is fair to say that within the next 12 months, provided that the human trials are completed successfully that the company has a price target of anywhere from $4-6, more if there is a partnership with a larger organization or if the company is the target of an acquisition.
However, for every Anika or InVivo “success story,” there exist companies experiencing steep decline. One such example is Geron (NASDAQ: GERN), which treats brain metastases caused by cancer. The stock has lost 52% of its value in the last year, primarily due to financial losses and unsuccessful patent challenges.
Parkinson’s disease is notorious for the debilitating effects of sufferers, as well as the lack of therapeutic success. The condition also has the notoriety of being a” white elephant” in the medical community, as both capital markets and the scientific community tends to view any positive developments towards treatment as a pipe dream, at best.
In addition Geron also withdrew from the stem cell market after spending hundreds of millions on research which was a cornerstone of their therapy model.
What has happened to Geron is but one example of the pitfalls and dangers that this industry faces. Another example is the failure of revolutionary biotherapies, as was the failed joint development of an antibody-based Alzheimer’s Disease therapy between Johnson & Johnson (NYSE-JNJ), Elan (NYSE-ELN) and Pfizer (NYSE-PFE). Elan made the announcement in July 2012, identifying the failed Phase III trial of their anti-amyloid antibody bapineuzumab — “bapi”, as a Alzheimer’s treatment.
This has hammered the Elan stock down even more after their Phase II failure announcement back in 2008, knocking the stock down 34% from its July 7th 2008 close of $34.90 to its trading at the current $11-12 mark.
The takeaway from Geron and Elan is that the public markets investors will richly reward companies that do indeed deliver on promises made, but will punish them severely for falling short. Equally as important, because of the failures of big pharma, this is a market opportunity in which nanocap and microcap companies with disruptive technology can thrive.