• This is the transcript of the LIVE discussion we had today with some of Seeking Alpha's top biotech contributors.
• We will try to do this every Monday, and maybe even at other times.
• Topics discussed were the huge biotech pullback, Shire and Baxalta, Valeant and Sprout, Mylan and Perrigo, Oncology stocks, and some top stock picks from everybody.
• The transcript has been slightly condensed for easier reading.
Dr Kanak Kanti De: Good morning, everybody. Today, we have with us Bret Jensen, Daniel Katz, Chris DeMuth Jr, DoconStocks, and The Critical Investor.
Dr Kanak Kanti De: We will be discussing some of the things that happened in biotech the last week. Panelists may discuss anything else biotech related they want to. Subscribers can send in a question any time using the chat. This is a great opportunity to interact with some of the top minds on Seeking Alpha.
Dr Kanak Kanti De: So, Bret, let's begin with the biggest news in biotech -the sell-off in equities. Do you see the correction in biotech as a good thing for the sector overall? We have had a multi-year rally in biotechnology sector so are you looking at this pullback as an opportunity to add positions.
Bret Jensen: Well, we certainly have a lot to discuss. Exiting week. Biotech sector was overdue for a pullback after being up better than 50% in previous 12 months. I had 30% allocation to cash prior to sell-off and putting it to work incrementally.
Bret Jensen: I would start with the large cap growth plays that already are selling at reasonable or attractive valuations and can churn out revenue & earnings growth even in this difficult environment.
Bret Jensen: I would start with names that pays dividends as part of their value proposition like AbbVie (NYSE:ABBV), Amgen (NASDAQ:AMGN) and Gilead Sciences (NASDAQ:GILD).
Bret Jensen: If sell-off continues you can move down to pure growth plays in large cap such as Celgene (NASDAQ:CELG) and maybe even Biogen Idec (NASDAQ:BIIB) despite its recent challenges.
Dr Kanak Kanti De: What challenges in BIIB, Bret?
Bret Jensen: A sharp slowdown over the past five to six quarters in sequential revenue growth, lowered guidance.
Dr Kanak Kanti De: So, overall, this pullback is a big opportunity for you, Bret?
Bret Jensen: It is a dip we have not seen in quite a while. Wish I was smart or omnipotent enough to know whether correction will turn into bear market or is just a blip in volatility. That is why I am buying incrementally.
Dr Kanak Kanti De: Yes, this is a big dip, probably not seen in 3-5 years
Dr Kanak Kanti De: Daniel, what's your take on that?
Dr Kanak Kanti De: Do you see this as a buying op too?
Dr Kanak Kanti De: Do any of you see any of the large cap pharmas see a material impact due to China slowdown?
Bret Jensen: Actually, remember we had quick sharp downturn in biotech starting in March of 2014 that last six to eight weeks.
Daniel Katz: Bret made some great points. Investing after the pullback is sound advice, especially in the big players in the industry
Bret Jensen: China will be factor in taking down whole market. Pharma will be impacted due to change in sentiment on equities, not so much by any direct business impacts from China's slowdown.
Dr Kanak Kanti De: Chris, what do you think of Bret's point about China?
Daniel Katz: Well, I would buy a stock that we will further analyze later in this panel. Shire
Chris DeMuth Jr: Well, I don't know much about a long list of things including macro. But I am short China and short biotech. My favorite shorts include YINN and BIB, both to exploit the constant leverage trap and to exploit what appear to me to be high, unstable, and precarious prices.
Chris DeMuth Jr: However, within China and within biotech, I also pick away here and there with one off little opportunities.
Bret Jensen: Definitely have to be selective in high beta sectors of market including biotech and small caps imho
Dr Kanak Kanti De: So, for long picks, do you have any stock in mind, Chris?
DoconStocks: Absolutely Bret, biotech shorting is a dangerous game.
Chris DeMuth Jr: Kanak, I continue to own DEPO. I think that is a very interesting opportunity.
Chris DeMuth Jr: HZNP management appears committed to their offer.
Dr Kanak Kanti De: What are your +ves for DEPO?
Chris DeMuth Jr: They have excellent communication with DEPO holders.
Bret Jensen: HZNP definitely is focused on it.
Chris DeMuth Jr: It would be reasonable to expect a bump to the mid-30s.
Dr Kanak Kanti De: Doc, what do you think of DEPO and what Chris is mentioning?
Chris DeMuth Jr: I told them that I am 38 years old and looking for something in my age range for me to support a deal.
Dr Kanak Kanti De: Do you back the Horizon deal?
Bret Jensen: LOL, good one Chris
DoconStocks: I think DEPO is substantially undervalued. It's common to see HZNP run after companies and trying to steal bargains.
Chris DeMuth Jr: Kanak, I do not support anything that has been offered thus far.
Chris DeMuth Jr: But I am greedy and hard to get.
DoconStocks: The HZNP offer was definitely on the low side, but that's how they play it
Chris DeMuth Jr: I support a combination. I think that the key is to get DEPO's assets put to their best and highest use.
Chris DeMuth Jr: That would entail a sale to a larger combined company with more resources.
Bret Jensen: Can't knock HZNP's strategy. Certainly has boosted the stock over the past few years
Chris DeMuth Jr: But I am happy to speak with anyone and have no principle at stake in terms of who ultimately owns DEPO.
DoconStocks: Absolutely, (Hyperion)
DoconStocks: Stock is up 50% YTD, even with the drama
Dr Kanak Kanti De: Right, good points everyone. Looks like this is certainly an op, long some, short some.
Dr Kanak Kanti De: Our next topic is Valeant, which is about to make another acquisition with Sprout. This year VRX has already made a number of acquisitions, including buying up Salix. The acquisition-led strategy has paid off for the company over the past five-six years. Have we reached a point where the company may need to slowdown the pace of acquisitions? Or the recent sell-off in biotech gives the company a chance to make some new acquisitions? That's an open question, gentlemen. Anybody with a view, please pitch in. Chris, I know of your interest in Salix. What are your thoughts? What's everybody else thinking?
Chris DeMuth Jr: Following its accounting issues, Salix was probably my favorite opportunity in this space ever and it became a significant investment for me.
Chris DeMuth Jr: I am looking for the next Salix right now...
Dr Kanak Kanti De: did you identify anything?
Chris DeMuth Jr: If anything, VRX has to keep going with M&A to justify its price.
DoconStocks: I think the Salix acquisition was SMART deal on VRX's part. They took advantage of a weakness in the management, and shareholder trust. I do think however that VRX may need to focus on it's organic growth to keep the pace going. It's got a break for now as the sell-off and stronger USD will provide aid in terms of buying other companies.
Bret Jensen: Valeant's business model is to acquire so I don't see them slowing down unless M&A environment completely collapses. Bigger question is what is Allergan (NYSE:AGN) going to do with the over $40 billion they just received from Teva Pharmaceuticals (NYSE:TEVA) for their generic business. JMTC
Daniel Katz: Can't knock Valeant, these guys keep making bold moves that pay off. I think the Sprout purchase is a bit more risky than people realize, but I still support the move.
Chris DeMuth Jr: To answer Kanak's question on the next Salix, might it be Akorn, Inc. (NASDAQ:AKRX)? That is one worth thinking about, but I would be interested in Kanak's view on that (not to put him on the spot, just sometime…).
Dr Kanak Kanti De: Bret, what do you think about the Sprout purchase?
Bret Jensen: Solid purchase overall. Saw PTN run up in empathy and then right back down, which is why you can't play that game.
Dr Kanak Kanti De: Are you worried about VRX's debt?
Dr Kanak Kanti De: And how do you like AKORN, Doc?
Dr Kanak Kanti De: Chris, AKORN is an interesting idea.
DoconStocks: I don't think VRX's debt presents an issue because 1) the acquisitions they make are fairly justifiable. They can get that covered. 2) The way they do business (acquire then layoff) is extremely easy on the financials.
Bret Jensen: Not so easy on the employees of acquired company however
DoconStocks: Although I don't support the method at all!
Dr Kanak Kanti De: Right, not so easy for them
Dr Kanak Kanti De: Ok, back to Chris' point quickly
Dr Kanak Kanti De: How do you like AKORN?
Dr Kanak Kanti De: Bret?
Dr Kanak Kanti De: Is it the next Salix?
Bret Jensen: Akorn would seem to fit in that scenario. Not one I follow closely but certainly putting up nice numbers
Dr Kanak Kanti De: Ok, Chris, why do you like AKORN?
Chris DeMuth Jr: Surmountable accounting issues, cheap(ish) stock, good fit for a number of strategic combinations in a consolidating industry.
Dr Kanak Kanti De: Good points. a quick question from a reader, for Doc
Dr Kanak Kanti De: How much lower will gild go?
Chris DeMuth Jr: (GILD pre-market: $98.50)
Dr Kanak Kanti De: Yeah, that's unbelievable, too good to be true for us GILD longs
Bret Jensen: That is a good question. Dirt cheap stock held back by fear of approaching competition in hepatitis C space. Probably will sell just of money bull put spreads today to pick up premium or acquire a few more shares to core stake.
DoconStocks: I'd say its a big buying opportunity for GILD
Dr Kanak Kanti De: Can you give a number, doc?
Dr Kanak Kanti De: How far do you see it go down
DoconStocks: For sure, I'd honestly like anything under $100. I see it going to $90, AT MOST
Bret Jensen: Last big biotech sell-off in March of 2014 took GILD from $85 to $65 as I recall
DoconStocks: Yep, FYI IBB to $320 this morning
Dr Kanak Kanti De: Yes, again, excellent points.
Dr Kanak Kanti De: Moving on to the Shire/Baxalta deal. Shire has already indicated that if Baxalta gives access to books, it will raise the existing offer. How far can SHPG go? What are your thoughts on this, and on Shire in general?
Chris DeMuth Jr: My $0.02 on BXLT is that there will be a deal around $50/share or so.
Chris DeMuth Jr: But, as I said, I am greedy and hard to get.
Dr Kanak Kanti De: And they should take it, Chris?
Chris DeMuth Jr: BXLT holders would support it, knowing full well that we have zero leverage over our board and management, but yes, they should and will take it. We will have to play nice and ask sweetly.
Dr Kanak Kanti De: $50 is sweet enough, correct?
Chris DeMuth Jr: Yes. Correct.
Dr Kanak Kanti De: Right, so, our next topic: The rush for oncology assets among big pharmas. From the digest, 'By 2020, according to consensus estimates, of the 20 top drugs in cancer, 7 will be from Roche (OTCQX:RHHBY), 2 each from Celgene and Bristol-Myers Squibb (NYSE:BMY), and 1 each for AbbVie (with JNJ), Johnson & Johnson (NYSE:JNJ), Amgen , Astellas (OTCPK:ALPMF) (with Medvetio), Eli Lilly (NYSE:LLY), Merck (NYSE:MRK), Novartis (NYSE:NVS) and Pfizer (NYSE:PFE). Total from the top 20 drugs will be $79 billion in sales. Of that, a whopping $27.2 billion, more than one third, will come from Roche, in such products as Avastin, Rituaxan, Herceptin, etc. Celgene, with $12 billion, and with the top selling drug Revlimid on the list, will be a distant runner up. Compare that to 2014, and Roche is still on top with 6 drugs and $23.8 billion in sales, while Novartis is second with $7.8 billion and Celgene third with $4.9 billion. The total for the 20 is $55 billion. However, the rise of Celgene is phenomenal, with almost tripling of its top cancer drug sales. Novartis' fall is equally phenomenal, down to $2.3 billion, almost a third of 2014. This is a rough analysis, but if the consensus is anywhere near correct, this gives us some interesting food for thought. One idea, although a little simplistic, is: if you bought all 20 companies in 2014 for $1,000, you would make around $1,436 in 2020, or roughly 44% in profit. If you bought Celgene for $1,000, you would make $2,448, or almost 145% in profit.'
Which is the one company you will bet on in the oncology space right now?
Dr Kanak Kanti De: Bret, you want to go first with that?
Dr Kanak Kanti De: What's your best pick on ONCO?
Bret Jensen: Chiming in on Oncology question. I don't think you bet on any one stock as it is a big and evolving space. Amgen & Celgene are large caps in my portfolio as core stakes. Roche is interesting here. Rest of portfolio around oncology consists of a variety of much smaller stakes in variety of small speculative but promising concerns.
Dr Kanak Kanti De: Any single sector you are most interested in? rGBM? NSCLC? anything else?
Bret Jensen: I think when it comes to biotech you need to spread your bets in a variety of different parts of the industry. Immuno-therapy had huge run but has come back here some. Like small caps that have partnerships with larger players.
Bret Jensen: Such as Agenus (NASDAQ:AGEN), Eagle Pharmaceuticals (NASDAQ:EGRX) Progenics (NASDAQ:PGNX), and Synergy (NASDAQ:SGYP).
Dr Kanak Kanti De: Chris, you have a take on oncology?
Chris DeMuth Jr: As Charlie Munger says, "I have nothing to add".
Dr Kanak Kanti De: OK, lastly, again for everybody, give us some idea of
your top biotech picks for the coming 2 weeks? What are some of the major catalysts for your picks?
Chris DeMuth Jr: Short BIB; reversion to making sense.
Dr Kanak Kanti De: Daniel?
Daniel Katz: I have said a few times why I think Shire is a great play right now, even with Baxalta seemingly off the table.
Bret Jensen: I think if we look out more than two weeks you have several companies that are either presenting data at conferences or getting word from FDA such as ZIOPHARMA Oncology (NASDAQ:ZIOP), Merrimack Pharmaceuticals (NASDAQ:MACK) and Clovis Oncology (NASDAQ:CLVS).....
Daniel Katz: Also, in the long run, I am long BIB. I understand why it would be shorted right now, but I can't see BIB staying this low
Dr Kanak Kanti De: I used to like CLVS a lot sometime back...what is happening with it these days?
Bret Jensen: The company should be providing an update on its main drug candidate 'rociletinib' at the World Lung conference from September 6th through the 9th, rociletinib could gain FDA approval and launch commercially over the next few months. In addition Phase II trial results for its compound 'lucitanib' for breast cancer should be out by the end of 2015.