Catalysts Drive These Stocks

Whether biotech stocks keep up the scorching pace of 2013 remains to be seen, but we can count on one thing going forward, says Cantor Fitzgerald Senior Analyst Mara Goldstein. We are still in a catalyst-driven market. In this interview with The Life Sciences Report, Goldstein discusses four names with approaching milestones that she believes are important growth drivers. Her fifth pick is a binary event story, meaning it could skyrocket on good data or plummet on bad.

The Life Sciences Report: With stock prices up, I know companies want to raise money through secondary offerings. Do you feel this trend is strong right now, or is it showing fatigue?

Mary Goldstein: Let me take the second part of your question first. The question of fatigue is important because, with so much interest in financing in the past year, there has been a lot of discussion around whether the pent-up demand from previous years is gone and whether there is as much opportunity as there was in 2013 for financings to continue.

We have seen a fair number of companies raise capital thus far in Q1/14. In fact, this past January was the second strongest January on record since 1994 in terms of total money raised. The desire to secure financing is well know among biotech investors, and there does seem to be a strong dynamic to ride any potential wave of enthusiasm that gets generated at the beginning of the year because of conferences, such as the JPMorgan Healthcare Conference. That conference typically kicks off the year, and many companies try to extend cash runways by financing early in the year. Three and four years ago, companies had to finance because they were running out of cash, and funding was needed to get to that next data point. Now, companies are financing around data points, and that is a very different value proposition.

TLSR: Are you saying that companies are extending their cash runways even though they may not need the money today?

MG: I think that if you’re a biotech executive, cash and cash runway are always a concern given the long road from discovery to commercialization. My point was that financings are not happening solely to extend cash runways, although that is an important consideration. They’re also occurring around data releases, which have an impact on valuations.

TLSR: We’ve seen a lot of initial public offerings (IPOs) in the last year. Does the IPO market still look strong to you? If it does, does it look frothy?

MG: As an analyst, I watch financings as a surrogate for demand in the sector. Despite more than $20 billion ($20B) of equity capital coming into the biotech industry in 2013, the beginning of 2014 has shown some legs, with the appetite for biotech financings still in evidence. While one could argue that backlog and pent-up demand drove financings last year, one could also argue that investors have had a greater appetite for riskier and higher return stocks. I think the combination of those factors helped to fuel a robust IPO market. The question, in my mind, is whether conditions exist that facilitate demand for financings. Already in 2014, we’ve seen $5.5B in capital raised in the biotech sector, with more than $1B in IPOs and roughly $2B in follow-on offerings.

TLSR: Mara, what about the maturity of the IPO companies?

MG: If we are speaking to stage of development, I think it is mixed. Of the class of 2013, close to 50% of the IPOs were in phase 2, another 35% or so were in phase 3, and the remainder were earlier stage. I believe that breakdown is consistent with IPOs that have been priced thus far in 2014. But I think you’ve touched on an important point about the ability of companies to continue to advance drug candidates in capital raising-constrained environments. Of the 40 or so IPOs in 2013, a considerable number came to market having already advanced lead candidates into mid-phase testing.

TLSR: Are companies themselves mature enough when they go public, or are you seeing lower-quality companies that perhaps don’t have clear pathways to pharma partnerships or product commercialization?

MG: I wouldn’t confuse quality with development stage, because some very high quality companies are going public at earlier stages of development. Clearly the market has an appetite for stocks where investors believe that a high value return can be accelerated, such as for companies developing drugs for orphan disease.

TLSR: You mentioned the excitement and enthusiasm coming out of the JPMorgan Healthcare Conference. Were companies talking about any new regulatory or other trends that you can detect from their presentations?

MG: From company presentations in general, and from the dialogue that I broadly observed, it seems as if companies are engaging the U.S. Food and Drug Administration (FDA) earlier in the process than they have in the past. That is, of course, a good thing because the more that can be ironed out early on, the less regulatory risk later.

TLSR: Mara, do you have a current theme for growth-oriented investors?

(...)Click here to continue reading the original article: Catalysts Drive These Stocks [Celgene Corporation, Sunesis Pharmaceuticals, Inc., Celldex Therapeutics, Inc., Verastem Inc]

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