Last month, the Chair of the Federal Reserve, Janet Yellen, made headline news when she weighed in on stock valuations in her semiannual monetary policy report. In her testimony before the Senate Banking Committee, Dr. Yellen made the following statement:
"Valuation metrics in some sectors do appear substantially stretched—particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year."
Market values for small-cap biotech stocks declined sharply following Yellen’s comments. The NASDAQ Biotechnology Index fell over 3.5% the following 2 days, and the Russell 2000 remains down almost 3%.
I believe that Dr. Yellen’s evaluation does not reflect the true reality of the biotech sector, and that the ensuing downtrend and lingering after-effects are the result of irrational speculation.
The biotech sector encompasses hundreds of companies, many of which are still in the development stages. With virtually no profits or earnings, these companies rely on the support of investors that believe in their long-term potential. When analyzing the sector as a whole, one has to take into account the unique qualities that separate the biotech world from other investments.
We have certainly witnessed significant biotech bull runs in recent history. The Nasdaq Biotech Index (NBI) has even outperformed the broader market over the last two years. However, these metrics do not reflect the disproportionate make-up of the sector and may be the reason why some analysts might wrongly assess the small-cap sector as overvalued. The reality here is that the NBI is made up primarily of large-cap stocks, with a mere 10 companies accounting for close to 60% of the index. The Russell 2000 index, which comprises the small-cap segment of biotech, has performed in line with the broader market over this same two-year period.
Analyzing the biotech sector in terms of price-to-earnings (P/E) ratio would constitute a similarly misguided approach. This methodology assumes that small-cap bios are valuation stocks (they are not), and can be accurately assessed with a valuation metric like the P/E ratio. In reality, small-cap bios depend on the execution of specific milestones to create value for stakeholders, and are therefore best classified as venture stocks. Venture stocks are evaluated on long-term potential, which in the biotech world translates to company fundamentals, clinical data and implications, and key visible inflection points (sound familiar?). Dr. Yellen mentioned in her testimony that “ratios of prices to forward earnings remain high relative to historic norms”. For the majority of small-cap biotechs, P/E just simply does not matter.
ImmunoPulse: Prioritizing the "P's"
While the recent hit to small-cap bios has certainly had a negative impact on OncoSec’s share price, there is a beacon of hope amid all the panic – a “Gatsby-esque” green light in a sea of red that, unlike the unattainable dream signified in the novel, represents an unwavering fundamental truth about the company: from a venture stock perspective, nothing has changed.
To date, competitor progress in immuno-oncology has primarily been defined by the rapid advancement of PD1/PDL1 programs; and portfolio assessment has been mostly limited to the tabulation of various potential targets. In the emerging immunotherapy landscape, I believe it is still too early on to declare winners and losers. However, given the breadth of the opportunity, we expect several important components to be the key value drivers in speculating venture opportunities: People, Pipeline, and Positioning.
The immuno-oncology field is such that: (a) combination approaches are clearly the way of the future; and (b) rapid progress from bench to bedside leaves little room to falter. Thus, breadth and depth remain the ultimate goals for both tumor responses and company pipelines. While the critical importance of PD1/PDL1 backbones is unlikely to diminish, I believe that development approaches like OncoSec’s ImmunoPulse have made it clear that we expect the monotherapy to become rapidly antiquated by novel combination therapies. While there is no “magic bullet” for all cancers, there is certainly plenty of room for multiple PD1/PDL1 combinations to emerge that employ checkpoint inhibitors, co-stimulatory agents, and other immuno-modulatory facilitators.
As is often the case, first-to-market status holds substantial weight when the agents at times appear to be only marginally differentiated (i.e. similar checkpoint inhibitors). However, even early participants in the race to bring a PD1/PDL1 antibody to market will likely be at a significant disadvantage over time if they lack pipeline depth, breadth, and/or differentiation. The key advantage in the coming future will be to strategize or align with differentiated treatment components – components that ImmunoPulse could provide to a potential partner as a non-viral intratumoral immunotherapy platform that is methodical yet simple, personalized yet readily adaptable, and includes other unique device-related attributes outside of the novelty of DNA-based targets. The breadth of the ImmunoPulse platform also allows for multiple distinct strategies for reversing tumor-induced immune subversion, as therapeutics amenable to OncoSec’s intratumoral gene-electro therapy technology include ANY DNA-encoded protein targeting key pathways of immune subversion. Furthermore, the depth of the overall commitment to ImmunoPulse includes an emphasis on intellectual property, human capital/expertise (with several Key Opinion Leaders in the field), and overall investment. With over 27 US patents and three ongoing clinical trials (not including new development targets and indications), OncoSec’s commitment to immuno-oncology is undeniable. These activities will increase our potential paths forward and lay the foundation for numerous combinations to emerge in the immuno-oncology treatment paradigm.
To evaluate OncoSec as a venture stock is to disassociate the company from current market trends and judge solely based on core fundamentals. In my view, company fundamentals have never been stronger. Our excellent management team remains in place; our cash position is stronger than ever; we are rapidly expanding our pipeline to address a wide variety of immune targets and tumor indications; our core technology continues to demonstrate a potential to fundamentally impact the cancer treatment landscape and provide serious benefit to a large number of patients; our advisory board and stakeholders are comprised of the best and brightest in the field; and we have several key milestones planned for 2014 that we believe are of unprecedented significance for the company.
As the fall season approaches and activities ramp up, I am confident in our ability to execute on these key milestones and generate value for our stakeholders. Even more importantly, I believe in our platform’s potential to address some of the greatest unmet medical needs of our generation.
The statements or opinions expressed on this site are my own and do not necessarily represent those of my employer OncoSec Medical.