Rare Diseases: Biotech's High Risk, Highest Reward Sub-Sector
Ken Kam, Contributor
Forbes.com
June 27, 2017
In How To Maximize Biotech Returns Under Donald Trump, Todd Hagopian highlighted Rare Diseases, a sub-sector that includes companies developing novel drugs for diseases that affect small patient populations. The often incredibly high price tags for some of these drugs has generated a whirlwind of negative publicity, creating what Todd Hagopian believes is biotech’s high risk, highest reward sub-sector.
Todd started his Biotech fund at Marketocracy in March, 2011. The fund has returned 28.59% since inception and outperformed every mutual fund manager in the country for the past 5 years. Before taking anyone’s investment advice, you should always check out their track record. Here is Todd’s.
Ken Kam: Todd, tell me why you are excited about the Rare Diseases sub-sector?
Todd Hagopian: It is a very risky, but extremely attractive sub-sector. I believe we will start to see fewer FDA restrictions, and faster, easier, cheaper FDA approvals, specifically for diseases that have no current cure. If the Trump administration takes these steps, the companies who already have a full portfolio of Rare Disease drug candidates in their pipeline will have the most to gain.
Kam: You mentioned that these stocks are risky, what is the biggest risk in this sub-sector?
Hagopian: Anytime you are trying to accomplish something that no other company has done, such as cure a rare disease, there is inherent risk. When you add the fact that many of these diseases only affect tens of thousands of people, the only way to make the math work, when coming out with a cure, is to have a very high price tag on the drug. In today’s legislative environment, I doubt that there will be action taken on controlling drug prices, but it will continue to be front and center in the news.
Kam: So, you don’t think the government will take action on drug prices?
Hagopian: I think there are other ways the government can lower the cost of care in the United States. If they go after the drug manufacturers, by limiting their earnings potential, the result will ultimately be less new drugs coming to the market, because the return on investment will be too small for the drug manufacturers to tackle the diseases which have no cures. I could see the government taking action against the pharmacy benefit managers, which play a role as the middlemen between the drug manufacturers, the pharmacies, and the insurance industry. This is a low-risk way for the government to take action without stifling innovation in areas of biotech where it is needed most.
Kam: What stock is your most aggressive pick in this sub-sector?
Hagopian: I have, just recently, made an investment into Abeona Therapeutics (ABEO). The company’s lead drug candidate (ABO-102) was recently granted Fast Track designation by the FDA, which will help them drive the drug to market quicker than the usual drug approval process. This is a gene therapy designed for Sanfilippo Syndrome Type A, which is a rare autosomal recessive disease, which affects all of the body’s cells and organs, and leads to premature death in children.
On top of this lead drug candidate, the company boasts an impressive pipeline of nine other drug candidates which range between preclinical and phase two trials, across four different areas of expertise (metabolic, dermatology, hematology, and plasma therapies). This is the exact type of company who would benefit most from an easing regulatory environment, because they are getting ready to launch into the trial phases, which are the long, expensive part of the process, which may get made easier with upcoming legislation. They already have the drugs researched, and ready to go, they would be among the first to drive their rare disease portfolio through a cheaper, faster process, if that is what is coming down the road from this administration.
Kam: Very interesting. How big of a stake did you take, and what is your price target?
Hagopian: I started with a 5% stake in my portfolio, because I believe the company is trading at a great value right now, but I won’t hesitate to raise that stake if I have the opportunity to buy on future dips in the stock price. While the stock is trading at less than $6, the analysts are expecting this company to reach $15, with even the lowest analyst estimate coming in at $11. I believe this stock will reach $18over the next 24 months, which would be a return of over 200%.
Kam: Those are pretty aggressive expectations, what is the biggest risk with ABEO?
Hagopian: With high rewards, there is always high risk. ABEO has never brought a drug to the market, they are trying to cure incurable diseases, they are dabbling in a lot of different areas, there is pricing legislation risk, and the easing of regulations may never come. All in all, this stock will not be for those who have weak stomachs. All that said, I believe that the company’s first drug will succeed, which will start to fund the rest of the pipeline, and this company could become the next BMRN over the long-term.
Kam: Why is now the right time to be investing in the rare disease sub-sector?
Hagopian: Let me be clear here, this should never be a sub-sector that you enter as your only biotech investment, it is far too risky. It should always be used as part of a broader biotech portfolio strategy. That said, if you want to outperform the broader biotech sector, this is a must-have sub-sector in your portfolio. It is also not a sub-sector where you want a whole bunch of small positions in many companies. There will be big winners, and big losers here. Do your research, find the high-potential future winners, or have someone do it for you, but don’t peanut butter spread your money in the rare diseases sub-sector, or you won’t get the high-reward benefit for the high-risk that you are taking on.
My Take: Biotech stocks are aggressive investments. As we have seen, time and time again, companies can swing 50% in a matter of months on drug trial successes/failures. Clinical-stage companies carry even more risk than traditional biotech companies.
It takes expertise and a lot of time to stay on top of clinical developments. This is why sector funds are a better way to play the biotech field for most investors.
Todd’s approach is to focus a portion of his portfolio on clinical stage biotechs, while balancing his portfolio with extreme value large caps within the industry, thus allowing him to participate in the upward trend without risking it all on a single stock.
Overall, Todd has a long track record of beating the experts, across different industries. For a full review of his 20+ articles on the market, please visit his profile. For information about investing with Todd, click here.
