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Biotech Stocks With Unique Diagnostic and Therapeutic Technologies

July 24th, 2014

healthcare3Aging baby boomers face increased cancer risk, and growing numbers of obese and overweight Americans face metabolic disorders that could lead to cardiovascular disease. Debjit Chattopadhyay of ROTH Capital Partners recommends that biotech investors consider these trends when looking at portfolio options in the healthcare sector. A medical researcher turned biotech analyst, Chattopadhyay highlights several companies with unique diagnostic and therapeutic technologies in this interview with The Life Sciences Report.

The Life Sciences Report: Debjit, can you tell me about ROTH Capital’s outlook for small-cap pharma and biotech?

Debjit Chattopadhyay: ROTH Capital, in general, has a very strong healthcare presence, and currently follows almost 80 companies in this sector. This gives us a very robust view of what’s happening in micro-, small- and mid-cap companies across medical devices, diagnostics, immuno-oncology, regenerative medicine and specialty pharma. This diversity gives us a very unique view as to what’s happening in the sector, how development in larger companies is impacting valuations in the micro- and small-cap range, and which technologies are of interest from licensing, partnering and acquisition perspectives.

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TLSR: You mentioned a broad range of sectors within healthcare. Can you highlight some of the technologies that pique your interest?

DC: To answer that question, we need to take a step back and look at what’s happening with the population. With 10,000 (10K) baby boomers turning 65 every day for the next 15 years, there will be 2 million (2M) additions to that population over those years. In addition, 33% of the country is potentially obese, and over 50% of the country is overweight. Aging and obese populations are prone to multiple diseases and comorbidities, compared to younger populations and populations that are more fit.

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Given these significant trends, one can envision which diseases these populations are most likely to be impacted by. For the aging population, the first thing that comes to mind is oncology. In fact, the rate of cancer is 10 times greater for those 65 years and older compared to those under 55. With the aging demographic, 17% or 18% of the population will be susceptible to higher rates of malignancies over the next 10–15 years. Companies focused on targeted therapeutics and diagnostics are addressing this need.

On the other hand, the obese population is at increased risk for cardiovascular, metabolic and orthopedic disorders. For example, statins have benefited patients with hypercholesterolemia. With these drugs going off patent, PCSK9 inhibitors, which block a gene that regulates production of low-density lipoprotein (bad cholesterol), may represent the next generation of treatment. For orthopedic disorders, regenerative medicine will see the use of stem cells to rebuild cartilage, potentially reducing incidences of knee replacement surgery.

Finally, diagnostics are going to play a huge role in both sectors, by targeting each therapeutic to the patient population most likely to respond.

TLSR: Do you see consistent growth in healthcare, or are there social and political factors impacting the sector these days?

DC: For a long-term investor, I think the healthcare sector offers unique opportunities, as short-term, macro-induced volatility is likely to present investment opportunities. As long as individuals have insurance, underlying chronic or acute conditions have to be treated, unless patients want those conditions to balloon into something much more serious. In an economic downturn, you avoid big-ticket consumer purchases and elective procedures. As long as the employment market remains stable, chronic and/or serious medical conditions have to be addressed.

Overall, in my opinion, healthcare is a growth sector. Furthermore, despite the robust stock performance during 2013, the sector is far from being overvalued. This is especially true for commercial-stage companies where forward price/earnings ratios are supported by earnings growth. Sure, some biotechnology companies are going to blow up because of study failures, but that’s where investors must do their research and identify the companies or the technologies most likely to succeed.

TLSR: Can you comment on the growing trend linking cancer therapeutics and diagnostics?

DC: This trend is a result of the aging population directing the sector. With the projected growth in cancer cases, are you going to treat everybody with a targeted therapy, not knowing what mutation or specific translocation that person has? For example, Genentech/Roche Holding AG’s (RHHBY:OTCQX) Herceptin is almost a $7 billion ($7B) global franchise, but only 20-30% of all breast cancer patients are positive for HER2 (human epidermal growth factor receptor 2), and will respond to the therapy. Are you going to give Herceptin to 100% of breast cancer patients, or are you going to be selective and give Herceptin to the few who will respond? With Herceptin therapy costing about $75K, the cost of performing the IHC (immunohistochemistry) and FISH (fluorescence in situ hybridization) tests are more than justified.

Herceptin is an example of an approved therapeutic. What about therapies currently under development? An increasing number of companies are screening patients for relevant gene mutations before enrolling them in clinical trials. These emerging drugs are likely to be approved with companion diagnostics. The pharmacoeconomic benefit to the system and society in general is large. Instead of spending $100K on a drug for a patient who won’t respond, spending a few thousand on a diagnostic test is truly meaningful, and the patient is spared from significant adverse events.

TLSR: There was resistance to the concept of personalized medicine, at least early on, because pharma companies would like to sell their drugs to as many people as possible. But if a company can select subpopulations likely to be responders, then that company has a whole class of nonresponders for whom it can develop additional therapeutics, right?

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