Interview: Biotech Guru David Miller Talks Intercept Pharmaceuticals, the Cannabis Trade, and the Big Bubble Question
Portfolio manager David Miller sat down with Minyanville for an exclusive interview.
On Tuesday, February 10, I had the pleasure of sitting down with biotech expert David Miller for an exclusive interview.
David serves as portfolio manager for hedge fund Alpine BioVentures, and is the resident biotech guru for Minyanville's Buzz & Banter service.
We've posted a partial transcript of the interview below.
You can listen to the full recording on YouTube, which includes David's forward outlook for biotech, additional commentary on shorting, the dangers of testosterone replacement therapy, and why Obamacare is great for the pharmaceutical industry.
Michael Comeau: In 2013, biotech, as measured by iShares Nasdaq Biotechnology (NASDAQ:IBB), was up 65%, actually outperforming the Global X Social Media Index ETF (NYSEARCA:SOCL), and is up 12% year-to-date. Do you think biotech is in a bubble?
David Miller: I think that there are stocks whose fundamentals aren't in relationship to their market cap, for sure.
Is the entire sector in a bubble? I would argue that no, it isn't. If you are looking for an investment where companies have pricing power with large gross margins and where their return on R&D is improving, if that kind of sector appeals to you, I think that biotech should appeal to you.
MC: In your investing, do you go toward the more mature companies that have drugs on the market and cash flow and earnings? Do you stay away from the more speculative plays?
DM: The fund strategy is really twofold. We're going to hold some core up-and-coming companies. These are companies that will have revenues, but the best is yet to come. They have good drugs in their pipeline, or their drug that they're getting revenues from isn't as approved in as many indications as in the future.
But our expertise at Alpine is really in finding companies whose science makes sense; their management team knows what to do with that science, knows how to design clinical trials, and has drugs that are not yet on the market. That's really our bread and butter because we think we can bring the 30+ years of experience we have in the sector to find both the ones we think are going to fail as well as the ones we think are going to succeed.
MC: On a basic level, how do you assess a company's ability to get something on the market? In my experience, almost every biotech company has a very interesting story and the drugs always sound spectacular. So how do you decide what's going to make it?
DM: Only one out of every 10 companies that come public is actually going to succeed. The rest of them fail. It all comes back to the science. You go and you read all of the pre-clinical data and all of the human clinical trial data. I travel quite a bit to scientific conferences, so not only do I see the data presented, I talk to the investigators that actually used the drug in the clinical trials and they provide amazing insights.
The returns can be quite lucrative, but it's a lot of hard work and you really have to know the science, you have to understand the FDA, and you have to really pay attention to what management is doing.
MC: What advice would you give to someone who is coming out of college and doesn't have a medical or scientific background? What would you tell them to do to get started in biotech investing?
DM: I think that for someone out of college looking at biotech on the investment side, I think you have to read people who do it already. Pick some good biotech analysts and read everything they do. One thing that's very different from when I started doing this 15 years ago and now, is Twitter (NYSE:TWTR). You can go on Twitter, and if you're careful about choosing who to follow, you can get a steady stream of really intelligent analysis, both scientific and stock-based.
And write. Write a blog and keep track of what you're doing and then become really familiar with a librarian who can get you access to scientific publications. It will take a while, but you'll pick it up.
MC: Let's get into some names. One company that's been very hot as of late has been Intercept Pharmaceuticals (NASDAQ:ICPT), which got some data on a study, went from $80 to $450, and has now come down.
DM: I think Intercept is really interesting. It has kind of turned into a cautionary tale for anyone who wants to short development-stage biotechnology companies. That stock was up almost 400 points in two days and there were about 600,000 shares short, so some people got their year ruined before they had their first cup of coffee that first morning.
And I do believe that's had an effect. There are a lot of small biotech companies out there that have billion-dollar valuations. But in past strong markets, like in 2003, there was a cap because people would come in and start shorting.
I think people are scared to do that now.
MC: Another name that's come up a few times on Minyanville because we've done a lot of coverage on what we call the cannabis sector, is GW Pharmaceuticals (NASDAQ:GWPH). Do you have any thoughts on it?
DM: There is a great deal of interest in the pot trade. GW is an interesting play. They have approved drugs and an approved pathway to get their plant-based marijuana derivatives into the United States. Whether that's volume limited by the DEA or not is one issue; there are other companies that have synthetic THC that have an easier path.
I've been around long enough to remember the last time biotech IPOs were hot, and that was in the back half of 2000. The tech bubble had burst, as in silicon tech, and all these tech funds decided to invest in biotech. All these pick-and-shovel companies went nuts into the third and fourth quarter of 2000.
If you want to invest in marijuana, find companies that do hydroponics, growing lights, and solar, because most of these regulations are going to require indoor growing facilities, and so they're going to be huge power draws. Look for picks and shovels more than the marijuana companies themselves.
MC: Looking at the broader biotech landscape, what are some of the names you like?
DM: One of our favorite names has to be Medivation (NASDAQ:MDVN). This is a company I have been following for a number of years. They have a prostate cancer drug called Xtandi. Fortunately, prostate cancer is a very curable disease, or at least it's a disease that we can put into remission.
Xtandi is a drug that actually helps block androgen, which is kind of a gasoline that fuels prostate cancer. It's a very nontoxic drug and they just released data that were stunning. I've done a lot of work in prostate cancer over the years. I understand the space really well, and hands down, it was the best data I've ever seen.
Worldwide, it's probably going to be a $2-3 billion drug. I think there's a lot of people on Wall Street who don't understand that Xtandi is really going to, to put it bluntly, kick the crap out of Johnson & Johnson's (NYSE:JNJ) Zytiga, which is already approved in this new further-ahead indication, and so I still think there's probably some upside there. And I think it's got to be at the top of everybody's list for a takeout candidate.
Listen to the full interview with David Miller here:
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