MoneyTalks: Here’s why this fund backs these 2 big ASX biotechs alongside Merck and Novavax
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MoneyTalks is Stockhead’s regular recap of the stocks, sectors and trends that fund managers and analysts are looking at right now and in this edition we’re looking at big biotechs.
Today we hear from James McDonald, portfolio manager of Pengana’s High Conviction Equities Fund.
It only holds 20 companies, of which at least 20% must be Australian. Ethical investing is a fundamental philosophy of the portfolio and healthcare makes up a big portion of it.
“I’ve been an ethical investor for 20 years in my career – a long time before it was popular in the market,” McDonald told Stockhead.
“So that’s core to its identity and we integrate ESG into the process, we engage with management and vote on all of our shares.
“I’ve been investing in healthcare for a large part of my career and I like the sector as it’s fundamentally defensive but there’s a big amount of technology differentiation where you can find great stocks.
“In a fund with limited resources you do have to focus on some areas and understand those areas well rather than being a jack of all trades.”
Telix is the largest holding in the fund as well as one of the few “big biotech stocks” on the ASX. It’s capped at $1.65 billion and is one of the few involved in radiation oncology.
“I spent a lot of time researching a previous company listed on the ASX called Sirtex Medical which was involved in radiation therapy and oncology and thought highly of the management there, particularly David Cade who was chief medical officer there, then became CMO Cochlear and then joined Telix two years ago and now he heads up their Asian division,” McDonald said.
But beyond the calibre of the people, radiation oncology also fascinated him.
“Telix has built a next generation Sirtex, it’s called molecularly-targeted radiation (MTR) therapy and that’s basically where you get a radioactive molecule and attach it to an antibody or chemical and it selectively seeks cancer and destroys it. You can use that at a low dose as a diagnostic.
“It built a broad portfolio of 11 different areas now mostly focused on brain, kidney and prostate cancer, but really a platform technology where they’re trying to roll up a lot of small radiation therapy companies around the world.
“It made one acquisition last year of a French company, bought a disused plant in Belgium they’re bringing up to speed to produce their product, and then distribute them around the world and leverage the platform.”
McDonald says while oncology is a crowded space, the effort is worth it.
“It is good to be able to work in an area where you’re saving lives and you can measure how quickly you’re saving lives. It’s got clearly defined endpoints in studies,” he said.
“There are many illnesses that are problematic for the world; diabetic foot ulcers and wound care are markets but it’s difficult to define endpoints and prove your product is better than someone else’s. It’s hard to keep people into the studies as people drop out all the time.”
“That’s why oncology is such an interesting market.”
“Immutep is in that basket as well where it’s an immunotherapy company,” McDonald continued.
“Immutep is a relatively small company at $400 million, they’ve got $100 million of cash and that is something we really like.
“If a company is not free cash flow generative we like them to have a good balance sheet so you can get through to when you are cash flow generative.
“And it’s got a huge market potential.
“Merck in the US is the largest pharmaceutical company in the world and they’ve got a successful immunotherapy drug Keytruda which has been successful in a number of indications but only for small percentage of total cancer patients.
“That comes off patent in 2026 but they will sell $20 billion of the drug per year, so they’re tying to extend franchise by building up all these little immunotherapy companies and trying to break out into areas where immunotherapy hasn’t worked – that’s where Immutep comes in.
“Immutep is different class of drugs called LAG-3 and could potentially be a really fast market if it’s successful.”
While current clinical trials are at an early stage, there’s the promise of more data out next month and next year.
And McDonald thinks it could potentially be an M&A target by big biotech company Merck, which is also a Pengana holding and a collaborative partner of Immutep.
“Quite a lot of these small companies get taken out for somewhere between $2-$5 billion,” he said.
“With a $400m market cap, it could look extremely cheap relative in a couple of years.
“[There’s] no guarantees as to what happens when they complete their studies but the early data is encouraging. In head and neck cancer they’re getting a number of people with a ‘complete response’.”
Still with big biotechs and the fund also holds Novavax which is in the COVID-19 vaccine race. While it is behind Pfizer and Moderna at the moment, McDonald says it shouldn’t be counted out just yet, having signed large contracts with many countries.
Australia is one such country, having signed a deal for 50 million doses with shipments beginning in November. But it hasn’t yet been approved by the TGA or the FDA.
“They finished their Phase III study in the UK in February and in the US in about May and they’re in line to get EUA in the US but they’ve had some difficulty proving that the vaccine in the clinical trials is identical to the one that’s being produced in eight factories around the world – some with partners, some on their own,” McDonald said.
“They claimed they’ve resolved the issue and they’ll submit the product for approval in US, EU, Australia over the next month, so that could be a catalyst for this stock.
“The downside is the US could say you have to go for full authorisation, which would delay it further.”
McDonald says his gut feel is approval ultimately will come and the Novavax vaccine will have the benefit of a larger patient cohort in its clinical trial and a higher safety profile than Pfizer or Moderna, not to mention the push for booster shots.
“I think we will need a third shot and data shows a third shot of Novavax increases your antibody levels four-fold over a second dose, so that’s encouraging,” he said.
“There’s [also] a study going on with mixing and matching to look at which is best combination – so we will know the answer.”
Even if it can never overtake Pfizer and Moderna for COVID-only vaccines, it might be ahead of them in another race.
“Novavax also a year ago developed a flu vaccine which looked to have leading efficacy compared to all the other influenza vaccines, so they’re looking to combine COVID and flu shots, they’ve got that in Phase 1 now.
“Moderna and Pfizer are trying to go down that route but they’re just starting Phase 1 [of flu only shots]. Novavax has done Phase III trial of [separate] COVID and flu vaccines, now they have to do Phase 1 of COVID plus flu so have to take it to [stages] 1, 2 and 3. Moderna and Pfizer are just on Phase 1 of flu.
“I don’t know how long it’ll take to combine one but Nonavax will be a couple of years ahead of everyone else in having a combined vaccine.”
“What we’re really looking for companies that have a strong competitive position and then trying finding these businesses when they’re trading at difference to what their valuation is,” McDonald concluded.
“And hopefully by doing that it gives us downside protection and long term returns. So that’s a lot of the battle if you can do those things.
“Hopefully you can be a bit protected from ups and down but no doubt if the market drops dramatically it impacts everyone.
“You have to be mindful of those impacts but I think there’s opportunity to find companies that’ll do well in any market.”
The views, information, or opinions expressed in the interviews in this article are solely those of the interviewee and do not represent the views of Stockhead.
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