3 Innovative Biotech Stocks to Diversify Your Portfolio

Streetwise Reports interviews Anita Dushyanth, a medical technology and devices analyst with Zacks Investment.

The Life Sciences Report: Anita, now that the fall investment season is upon us, is it a good time to look for opportunities in the life sciences?

Anita Dushyanth: Definitely yes. In 2013, the Nasdaq Biotech Index showed a gain of about 66%, and in 2014 thus far, it’s been about 21%, which is not too bad. The sector has had some corrections, but it is growing. Within biotech itself, investors can consider adding small-cap companies to their portfolios, as well as established players offering new products and companies offering technologies in niches like drug delivery or pain management and therapy.

TLSR: Where should somebody interested in investing in the life sciences look for companies? Are some countries better?

AD: As a nation, Canada seems to be leading the world in biotechnology per capita. The Ontario region, especially, has a lot of brand-name pharmaceutical and medical device industries. Israel would be another promising country to look at, with more than 700 medical device companies. They all show a lot of promise and are in demand. In addition, the Israeli trade and labor ministry sponsors incentives and is making considerable effort to expand the country’s innovative capacity in biotechnology. So far, not many of the companies from Israel have visibility in the U.S., and some of them don’t have much profit yet, but they definitely have promising technologies.

TLSR: What do you look for in a small-cap biotech company?

AD: No two firms are exactly the same, and the value proposition that each company brings is unique. If it is a well-established company, then it’s easy to go into the standard valuation metrics, get the price/earnings or price/earnings to growth ratio. That is a good starting point.

For more nascent, small-cap companies that generate revenue but don’t have any earnings, some are not public yet and don’t have a track record of revenue. For those, it’s not very straightforward.

“We are very positive on Theralase Technologies Inc.’s technology. It’s very promising.”

We start by looking at the company’s history, evolution and fundamentals, and then go deep into a comprehensive analysis, looking at the sector addressed and how the company is situated globally or domestically. We want to know about a company’s primary operations, whether it has products on the market or therapies in the pipeline, what the market potential of the products could be, whether the company offers a disruptive technology. Diversity is important: Does the company have multiple product candidates? Where is it in the business life cycle—in the development stage or the commercialization stage? Then, of course, we look at the balance sheet. The small-cap companies I cover in biotech have a very high cash-burn rate. They’re often raising equity financing, and that’s dilutive to investors.

I think it also comes down to how the company has set its values. In general, a streamlined and well-articulated business plan, definite development milestones and checking off those milestones when targeted goals have been reached are telling in the assessment. Finally, I think if a company is well managed, it will get good strategic advice and be able to gain more visibility in the market.

But the judgment comes from where the small-cap biotech is headed. It’s not about straightforward metrics, but a lot of research and due diligence into the company and the sector as a whole.

TLSR: Let’s break down some of the product advances that you’ve spotted. Let’s start with the design and development of medical devices. What do you see going on in that space?

AD: A company in Pennsylvania, Echo Therapeutics (ECTE), is working in the diagnostics space. It is developing a technology for glucose monitoring where diabetic patients would be able to access the blood with a patch, not a poke. A handheld device employing a noninvasive technique, part of the Prelude SkinPrep System, analyzes the patient’s blood chemistry using a biosensor on the patch. It takes about a minute to read. Then the system connects remotely and sends out the reading to a remote monitor, perhaps in a hospital or physician’s office, that tracks the glucose levels. The system is great because I don’t think any patient is happy doing a pinprick. The product is still undergoing clinical trials.

TLSR: What about the biomechanics of the human body? Have you come across any products in that sector?

AD: I have read about a private company, Motus Global, making a wearable device—a sleeve—for baseball pitchers. The sleeve has a sensor at the elbow, along with accelerometers and gyroscopes like those found in today’s media games. The sleeves are designed to, with a minimal amount of calibration, monitor an athlete’s range of motion, arm speed and the angle of the elbow, then provide a reading of the pitcher’s efficiency and level of fatigue.

TLSR: Have you identified additional companies with innovative products?

AD: I cover a Canadian company, Theralase Technologi (TLTFF), which has a cold laser technology for pain management. That device, the TLC-1000, generates about $2 million ($2M) in revenue annually. The company has also come out with a biofeedback laser device, TLC-2000, a second-generation to its TLC-1000, which is designed to deliver the exact amount of laser energy needed to injured tissue to accelerate the healing process. It is expected to launch at the end of this year.

TLSR: How does laser technology heal cells?

AD: This is a superpulsed laser, so it triggers the body’s immune response to start repairing itself. It is for pain management—joint pain, for example. Most often with joint injury, especially in the knee, inflammation is a side effect, which causes pain. Patients may also have some sort of nerve degeneration, which also causes pain. Laser therapy activates three biological pathways that contribute to the healing process.

One is the nitric oxide pathway. When the tissue absorbs the laser light, it triggers a physiological process at the iron-containing and copper-containing reduction oxidation centers of the cells. This increases nitric oxide levels by about 700%, which controls downstream signaling effects, such as increased adenosine triphosphate (ATP) production. In essence, the nitric oxide causes the blood vessels to dilate, increasing blood flow to the joint. There is also more interstitial fluid drainage, so that decreases the swelling.

“If a company is well managed, it will get good strategic advice and be able to gain more visibility in the market.”

The second is the ATP pathway. Small changes in the ATP levels can significantly improve the cell’s operations. When tissues are exposed to this laser, an oxidative process is initiated that allows the diffusion of sodium and calcium ions to enter the cells. The calcium ions activate the mitochondrial protein within the cell to promote healing.

The third is a lipid absorption pathway. ATP is supposed to regulate the sodium and potassium component of a cell, thereby controlling the transmission of pain signals from the pain area. By controlling ATP production, laser therapy can actually control the propagation of pain.

TLSR: How is the laser therapy administered?

AD: Administration is similar to electrical therapy as administered in a physical therapy center. The clinician places the laser probe over the affected area of the joint. The laser system is set to deliver a specific dose of energy for a specified treatment time at the location on the skin surface.

TLSR: Does that have any side effects?

AD: No known side effects have been recorded from the clinical studies.

TLSR: How long has it been on the market?

AD: Close to eight years.

TLSR: Are there additional applications for the company’s laser treatment?

AD: Yes. Theralase uses the same laser technology for cancer therapy also, but not just the laser itself. The low-level laser activates photodynamic compounds (PDCs) using specific wavelengths of light. A PDC is activated to kill cancer cells. The cancer application is still in clinical trials; the company expects to initiate a Phase 1 clinical trial in the beginning of next year. The experiments conducted so far have had positive results, and Theralase seems to be moving in the right direction, which is very positive.

TLSR: Is there a name for the cancer treatment?

AD: It’s called photodynamic therapy (PDT). For the therapy, Theralase uses its proprietary TLC-3000 laser with a specific PDC. The compound is specific to the cancer being dealt with. The company has demonstrated success in bladder cancer, and is looking into other cancers. But I am not aware of the specific target because the therapy is still in trials. Once the results come out, we’ll know which PDC is specific for a specific type of cancer and the region the cancer is in.

TLSR: How is Theralase financing these trials?

AD: So far, the company has only used equity-based financing, and has been very successful with that. It is also generating about $2M annually in revenues from the TLC-1000. But for all of its research and development work related to the PDT technology, Theralase is definitely raising capital.

The company is still cash-flow negative because it is funneling its resources into research for the PDT therapy/cancer technology. I think it will turn cash-flow positive once its second-generation product picks up and the cancer therapy product gets to the market. It’s a very small-cap biotech firm, but we are very positive on its technology. It’s very promising.

TLSR: How has its share price been reacting to the new trials? Do you have a target price on this stock?

AD: On the report, we show $1. The stock is currently trading at about $0.30/share. Just like any biotech, there are highs and lows, but the stock has not really gone up yet because investors are waiting for the new product to come out and penetrate the market. The cancer treatment is a big catalyst, because it addresses a larger community and a more serious disease. I think the weight is on that.

TLSR: Is there another company you’d like to mention?

AD: Tribute Pharmaceuticals Canada (TBUFF) is a commercial-stage, specialty pharmaceutical company operating out of Canada. It is also pretty small, with a $25M market cap. It has six commercialized products, and primarily works by in-licensing products and then selling them. It began trading on the TSX Venture exchange in May, and is currently trading at about two times its sales. As the company expands its portfolio into drugs that address wider communities, it will turn cash-flow positive.

TLSR: Can you talk about what drugs it has on the market now and what drugs it has in the pipeline?

AD: Right now, its biggest drugs in terms of revenue are Bezalip (bezafibrate) for hyperlipidemia, Soriatane (acitretin) for psoriasis and Cambia (diclofenac potassium for oral solution) for migraine.

Cambia was introduced in 2013. Since the introduction, it gained more than one-third of the market share just in Canada. Cambia is patent-protected until 2026, so it will enjoy market exclusivity for another dozen years. I think that shows good promise. Soriatane’s domestic sales in Canada have increased about 10%. Tribute also has its own proprietary products, Uracyst (2.0% sterile sodium chondroitin sulfate solution) for painful bladder syndrome, and NeoVisc (1.0% solution sodium hyaluronate) for joint pain. These drugs contribute modestly to its revenues. More recently, the company has in-licensed bilastine, for allergic rhinitis and chronic idiopathic urticaria, which has not come to market yet.

TLSR: Does the company primarily distribute in Canada?

AD: Yes, it does. But Tribute also distributes internationally, where it has licensed some of its products in different regions, including the United Kingdom, a number of European countries, Iceland and Korea.

TLSR: Anita, thank you for your time.

Anita Dushyanth is a medical technology and devices analyst with Zacks Investment Research. Prior to joining Zacks, she has worked as a researcher in the field of bioengineering at the University of California, Los Angeles (UCLA) for more than 10 years. Her expertise includes research that delves into design and development of medical compliant devices, biomechanics of the human body, degenerative disease progression and quantitative image analysis and optimization. She has been a peer reviewer and editor for a number of journals in the field of biomedical engineering. Prior to that, Dushyanth worked as a researcher at the department of radiology and biomedical imaging at the University of California, San Francisco (UCSF). She has completed the research work for a doctorate in bioengineering from UCLA. She holds a master’s degree in biomedical engineering from Wright State University in Ohio and a bachelor’s degree in instrumentation engineering from the University of Madras, India.

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