This article is excerpted from Tom Yeung’s Moonshot Investor newsletter. To make sure you don’t miss any of Tom’s potential 100x picks, subscribe to his mailing list here.
A Biotech Moonshot Takes Off
On Thursday, Longeveron (NASDAQ:LGVN) issued a press release that would send investors over the moon:
“U.S. Food and Drug Administration (FDA) has granted Rare Pediatric Disease (RPD) designation for Lomecel-B for the treatment of Hypoplastic Left Heart Syndrome (HLHS), a rare and life-threatening congenital heart defect in infants.”
It isn’t even Christmas yet.
LGVN would jump 400% to $14.75 within two days. The RPD designation is essentially an FDA approval in cases where a disease is so rare that regulators are willing to forgo full clinical trials.
So how did the Moonshot Investor manage to find this biotech when it was trading under $3 last month?
Simple. LGVN insiders were buying shares.
It turns out that some biotech executives are also savvy traders. These brainy folks often use their hard-earned knowledge to predict clinical trial outcomes, making legal profits in the process. And as long as they avoid using financial or regulatory information, insiders are generally left off the SEC’s “naughty” list (Regulators: “have you been a good kid this year too? Here…have some 10x stocks.”)
Christmas in November
As clinical trials revert to pre-pandemic levels, investors will likely see more of these Moonshot bets come back into play.
Insider Track Biotech
Moonshot investing makes biotech investing seem easy. Open a list of the week’s top performers, and biotech stocks often make up half or more.
But there are two downsides that frequently discourage investors.
First, biotechs are risky.
In a sense, these research firms are a lot like stressed-out parents. Moms and dads might hope their kid someday turns into a CEO or cryptocurrency billionaire. But parents ultimately have little control over their child’s ambitions, especially once the kid leaves the nest. Similarly, once a biotech firm settles on a drug, dosage and test population, it’s up to clinical trials to determine if the drug gets approved.
Second, biotech investors need patience. The average clinical trial takes seven years to its completion, and the lengthy FDA review process can add on several more. But Moonshot investors can always get returns along the way as drugs progress through the three clinical trial phases.
That’s why, for those willing to lose some bets along the way, biotech firms offer a one-of-a-kind Moonshot opportunity that’s hard to beat. That’s especially true if you’re investing with better-than-average odds… using the Insider Track strategy.
Windtree Therapeutics (WINT)
The Moonshot Investor first featured this company in October. Insiders have since purchased more shares, making it a top Insider Track pick:
- CEO. Bought $7,200
- Director. Bought $95,000
Windtree Therapeutics (NASDAQ:WINT) is a microcap stock focused on treating lung and heart diseases. Five of its drug candidates are undergoing phase-2 trials, while a sixth is in pre-clinical studies.
The reason for buying WINT is simple: the startup is pursuing big diseases, which means big payouts if any drug proves effective.
Consider heart disease, an affliction targeted by three of WINT’s drug candidates. The National Association for Biomedical Research (NABR) estimates that Americans spend $193 billion per year on treating the condition, making it the single most expensive disease in the U.S.
Then there’s lung damage, a condition that WINT’s KL4 Surfactant attempts to help reverse. If their candidate can undo some of Covid-19’s potential long-term damage, WINT will be worth hundreds of millions of dollars overnight.
Though Windtree’s drug candidates aren’t quite as “slam-dunk” as Longeveron’s, the former’s $44 million market capitalization makes it a one-sided bet. Those willing to risk total loss in a Windtree investment stand to make 50x their money if things somehow go right.
Oxford BioDynamics (OXBOF)
This week, the Insider Track strategy adds a new biotech firm to its list: Oxford BioDynamics (OTCMKTS:OXBOF), a U.K.-based startup spun out of Oxford University in 2007.
- Interim Chairman. Bought 1,137,500 GBP
- CFO. Bought 4,500 GBP
OXBOF is developing a series of genetic testing kits to profile biomarkers. Its most recent launch, the EpiSwitch CST, helps doctors predict potential Covid-19 severity in patients. Other kits in the pipeline include those for prostate cancer, colorectal cancer and canine lymphoma (i.e., cancers in pets).
The market for Oxford Biodynamics’ products is vast. Many cancers — such as those of the liver, nasopharynx and skin — are hard to detect without biopsies or less accurate blood tests. A test that can detect traces of cancerous biomarkers would help doctors and patients identify cancers far sooner.
OXBOF’s EpiSwitch can also help researchers design new medicines. The race to cure Alzheimer’s disease, for instance, will benefit greatly from better biomarker tests. The firm claims it can triple the likelihood of bringing a drug to final approval.
So why are executives choosing now to buy stock? There are two surprises in the works. Firstly, the firm mentioned it had booked GBP 2.5 million in incentives post period end. Adding the GBP 3.6 million raised in October, means OXBOF’s most recent financial statement undercounts cash by nearly half.
Second, the firm launched two new products after its most recent semi-annual report this year. No one besides insiders knows how well EpiSwitch’s sales are doing. And if the same executives are voting “yes” with their feet (through buying more stock), then regular investors ought to pay attention and take a deep look.
Oxford BioDynamics trades OTC in the U.S. for $1.15.
“Rather than concentrate on creating marketable cancer treatments, management has instead focused on pumping up its share price to buy up questionable moonshots.”
Meanwhile, Clover Health (CLOV) has fallen even further since getting featured on this newsletter’s “sell” list:
“Medicare Advantage is already a tricky business. It’ even harder when you’re accused of violating the Stark Law.”
The key issue comes down to valuation. Healthcare-related stocks differ from most meme stocks because no matter how much money you raise, cash can’t guarantee that a drug or healthcare product will work (Though handing patients a suitcase full of cash might make them feel better, at least).
That means high stock prices for biotech firms don’t produce the same magic that they might for say, a near-bankrupt AMC Entertainment (NYSE:AMC). It could actually work in reverse since high stock prices make biotech firms less attractive to potential acquirers.
Legal Vs. Illegal Insider Trading in Biotech
In 2005, general counsel of Massachusetts-based Biogen (NASDAQ:BIIB) Thomas Bucknum dumped $6 million of his employer’s shares at a discount. It soon became clear why.
Ten days later, Biogen announced a suspension of lead drug Tysabri on safety concerns. BIIB stock would decline 42% in a single day. The Securities and Exchange Commission eventually sued Mr. Bucknum, and the case was settled for a $3 million fine without admission or denial of wrongdoing (one can only assume he got a lump of coal for Christmas that year).
Such cases highlight the SEC’s preference for pursuing clear-cut cases. It’s far easier to prove illegal insider trading around corporate announcements than on drug approvals. One of the most recent cases in August involved a former employee who bought short-term out-of-the-money options on Incyte prior to a merger announcement.
Fortunately, most executive trading at biotech companies is of the legal type. Drug efficacy is uncertain, and even the best experts can make the wrong predictions.
So if you’re willing to take some losses along the way, there are few better ways to make one-sided bets that can send you to the moon.
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On the date of publication, Tom Yeung did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Yeung, CFA, is a registered investment advisor on a mission to bring simplicity to the world of investing.