A Small-Cap “Rocket” to Ride the Vaccine Boom
Investing in biotechnology is not for the faint of heart. The sector tends to be volatile and populated with promising start-ups that eventually crash and burn. But few industries can offer profits as explosive. Below, I pinpoint an exciting biotech opportunity for aggressive investors.
In a frustrating equity market that seems to lack direction, the right biotech stocks can give a shot of steroids to your portfolio. Pick the wrong biotech, though, and you could get slammed with sharp losses. The key is striking the right balance between risk and reward and finding companies whose treatments in the pipeline are unique and in demand. One hot market is vaccines.
Demand for vaccines is growing around the world, offering an industry niche that’s more stable for investors than other types of therapies.
According to Zion Research, global annual revenue generated by vaccines is expected to exceed $59.2 billion in 2020, compared to about $40 billion in 2016 (see chart).
Global Vaccine Demand: The Picture of Health
Source: Zion Research
The blue chip, mega-cap biopharmaceutical companies all boast promising vaccine development, but their sheer size limits their room for growth. The big payoffs for investors come from small-cap biotechs, which can take off like “rocket stocks” if their new drugs pan out.
The race is on for new treatments…
That’s why I particularly like VBI Vaccines (NSDQ: VBIV). Based in the academic hub of Cambridge, Mass., VBI Vaccines develops vaccines to address unmet needs in infectious diseases, for underserved areas around the world. The company also has research operations in Ottawa, Canada and research and manufacturing facilities in Israel.
VBI is developing a proprietary eVLP (enveloped virus-like particle) platform for the bioengineering of immunological vaccines that closely mimic viruses, to induce potent and durable immune responses.
Research surrounding immunotherapy is a thriving scientific field, as scientists and physicians try to find a way to get the body to fight diseases by itself, eliminating the need for costly and painful techniques such as chemotherapy and radiation. The winners in the immunotherapy space will prove superb long-term investments.
VBI also is developing a Lipid Particle Vaccine (LPV) technology, a formulation that allows the stabilization of vaccines through freeze drying. On LPV, the company is working in collaboration with giant biopharma players Sanofi (NYSE: SNY) and GlaxoSmithKline (NYSE: GSK).
VBI offers Sci-B-Vac, a third-generation hepatitis B vaccine for adults, children, and newborn infants. To date, more than 300,000 infants and adults have been vaccinated with Sci-B-Vac around the world.
In addition, VBI is developing a vaccine program, which is in Phase I clinical trials, for the prevention of human cytomegalovirus (CMV) infection. CMV is a leading cause of prenatal developmental delays. The company also is creating vaccines for common adult and pediatric brain tumors, as well as pursuing a Zika vaccine.
VBI recently raised $23.6 million in concurrent equity and debt financing transactions with Perceptive Advisors’ biotech-focused fund, the Perceptive Life Sciences Fund.
VBI reported a first-quarter fiscal 2017 loss of 22 cents per share, but losses should narrow as the company accelerates development of its drug pipeline. Meanwhile, the company is in strong shape for long-term growth.
Many biotech innovators eventually implode (taking investors down with them) because they’re thinly capitalized with unsustainable debt. Despite the promising nature of their advances, they spend cash too quickly. VBI features a small but sturdy market cap of $181 million, year-over-year revenue growth of $164.60%, and relatively low debt of $12.24 million. The company’s total debt-to-equity ratio is only 0.02, compared to about 0.80 for the biotech industry as a whole.
It’s also important to look at the quality of a company’s management — that’s one of Warren Buffett’s major criterions. On that score, VBI boasts an impressive CEO in Jeff Baxter. With more than two decades of experience in biotechnology, Baxter has served high-level stints at GSK, as well as at Unilever (NYSE: UN) and British American Tobacco (NYSE: BTI).
Big biotech deals are brewing…
Another enticing aspect of VBI is its attractiveness as a potential takeover target. The cash-rich biotech industry is on the cusp of further consolidation this year, as drugs lose patent protection and price pressure compels companies to seek economies of scale and other efficiencies through mergers and acquisitions (M&A).
Jim Fink, chief investment strategist of Velocity Trader and Options For Income, puts it this way:
“Investor fears over Trump’s threat to regulate drug prices are overblown. It’s time to buy biotech as M&A is expected to pick up steam in the sector and several newly approved drugs are set to generate substantial revenue.”
M&A volume across the biotech industry totaled more than $200 billion in 2016 and this year is on track to exceed that level. Disease treatments that once were considered breakthroughs are increasingly commonplace and vulnerable to competition, prompting the industry to pursue treatments for unmet needs in underserved areas — and that’s precisely VBI’s “sweet spot.”
Biotech is embarked on an upward trajectory and should continue beating the broader market this year. The benchmark iShares NASDAQ Biotechnology Index ETF (NSDQ: IBB) is up about 10% year to date, compared to about 9% for the S&P 500. VBI shares YTD have soared about 45%.
With leading-edge immunology treatments in development, this small company still has room for significant capital appreciation, while Big Pharma struggles with the headwinds of patent expirations and government cost-containment.
Questions or comments? Drop me a line: firstname.lastname@example.org — John Persinos
The frac sand gold rush…
Biotech isn’t the only sector that offers fast, exponential gains. Consider the energy sector and frac sand.
OPEC’s recent agreement to curtail crude production is enjoying long-term staying power, which is good news for energy prices and the North American fracking industry. Frac sand is a crucial part of the fracking process; as such it’s a pick-and-shovel play on energy’s continued recovery.
Pick-and-shovel is a Wall Street term that refers to the 19th century California gold rush, when the few people who got rich weren’t the prospectors but the shopkeepers who sold the picks and shovels (or blue jeans) to the gold-hunters. Levi Strauss immediately comes to mind.
An advanced, high-purity sand compound known as “Augmented SiO2” is being used to tap the underground riches of the second largest oil field on the planet. This material is so crucial to the fracking process that some oil producers are paying up to 5x the normal price for it. This mysterious new compound already is creating the next wave of energy millionaires.
The trick is getting onto the ground floor of this energy opportunity, before the investment herd turns frac sand into another crowded gold rush.