Feature interview
E. Roudasev is a senior business manager for a major financial institution. Her areas of interest are biotech, environmental tech and credit risks. We discussed the contrarian opportunity after seemingly negative drug trial results, what to focus on when reviewing drug trial results, and the importance of reviewing the balance sheet and burn rate.
Seeking Alpha: Walk us through your investment decision making process. What area of the market do you focus on and what strategies do you employ?
E. Roudasev: My current investment focus lies on biotech stocks mostly related to oncology and neurodegenerative diseases, environmental tech and occasionally shipping. My investment strategy focuses on fundamentals, competition and timeliness/catalysts to make a decision on taking an initial position. Those two are what I try to cover in my articles. General market direction and expected sentiment play an additional deal, but mostly for the decision whether or not to add to position. It’s harder to incorporate that in my articles.
Fundamentals. What I see, in all areas but mostly in neurodegenerative diseases, is that science is always some steps ahead. PubMed and other medical sources are a great free source of information for that, and analyst reports provide extremely useful information. I will not recommend a stock if I don’t understand its science enough.
Particularly in neurodegenerative diseases, different solutions are forthcoming. I believe the investment community is far from having caught up with this. Most but not all of these solutions relate to the same things: modulating overactive immune cells of the central nervous system, and bringing down inflammation. The opportunity here is that valuations are generally low given the historical failure rate of drugs for this disease. But even on that front things are changing. Biogen’s aduhelm was the first approved drug, Eisai/Biogen’s lecanemab may be the first one to have shown slowing of cognitive decline, donanemab may be the second to do so. After lecanemab results were reported, Eli Lilly’s market cap rose about 6.7% post market, adding about $20 billion. That shows the potential of a successful Alzheimer’s drug. And I expect that the drug candidates from some of the companies I have covered will show much more than what anti-amyloid drugs can do, namely stabilization or even improvement of cognition. Add to that, FDA’s recently confirmed ‘broadest’ regulatory flexibility with regards to ALS which I believe also applies to other neurodegenerative diseases. That may allow disproportional rises in valuations once successes are reported, and even in anticipation of these results.
Just like in other areas, investors are finding out there will not be a one-size-fits-all solution. That will mean more than one drug will be able to treat these diseases, and combination therapies will in the end be useful, allowing to bet on different horses. As solutions are finally forthcoming, there are several opportunities here. But also, as science progresses, the level of certainty that a drug will only work a bit raises as well. Finally, I focus on biomarkers a lot. I believe this is also where the FDA is going, when going through FDA documents.
Competition. I want to get the broadest possible view of what the competition is doing, and convey the essence of that knowledge. I don’t see this too often in Seeking Alpha articles, but it’s really essential. You want to know where the company’s results stand in light of its peers.
Timeliness/catalysts. My strategy is generally to find a stock that has catalysts ahead, and has sufficient funding.
SA: You focus on micro/small cap biotech/pharma stocks – can you discuss how you find these ideas as many are under the radar?
E. Roudasev: My search strategy for interesting stocks is not linear, and most importantly I try to keep an open mind. I try to check, insofar as possible, any company of interest that passes along my radar. That can be because of a mention in an analyst report, because someone has advised me to look into it, because I see it mentioned on investment-related social media, or for other reasons.
As for my investments in neurodegenerative diseases, given the failure rate and the fact that even analysts seem to touch in the dark quite a bit here, I took on the task to do a due diligence on all players in the field of Alzheimer’s and almost all in the field of Parkinson’s. That took many long hours, and I now have binders full of documents on these companies, but it did provide me with a great deal of knowledge, and a selection of possible successes. Though the share price may not always show it, all my certain bets have also delivered successful readouts so far. For other sectors, such work would be impossible because there simply would be too many players.
I find that watching company webinars often conveys very useful information as well. It gives an idea of the level of confidence of the company, analysts’s views at times, or the view of key opinion leaders in the field.
SA: What are typical sources of mispricings and/or unwarranted selloffs in biotech/pharma?
E. Roudasev: I believe the biggest source of mispricing may be hype, or conversely, the lack of it. Some companies will receive a lot of attention, others won’t receive any at all. I do believe those will eventually also be picked up, more by funds, less by individual investors.
In neurodegenerative diseases, I believe mispricings mainly exist because investors have not taken the effort to study where the company’s science stands as it relates to the state of the science.
In oncology, a far more evolved field, I feel it’s rather that one seems to lose an overview of what’s happening, and where to focus on.
In biotech, unwarranted selloffs seem to be part of the game. Biotech is highly volatile at times, and short investors are highly active in it. If you cannot keep your cool and have not done your research, I feel you’d better stay away.
SA: To follow up, are significant one-day drops due to seemingly negative drug trial results, clinical holds etc. ever a contrarian opportunity? If so, can you give an example?
E. Roudasev: One-day drops can be a contrarian opportunity, if fundamentals point in the opposite direction. Most of the times, selloffs are based on changing fundamentals however. My Athira Pharma (ATHA) idea, for example, was a very contrarian view where I believed the market was perceiving the drop fully wrong. My latest idea on Cardiff Oncology (CRDF) was too, I believe, which I saw confirmed in my eyes when three directors had started adding to their positions some days after. Kodiak Sciences (KOD) had experienced an 80% drop back in February, with so much going on that can be successful. Seeking Alpha author Terry Chrisomalis had covered it here at the time. I recently did a follow-up after the company met its primary endpoint in a Phase 3 trial in retinal vein occlusion. Over a longer time-frame, some of these drops make no sense.
SA: Given the inherent risk of investing in biotech/pharma, can you discuss how to manage risk on an individual stock and/or portfolio level?
E. Roudasev: I believe diversification is key. I have read once that of the ten positions in biotech portfolios, nine will not amount to much but one of them may skyrocket. In that light, a safe portfolio should only have limited exposure to biotech, and biotech bets should be diversified. There is simply no certainty that one company will make it to the finish line, as much as you want to believe it will.
Further risk management is done by constantly reading up on the science, in an effort to be informed or to challenge the company’s claimed mechanism of action, and to stay informed of what the competition is doing.
SA: When reviewing drug trial results, what data, key words, etc. increase or decrease your confidence in the results and prospects for the drug? Can you give an example?
E. Roudasev: Safety, tolerability and biomarkers are of the utmost importance.
Safety and tolerability. Tolerability or safety issues are the first concern. Does the drug cause any issues, or could it cause any issues, such as dysregulation of the immune system or liver toxicities? In oncology, for example, the goal is in essence to kill a proliferation of cancer cells without targeting healthy cells. Trying to find ways to trigger the body into killing the right cells again when they are already in a phase of massive proliferation, without harming normal that are not in such phase of massive proliferation, could come with side effects. In an interview last year, I heard a key opinion leader say that CAR-T immunotherapy would inevitably come with a certain level of toxicity. So, tolerability of a good therapy is essential. The drugs I cover generally comes with a good safety profile. Some of them are CAR-NK-based therapies such as NKarta’s (NKTX) or INmune Bio’s (INMB) INKmune program, other immunotherapies such as Cardiff’s (CRDF) onvansertib, or novel chemotherapy drug candidates such as NuCana’s (NCNA) NUC-3373.
Conversely, Quince Therapeutics’ (QNCX) – previously Cortexyme – massive drop from $57 to $14 on Phase 2b/3 results of Alzheimer’s drug candidate atuzaginstat, which did not meet the primary endpoint, also generated “dose-related liver enzyme elevations”. I see no path forward in such case. I am very cautious about drug development if a drug developer has not yet sufficiently cleared the drug candidate’s safety profile, or if I don’t find a sufficient amount of peer-reviewed papers that back up the drug candidate’s results or mechanism of action.
Biomarkers. Biomarkers which could coincide with efficacy are what I also focus on. Biomarkers are often disease-dependent, and quite some research is required to see where the scientific field is looking at, and how to interpret them. Biomarkers can be all sorts of things; in oncology, blood diagnostics or scans are biomarkers. In the field of Alzheimer’s, I believe it’s more tricky. I believe the field is now finally letting go of amyloid in the brain as the most relevant biomarker.
From what I see, in neurodegenerative diseases the scientific field including the FDA is starting to agree on one biomarker. That biomarker, which should be able to be used across neurodegenerative diseases such as ALS, FTD, Alzheimer’s or Parkinson’s, is neurofilament light or NfL. The FDA seems to be pushing companies to include readouts of that biomarker in their reporting. Notable companies that have reported results of this biomarker, in order of their success rate as I see it, are Alector (ALEC) in frontotemporal dementia, Annovis (ANVS) in Alzheimer’s disease and Parkinson’s disease, Cassava Sciences (SAVA) in Alzheimer’s disease and INmune Bio (INMB) in Alzheimer’s disease. INmune Bio truly stands out here, but Cassava Sciences does not do too bad either. The Phase 3 readout of Anavex (AVXL) should contain a readout of this biomarker too, and I’m looking forward to that.
Some biomarkers can also be misinterpreted, and I believe one should look at the consistency of how biomarkers reported evolve. Cognition Therapeutics (CGTX) recently made a press release on YKL-40 and clusterin that made the stock go up 100% only to come back down soon after.
SA: Can you discuss the importance of reviewing the cash balance and burn rate, and how it impacts your ultimate view of the stock?
E. Roudasev: In biotech, shareholder dilution is inevitable and always lures around the corner. I try to avoid to rate a stock as a buy if it will require money soon after my publication. After the issuance of good results, one should also always be cautious of shareholder dilution. Cash balance and burn rates are therefore essential. That being said, issuance of new shares generally holds the stock in place for a little while, and then that moment is forgotten again.
SA: What’s one of your highest conviction ideas right now?
E. Roudasev: INmune Bio is by far my highest conviction idea. INmune Bio is testing a second-generation TNF inhibitor for neurodegenerative diseases. The US-part of the Alzheimer’s trial is currently on a clinical hold related to manufacturing issues. I am confident this will be resolved soon. The risk here is very asymmetrical. To me, INmune Bio is a multi-billion dollar company in the making, with huge buyout potential after Phase 2 results, with a clear vision, and a fast-track process forward.
In any neurodegenerative diseases, scientific articles on the role of neuroinflammation are published constantly. Successes in these diseases also often relate to bringing down neuroinflammation and modulating glial activity. If one looks, a pretty clear silver lining is emerging for investors. Animal testing of the drug, resulting in more than 70 publications both from INmune Bio’s own team or from external labs, has brought forth promising results in different disease settings and insight in how the drug works. Reading through those publications prior to my investment has given me quite some comfort. Contrary to some other players, INmune Bio is also well respected in the scientific field, but has yet to receive the same praise from investors.
The company has not touted its results in Alzheimer’s in abundant press releases. My eyes opened looking at their different webinars on Phase 1 results, the last one of which was in September of 2021. The biomarker results having come out of the Phase 1 are unlike anything I have ever seen reported by other companies, nor are the publications of animal testing in several neurodegenerative indications, systematically showing XPro works. Results have translated perfectly to humans. I have mentioned the importance of neurofilament light. XPro lowered that biomarker by 84% over the course of three month which shows a potentially extremely strong regenerative response in the brain. The patient testimonials confirmed that. Some other companies have reported improvements of this measure, but none of this order. The data also trends particularly well, with biomarkers of neurodegeneration, myelination and axonal health continuously improving over the course of 6, 9 and 12 months. INmune Bio has not reported on cognition data yet, which is the most important for investors. For personal purposes, I have combined data reported by other companies on biomarkers and cognition, to see how INmune Bio’s data would translate to cognition. What I am seeing is impressive, and confirms what INmune Bio has been seeing in patients.
Importantly for investors, the Phase 2 trials are short. They are essentially designed as Phase 3 trials. Once these are done, INmune Bio has announced it would be going for accelerated approval. In light of FDA’s recent guidance on regulatory flexibility, I believe INmune Bio’s chances of such an accelerated approval are high. That makes the current clinical hold even more unfortunate, and with a particularly slow-moving FDA, I am looking at a share price under pressure as an opportunity. With Eisai/Biogen’s reporting on lecanemab, we have seen what a working Alzheimer’s drug can do. Biogen gained more than $15 billion in market cap on that news. And XPro may have a far stronger effect than Eisai’s lecanemab, with stabilization or perhaps improvement in several neurodegenerative indications. With a $100 million market cap, the risk/reward ratio is dramatically skewed to the upside. That makes being long well worth the wait for me. Finally, in spite of the current market woes on inflation, I see market growth expectations of neurodegenerative markets being higher than current inflation numbers, and these expectations are not expected to go down any time soon. I think the company is still very much undiscovered, and remain confident that the partial clinical hold will eventually be lifted. If that would only be in three months, then that’s how it will be. Meanwhile INmune Bio will be starting an open label extension study for patients in the Australian trial that are coming off the blinded part. That should be an interesting development as well. I believe the future of this company is particularly bright.
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Thanks to E. Roudasev for the interview.
E. Roudasev is long BIVI, NCNA, CRDF, INMB
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