Biotech investors will be watching the American Society of Clinical Oncology's (ASCO) annual conference closely from May 31 to June 4. At the conference, some of the world's top biopharma companies will unveil previously unreported clinical-trial data that could cause share prices to take off or tumble.
Recently, ASCO released abstracts for this year's presentations, prompting speculation over which companies could be big winners. It's anyone's guess which companies will wind up popping or dropping, but the abstracts suggest that MacroGenics (NASDAQ: MGNX) and Blueprint Medicines (NASDAQ: BPMC) are two companies worth keeping tabs on. These companies are scheduled for oral presentations of potentially game-changing new medicines, but are their stocks worth buying?
In this episode of The Motley Fool's Industry Focus: Healthcare, host Shannon Jones and Motley Fool contributor Todd Campbell dive into their ASCO abstracts for insight. Also, Motley Fool analyst Emily Flippen discusses a new SEC proposal that could change reporting requirements for early-stage biotechs. Listen in to find out how this proposal could impact these companies and their investors.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
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This video was recorded on May 22, 2019.
Shannon Jones: Welcome to Industry Focus, the show that dives into a different sector of the stock market every single day. Today is Wednesday, May the 22nd. I'm your host, Shannon Jones. I am joined in studio by a very, very, very special guest -- one of my partners in crime, one of the hardest working Fools that I know, analyst Emily Flippen. Emily, so glad to have you!
Emily Flippen: Thanks for having me! I think this is the first time I've been on any Industry Focus, actually.
Jones: Well, welcome. And hopefully not the last!
Flippen: Hopefully not the last! We'll see how this goes first.
Jones: We'll have Todd joining us here for the second half of the show, but I wanted to bring Emily on for a very important reason. Emily is very passionate, has a thirst and enthusiasm for detecting fraud, covering fraud, preventing fraud. [laughs] I don't know how else to say that. But Emily has done an awesome job. You recently wrote an article on a subject known as internal controls. Today's show is really about diving into that, because earlier this month, the SEC actually proposed making a change to internal control requirements. Excited to have you on the show to talk about that.
Before we get into the proposal and what that looks like, though, Emily, for our listeners out there, can you just explain, what the heck are internal controls?
Flippen: Sure thing. Internal controls in a lot of ways can be a moving target. Essentially, what they mean are the controls that a company has over their own financial reporting. So, the numbers that you see when a company issues a financial statement are obviously, hopefully, not just pulled out of the blue. Their internal controls are the way they manage the people and the processes which create the numbers. So if you don't have effective internal controls, or ineffective internal controls, that can cause misstatements or errors in the financial reports, which may mislead investors.
Jones: For this SEC proposal, what it's really going to do is, for a lot of the companies we talked about on the Industry Focus: Healthcare show, it can impact them, because many of the biotechs are early stage, pre-revenue, less than $100 million in sales. So let's talk about what exactly the SEC is proposing.
Flippen: Sure thing. They're proposing getting rid of the requirement that companies that have less than $100 million in sales have to have an independent auditor attest to the effectiveness of a company's internal controls. This is something that's specific to the United States. Under U.S. GAAP, if you are a company that doesn't qualify either under these new standards, which are being proposed as a company with less than $100 million in revenue, or an emerging growth company, an EGC company, then you have to have an independent auditor attest to the effectiveness of your internal controls. Note that they are not saying everything is without misstatements, but they are taking a hard look at the company from an outside perspective and saying, "OK, we're looking at the company, we think that within a reasonable error, you will probably create statements that are not prone to fraud or errors."
This is unique because in the U.S., that's the only country that requires this. If you report under IFRS, International Financial Reporting Standards, then you don't have to have an independent auditor attest to it. So this is already a higher barrier that a lot of U.S. companies, to be listed on a U.S. exchange, have to go through. So they're trying to loosen it up for these smaller-revenue companies to make IPO-ing essentially a more easily accessible process.
Jones: Yeah. We'll get into some of the things that are driving this in a second. But I mean, really, at the end of the day, internal controls requirements are really about building trust. You have this extra layer of auditing that's happening really so that investors can trust that management is taking the steps to make sure that there are not errors or huge misstatements. Not to say that they won't happen, but it's just that extra layer of protection to make sure the math all adds up at the end of the day.
With a proposal like this, especially for a lot of our biotech investors out there, I guess on one hand, it's great. It's great that there are less requirements overall, because ultimately, having to do audits and pay for an auditor costs money. That's money that could be funneled into R&D [research and development], could be funneled into just hiring more people. But on the other hand, the obvious problem here is, if you take out the fact that an auditor is reviewing these internal controls, you have a lot more risk for companies that are already extremely risky.
Flippen: This is the challenge that the SEC faces, too. The SEC is trying to get rid of unnecessary burdens, which makes the financial markets more efficient. Taking away unnecessary regulations undoubtedly makes the markets more efficient. But at the same time, you never want to take away decision-useful information. And there have been studies that have come out since the JOBS Act that say that this isn't necessarily the most effective way of removing barriers. The JOBS Act, for anybody who might not be familiar, a few years ago, they essentially loosened up a lot of regulations requiring reporting when it comes to IPO-ing in the United States. One of those was that, if you qualify as an emerging growth company, you don't have to have that independent auditor attestation until you have at least $1 billion in revenue or you've been listed for about five years, among a few other loopholes. A lot of companies have qualified as an emerging growth company, which doesn't require them to report a lot of these things. The reason why the SEC felt comfortable both taking the JOBS Act and taking this stance is because they say a lot of these reports are not decision-useful information.
But actually, what we've seen since the JOBS Act has been passed is not necessarily that these companies are taking that money and putting it back into the organization itself, but that investors are more trepidatious with these IPOs. They require a higher premium because they have that little bit more doubt.
So, the SEC has this big task of determining what's useful and what's not useful. For some investors, this might seem like a great thing because an attestation to the effectiveness of the internal controls may not be something that's really high on their list for investing, especially in these smaller companies. But at the same time, you have to wonder about the company that chooses to list on a public exchange because controls were relaxed. What company is that? So, for more investors, it might be that, "Hmm, this is a red flag to me, this is actually something that I was actively using to make an investment decision."
Jones: Yeah, I think you hit the nail on the head. For a lot of these companies, having that extra layer there certainly makes sense. You would really drive risk higher. I think when it comes to risk, you kind of mentioned this, obviously, as risk increases, your cost of capital increases, so investors are going to be looking for higher returns moving forward.
I want to circle back, though. In talking about what's really driving the SEC to do this, you talked about IPO volume and the number of IPOs. For me, I can see both sides of the argument. Yes, reducing the requirements, reducing the cost, allowing some of these younger, earlier-stage companies to go public, makes sense. But on the other hand, I always get a little nervous when I see a flood of companies going public. I think what tends to happen is, when you see a lot of these companies going public, the quality of that IPO class tends to go down overall because you have a lot of companies chasing after a swath of money. And you have a lot of these early-stage investors, including venture capitalists, who are looking for their exits while the market's hot. So you just have a flood of companies that probably should not be going public to begin with starting to dilute the overall quality. For us as investors, it makes it a lot harder to sift the goats from the sheep, if you will.
I do agree that relaxing regulations is key. But at the same time, it also scares me, too.
Flippen: Well, the U.S. has some of the highest regulatory standards for our public companies, which is why a lot of really small companies that want to go public choose to do so on foreign venture exchanges, simply because they just don't have the capital that's necessary to report on a major U.S. exchange, despite the fact that they may want to. What this is causing, at least from my experience, my perspective, is a dilution in the quality of IPOs over the past few decades. That's simply because good companies stay private longer. It's more beneficial. Access to venture capital is so much more readily available than it was previously. Why would you take on not only the additional reporting burden, but the additional burden of having large shareholders, having your company out in the public eye, when you can keep it private for longer? So, when you see companies going public -- and we saw this with Uber and Lyft -- it's long after their heyday. When you probably would have wanted to get into these companies would have been years ago. But they're only now getting into the public market because they're large enough to make it efficient.
So I do sympathize with the perspective that reducing regulations maybe encourages companies to list sooner rather than later, which gives retail investors like you or I access to better companies earlier on. I think there may be a very strong perception in the market right now that the best deals are found through private equity, getting into private companies. You really need large amounts of capital to do that, so it's really hurting the small investor and benefiting these large investors with hundreds of thousands of dollars, potentially, to invest in private companies. Those are the ones who are really getting the great returns. We're not going to see companies like Apple, for instance, listing on U.S. exchanges as early as they did when they did versus today.
So that's one perspective. That's not to say that's necessarily what we're seeing happening. But I can see the argument that loosening up these regulations may help encourage people to IPO sooner rather than later.
Jones: And we all know what happens when regulations tend to go loose. [laughs] I think we've got plenty of history there just to see what happens when the government decides to take a step back. We'll have to keep our eyes on this. Emily, finally, are there any key takeaways that investors should have right now, knowing that this proposal is likely to move forward?
Flippen: All that came across as if I was very against this internal control and higher reporting. But I'm actually pretty much for it. And I would encourage anybody who's not familiar with the concept of internal controls to do a little bit of digging. We've seen internal controls be the downfall of a lot of companies. A popular company around here, Camping World Holdings, being a great example of a very large, widely held, publicly traded company that had horribly ineffective internal controls. You, I, anybody listening... as investors, you deserve to know about that. So if it's not decision useful for you right now, maybe you should make it decision useful. Look into the companies that you own, sift through their reports. You'll be able to find pretty readily, at least currently, whether or not they have effective internal controls. And especially if you're investing in small companies, especially companies in the marijuana industry, you may find that these internal controls are maybe not up to your standards.
Jones: Do your due diligence!
Flippen: Do your due diligence! Exactly.
Jones: You heard it here from Emily. Emily, thank you so much for stopping in to the show!
Flippen: Yeah, thank you so much for having me!
Jones: We are back, and we've got Todd Campbell joining us for the second half of the show. We're going to be talking about two stocks we're keeping a close eye on heading into one of the biggest healthcare conferences of the year. That's none other than the American Society of Clinical Oncology, also known as ASCO, that's taking place May the 31st through June the 4th. Todd, I love the week when abstracts drop for ASCO. So much knowledge to be gleaned, so many important updates. I know you have been keeping a close eye on all of them, but there are two stocks, in particular, that have caught your eye.
Todd Campbell: Yeah, and I'm looking forward to chatting about them today. I think investors should always be paying attention to -- you can actually add one to the list -- ASH in December, JPMorgan in early January, and then of course, the American Society of Clinical Oncology, ASCO, coming up very quickly. I think those three right there, typically, you see some market-moving news come out of them. It's very important if you're a healthcare investor to be paying attention to what's happening at them.
Ahead of the conference, they do indeed release the abstracts to the world. That allows us an opportunity to dissect a little bit about what they're going to be talking about. Obviously, they hold back some things because they want the presentation to be engaging and everything. But you get a really good feel for what news may be coming that could move the needle.
There were two that jumped out at me. The first of the two is MacroGenics, MGNX. They're going to have an oral presentation on a drug that they're developing. It's unique because it's a new take on a very successful old drug.
Jones: And that drug is Margetuximab. Am I saying that right, Todd?
Campbell: I love the way it's spelled. I'm just going to affectionately call it Marge. [laughs]
Jones: Marge. I'm going to roll with it. But yeah, for ASCO, it was really Phase III trial updates from the SOPHIA trial where they were studying progression-free survival for this particular drug. By all accounts, it sounds like with this particular abstract, really, this drug Marge produced superior progression-free survival in HER2+ metastatic breast cancer patients. Todd, what can you tell us about that?
Campbell: There is a significant need. There are HER2+ targeting antibodies on the market today, the best known of that is Herceptin, which was a $5 billion per year drug at its height. But over time, most breast cancer patients who are HER2+ develop a resistance to it. And unfortunately, as they get later and later into their disease, these existing therapies don't work very well for them. There's a really big need for late-line treatment. What Marge is, it's more selective. It's optimized so that it'll yield a better -- theoretically -- efficacy that can overcome or sidestep some of these things in these late-line patients. What really stood out to me from the ASCO presentation wasn't -- they'd said back in February, yes, 24% risk reduction as far as progression-free survival vs. Herceptin, which I think is interesting because this is going head-to-head against the comparator drug. And then they also had said back in February that there was a significant 32% risk reduction in progression-free survival for a particular subgroup of patients that had a specific genetic makeup. That genetic makeup, it's important to know this as an investor, because people with that genetic makeup usually have a very inadequate response to these existing HER2 targeting antibodies.
What we saw in the abstract was not only the fact that they improved progression-free survival, but we actually got the numbers. The medium progression-free survival was 5.8 months vs. 4.9 months on Herceptin. In that subgroup of patients that I mentioned, it was 6.9 months vs. 5.1 months -- 1.8 month improvement in progression-free survival for that subgroup of patients. Again, I think that that's important.
But we also saw the first look, Shannon, at overall survival data. As you and I've talked about on the show in the past, that's kind of the gold standard. You don't get any better than overall survival.
Jones: That's right. Overall survival with the Margetuximab chemo regimen combo, if you will, improved overall survival by 1.7 months at the median over that rival cancer treatment that you mentioned earlier, as well. Overall survival is also a key point that European regulators, they've been wanting this data. Of course, this drug is expected to get approved, actually get filed in the later half of this year. So approval could come very soon. But on the European front, overall survival certainly bodes well for an approval there, too. And really, with this drug, this particular segment of the breast cancer market, as you mentioned, these are generally going to be your sicker patients, they're treatment resistant. But this is a huge segment, could be worth as much as $10 billion in annual sales by 2025. This is an amount that really dwarfs where the company's current market cap -- I think just a little bit north of $900 million right now. So there could be considerable upside if this drug makes it across the approval finish line.
Campbell: Yeah. The overall survival data that we got is still maturing. So this is kind of an early look. They're going to do a later look, a second look, in terms of survival, in the second half of this year. It'll be interesting to see, as this data matures, what happens with those numbers. I think some people were hoping for a better improvement in median overall survival than what the headline number was, that 1.7 month improvement. But what we have to remember, too, is that in that tough-to-treat subgroup that I mentioned, there was actually a 6.8 month improvement in overall survival. So again, we're comparing it against a very widely used drug, Herceptin. It's outperforming Herceptin overall. And within this tough-to-treat subgroup, it's really outperforming it.
I think the other reason that you've seen the market cap not explode higher on this news is not only the fact that investors want to see more mature overall survival data, but AstraZeneca also came out with some data recently for their own HER2 targeting drug that also appeared very compelling. I don't believe that data, though, was comparing to Herceptin. I know AstraZeneca is planning to file that drug for approval later this year. So theoretically, in 2020, we could have these two drugs facing off against each other in the late lines. It's really going to come down to what the final data looks like for Marge.
Jones: Yeah. A lot to look forward to. Of course, as you mentioned, once ASCO gets underway here in a couple of weeks, we'll be able to take a deeper dive into the data and start to take a look.
But let's turn the tables because there's a second company that is certainly on our watch list. This is a company, Blueprint Medicines, BPMC. It's a precision therapy company, really aiming to have two approved drugs in the U.S. by 2020. With this particular company, instead of targeting cancer based on the location of its origin, Blueprint is making therapies that address cancer on their genetic level, which is really interesting. Todd, what's got you excited about Blueprint Medicines here?
Campbell: Well, there were some intriguing data that they released in the summertime of last year that drew my attention to it. But what really got me interested in following Blueprint Medicines was Eli Lilly's decision earlier this year to acquire Loxo Oncology in a mega deal worth $8 billion, after Loxo got its first precision cancer drug approved last year. That really attracted me to this space. Precision therapy, this whole concept of saying, we're not just going to treat this cancer because it's breast cancer, we're going to look for these genetic hallmarks that oftentimes will show up in different types of cancers, and we're going to target that instead. What we're going to see on June 3rd is an oral presentation of a drug called BLUE 667. That's under evaluation for advanced RET fusion positive non-small-cell lung cancer. These are non-small cell lung cancer patients who have a particular genetic mutation called RET fusion. Only about 2% of non-small cell lung cancer patients have this particular genetic makeup. But non-small cell lung cancer is a very large indication, so even 2% represents a relatively significant addressable market for this drug.
We did get some data from the abstract for BLUE 667. They did show that the overall response rate among those that they could measure was about 56%, a little shy of 60%; that 91% of the people who responded to the drug remained on the treatment as of the data cutoff; and that six of those patients have achieved a response duration that's been greater than six months; and the disease control rate for this drug was 91%. The company is still targeting filing for approval of this drug in this indication in the first quarter of 2020, pending data. People are going to want to watch and have them flesh out in this oral presentation a little bit more of this data. And then they can match it up against Eli Lilly's Loxo Oncology, which also is developing a drug that has the same target. I think that's, again, going to set up a very interesting dynamic, where you could have two drugs by the end of 2020 that work similarly, and it's all going to come down to, am I going to use this drug because the data was so much better for this one, or this one.
Jones: Yeah. In addition to BLUE 667, they also have another drug, Avapritinib, that is also very highly selective and potentially highly potent. One of the things that I think is really interesting about Blueprint Medicines is that with these drugs that they're developing, they're really going after very specific targets. There are other what are called multi-kinase inhibitors out there. But with these multi-kinase inhibitors, it's really hard to determine what's really driving efficacy or safety. But Blueprint is really going even more precise with its approach. And ultimately, what they're hoping to do with these two drugs is that with a more defined, more targeted approach, it can increase the chances of getting to full inhibition of a specific target, which also should limit some of the off-target toxicities or the side effects. And assuming that that's happening, the company is also saying that this could really open up the door to other combination strategies, or even just changing the sequence in which these patients get these medicines, to help hopefully have a better therapeutic outcome.
I think the take-home message with BLUE 667 -- and even Avapritinib -- is that they are just becoming much more precise, more targeted, which hopefully should lead to better outcomes overall.
Campbell: Yeah, and with Avapritinib, I think it's important for investors to know, not at ASCO, but at the 24th Congress of European Hematology Association conference in Amsterdam, which is running June 13th to 16th, they're scheduled to have an oral presentation for Avapritinib in advanced systematic mastocytosis. That could be very important, obviously, to figuring out, what is the ability to use this drug beyond 2020?
They do plan to file for approval of Avapritinib before end of this year in gastrointestinal stromal tumors. An approval for Avapritinib could come actually earlier than BLUE 667, depending, of course, on the timelines -- when these get filed, when they get accepted, and the timeline for review.
Jones: The market for this particular approach, these kinase inhibitors, and even just on the less selective end, is more than $25 billion a year. So this is a huge opportunity for Blueprint Medicines. Speaking of their overall goals, we talked about the two drugs, but of those two therapies, they're hoping through label expansion to gain up to four additional marketing approvals in the U.S. or Europe. And they also, of course, have a research platform, six different therapies in clinical development, eight preclinical programs heading to the clinic soon, as well.
All in all, Todd, this is a company I like. I really like Loxo Oncology. We've talked about it on the show. But I also like the approach with Blueprint Medicines. More importantly, I love the management team. I mean, this is a solid team. If you look at the CEO, the CEO was previously U.S. president of Algeta. That was acquired by Bayer for $2.9 billion in 2013. The chief medical officer formerly ran Novartis' oncology research division. The list just goes on. So not only do you have a very targeted approach to drive better patient outcomes, you've got a very solid management team, and you've got a pipeline that's certainly building up for long-term growth. All in all, I like what I see so far.
Campbell: Yeah. Investors should also know, with any of these clinical-stage companies, especially when you start thinking about if they're moving from clinical stage to commercial stage, how much are they going to have to invest in hiring new salespeople, making that shift to commercialization? You should know that they raised this money earlier this year. They've got plenty of cash on the books. They finished the quarter with $416 million. They added another $327 million in April because of that offering. And they think they've got enough money now on deck to get them through the middle of 2021, which theoretically would be a period where they already have two drugs on the market -- theoretically -- generating revenue. So they may not need to tap investors for more money.
Jones: Yeah, just another check mark for this company. But we'll be sure to keep all of our listeners up to date on everything happening with ASCO, and even beyond.
That'll do it for today's Industry Focus: Healthcare show! We appreciate you tuning in. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. The show is produced by Austin Morgan. For Todd Campbell, I'm Shannon Jones. Thanks for listening and Fool on!
Emily Flippen has no position in any of the stocks mentioned. Shannon Jones owns shares of Apple. Todd Campbell owns shares of Apple and Blueprint Medicines. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Camping World Holdings. The Motley Fool has a disclosure policy.