Changes in my portfolio - advance notice

Investment Analysis Clubs Saul’s Investing Discussions
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I’ve been making some changes in my portfolio, and as they were reasonably major I will go ahead and let you know about them before the end of the month. As you know, I had taken a small position in KITE and then tiny positions in three other CAR-T companies to be sure of being aware of a winner. Well, after the recommendation for approval for Novartis, it became pretty sure that Kite would be approved at about the same time, and that Kite was clearly ahead in pipeline and preparation. My other three (CLLS, BLUE, and ZIOP), all had good and bad points, but ZIOP was running out of money, and CLLS announced an IPO of their agricultural subsidiary at $15 to $18, but ended up having to IPO at $8, which didn’t bring in much money. They were all in the early study stage (Stage 1).

Then today, along came this press release from KITE (as edited by me):

“Durable complete remissions up to 56+ months in patients with chemorefractory aggressive Non-Hodgkin Lymphoma (NHL) after Anti-CD19 CAR T-Cell Therapy at the National Cancer Institute

? Durable complete remissions continued after recovery of normal B Cells
? Anti-CD19 CAR T-cell therapy can be curative!

This follows previously published data in the February 2015 issue of the Journal of Clinical Oncology in which nine patients with chemorefractory aggressive NHL were treated with a single dose of anti-CD19 CAR T cells. Seven of the 9 patients were evaluable for response. Complete remissions (CR) were observed in 5 of the 7 evaluable patients. Four of the 5 complete remissions are ongoing from 38 to 56+ months after treatment.

There were no chronic toxicities attributable to CAR T cells except B-cell aplasia and hypogammaglobulinemia. Importantly, 3 of 4 patients in ongoing CR had recovery of normal polyclonal B cells, showing that durable completer remissions can be maintained in the absence of continued activity of anti-CD19 CAR T cells.

We are encouraged to see durable CRs ongoing for more than 3 years, which raises a possibility of cure, from a single infusion of anti-CD19 CAR T cells in patients with chemorefractory DLBCL, a population that previously had no curative treatment options.

This study helps us to understand the long-term potential for this anti-CD19 CAR T cell therapy (axicabtagene ciloleucel) in the larger aggressive NHL patient population.”

In response to that remarkable press release, I decided I had my winner. I wasn’t interested in trailing around a number of companies who weren’t going to have commercial products until 2020 or 2022 or 2024, so I sold out of my positions in the other three CAR-T companies, and sold out of my small position in Hortonworks and invested a significant portion of the funds in increasing my KITE position. I had already sold out of my tiny position in MTNB after their disastrous study report. So now my Kite position is my only biopharma, and it’s about a half position at roughly 3.8% or so.

Hope this helps.

Saul

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I’ve been thinking about buying something “outside of tech” to help diversify myself a bit more, and had been thinking biopharma might be the way to go (pairing with my small-ish Celgene position). Bluebird was one I had considered, and I guess Kite will be getting additional consideration now as well.

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Thanks, Saul.

Regarding your exit from HDP, how much was that decision related to…

  1. the recent management changes and losing confidence in the company?

  2. the slowing in revenue growth? 2014 > 2015 revenue growth was 165%, 2015 > 2016 revenue growth was 51%, 2016 > 2017 revenue growth, based on their midpoint of their guidance, will be 29%.

  3. having better places for your money?

Thanks.

Chris

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Regarding your exit from HDP, how much was that decision related to…

1) the recent management changes and losing confidence in the company?

2) the slowing in revenue growth? 2014 > 2015 revenue growth was 165%, 2015 > 2016 revenue growth was 51%, 2016 > 2017 revenue growth, based on their midpoint of their guidance, will be 29%.

3) having better places for your money?

Hi Chris, I would say it was 1, compounded by 2. I figured they have been having decreasing growth and this is part of why the head of sales was summarily fired. I imagine that future bookings were down even more and guidance will reflect that. They’ve had a huge run-up this year, even after yesterday’s fall, and I sold as close to the opening as I could today.
Saul

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You signed off “Hope this helps”

It does.

Thank you for helping us/me to understand your thought process and for helping us/me to become a better investor.

Steve

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Thanks, Saul!

Regarding your exit from HDP, how much was that decision related to…

1) the recent management changes and losing confidence in the company?

2) the slowing in revenue growth? 2014 > 2015 revenue growth was 165%, 2015 > 2016 revenue growth was 51%, 2016 > 2017 revenue growth, based on their midpoint of their guidance, will be 29%.

3) having better places for your money?

Hi Chris, I would say it was 1, compounded by 2. I figured they have been having decreasing growth and this is part of why the head of sales was summarily fired. I imagine that future bookings were down even more and guidance will reflect that. They’ve had a huge run-up this year, even after yesterday’s fall, and I sold as close to the opening as I could today.

Bear,

Have you noticed this decelerating revenue growth? Why do you like HDP so much when there are other companies that have higher revenue growth rates with a slower deceleration (examples: SHOP, TWLO, HUBS, MULE)?

Chris

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I saw that press release today as well Saul but was too busy to get in any orders before market close. I will be adding in the morning. Cures for cancers that are death sentences… what an amazing world of medical research we are in at this time… I graduated from medical school in 2001 and was an intern on the bone marrow transplant unit at Vanderbilt University Medical Center later that year. It’s hard to believe how far medicine has come since that time…

MC

  • Now long KITE…
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Bear,

Have you noticed this decelerating revenue growth? Why do you like HDP so much when there are other companies that have higher revenue growth rates with a slower deceleration (examples: SHOP, TWLO, HUBS, MULE)?

Chris

Chris,

Hortonworks’ subscription revenue (which is 3/4 of all their revenue) grew 52% in the March quarter. I consider that excellent, and it’s up there with TWLO and faster than HUBS. I think it just takes a slightly deeper look to see it. Very similar to what I noted here about SPLK:

http://discussion.fool.com/first-quarter-sales-rose-30-versus-th…

Bear

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Hortonworks’ subscription revenue (which is 3/4 of all their revenue) grew 52% in the March quarter. I consider that excellent

OK. Thanks. For Q2 let’s assume that will come in at $58.5M which I think will be close given that they updated the guidance after the quarter already closed. Let’s then assume that Prof services revenue comes in at $13M; it may be well be higher but higher would be worse for recurring revenue growth. This means the Support Revenue (the recurring part) will be $45.5M which would represent 44% growth (and I see this as a best case from Q2) which is dropping from the 52%. If Saul’s prediction about bookings dropping is correct that means we will see a sharp drop in recurring revenue growth.

Chris

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This means the Support Revenue (the recurring part) will be $45.5M which would represent 44% growth

Actually it would be 47% growth vs 31M last June quarter.

Bear

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Actually it would be 47% growth vs 31M last June quarter.

Right. So depending on how the revenue gets split between recurring and non-recurring, Q2 growth will be 40-47% for recurring revenue. Also, assuming $45M in 2017 Prof Services Revenue, we will see 52% recurring revenue growth for 2017 compared to 2016. That’s down from 63% in the prior year. So what you’re saying is that you like the growth when you break out recurring revenue.

Chris

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In response to that remarkable press release, I decided I had my winner

So what makes you think that ONLY KITE ($5.8 Billion market cap) will be a winner or that it will own the CAR-T landscape of opportunities?

What is the expected market TAM, for the specific indication it could approved for (not yet FDA approved correct?)…chemorefractory aggressive Large B Cell Non-Hodgkin Lymphoma (NHL)…and how much of that is priced into the stock now?

My understanding was that KITE’s approval for this drug was not expected until at least November. That was only 9 patients studied…only 9…and that was from back in 2015.

Each of these CAR-T companies will be going after different markets…Novartis just got an indication for leukemia.

Let’s look at the BLUE ($4.2 Billion market cap) data on multiple myeloma…a much larger population…100% response…why then not BLUE? The revenue expectations for this one drug are believed to be in the range of $3.6 Billion annually according to a BMO Capital analyst.

http://www.investors.com/news/technology/drugmakers-make-sci…

Bluebird may lag Novartis and Kite in terms of commercialization, but its CAR-T drug has had arguably the strongest trial results, Janney’s Chattopadhyay and Leerink’s Schmidt said following the American Society of Clinical Oncology conference this month in Chicago.

There, Bluebird and Celgene said the drug now known as bb2121 while in testing resulted in a 100% overall response rate in patients with multiple myeloma, a cancer that forms in a white blood cell called a plasma cell, according to the Mayo Clinic. Of 15 patients evaluated, all signs of cancer disappeared in 27% of them.

Data from Bluebird and Celgene were “among the most impressive early data sets we have seen in the CAR-T space to date,” Schmidt wrote in a June 6 note to clients. The duo set a “high bar” for rivals Novartis, Kite and Juno, which are all a year ahead.

SO again…how have can you be so sure you have picked THE winner???

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I couldn’t agree more MC, I spent 2 months over the course of 2 years on the transplant unit at Stanford during my residency in 2007 and none of this stuff was even being discussed then. We wielded such blunt tools but it was the only thing we had then and that was only 10 years ago.

-ethan

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Not answering for Saul, but what is wrong with the idea of deciding that one had identified one winner out of the basket and deciding that this was a better choice than going after a basket which included some uncertain prospects?

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Matthew 25:13-30 NIV
[13] … hour. The Parable of the Bags of Gold 25:14-30Ref—Lk 19:12-27 [14] “Again, it will be like a man going on a journey, who called his servants and entrusted his wealth to them. [15] To one he gave five bags of gold, to another two bags, and to another one bag, each according to his ability. Then he went on his journey. [16] The man who had received five bags of gold went at once and put his money to work and gained five bags more. [17] So also, the one with two bags of gold gained two more. [18] But the man who had received one bag went off, dug a hole in the ground and hid his master’s money. [19] “After a long time the master of those servants returned and settled accounts with them. [20] The man who had received five bags of gold brought the other five. ‘Master,’ he said, ‘you entrusted me with five bags of gold. See, I have gained five more.’ [21] “His master replied, ‘Well done, good and faithful servant! You have been faithful with a few things; I will put you in charge of many things. Come and share your master’s happiness!’ [22] “The man with two bags of gold also came. ‘Master,’ he said, ‘you entrusted me with two bags of gold; see, I have gained two more.’ [23] “His master replied, ‘Well done, good and faithful servant! You have been faithful with a few things; I will put you in charge of many things. Come and share your master’s happiness!’ [24] “Then the man who had received one bag of gold came. ‘Master,’ he said, ‘I knew that you are a hard man, harvesting where you have not sown and gathering where you have not scattered seed. [25] So I was afraid and went out and hid your gold in the ground. See, here is what belongs to you.’ [26] “His master replied, 'You wicked, lazy servant! So you knew that I harvest where I have not sown and gather where I have not scattered seed? [27] Well then, you should have put my money on deposit with the bankers, so that when I returned I would have received it back with interest. [28] “ 'So take the bag of gold from him and give it to the one who has ten bags. [29] For whoever has will be given more, and they will have an abundance. Whoever does not have, even what they have will be taken from them. [30] And throw that worthless servant outside, into the darkness, where there will be weeping and gnashing of teeth …

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I saw that news today, and it warmed my heart seeing our investment do so much good. I am increasing my investment a little bit too.

bulwnkl

long KITE

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“SO again…how have can you be so sure you have picked THE winner???”

Duma,

He said he had “my winner”, not “THE winner.”

Your 9 patient comment is incorrect. This drug has been studied in around 200 patients total thus far with a grade 5 cerebral event rate of only 2% (actually it’s over 300 patients if you include the ones before the company was KITE). The ZUMA-1 study alone had 101 patients enrolled. Your November comment is correct as far as I know but that’s only a little over 3 months away.

As for some of your other points KITE does have a multiple myeloma version in development called KITE-585. They were so encouraged by the results of 585 that they moved up the IND filing to third quarter with plans to begin trial enrollment by year end. They are also early in the game for solid tumor treatment of bladder and lung cancer and are probably currently enrolling patients in those trials as we write (according to the last conference call). They are also in Phase 2 trials for treatment of mantle cell lymphoma and acute lymphoblastic leukemia and plan to initiate follicular NHL trials as well.

Also, be wary of “response rate” and how it is defined. I’m not as well read up on Bluebird so I’m glad you brought that up because I need to be.

MC
Long KITE

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Thanks MC…the 9 patients and the specific response rates were from that announcement yesterday in the article itself so that is where I got that number…but thanks for clarifying the other patients treated…have their response rates all been reported out and why weren’t they included in the article?

What is the actual TAM and revenue projections for that specific indication? Obviously as a doctor, you can be amazed at these novel treatments and hope that is brought to disease states that were previously not treatable…but as an investor we need to be amazed by the revenue projections and growth rates.

So what is the addressable market for the specific indication that is being requested to the FDA…only refractory B cell lymphoma that is chemo refractory?..what is that market?

The article I referenced seems to state that the clinical data for BLUE surpasses ANY of the other CAR-T companies and data…why would they say that?

Also, they specially mention MUTATION rates in others CAR-T’s (Novartis and KITE both) and the lack of response with followon treatment…but not with BLUE…maybe that was just that multiple myeloma doesn’t mutate…or maybe they have a better solution but as an investor, I would want to understand that better…because that could be a differentiator.

The reason seems self evident…if what you are saying is that the CAR-T space is characterized by a “me too” market event…all of them having products for every indication…then there is NO WINNER from a stock perspective (patients of course are the greatest winner and from an ethical perspective that is fantastic)…but when 2 or more drugs are on the market for the same indication with the same effectiveness…drug prices fall…the companies don’t make as much money and the “winner” becomes much less of a winner…again, still good for patients…but it seems very difficult to be sure from an investor perspective if there is any major winner…hence the basket approach.

last comment and I would hope that Tinker could weigh in here because he has a lot of experience on the investment side of early stage biotechs as does Mauser (I lived through many of them with long long long discussions on the NPI from DNDN, VRTX, and so many more)…often the stock price now presumes approval for KITE…VRTX had a $5 Billion market BEFORE approval of its Hep C drug and had the sole drug for several years after…the ONLY player…the market caps make assumptions well before FDA approval. SO how much will KITE run up from here with numerous CAR-T drugs in development for every indication?

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Yes, those are good questions. PS for KITE is ~ 232. What might we divide that by?

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MC:

Sorry but one last series of comments about investing in the biotech space…and again I am only commenting initially because of the surprise that Saul name his winner…in this of all spaces…so I wasn’t intending on getting much into the discussion until your response…so you are to blame for what follows :wink:

Briefly looking over the KITE portfolio…yes at first glance it is impressive to see so many “shots on goal”…but the typical development costs to bring a drug to market (this CAR-T could be more so because of the intensive processing required)…is around $1 BILLION per agent:

http://www.kitepharma.com/our-research/pipeline/

Having “many shots on goal” can be a HUGE drain on resources and KITE does NOT have those resources (565 million cash and 144 million in debt). It sounds great to have so many candidates until you see that this is a spiral to stock dilution and ultimately becoming an acquisition candidate. The flavor I get from the little reading I have done is that KITE likely doesn’t survive as a standalone company but instead gets acquired…likely resulting in some gains to a stock holder but unlikely a 10 multiple if that is what the dreams are here…maybe KITE will be different but with so many “me too” drugs all going after the SAME indication…doubt it as we now see the landscape with Celgene, Novartis, BLUE, JUNO and KITE (? Others) competing for same indications.

The recent FDA approval for Novartis noted the complexity of the process and the challenges scaling up and maintaining quality and timeliness…this is NOT a simply manufacturing of a drug and pushing product out…it is a painstakingly precise process. Processes are far more difficult to control margins IMO.

I know that some might assume that indications could be broadened to less severe diseases but the 22% CNS adverse affects and several deaths make that unlikely…unless side affects are reduced. It is easy to justify adverse affects when the alternative is imminent death but treating less severe cases where death may not be imminent may be more problematic. JUNO was taken down with its risk profile and that death from KITE reported last quarter had the effect of KITE getting “juno’d”…strange things happen in biotech on the way to the bank.

https://www.forbes.com/sites/matthewherper/2016/07/07/juno-t…

JUNO had 3 deaths on their leukemia trial but have 8 other candidate agents besides that one.

I could go on but I have surely outstayed my welcome with some sprinkles of reality in the biotech world. It is an incredibly exciting field with truly amazing results by every one of these companies…but that doesn’t make it any less challenging to pick “my winner” at this particular time IMO.

Please let me know what you think about BLUE…lower market cap, partnered with Celgene, reported better study results than alternative players:

https://www.bluebirdbio.com/our-focus/cancer-immunotherapy/

Very difficult to community exclusively to any of these right now…their market caps have run up substantially already.

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