NKTR, JUNO, and biotech stocks

I received this off board question in an email and decided it was a good question and responded, and I thought I should post the question and answer to the board as it might be useful for others too. Here it is:

Question: Recently, I have great interest in Biotech sector as I believe 2018 will be an interesting year for it, knowing that tremendous cash will be repatriated to US because of the tax reform. M&A in Biotech sector might be more frequent than ever. I am so happy that you mentioned JP Morgan conference in SF, I believe the tone of the whole Biotech sector in 2018 might be set after this conference. Therefore, it is definitely worthy taking a look at this event. According to some experts, I think two areas will be very interesting, with one being IO readout and the other one precision health care (i.e. predicting and preventing disease. I got this idea from the discussion of FMI on the board).

As a novice, I barely have investment experience in Biotech and have no academic background in medicine or biochemistry either. As a result, I found ARRY by trying to imitate your view on NKTR, which is shown below.

“NKTR has a lot of other programs and partnerships, and while I didn’t buy NKTR for their approved drugs and non-I-O programs, they have some value and I think they limit the downside risk. I believe that NKTR may have something (NKTR-214) that can generally enhance I-O therapies by making the immune system even more effective. Thus, I think that NKTR has the potential to partner with many I-O therapy developers (co-therapy) and share in the revenue if any of these combination therapies hit. I like that they are increasing their odds of success by have more shots on goal.”

Speaking of NKTR, I have several questions. I will appreciate it if you can share your insights and wisdom with me.

First, how do you evaluate the pipeline of a biotech company even if you don’t have solid knowledge on medicine or biochemistry? Why do you think the pipeline of NKTR is good?
Second, how do you evaluate the fairness of the market capital of NKTR? What kind of metrics do you use?
Third, how do you determine when is the right time to put on the trade? It seems that you already knew there would be some data release in Q4 2017 when you bought NKTR in August 2017.

Here is what I wrote in response:

Biotech is tough. I have strong technical knowledge of molecular biology but not so much medical knowledge and I’m not an expert on analyzing pipelines and drug A versus drug B. In the past I’ve steered clear of investing in biotechs. I don’t like biotechs that are a one trick pony. It’s just not the kind of risk that I want to take. See VSAR as an example of what can go wrong if you only have 1 shot on goal and you miss. I’ve made a decision to invest in NKTR and JUNO because I learned about them from a friend who is a manager of a mutual fund. I looked into these companies further and decided to invest in them because they both offer multiple paths for success. I also invested in them because I had just cashed out of KITE. But I keep the allocations small. I’m not looking for more biotechs to invest in because I feel that I have placed 2 bets that offer me what I think to be good risk-reward opportunities. Also, my time to focus on investing is much more limited now that I am working a full time job. So I don’t have time to examine ARRY.

But I do want to answer your questions:

  1. I am inferring that NKTR offers a good pipeline opportunity because they have some good co-development/dual-drug treatment partnerships. If these pharma partners were willing to do these deals they must have evaluated the prospects for success (safety and efficacy predictions.

  2. Assessing the valuation is difficult for me when looking at biotechs. It’s hard for me to assign a value to a drug and it’s also hard for me to assess how a drug fits in competitively into the market given what other drugs are already on the market or in development. I have little experience with this. But I say that KITE was acquired by GILD for $12B. JUNO’s market cap is well below that I have some opinions from people who know more than I do that JUNO’s drug will be safer and better then KITE’s. I am am taking somewhat of a leap of faith with JUNO and also with NKTR that the valuation could be there through an acquisition since I think they offer pharma companies an entry into the IO space…and there are a limited number of good IO acquisition targets. JUNO’s market cap is only about $5.5B and approval might come in 2018 so I think it has a good chance of doubling (or more) just on an acquisition. NKTR has some revenue from approved drugs and they also have a non-addictive pain drug that might get approved in 2018. Opioid addiction is probably the biggest medical challenge in the USA right now so there should be a lot of pressure to get this drug approved. NKTR’s market cap is over $9B and it’s already up 185% since I purchased! I’m not adding or selling and plan on riding it out. The IO drugs offer several IO opportunities and the pain drug alone (if successful) I think might justify the valuation (I’m guessing here). So overall, I believe that both JUNO and NKTR are worth sticking with at least until we get more info during 2018. That’s how I look at the valuation; I know it’s not super quantitative but I believe that each of these stocks have the possibility to double in 2018…we’ll see. But with that said, I’m not willing to allocate a large percentage of my investible dollars into these companies or any biotech…about 7% in total for biotechs seems about right for me.

  3. I put on the trades after I learned about them from my friend and did some additional work and reading about them. I knew about the data release dates because the companies announce those. You need to follow the news on when they expect to release clinical data. Often those data get announced and presented at relevant medical conferences. I think I was very lucky to hit the timing so well because I was able to get in right before they increased in share price. It was fortunate that I cashed out of KITE and was looking to reinvest the proceeds into a different biotech with IO focus. It was lucky that I had dinner with my mutual fund manager friend a few days before the KITE acquisition was announced. So with the timing, I was just really lucky that I was presented with these opportunities at the right time. I certainly don’t expect to get lucky like this again in the future and I don’t consider myself to be an expert biotech investor.

I hope this helps. And BTW, my positions sizes for JUNO and NKTR are 3.24% and 3.55%, respectively. I won’t touch options for these two investments. I may add a little to JUNO if the stock stays below $45 or lower but right now I don’t have any extra cash laying around.



Thank you for sharing