Another good start for the sector today and this is certainly feeling like a change in sentiment but we need to remain cautious. That being said, I would lean toward being a more aggressive buyer on pullbacks as we are finally starting to see some bids in the mid to small cap space. I have been saying for awhile that the sector would stabilize from the top down and clearly the large caps have been doing well the past couple of weeks with the SMID caps lagging dramatically. We might be entering a period of SMID cap catch up, which means bargain hunting on pullbacks could be the move.
1. ONTX had its conference call yesterday and no one seemed to care. That is a good sign as it likely means we are very close to the bottom as they tend to occur not when everyone is worried about a stock but when no one cares about it. In fact, only three analysts asked questions on the call, which just reinforces that view. So what did we learn? Not much. They finally started calling the subset a pre-planned analysis (which it was), so they seem to be learning from their past missteps. They continue to expect the start of the phase III low risk-MDS trial later this year, which would be a nice catalyst. The real potential stock mover would be in terms of the high risk-MDS. They expect to have regulatory feedback in the next couple of months. The base case is that they would need another large phase III program in the primary-HMA failure group (the sub-set where it worked) but if the FDA gives them some positive feedback it could really catapult the stock higher. Again, this is not the base case and I would argue we should assume that it is very unlikely but it would be the nearest term catalyst and would be a game changer for the stock.
2. I added to my FMI position today. I am not sure why the stock was selling off so dramatically in the morning. The bears have been winning the short term as the company continues to work through coverage issues with insurance companies. I am perfectly happy to be on an island with this company in that no one likes the diagnostic space and at this point no one likes the coverage concerns. Despite all of that the fundamentals are the same and the sales are growing and will continue to grow. If you invest in FMI, then you need a long time horizon and patience as it is going to take awhile for the market to come around to it given the natural dislike of the diagnostic space. So my game plan is simply to slowly add over time and follow the fundamentals of the company and wait. Also, keep in mind that the company wants to raise some more cash, so that is going to be an overhang for awhile and when that happens it will be another chance to add to a position.
3. I also started a position in XNCR today. This is one that I have been watching and getting shares under $9 seems like a good risk reward. All of their programs are early and data is not expected until later this year, so I would not expect it to rocket higher. This is similar to FMI in that I expect to be building this position over time as XNCR builds out it pipeline and its assets get into later stage testing. I doubt they will have anything in late stage testing before 2018 but they are an antibody development platform company with a nice set of collaborators. This reminds me of an early MPSFY. It can take time for these plays to really hit but I can see XNCR with a multi-billion valuation by 2020, which would be close to a 10X return. In addition, what is the risk at these levels given that the most likely course is to continue trials with their late stage products and continue to gain more collaborations. So between MPSFY and now XNCR I am going to keep a portion in my portfolio in antibody platform companies as a low risk potential high reward but one in which it will take patience to get the return.
I will end it here and look forward to a CNAT update after hours. I do not expect much and if it follow suit with other small caps, it will likely see some weakness tomorrow. Have a great day.
Disclosure: Long CNAT, XNCR, MPSYF, ONTX and FMI.
