1. business and industrial

Ross Silver on How to Find the Perfect Combo of Biotech
Science and Market Savvy
The Life Sciences Report www.TheLifeSciencesReport.com
COMPANIES MENTIONED
Acorn Energy Inc.
ADVENTRX
Pharmaceuticals Inc.
Algae.Tec
Arena Pharmaceuticals
Inc.
Auxilio Inc.
Novartis AG
Oculus Innovative
Sciences Inc.
Ohr Pharmaceutical Inc.
Pfizer Inc.
Regeneron
Pharmaceuticals Inc.
Roche Holding AG
Shire Plc
Ross Silver
Vista Partners
Tel.: (415) 738-6229
[email protected]
Streetwise Reports LLC
101 Second St., Suite 110
Petaluma, CA 94952
Tel.: (707) 283-0681
Fax: (707) 981-8998
[email protected]
THE ENERGY REPORT
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THE LIFE SCIENCES REPORT
THE CRITICAL METALS REPORT
12/06/2012
Many components go into building a successful biotech
company, but excellent management is a keystone. Combine
good management with an innovative product or service, and
investors can possibly unlock big multiples over their original
investments. So says Principal Analyst and Fund Manager Ross
Silver, co-founder of Vista Partners. In this interview with The Life
Sciences Report , Silver brings obscure micro-cap ideas to life and discusses
why they may have mammoth potential.
Source: George S. Mack of The Life Sciences Report
The Life Sciences Report: Your focus at Vista Partners is on small- and micro-cap
companies where investors can potentially make big gains. Do you have a sector
bias, and what sectors do you cover?
Ross Silver: To identify companies we believe are compelling investment
opportunities we do two things. First, we invest our own capital into the companies.
Second, we write research about these particular companies and disseminate our
research and monthly newsletters for free on our website.
As for sector bias, we are generalists for the most part, but we tend to focus on
healthcare and technology companies because we believe the majority of alpha is
derived in those particular industries. A healthcare or early-stage biotech company
with a $10 million ($10M), $20M or $30M market cap has the potential to become a
multibillion-dollar company in a relatively short period of time—over 5–10 years,
let's say. With a small-cap retailer that transformation would take a lot longer,
although there are exceptions to that rule. Our core competencies and focuses are
in healthcare and technology for that reason. I would add special-situation energy
companies into that mix as well.
TLSR: You focus on companies valued between $5M and $1 billion ($1B) in
market cap. You actually have one right now that's just over $3M in market
valuation. What struck me is that even though a $1B market cap is still considered
small-cap by most people, the spread between $5M and $1B represents different
worlds entirely, doesn't it?
RS: There are a number of differences between the low end and the high end of the
market cap spectrum. Mainly, when we talk about life science companies, it's the
maturity of the business or the maturity of the drug candidate pipeline that causes
the valuation disparity. The other difference is that because of the maturity on the
higher end, companies closer to the $1B range will have additional coverage or a
larger following from brokerage firms like Goldman Sachs or J.P. Morgan. More
analysts will be writing research on them, and there will be more institutional
investment in them. More people will be aware of them and therefore, typically, they
enjoy higher trading volume or liquidity.
"An early-stage biotech
"An early-stage biotech
company with a $10–30M
market cap has the
potential to become a
multibillion-dollar company
in a relatively short period
of time."
At the bottom end of the spectrum, for a $5M
market cap company, there is typically little
to no institutional ownership, little to no
research coverage and little to no one
advocating for it. Therefore, these
companies typically have less trading
liquidity. It's a lot harder to get up to speed
on the lower end of the range. That said, there is tremendous opportunity with the
small- or micro-cap companies if an investor is willing to do some work and
possibly accept additional risk.
TLSR: But doesn't the research on lower-end companies require different
disciplines?
RS: Yes. The primary difference is that, in most instances, risk profiles differ greatly
between smaller versus larger market cap names. In larger, more mature
companies, the due diligence process is easier because investors can understand
the competitive matrix, where a particular company fits within that matrix and how
that company is going about obtaining market share. At the top end of the range it's
more fundamental analysis, because the market is well understood. At the lower
end of the spectrum, it's more blue sky, and there are usually more hurdles that
companies will need to overcome before they will be adopted by a broader
audience.
TLSR: Ross, I think you're saying that on the very low end, you really have to get
into a company to get a handle on what it's doing, because there is almost no
coverage of that company whatsoever. From my experience, even the websites of
companies on the low end tend to be low information sources.
RS: You are exactly right. Investors have to be able to go through the Securities
and Exchange Commission (SEC) filings and do all the work themselves. By doing
homework and due diligence, investors may be able to identify companies with
value and potentially determine the steps required to get to a valuation inflection
point, where the company could be an acquisition candidate or a leader in its
particular market or industry. If investors can get in early enough, and if they have
enough guts and understand that things may take longer than anticipated, and if the
investment thesis remains intact throughout, they may have a good investment
opportunity on their hands.
TLSR: When you begin to consider a company, what do you look for first?
RS: First and foremost, we look at the management team. We want to make sure
the management and board of directors are familiar with the industry they are
competing in and that they understand the process of becoming the number 1 or
number 2 company in that particular market or industry. We look for experience in
developing the company or developing the product.
We also look for an understanding of how
the capital markets work. One of the issues
that comes up with small- and micro-cap
companies is that of the brilliant scientist
who has a very interesting compound but is
unable to understand how the public
markets work. In the process of trying to
raise funds to continue development of the
"There is tremendous
opportunity with the smallor micro-cap companies if
an investor is willing to do
some work and possibly
accept additional risk."
company, the scientist paints himself in a corner and ultimately sets the company
up for failure. We see this very often.
On the other side, you can have a management team that is very clever with the
workings on the capital market side, but the company's development pipeline is
very weak. We try to find management teams and boards of directors or scientific
advisory boards with the perfect combination of science and market savvy, because
at the end of the day, you have to trust them to move a product or idea forward in a
timely manner and efficiently from a capital-use perspective.
TLSR: Certainly you have to look at the product side. What do you look for?
RS: Investors should consider looking at the product to see where it fits within the
competitive matrix of a particular market or industry. Is it going to displace an
existing therapy or technology? Is it going to be used in combination with another
therapy, or is it going to be a "me too" product? We try to avoid the "me toos,"
copycat versions of existing drugs. We're OK with combination therapies or
technologies, but we try to find products that could displace existing therapies or
technologies, should they be approved.
The last part of the equation is capital structure. How has the company financed
itself to date? Who has put money into the company? Are they short-term investors
who are just looking to give the company money and arbitrage out and flip the
warrants, or are they long-term investors? The ideal scenario would be to have a
top-tier fund in the stock that has been in that particular company for a while.
How much stock does management or the board have? How did they acquire that
stock? Have they been purchasing stock in the open market? You want to see
management buying stock consistently when the window is open, and you want to
see them very hesitant to dilute shareholders. You also want to see them doing a
great job managing their cash. Acorn Energy Inc. (ACFN:NASDAQ), in my opinion,
is a prime example of what you look for from a management team, as the
management team and board have been consistently buying stock.
TLSR: Speaking of management, when you're looking at and considering a
company, do you insist on meeting management?
RS: We will not follow a company unless we speak with the management team.
That's our first conversation. We want to be able to meet them, speak to them and
get comfortable with them. It is a critical component.
TLSR: Could you go ahead and address some of the companies that you cover?
RS: I'll start with Acorn Energy. It's a technology/energy company providing digital
solutions to improve energy infrastructure by making it more secure and more
reliable. It's a compelling company because it's very different relative to what we
normally see in the public domain. I say that because Acorn is a holding company
with four separate subsidiaries, meaning that investors are essentially buying a
portfolio of small companies. It's nice to have some diversification.
In the last four years John Moore, the CEO of the company, has successfully sold
two companies at a multiple of revenues after initially funding them and building
them up. He has done very well. As I said earlier, the first thing investors should
look at is management, and Moore has validated his model. Also, insiders including
Moore and some members of his board have been purchasing stock in the open
market periodically over the last year, which is another very good sign. The
company pays a dividend, which is a rarity among small-cap growth stocks. The
dividend was meant to serve as a way for investors to participate monetarily in the
sale of Acorn companies. It paid a special dividend after the sale of a previous
portfolio company, as well as paying an ongoing quarterly dividend.
Each of Acorn's four current portfolio
companies has different products, some of
which overlap synergistically. But each is
positioned in multibillion-dollar markets,
and each has already achieved a level of
validation within these markets. As continued validation occurs, the valuation of
each of these companies will increase, and we believe the increase will be
substantial. Acorn is a very exciting company to follow.
"We try to find the perfect
combination of science and
market savvy."
The company also has good capital structure. In addition to the dividend payments,
Acorn has a strong balance sheet. One very interesting thing, from a short-term
perspective, is the large short position that could create a potential short squeeze.
This situation occurs when short positions run out of stock to short. Add some good
news, and you have a significant amount of buying that comes in and forces the
shorts to cover, and the stock can go up significantly.
TLSR: As of the middle of November, there were 3.9M shares short, representing
about 25% of the float. If shares begin to resume their bullish upturn, how long could
it take to close these positions to get some hefty upside in the stock?
RS: Based on the average trading volume for Acorn, which is a little over 100,000
(100K) shares a day, it would take well over 70 trading days to cover the position if
the short seller were to buy back stock and if he were to represent 50% of the daily
volume. However, it is unlikely that anyone will represent 50% of the daily volume,
especially if they are buying, because they would potentially cause the stock to
soar. So the unwinding of a short position would most likely take a lot longer than
70 days.
TLSR: What was the reason for the large short position? Was it because the stock
entered the Russell 2000 Index? Could that be the only reason?
RS: Often when companies are added to the Russell 2000 or Russell 300 Indexes
—Acorn was added to both this year—a large short position comes in. That's
because index fund managers are forced to buy the stock. The idea is that some of
these companies may not last long and will get kicked out of the index, which would
create a significant amount of selling by the index managers. That is potentially why
you see this large short position.
TLSR: In keeping with the John Moore business model, is your investment thesis
that these Acorn subsidiaries will ultimately be sold or spun out, and value created
that way?
RS: Yes. Moore finds small companies, funds them, builds them up and then
ultimately sells them at a multiple of invested dollars and/or revenues. He's done
this twice over the last four years, and we anticipate that he will do it again because
that is his skill set. That is what's so exciting about Acorn.
TLSR: Another one you wanted to mention?
RS: One that has a near-term catalyst is ADVENTRX Pharmaceuticals Inc.
(ANX:AMEX), which is led by CEO Brian Culley. We are big fans of the
management team, as well as the board, which includes Jack Lief, the CEO of
Arena Pharmaceuticals Inc. (ARNA:NASDAQ). Arena's weight loss drug Belviq
(lorcaserin HCl) was approved by the U.S. Food and Drug Administration (FDA)
just this year.
ADVENTRX is developing its lead product candidate, ANX-188 (poloxamer 188),
for sickle cell disease, which affects a very small portion of the population but is a
serious issue for those patients. The company's compound is scheduled to enter a
phase 3 trial before the end of this year, which we believe will be a significant
catalyst and could result in a higher valuation. At the moment, ADVENTRX trades
at a negative enterprise value, which means its cash value is higher than its market
cap. We don't believe that is likely to continue much longer, especially upon
initiation of the phase 3 trial. We're definitely excited about the trial starting.
TLSR: I found clinical trials for poloxamer 188 going back a dozen years. The
product has been used in foods, drugs and cosmetics for more than 60 years. What
is special about this preparation? Also, we're talking about a compound that has
been in the public domain for a long, long time. What about patent protection?
RS: One of the good things about the product being in the public domain for a long
time is that it has an established safety profile, which is positive. Regulatory risk is
mitigated to an extent because of the long-standing safety profile. As far as what's
special about the product, ANX-188 is a purified version of poloxamer 188.
Because of that the company believes its patent protection is sound and the
compound may be used for other indications, which the company is currently
exploring.
Another thought to consider is that sickle cell disease is an orphan indication, which
means the company gets orphan exclusivity, enabling it to market its compound
unobstructed by competitors for eight years. That's another bit of protection
ADVENTRX has in this particular market.
In addition, the company had about $40M in cash at the end of Q3/12, according to
its latest filings with the SEC. The company stated that the phase 3 trial would cost
about $15–18M. It is sitting on a nice pile of cash, which would seem to give it a lot
of flexibility.
TLSR: Ross, you are clearly saying that ADVENTRX can complete its phase 3
studies without partnering, right?
RS: Well, yes—but it might be attractive for them to partner. Also, a partner could
come in at any time. I don't know if you've seen some of the partnership deals that
have been announced, but there have been some pretty big ones. Novartis AG
(NVS:NYSE) partnered with Selexys Pharmaceuticals (private) to gain access to its
lead asset in a deal that could be worth up to $665M, including upfront and
milestone payments for its sickle cell candidate. That was just in September. Last
year Pfizer Inc. (PFE:NYSE) partnered with GlycoMimetics (private) to gain access
to its sickle cell candidate, currently in a phase 2 trial, and that deal could be worth
up to $340M in payments, plus royalties.
TLSR: What's your next idea?
RS: The next company is Ohr Pharmaceutical Inc. (OHRP:OTCBB). One of the
reasons we're keen on this one is that Regeneron Pharmaceuticals Inc.
(REGN:NASDAQ) has had tremendous success with its drug Eylea (aflibercept) for
wet age-related macular degeneration (wet AMD). There is also Genentech's
(acquired by Roche Holding AG [RHHBY:OTCQX]) Lucentis (ranibizumab) for wet
AMD. Those two drugs combined should do about $5B in sales this year, as the
demand increases and as the baby boomers continue to age and experience vision
loss due to wet AMD. But these products are administered via injections into the
eye, because they are large molecule antibodies.
Ohr, with just an $81M market cap, is
developing a small molecule eye drop with
similar and additional properties. Thinking
of this from the patient's perspective, would
you rather have an injection in the eye,
administered by a physician in a clinic on a
periodic basis, or an eye drop you can
administer at home? I would speculate that
most would think the choice is fairly
obvious.
"You want to see
management buying stock
consistently when the
window is open, and you
want to see them very
hesitant to dilute
shareholders."
Ohr just initiated a phase 2 clinical trial with its squalamine drops, in which a patient
is injected with Lucentis initially and continues on a maintenance program of Ohr's
eye drops. This could be very exciting. There is also the possibility that squalamine
could be a standalone therapy, thereby displacing Eylea, as well as Lucentis, as
the market leader.
TLSR: You have discussed the importance of management in detail. What about
management at Ohr?
RS: Management has, from my point of view, funded the company smartly since its
inception using a group of insiders, and today Ohr has a solid balance sheet. It also
has some of the best physicians and scientists in the ophthalmic space on its
scientific advisory board.
TLSR: What's your next idea?
RS: We're very fond of Auxilio Inc. (AUXO:OTCBB), which has just a $19–20M
market cap. There have been an incredible number of mergers in the hospital space
because the Patient Protection and Affordable Care Act (Obamacare) is forcing
hospitals to drive down costs. Auxilio manages an area that happens to be an
incredible cost center for hospitals: printing.
TLSR: They do it at the hospital, correct?
RS: Right at the hospital. Auxilio's onsite staff is integrated within particular
hospitals and hospital systems. They wrap their "arms" around the whole hospital
system's printing issues, from top to bottom. If a copier breaks, they handle it. If
there's an issue with a printer, an Auxilio staff member will repair it. The company
also consults with and educates the entire hospital system on a more
environmentally friendly approach to printing, while simultaneously taking a vendorindependent approach, paring down contracts to reduce costs and realize
economies of scale during what are typically three- to five-year contracts. I believe
the company is compelling and has a competitive advantage versus the larger print
companies out there.
TLSR: Will the company meet its goal of more than 50% revenue growth for this
fiscal year?
RS: We believe that they are on track to do so. That's what management has
officially stated.
TLSR: Your next idea?
RS: Our next idea is Algae.Tec (ALGXY:OTCBB; AEB:ASX), which is focused on
the development and commercialization of innovative and leading-edge technology
for the production of algae, capture of solar energy and sequestration of carbon
dioxide. The company targets the substitution of fossil fuels with sustainable algae
biofuels that can be used in transportation and energy production, among other
applications. There has been a lot of talk and interest around this area. Algae.Tec is
now in the process of commercializing its technology. It has entered into a contract
with the airline company Lufthansa. Algae.Tec has other agreements in place,
including one with Holcim Lanka Ltd., one of the largest cement makers in the
world. Now it's a matter of continued validation in the form of new partnerships. We
think other deals could come down the line particularly in the U.S in the near term.
TLSR: When the company announced the collaboration with Lufthansa back on
Sept. 19, Algae.Tec's shares spiked. But now they're near a 52-week low, with an
approximate $71M market cap. Institutional investors can't really get near this stock
at that valuation. What is the catalyst that's going to drive these shares up?
RS: I believe the company needs additional capital to continue product
development and speed up integration with some of its partners. Given that it has
some important partners right now, we believe the balance sheet issue could be
shored up fairly quickly, possibly by institutions, especially upon the announcement
of another partner equivalent in size to Lufthansa.
TLSR: Can I get you to talk about one more idea?
RS: I have a last one: Oculus Innovative Sciences Inc. (OCLS:NASDAQ). It has two
segments to its business. The first is a commercial portion, whereby it sells wound
care products via its partners to both the veterinary market and the human market. It
has had a level of success with some of its partners. Its non-antibiotic, anti-infective
product Microcyn (hypochlorous acid + sodium hypochlorite) has utility in a number
of different areas, including wound care and dermatology. The company signs on
partners within each of those verticals, and the partners market the product, with
Oculus getting a percentage of revenues. Partners have launched some of Oculus'
products, which are relatively new to the market space, and some of the products
are still in the process of being launched. We anticipate that revenues will continue
to grow over time as additional adoption occurs.
The company also has a surgical side, a business it decided to spin out into a
separate company. Basically, the company is addressing wound-care treatment in a
surgical suite, so we're talking about an FDA-approved compound that will help
with wound healing, scarring and other issues as well.
TLSR: It's a wonderful idea to displace antibiotics, when you can, for these various
indications—infections of the eye, skin, ear, urinary tract, etc. We are facing an
epidemic of antibiotic resistance today. Oculus' market cap is just $25M. How big
do you imagine this market to be?
RS: It's a multibillion-dollar market. You hit the nail on the head about displacing
antibiotics. A lot of people just put Neosporin (bacitracin + neomycin + polymyxin B)
on a cut and a Band-Aid on top of it. But the utility of Neosporin is likely to decrease
over time because of resistance formation. Oculus has an alternative to antibiotics,
and it won't cause resistant bacteria to evolve. That's what's so exciting. It's a
massive market. Treatment of diabetic foot ulcers alone is a multibillion-dollar
market. You saw Shire Plc (SHPGY:NASDAQ; SHP:LSE) do a huge acquisition
late last year in the space when they acquired Dermagraft. There is no question
large pharma is very well aware of the wound care market, and the space is
massive.
TLSR: Thank you so much for your time. It's been wonderful speaking with you.
RS: Thanks a lot, George.
Ross Silver has been advising, researching and investing in public companies
across all industries throughout his career. Prior to founding Vista Partners LLC in
2005, Silver served as a research analyst for a San Francisco-based hedge fund.
From 2000 to 2003, Silver served as a research associate covering consumer
discretionary and consumer staple companies at Dresdner RCM (now Allianz).
Prior to joining Dresdner RCM, Silver was a member of CIBC's Technology,
Media, and Telecom Investment Banking group, where he assisted with equity and
debt offerings. Silver holds a bachelor's degree in business economics from the
University of California, Santa Barbara. He has served as a consultant for
government agencies including the National Institutes of Health (NIH). He holds a
Series 65 Securities license.
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IMPORTANT DISCLOSURES
1) George S. Mack of The Life Sciences Report conducted this interview. He personally and/or his family own shares of the following companies
mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of The Life Sciences Report: Oculus Innovative Sciences Inc., Acorn Energy
Inc. Streetwise Reports does not accept stock in exchange for services. Interviews are edited for clarity.
3) Ross Silver: I was not paid by Streetwise Reports for participating in this interview.
4) Vista Partners LLC's disclosures are listed on the company website. View the disclosures here. View Vista Partners' coverage list here. Vista
Partners is a registered investment advisor in California and Oregon. View terms and conditions here.
The Gold Report , The Energy Report and The Life Sciences Report do not render general or specific investment advice and do not endorse or
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