Chen Lin says that the way to invest in biotech stocks is to buy low and sell high. Read on to find out how he does it.
Charming and smart, Chen Lin makes a lot of money by jumping in and out of the highly volatile biotech market while obeying a set of simple rules, which he reveals in this interview with The Life Sciences Report. Applying his strong science background, Lin zeros in on biotech firms with solid products. The trick is in having the guts to buy low and sell high, against the market tide, says the editor of the widely respected newsletter, What is Chen Buying? What is Chen Selling? Lin also brings us up to date on his favorite picks.
The Life Sciences Report: In our last interview in June, you talked about some "red hot" biotechs. Can you give us an update on those firms?
Chen Lin: Sarepta Therapeutics Inc. (SRPT) remains my top pick in biotech. Now, I must point out that Sarepta is one of the most heavily shorted stocks in the biotech arena. I have followed the company for many years, and I know exactly what the shorts are thinking. They believe that the U.S. Food and Drug Administration (FDA) will give the company a hard time on its phase 3 trial for eteplirsen, designed to treat Duchenne muscular dystrophy (DMD). The shorts surmise that Sarepta will need to raise a lot of money to complete the approval process for this RNA-based product.
Click on the interactive chart to view stock prices over time.
But there is another side to this story.
A federal law passed in 2012 specifically instructs the FDA to accelerate the approval process for drugs that treat deadly diseases, such as DMD, which has no known cure. The company's data from the last 120 weeks are very strong. The FDA has no excuse to delay the accelerated approval process. After almost two and a half years of treatment, all the children in the eteplirsen trials are behaving extremely well, just like normal kids.
But the market does not feel that accelerated approval is a possibility. The beauty of working on the Street is being able to spot things that the market fails to see. If Sarepta gets accelerated approval for eteplirsen, its stock will explode. And even if the FDA does not go for the accelerated approval, but only clears the path going forward—the stock should catch fire. The company has been seeing more than $8/share in cash and persistent insider purchases, but this has been as high as $37/share in the past few months. That's about 50% higher than today's price and shows insiders' strong belief in the company. Worries about Sarepta are overblown.
TLSR: When will the FDA make a decision on the accelerated approval process?
CL: The FDA could give its final decision in February. It is a very urgent matter, because kids are dying. Further delay is unconscionable.
TLSR: Once the FDA approves eteplirsen, how long will it take for the drug to get to the market?
CL: The company has already ramped up the manufacturing process. If the FDA approves it this year, the drug could be on the market next year.
TLSR: Let's move on to another company you spoke about six months ago— Neptune Technologies & Bioressources (NEPT).
CL: Neptune is the pioneer in the krill oil business, and has a patent to protect its product, Neptune Krill Oil (NKO). Recently, its competitors agreed to pay Neptune a nice royalty and down payment for the rights to produce krill oil based upon its patent. Neptune has built a new plant to replace the one that was destroyed in a tragic fire more than a year ago. The new factory will be up and running in H1/14. We should see a very profitable company going forward. Neptune's subsidiary, Acasti Pharma Inc. (ACST), will also have an important phase 2 readout in H1/14 for its krill oil-based drug candidate. This year looks really good for Neptune's fortunes.
TLSR: What does krill oil treat?
CL: It reduces cholesterol levels. It is the only such product that can decrease triglycerides, decrease low-density lipoprotein and increase high-density lipoprotein. My mom took it with very good results. I am also taking it—so far so good, but still monitoring.
TLSR: You can get this product at your local drugstore?
CL: I got it from an online retailer. It is also in local drugstores. I have received many thankful letters from my subscribers who use it. Remarkably, the stock is far under the radar.
TLSR: Neptune's stock went down after the fire, which occurred in November 2012. Has it come back up or do you still see Neptune as a real bargain?
CL: After the fire, the stock fell to $1.70–1.60/share. Today, it's about $3/share—almost double. And the upside remains huge.
TLSR: What kind of target price would you put on Neptune?
CL: That depends upon how fast awareness of the benefits of krill oil grows. Neptune did not disclose the amount of the royalty payments, which are part of a confidential agreement, but it will release an income statement next quarter that reflects the royalties. Because Neptune dominates the krill oil business and all the other manufacturers have to pay it a royalty, the stock is probably worth a multiple of its present value.
TLSR: How is AcelRx Pharmaceuticals Inc. (ACRX) doing?
CL: AcelRx produces a product to replace morphine after operations. I do not know if you have ever gone through an operation. I, unfortunately, have gone through a few. Walking around with a needle in your arm attached to a morphine bottle is a drag. AcelRx has a revolutionary painkiller, Zalviso (sufentanil sublingual microtablet system), which can be put under your tongue. Patients can self-control the amount released to reduce pain. The drug is set for approval in July of this year.
TLSR: Does the painkiller have any side effects? Is it addictive?
CL: The painkiller is a controlled substance. It is released in increments by a secure, self-controlled device. It is only for use after an operation and only by prescription. AcelRx has a related product, ARX-04 (sufentanil acute pain nanotab), that is in development for the Army to use on the battlefield. That is further back in the pipeline—in phase 2—but it looks to be a very positive product.
TSLR: How is the AcelRx stock performing?
CL: The stock has been very volatile—which is a good thing! As I tell my subscribers, my investment strategy is very simple. I buy when a stock is in the single digits; I sell when it reaches double digits. I originally bought AcelRx at a few dollars per share. I sold a portion of it when it reached $13/share. Then it dropped to $8/share, and I bought again. I sold it again when the price hit $11–12/share. Now, it is around $12/share. We shall see if it drops to a single digit again. Then I shall buy more! I hold a strong position in AcelRx and use it to trade in and out. It is still a very good buy, with lots of upside, because the FDA approval is probably worth $30–40/share. Buy low, sell high!
TLSR: What is the story with Vanda Pharmaceuticals Inc. (VNDA)?
CL: Vanda Pharmaceuticals is a very interesting company. It has created a drug, Hetlioz (tasimelteon), that helps blind people with sleep disorders caused by light deprivation. When sighted people wake up, the light sets the rhythm of their 24-hour circadian cycles, but completely blind people can't set the circadian clock. They are living in a different cycle from sighted people. Vanda's revolutionary drug helps the blind adjust to light cycles in tandem with the sighted world. The drug received an overwhelming recommendation for approval from the FDA advisory committee, and secured FDA approval on Jan. 31. And it has no competition.
TSLR: How is the stock doing?
CL: It is volatile! I already sold all my Vanda stock, by the way. My trading strategy is very clear. In single digits, I buy. In double digits, I sell. I have done this three times with Vanda so far. When it reaches single digits—$5, $6, $7/share—I buy. When it's in the double digits—$12, $13, $14/share—I sell. This is not rocket science.
TLSR: Do you have a hedging strategy?
CL: No, I do not. I just pick solid stocks in companies that I can understand, and that I believe have very strong value. Then I wait and buy on market weakness. Then I wait again, for a good price to lock in profits. Biotech is extremely volatile, so when it has a pop and everybody goes crazy, I sell. Buying and selling both stock and call options in Vanda three times turned out to be extremely profitable for me in 2013.
TSLR: You make it sound easy.
CL: The trick is to pick a device or drug that is truly revolutionary and has little or no competition. I ride up and down with the market, taking profits in between waves. That's my general strategy, and so far it has been very successful.
TLSR: Are you a quant?
CL: Not necessarily. I use many different methods to analyze a stock. But mostly, I follow the fundamentals. I look at what the company is really worth. Biotech is so volatile that it is very hard to make money by buying and holding. I buy when everybody sells. And when everybody is happy and rushing in, I sell. This is so simple, is it not? Do you get it yet?
TLSR: You certainly stay ahead of the curve. Let's finish up with your last pick from six months ago, which was Apricus Biosciences (APRI).
CL: Apricus is the only stock in my red-hot picks basket that did not move. Apricus remains viable, however. It has created an erectile dysfunction drug like Viagra, called Vitaros (alprostadil cream). The difference is that the product is applied topically, instead of by ingesting a pill or suffering through an injection. A lot of people with heart conditions and other medical conditions cannot take the blue pill. Vitaros has been approved in many European countries, as well as in Canada. This year, it should hit the consumer market.
Investors are holding back because Viagra may go off patent. But that should not affect Vitaros, because it is applied to the penis. And Apricus is experimenting with a drug called Femprox, for the female sexual disorder, using exactly the same ingredient. Femprox has emerged from a successful phase 3 trial. It is going into another phase 3 trial, and FDA approval is expected in a couple of years.
TLSR: In terms of the biotech sector as a whole, is volatility just built into it? Or will biotech become less volatile over time?
CL: Biotech is volatile by nature. And computer trading makes the biotech market even more volatile, especially the small stocks. Once the nature of the beast is recognized, however, it is possible to tame it.
TLSR: Chen, it's been a pleasure talking to you.
CL: Likewise, Peter.
Chen Lin writes the popular stock newsletter What Is Chen Buying? What Is Chen Selling?, published and distributed by Taylor Hard Money Advisors, Inc. While a doctoral candidate in aeronautical engineering at Princeton, Lin found his investment strategies were so profitable that he put his Ph.D. on the back burner. He employs a value-oriented approach and often demonstrates excellent market timing due to his exceptional technical analysis.
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(Interview conducted by Peter Byrne of the Life Sciences Report. You can find the original here.)
1) Peter Byrne conducted this interview for The Life Sciences Report and provides services to The Life Sciences Report as an independent contractor. He 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:AcelRx Pharmaceuticals Inc. Streetwise Reports does not accept stock in exchange for its services or as sponsorship payment.
3) Chen Lin: I own or my family owns shares of the following companies mentioned in this interview: Sarepta Therapeutics Inc. and call options, AcelRx Pharmaceuticals Inc., Apricus Biosciences Inc., Neptune Technologies and Bioressources Inc. and Acasti Pharma Inc. I personally am or my family is paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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