10/12/2019 The Future of Biotech: How to Invest in Tomorrow’s Winners - Barron's

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Biotech Roundtable: How to Investin Medicine’s FutureBy Lauren R. Rublin Updated October 1, 2019 / Original September 27, 2019

Recent advances in biotechnology, from data-driven diagnostics to game-

changing gene therapies, suggest we’re on the cusp of a golden age in

which many feared diseases will become treatable, or even cured. Yet for all

the optimism in the lab, pessimism reigns on Wall Street, where investors

lately have been yanking money from health-care and biotech stocks and

funds. Given a 25% slide in the Nasdaq Biotechnology Index from its mid-

2015 peak, the disconnect between a looming scientific revolution and

investors’ disillusion has grown too big to ignore.

The five members of Barron’s first biotech roundtable zeroed in on this

paradox when they met with us recently in New York, and they didn’t stop

there. Biology, treatment modalities, regulatory matters, companies, and

stocks—all came under the microscope of this discerning group of analysts

and investors, who shared what excites them about the coming disruptions in

health care—and how to invest in and profit from them, too.

The members of our biotech panel include: Gbola Amusa, director of research

and head of health-care research at Chardan Capital Markets, a boutique

investment bank focused on health-care innovation; Ziad Bakri, manager of

the $12.5 billion T. Rowe Price Health Sciences fund (ticker: PRHSX), rated

BIOTECH COVER

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five stars by Morningstar; Eli Casdin, founder and chief investment officer of

Casdin Capital, a New York-based investment firm focusing on life sciences

and health care; David Schenkein, general partner at GV, the venture-capital

arm of Alphabet (GOOGL), and co-head of the GV life-science investment

team; and Gena Wang, director of biotech equity research at Barclays and a

research analyst covering U.S. small- and mid-cap biotech stocks.

Amusa, Bakri, and Schenkein all are physicians; Wang has a doctorate in

molecular and cell biology, and Casdin is a longtime investor in the sector.

In biotechnology, and biotech investing, hope and hype intertwine like the

strands of a double helix. Our roundtable panelists tease them apart in the

edited conversation below.

Why have many investors soured on biotech, and what might rekindle

their enthusiasm?

Ziad Bakri: If you looked back to the period from 2011 to 2016, when biotech

stocks were in favor, you would see a number of tailwinds to the sector. There

were high-profile scientific breakthroughs and high-profile, highly successful

drug launches—for hepatitis C and multiple sclerosis, for example. There

were also some high-profile acquisitions in the industry. At the same time, the

regulatory pendulum was swinging; the Food and Drug Administration was

getting more lenient and approving more drugs faster, and the payer

environment was becoming more favorable. At the beginning of that period,

biotech stocks had low valuations, and there had been years with a dearth of

new stock issuances.

Nasdaq Biotechnology Index

Source: FactSet

2015 ’16 ’17 ’18 ’19

2500

2750

3000

3250

3500

3750

4000

4250

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Fast-forward to today, and many of

the big tailwinds have moderated.

There have been some high-profile

scientific failures—in the

Alzheimer’s arena, for example. The

payer environment is more

stringent, and the regulatory

environment, while still reasonably

lenient, is getting a little tougher.

There have been hundreds of new

biotech initial public offerings, and

the stocks no longer have a pricing

tailwind. But I don’t want to paint

too bleak a picture; things aren’t that bad. There’s still a good environment for

new stock issuance. It is a tougher environment for larger companies trying to

replicate their past success.

David Schenkein: Two things haven’t changed. The scientific knowledge

and breakthroughs that we’re seeing across therapeutic areas, in both

treatment modalities and our understanding of the biology of disease,

continue to break open at a pretty incredible pace. Also, the regulatory

environment is still much more favorable than it was a decade ago.

Eli Casdin: There are lots of reasons to be excited, beginning with the

dramatic innovation taking place, a supportive FDA, and a new generation of

entrepreneurs, operators, and managers born of some of the most successful

companies in the space, such as Genentech, Biogen [BIIB], Amgen [AMGN],

Gbola Amusa Photograph by Guerin Blask

Gbola Amusa

Director of Research; Head of HealthcareResearch Chardan Capital Markets

Company / TickerPrice9/26/19

Regenxbio / RGNX $33.31

uniQure / QURE 41.20

Krystal Biotech / KRYS 40.98

MeiraGTx Holdings / MGTX 16.08

The Medicines Co. / MDCO 50.37

Kodiak Sciences / KOD 14.21

Bloomberg

I’m not sayingbiotech stockswon’t fall onpolitical

“

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and Gilead Sciences [GILD]. The people behind the endeavor are the biggest

predictor of success. Science and technology are only a part of the equation,

and great people can do a lot with mediocre assets, just as poor managers

can destroy the value of even the best science and technology.

That said, biotech remains a market of speculators and event-driven

strategies. Most biotech investors continue to focus on the next data-driven

catalyst, obscuring the longer-term growth potential of a company. Until the

sector evolves into being viewed with a growth-like equity mentality, as we

see in tech, the volatility in biotech stocks will continue. For example, today

one stock has fallen about 70% in pre-market trading, and another is down

30%. This volatility makes it hard for most investors to maintain broad

conviction, which limits the sector’s ability to sustain momentum.

Gena Wang: I cover small- and

mid-cap biotechs. The stocks are

usually high-risk/high reward, and

dramatic moves are considered

normal. The generalists are often

intimidated by this. But we have

seen how scientific breakthroughs

translate to successful drug

development, from monoclonal

antibodies in the 1990s to immunotherapies today. I anticipate the next new

drug-class frontier will be gene and cell therapies. Two gene therapies have

already been approved in the U.S. Of course, investors then want to see how

uncertainty. It’smore that if andwhen they do, it isoften a goodopportunity toload up on themost disruptivecompanies. ”—Gbola Amusa

Gena Wang Photograph by Guerin Blask

Gena Wang

Director, Biotech Equity Research Barclays

Company / TickerPrice9/26/19

Regenxbio / RGNX $33.31

Sarepta Therapeutics / SRPT 72.81

Bloomberg

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the new class of drugs will sell. A lot of potential investors are sitting on the

sidelines.

Gbola Amusa: We’re going into an election year, and that creates additional

uncertainty—and more volatility. In past election cycles, biotech stocks

suffered at times on worries about coming legislation, such as the Medicare

Prescription Drug Benefit or the Affordable Care Act. But therapeutic-

company fundamentals didn’t change as much as some feared after

enactment of these and other policies. Biotech investors should remember

that the worst-case scenario for U.S. health-care policy is adopting something

that looks more European. Europe historically has devoted a higher

percentage of its health-care spend to drugs, because drugs save costs

elsewhere in the system. In theory, even a European-style outcome might

increase the relative emphasis on drugs, with low-value drugs seeing heavy

price pressure and high-value ones being more resilient.

My advice is to focus on disruptive innovation and drugs that save costs. For

drugs like Zolgensma [a gene therapy for treatment of spinal muscular

atrophy in pediatric patients] there is no good substitute. Yes, drugs like

Zolgensma can cost up to $2 million, but if a company is an innovator and

there is no good substitute for its product, the company is effectively a

monopolist with pricing power, even when drug pricing is a concern. I’m not

saying biotech stocks won’t fall on political uncertainty. It’s more that if they

do, it is often a good opportunity to load up on the most disruptive

companies. Similarly, avoid companies whose business model is to grow by

borrowing money to buy non-innovative drugs and then boost prices.

Examples of products that can save the system costs are a new class of

therapeutics called prescription digital therapeutics. These are FDA-

approved prescription programs to treat medical conditions. Think of it this

way: Many chronic-use drugs have a 35% to 50% one-year compliance rate.

Prescription digital therapeutics can improve compliance and thus save

future health-care costs.

How can nonspecialists identify the industry’s disruptive innovators?

Bakri: It is difficult to differentiate among early-stage opportunities. We look

for therapies that have achieved some level of proof of concept, whether in

terms of survival benefit or other clinical benefit. If they are without

competitors, that is the holy grail. Recently, there has been so much

innovation that multiple companies are coming to market to treat the same

conditions. When that happens, you see price competition. The migraine

space is a good example.

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You’ll pay more for proof of

concept, but the risk is diminished.

If a company has a good management team and a platform that suggests the

science that produced its first product can produce more than one drug,

that’s even better. But they don’t have to do it again. AveXis had one

successful product [Zolgensma] and got acquired by Novartis [NVS].

Schenkein: I am super-optimistic about novel therapies, particularly cell and

gene therapies. But one challenge is to figure out manufacturing and access.

It is one thing to be able to deliver these therapies in an academic medical

center in New York or Baltimore or Boston, but in smaller centers around the

world, the technology still requires a fair amount of heavy lifting.

Casdin: There are investment opportunities around that statement. We’re an

investor in BioLife Solutions [BLFS], which offers a diverse set of gene- and

cell-therapy tools, including products for freezing, thawing, and delivering

cells and tissues. There are a lot of lower-volatility investment opportunities in

the biotech ecosystem. Investors typically think about therapeutics, but there

are a lot of companies and technologies that support the therapeutics.

Which new therapies excite you most?

Schenkein: I’m a hematologist and medical oncologist. There has been an

incredible change in the past two decades in our ability to understand the

biology driving individual diseases. Instead of lumping patients into a large

group based on where in the body a tumor shows up, we are now better able

to understand that lung cancer, for instance, is probably 50 different

diseases, and design more precise therapies for individual patients. This

involves capturing more data, and analyzing the data in a different way.

Also, new and exciting modalities are arising in oncology, including the

ability to edit cells in the body, and alter T cells outside the body and reinfuse

them. We have seen a big push in the development of drugs for rare diseases.

The patient populations are very small, so you need fewer patients for trials.

Things can move quicker. But this is leaving out some of the biggest killers,

such as heart disease and diabetes. We need to see the science move there.

Why has the focus been largely on rare diseases?

Schenkein: Probably the riskiest part of creating a new medicine is

understanding the biology of the targeted disease. In a rare genetic disease,

you know what the biology is. If you can figure out how to fix what’s broken in

the single gene or amino acid driving this disease, your probability of

technical success is high. Ziad mentioned the AveXis drug, which got

Bye-bye, Biotech Funds? Not So Fast. ItCould Be Time for Another Look

READ MORE 2018 AND 2019

ROUNDTABLES:

2019 Barron’s Roundtable

2019 Midyear Roundtable

2019 Energy Roundtable

2018 Silicon ValleyRoundtable

2018 Emerging MarketsRoundtable

2018 Midterms and MarketsRoundtable

2018 ESG Roundtable

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approved based on a trial of 15 patients. In a case like this, where you need a

much smaller number of patients to prove that your drug works, the

regulatory timeline and your spend are compressed.

Casdin: Knowing the biology of these diseases reduces the chance of

developing a drug that has little chance of working. On the regulatory side,

the FDA is designed as a risk-mitigation and risk-management organization.

From a risk perspective, any approved orphan drug by definition will be used

in a small number of patients, limiting the danger of unforeseen toxicity in a

large patient population. Similarly, the potential for dramatic positive impact

is huge, as the alternative to a successful treatment for these patients is often

death or a life of high morbidity. The agency often views the risk/benefit

proposition of a rare-disease drug program as far more favorable, and is more

willing to give it accelerated approval over a drug developed for a common

and complex disorder like heart disease.

Wang: In heart disease and other big diseases, you need to run multiple drug

trials with at least several thousand patients. With rare-disease treatments—a

rare disease is considered one with 200,000 or fewer patients—you can run a

single trial with as few as 15 or 20 patients and no control group. The drug-

development path can shrink from five to 10 years to maybe two or three, and

the cost is dramatically lower. Then, approved drugs have pricing power, and

insurance coverage is usually good.

Bakri: Here is a good example.

When David was CEO of Agios

Pharmaceuticals [AGIO], which

Ziad Bakri Photograph by Guerin Blask

Ziad Bakri

Portfolio Manager T. Rowe Price HealthSciences Fund

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focuses on rare cancers and other

rare diseases, he sought to raise

money from many investors,

including T. Rowe Price Group

[TROW]. The selling point for me

was that he said the biology is

defined, the company would know

early on whether its drug worked, and it could sell the drug itself. Unlike many

typical Big Pharma companies, such as Pfizer [PFE], a company with a rare-

disease therapy doesn’t have to hire a huge sales force. I like the idea of

investing in a small company like that, which can redeploy its capital to go

after other diseases using a similar playbook.

So, you gave him money?

Casdin: We all gave him money. He built a great company and made

investors money along the way. That’s a really good investment formula.

What does the focus on rare diseases mean for the treatment of common

diseases?

Schenkein: Some companies are going after the big diseases that cause so

much morbidity and mortality, but the biology is really hard. One of the most

important breakthroughs we need as a society is to understand

neurodegenerative diseases, such as Alzheimer’s.

Wang: When I was in graduate school more than 15 years ago, we were

already talking about beta amyloid plaques and tau protein tangles in

Alzheimer’s patients. Since then, to David’s point, there has been little

scientific advancement.

Casdin: There has been a lot of investment in cancer research for a long time.

It is time to direct capital to teasing out the genetic drivers of disease in other

areas. Better data aggregation and analysis is a critical component of this.

There is a huge and largely untapped opportunity to invest in data extraction,

whether through electronic medical records, or EMRs, or genomic data from

large sequencing programs and clinical genetic testing. Companies like

Verana Health, which counts GV as an investor, are starting to license,

organize, and analyze patient and disease data across multiple disease

categories. One area in which Verana is making a big push is neurology,

where organizing and examining data might enable us to break dementia

into many different disease categories, as we have done with cancer. This

opens the door to more precision-based drug-development strategies, which

have a substantially higher likelihood of success.

Company / TickerPrice9/26/19

Vertex Pharmaceuticals / VRTX $169.55

Ascendis Pharma / ASND 95.80

Tricida / TCDA 30.87

Bloomberg

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Amusa:If we can break larger

diseases into smaller ones—for

example, by genetically defining

them—we can start to develop

precision therapies. A disease like

inflammatory bowel disease, or

IBD, is probably going to be

considered something like 20 or 30

different diseases in 10 or 20 years.

If you pick the right therapy for

each of them, you will see better

outcomes. In Parkinson’s disease, Prevail Therapeutics [PRVL] is testing a

gene therapy targeting a particular genetically defined population. I don’t

cover the company, but to me that’s a good starting point.

Casdin: The promise of gene therapy to cure rare genetic disease is now a

reality, and yet for most patients it takes a multiyear diagnostic odyssey that

costs tens of thousands of dollars before they know what’s wrong with them.

We’re investors in Invitae [NVTA], a company that provides clinical

sequencing for inherited genetic diseases. Invitae solves the diagnostics

problem with a DNA sequencing-based test costing an average of $471 that

takes less than two weeks to come back with an answer as to the genetic

mutation responsible. It isn’t hard to imagine that in 10 years, most children,

particularly those displaying signs of a rare disorder, will be sequenced at

birth. The potential of this practice to change clinical care is huge.

Eli Casdin Photograph by Guerin Blask

Eli Casdin

Chief Investment Officer Casdin Capital

Company / TickerPrice9/26/19

BioLife Solutions / BLFS $16.95

Magenta Therapeutics / MGTA 9.88

Invitae / NVTA 19.24

MyoKardia / MYOK 52.30

Bloomberg

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Schenkein: Take it a step further. Imagine the day when you visit your

primary-care doctor, who tells you your blood pressure, cholesterol level, and

germline genome. Based on that information, you can discuss the diseases

you’re at risk for and therapies that can intervene. This isn’t so far away—

maybe 10 years-plus—given how cheap sequencing has become, and how

much better we’re getting at understanding the data.

Casdin: Although a huge investment is happening in data management,

most medical records remain isolated within your individual provider. If you

see a primary-care physician and three specialists in New York, they’re all

using different record-keeping systems, and the data are trapped within each.

We have to get much better at aggregating large data sets and using

machine-learning tools to understand them. That is coming—and it’s coming

fast.

Let’s move on to the companies that look most promising to all of you.

Gena, care to start?

Wang: Adverum Biotechnologies [ADVM] is one of the stocks that sank this

morning, after the company disclosed disappointing results in a Phase 1

study of its gene therapy for wet age-related macular degeneration. Patients

didn’t see an improvement in visual acuity. We don’t cover the stock, but we

follow it closely. Our pick is Regenxbio [RGNX], which has a competing gene

therapy that appears to reduce the need for intraocular injections of a

monoclonal antibody, the standard treatment for this incurable condition.

Before this morning, I was a bit worried about competitors’ data.

Regenxbio holds the intellectual property rights for many AAV vectors

[adeno-associated viral vectors used to deliver genes and gene-editing tools

to the patient’s body], including the vector licensed by AveXis to develop

Zolgensma. The value of this provides a floor value for the stock. Regenxbio

hasn’t benefited much yet from the Zolgensma launch, but we expect that it

will. In the fall, we will have more data on Regenxbio’s wet AMD gene

therapy, which could provide upside to the stock. Our price target is $88.

Regenxbio is trading for around $40 a share.

Sarepta Therapeutics [SRPT] is another gene-therapy company we like. The

stock is out of favor, having fallen on negative news. Sarepta focuses on

treatments for Duchenne muscular dystrophy. The patient population is

meaningful, at 13,000 to 18,000 in the U.S. There is only one treatment now,

which isn’t very good. Sarepta has shown initial proof of concept for its

microdystrophin gene therapy with four patients. Pfizer has a competing

program, and its initial data have independently validated that approach.

Near term, Sarepta doesn’t have too many catalysts, but we see upside

Invitae has soldhundreds ofthousands ofgenetic tests sinceinception, andvolumes areexploding. As thevolumes grow, thevalue of thegenomic data theycapture will, too. Itis a virtuous cycle.”—Eli Casdin

“

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longer-term before the company releases important data in the second half of

2020.

Hemophilia has been a battleground for biotech companies. Which

companies do you expect to prevail with successful gene therapies?

Wang: BioMarin Pharmaceutical [BMRN], Spark Therapeutics [ONCE], and

Sangamo Therapeutics [SGMO] are all developing one-time gene-therapy

treatments for hemophilia A. This is a big disease, too, with a moderate and

severe patient population of about 12,000 in the U.S. alone. We aren’t

impressed by BioMarin’s data so far. There is a lot of variability, and its drug’s

durability isn’t very good. Spark has a better clinical profile. Sangamo’s data

also looks good, but I would like to see more about durability, which we will

get at ASH this year. [The annual American Society of Hematology

conference will be held in December.] We favor Spark and Sangamo’s

hemophilia A programs over BioMarin’s. Spark also has reported good data

on its hemophilia B treatment, as has uniQure [QURE]. Based on clinical

profiles, they are close competitors.

Many people have focused on

the $2 million price tag on

Zolgensma. Less attention has

been paid to the treatment’s

effectiveness. Is it curing

patients?

Wang: We have looked at all

treatments for spinal muscular

David Schenkein Photograph by Guerin Blask

David Schenkein

General Partner; Co-Head of Life ScienceInvestment Team GV

Company

Verve Therapeutics Private

Beam Therapeutics Private

Verana Health Private

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atrophy, including Biogen’s

Spinraza, approved in 2016, and

Roche’s risdiplam, partnered with PTC Therapeutics [PTCT], comparing them

side-by-side across different patient populations. We still think Zolgensma

shows the best clinical benefit.

Thanks, Gena. Eli, which companies intrigue you?

Casdin: We have invested in the shares of BioLife Solutions, mentioned

earlier, and gave the company needed capital to aggregate smaller

businesses, building a one-stop bio-production resource for gene- and cell-

therapy companies. Buying service providers to gene- and cell-therapy

companies like BioLife is a great way to benefit from the industry’s growth

without encountering the volatility of binary therapeutic solutions. Every cell-

therapy company we talk with is looking for a strong provider of solutions.

BioLife has a market cap of about $415 million. Through consolidation and

execution, BioLife should build a high-margin, high-revenue growth

company, with a diverse product portfolio. Over the next few years, the

company will have a substantially bigger business and, as a result, a much

higher stock price.

One of the biggest barriers to the success of cell therapy is the conditioning

regimes that patients must undergo. In the case of some treatments, a

patient’s entire immune system must be ablated prior to treatment to allow

the new, genetically modified cells to engraft. David can speak to this as a

physician. We are invested, along with GV, in Magenta Therapeutics [MGTA],

another small company developing targeted conditioning regimes for cell

therapy and transplant patients, to make the procedures less toxic and more

accessible. If Magenta is successful, it will build a company with multiple

high-value, high-margin products.

Does Magenta have any revenue yet?

Casdin: Like most early-stage drug-development companies, it is pre-

revenue, with little to show but expenses and cash on the balance sheet. It

isn’t well appreciated by investors and today has an enterprise value of just

under $400 million. If encouraging signs of success in its pipeline emerge,

which could occur in the next year and a half, the stock would be significantly

higher.

As demand for precision medicine and gene and cell therapies grows, so will

demand for tests that diagnose these patients. Three or four years ago, there

weren’t many companies in the molecular diagnostics space providing these

Bloomberg

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types of tests. Today, there is a whole ecosystem of companies. Most are in

cancer, some are in transplants, and only a few are in the broader inherited-

genetic-disease testing space. Price-to-revenue multiples are high. Growth

investors are buying into the expectation of accelerating revenue growth and

the broad value and applicability of the genomic data these companies are

capturing. Invitae, which I mentioned earlier, is a stock we own in this area.

Why Invitae?

Casdin: Invitae is a $1.9 billion-market-cap company. The stock trades for

about $21. The company had $148 million of revenue last year. Invitae has

sold hundreds of thousands of genetic tests since inception, and volumes are

exploding. While they aren’t making money on the bottom line, it is only a

matter of time before they start generating substantial cash flow to reinvest in

the business. As the volumes grow, the value of the genomic data they

capture will grow, too. It is a virtuous cycle that promises to create a next-

generation molecular information company, which few investors appreciate

today.

Any recommendations come with the caveat that the stocks we invest in are

extremely volatile and can often go down before they go up. Some never get

off the mat, making sizing your position critically important. My therapeutic

pick is MyoKardia [MYOK], which is developing targeted small-molecule

therapies for congestive heart failure and hypertrophic cardiomyopathy

[thickening of the heart muscle]. Heart disease is a big disease, but they’re

thinking about it as a rare disease, isolating the patient population with a

particular genetic makeup and providing solutions to address that piece. The

market cap is about $2.5 billion. MyoKardia doesn’t have any profits, but the

data look really compelling. If future data hold, the stock has a long way to

go.

What metric do you use to value these companies in the absence of

revenue and profit?

Casdin: First we ask, what would a perfect future look like? What is the

possibility the company could get there? How much market share could it

reasonably get, and what would it cost to achieve that? Then you back into a

reasonable expectation of value. We create many scenarios. With any given

program, the chance of success is low, so you need to size for the risk and

make sure the clinical trial is designed for unambiguous data. As my father

used to say, “If the data is ambiguous, there is no ambiguity.” Meaning, when

a drug works, it is obvious, just as when it isn’t working.

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You also want to make sure to invest in companies that have multiple

programs, maybe around a therapeutic identity or technology platform, all at

different stages of development. If one fails, the company—and you, the

investor—aren’t out of the game. Unfortunately, this isn’t value investing,

where there are hard numbers to anchor to. Biotech valuations are like a

thermometer that tells you how hot or cold the potential is; they aren’t a

precision instrument.

Bakri: In small- and mid-cap biotech, in particular, all your returns typically

come from a small percentage of winners. You can lose 100% of your money,

but you can make 500% or 1,000% on an investment. When you do the

decision-tree analysis Eli described, you should hypothesize that one tree can

grow to the sky. One of your companies could become really big. You don’t

want to sell your winners early.

Ziad, which of your biotechs could be big winners?

Bakri: Vertex Pharmaceuticals [VRTX] is a larger company that hits on a lot of

themes we’ve been discussing. Vertex generates more than $3 billion of

revenue a year from cystic fibrosis treatments. The company has developed

transformational drugs for a severe, life-threatening disease. It has a defined

patient population, and no competition. It can reach 70,000 patients around

the world with a small sales force. This is precision medicine at its finest, and

also a really good business. Its costs are relatively low.

Many biotech companies stumble as they become bigger because they have

to replicate their success, and in a big enough way to move the needle. This

isn’t like Facebook [FB] or Google, where the bigger you get, the bigger

you’re going to get because of the network effect. In biotech, past success

often doesn’t correlate with success in the future. This is why larger

companies often buy other companies. Vertex will be able to replicate its

success. It is going after other diseases, including Alpha 1-antitrypsin. Vertex

also has a business-savvy management team. The pieces are in place for it to

become much larger over time, and in a relatively low-risk way.

What is the price/earnings multiple?

Bakri: The stock is trading for about $172. Consensus earnings estimates for

2020 are $6.17 a share, so the multiple is around 27 times earnings. But

profitability is going to ramp up because a lot of the spending has been done.

Vertex is going to layer on new indications for existing treatments, which will

take revenue up to $7 billion to $9 billion. Profit will drop to the bottom line,

and the multiple will contract. For someone who wants to play biotech in a

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lower-risk way, Vertex allows you to benefit from the scientific innovation

without the idiosyncratic risk.

Casdin: Vertex just announced the acquisition of an early-stage cell-therapy

company with transformational potential in the treatment of Type 1 diabetes,

one of many recent deals and partnerships they have done. We love to see

forward-thinking companies expanding their pipelines into new growth

areas. Gilead did this extremely well and built a tremendous business.

Could Vertex be an acquisition candidate?

Bakri: Yes and no. If I ran a big pharma company, it is exactly what I would

want to buy. On the other hand, an acquirer would probably have to pay a big

premium. I hope they don’t get acquired because I need companies that can

grow and become profitable.

Why do you think Vertex can repeat its success?

Bakri: Vertex has an excellent chemistry platform and is better at designing

small molecules than almost anyone. It has a lot of scientific capabilities and

good partnerships with academic institutions. Vertex hired David Altshuler

from the Broad Institute of MIT and Harvard [a biomedical and genomic

research center] in 2014 as its chief scientific officer.

I’ve also got two small-caps to recommend.

Ascendis Pharma [ASND] isn’t a sexy gene-therapy company or a player in

molecular medicine. It modifies the drug-like properties of hormones used to

treat medical conditions, such as parathyroid hormone and human growth

hormone. It turns out you can achieve a lot of therapeutic benefits by

changing the pharmacokinetics—the half-life and other pharmacology

properties of these treatments. This is like a value-investing theme in biotech;

it isn’t in the limelight but could yield big rewards. Ascendis will have a

revenue-generating product in the growth hormone area on the market in the

next couple of years, and it has a pipeline of other products, including

parathyroid hormone, that address known large markets and could bring

potentially big improvements in the standard of care. The stock is trading

around $105, and the market cap is $5 billion.

Tricida [TCDA] is an off-the-radar company focusing on a drug for kidney

disease. It is using an older polymer technology approved in other diseases

to soak up hydrogen ions, which makes kidney-disease patients less acidotic.

Tricida’s drug application has been filed with the FDA, and the drug could be

approved next year. There are a lot of data indicating that if you improve the

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acidosis [reduce the level of acid in the blood] of these patients, you will

affect the course of the disease in a positive way. Tricida has a market cap of

about $1.7 billion.

Let’s turn to Gbola. What excites you?

Amusa: Phage therapeutics, a subset of microbiome medicines, might soon

emerge as a precision tool to eradicate specific strains of bacteria implicated

in chronic diseases like IBD. [The human microbiome refers to microbes that

live on and in the body.] The prescription-digital-therapeutics space can also

perform by saving the health-care system costs. Among publicly traded

names, I tend to like gene-therapy companies that are post-proof of concept,

with internal manufacturing, and gene-therapy companies levered to

synthetic biology.

Gena spoke of Regenxbio, one of our top picks for 2019. I’ll discuss it in

different terms. Regenxbio has about $450 million of cash, and may capture

up to 10% of the economics from Zolgensma in AveXis, which was bought by

Novartis for about $9 billion. Add up $450 million and $900 million and that’s

roughly where Regenxbio’s market cap has been lately. The opportunity

derives from investors not yet modeling the majority of the 30 or so products

in the company’s pipeline. The consensus has modeled only five to seven.

Ten to 15 are in the clinic and could soon generate data. Thus, many

Regenxbio products should soon be modeled by analysts, which tends to

lead to better stock performance from earnings estimate upgrades. Think of

the company as having up to 30 shots on goal. My price target is $150.

UniQure, another of my top picks entering 2019, is up about 50% this year,

resulting in about a $1.6 billion cap. I expect it to get acquired, perhaps by

BioMarin, and perhaps after uniQure releases in 2020 its pivotal Phase 3 data

for its hemophilia B gene therapy. BioMarin has a hemophilia A gene therapy

in late-stage development and would see synergy in having a hemophilia B

asset, and uniQure also has rights to National Institutes of Health patents and

hemophilia B Padua transgene patents that could be useful for BioMarin.

Furthermore, BioMarin, as I understand it, is using a manufacturing process

similar to uniQure’s, which is patent-protected. Finally, uniQure could

produce proof-of-concept data in Huntington’s disease in 2020. UniQure’s

one-time gene therapy, if successful, would be addressing a large gene-

therapy market. Clinical success in Huntington’s disease in 2020 could lead

to uniQure shares doubling or tripling. The stock is around $47. My price

target is $125.

What else do you like?

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Amusa: MeiraGTx Holdings [MGTX], despite roughly doubling this year,

continues to be a top pick. It is levered to synthetic biology, or gene

regulation. For gene therapy to work in mass-market conditions, clinicians

will need to be able to turn it on and/or off as needed. Johnson & Johnson

[JNJ] partnered with Meira on Meira’s gene-regulation technology before it

took an equity stake in Meira, and before J&J effectively derisked the

inherited retinal disease, or IRD, platform by partnering to pay most of the

costs of these programs. Meira potentially could double in the next year if the

company produces positive data on large-market indications not partnered

with J&J. Success there could increase the long-term potential for J&J to

acquire Meira. My MeiraGTx price target is $45.

Medicines Co. [MDCO] was

another of my top picks entering

2019. The stock has more than

doubled this year, and the market cap is now over $4 billion. The company is

reporting positive test results for inclisiran, an anti-PCSK9 genetic medicine to

lower cholesterol, in pivotal Phase 3 studies. The market is skeptical on

inclisiran, due to the lackluster performance of anti-PCSK9 monoclonal

antibodies Praluent and Repatha. Unlike these competitors, which require

cold storage and administration every two weeks, inclisiran can be stored at

room temperature and administered only twice a year. To me, companies like

Pfizer, Eli Lilly [LLY], and Roche Holding [RHHBY] don’t have heir-apparent

cholesterol products. That makes Medicines another potential acquisition

target. My Medicines target price is $100.

I have two more stocks to discuss.

Let’s hear them.

Amusa: Krystal Biotech [KRYS], another of my top picks, is up more than 50%

in 2019. Krystal is unique in doing gene therapy for the skin and showing

enough success to achieve important regulatory designations in the U.S. and

Europe. Under success scenarios, the company could have the opportunity

to address everything from rare skin diseases to mass-market skin diseases

like diabetic ulcers or even aesthetic conditions. Krystal has invested

meaningfully in manufacturing—a credible signal that management believes

in its own products, which isn’t a given in biotech. My price target is $75.

Finally, Kodiak Sciences [KOD], despite more than doubling in 2019, still has

only a $535 million market cap. It focuses on retinal diseases, such as wet

AMD, diabetic retinopathy, and retinal vein occlusion. The standard of care in

these markets generated more than $10 billion of sales in 2018, which makes

Kodiak’s market cap cheap. Kodiak’s lead product is engineered to maintain

READ THE SIDEBAR

Bye-bye, Biotech Funds? Not So Fast. ItCould Be Time for Another Look

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the key attributes of standard-of-care products (Eylea, Lucentis, and Avastin),

but optimized to address the biggest issue with standard of care—namely,

the need for monthly or bimonthly injections into the eye. Data this year

suggest that Kodiak is heading in the right direction. The stock is around $14.

My price target is $22.50.

Thanks for sharing those ideas. David, give us the venture capitalist’s

view of the biotech world.

Schenkein: GV has a broad remit in health care, from pure therapeutics to

delivery solutions to the payer-provider arena. We look for therapies that have

the ability to change medicine, not make incremental advances. I will discuss

three recent investments in private companies that are looking to have a big

impact.

The first, Verve Therapeutics, was

launched this year. Gene editing, or

the ability to edit DNA, still needs to

be proved as a therapeutic

solution. It is very early on. While

most gene-editing therapies are

going after rare diseases, Verve is

going after cardiovascular disease.

GV led the Series A financing

round. We’re really excited about

the company. It is creating the first

therapy that could be able to

correct a gene in a rare subset of patients whose cholesterol is off the charts.

Conventional therapies aren’t going to work. Imagine being able to correct

this condition with a one-time editing of the responsible gene.

We have also invested in Beam Therapeutics, which launched last year and is

working on a gene therapy developed in partnership with the Broad Institute

and others. Beam is developing a more precise form of CRISPR gene editing

than exists now. CRISPR is a molecule that acts like a scissor. It cuts your DNA

and can insert a new strand. Sometimes, however, there are errors in the

cutting. Beam has developed a therapy best thought of as a pencil with an

eraser. It allows us to change a single genetic code without cutting the

patient’s DNA. It just erases one that’s problematic and inserts a replacement.

The company isn’t in the clinic yet, but it will be a disruptive technology if it

plays out.

What is your third name?

READ MORE 2018 AND 2019 ROUNDTABLES:

2019 Barron’s Roundtable

2019 Midyear Roundtable

2019 Energy Roundtable

2018 Silicon Valley Roundtable

2018 Emerging Markets Roundtable

2018 Midterms and Markets Roundtable

2018 ESG Roundtable

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MORE FROM NEWS CORP

Schenkein: Verana Health is aggregating huge amounts of clinical data from

around the country in ophthalmology, neurologic diseases, and potentially

other diseases. Aggregating this data will be useful for physicians, payers,

and pharma companies to help them better understand how their drugs are

working. One area that this kind of data can impact is clinical trials, by

creating synthetic control arms for clinical trials. Instead of randomizing

patients in a trial to either receive a new drug or a placebo (sugar pill), you

can compare your new drug to the expected data from a virtual control arm,

based on data from large numbers of patients in Verana’s database. This is

potentially much better for patients.

For sure. Thank you, David, and everyone.

The Barron’s RoundtablesThe Barron’s Roundtable is a panel of professional investors and market

strategists who meet every January to discuss the outlook for the economy,

the financial markets, and their favorite stocks. The first Roundtable took

place in 1968, and Barron’s hasn’t missed a year since. In recent years, we

have organized investment Roundtables around numerous subject areas,

including energy investing, emerging markets, ESG investing, the 2018 mid-

term elections, venture capital, and now, biotech. These Roundtables,

moderated by Barron’s writers and editors, allow for an in-depth discussion of

the issues driving particular industries and market sectors. They also include

the panelists’ top investment picks.

Readers tell us they look forward to getting original insights and perspectives

from the market pros. If you have ideas for more Roundtables, please write to

us at editors@barrons.com.

Write to Lauren R. Rublin at lauren.rublin@dowjones.com

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