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Thursday, September 29, 2016

Five Small Cap Names That Should Get Acquired

Last week, I read an article in the Wall Street Journal that highlighted renewed interest in acquisitions of small biopharma companies from "Big Pharma" players. The author of the article noted that, "Drug companies are starting to open their wallets again," and that this was a good sign the outperformance of the biotech ETFs, such as the XBI and IBB, would continue. The article was written the day after Allergan (AGN) announced two acquisitions on the same day, both targeting small-cap companies with proprietary drug candidates for the treatment of NASH.

Big Pharma's propensity to "buy" and not "build" is a major reason why investors flock to risky small-cap biopharma stocks. For example, investors in Tobira Therapeutics (TBRA) woke up to an astonishing 750% return thanks to Allergan's intrepid acquisition. Last month, a former BioNap favorite, Cynapsus Therapeutics (CYNA), agreed to be acquired at over a 110% premium. Good luck making those kinds of return in one day investing in Pfizer or Sanofi!

And speaking of Allergan's former merger partner Pfizer, they too have been aggressively spending money. In April 2016, the company won the race to acquire Medivation for $14 billion. According to the WSJ article, Pfizer and Allergan have spent a combined $20 billion since their $150 billion marriage fell apart in the second quarter. Other big pharma companies like Gilead and Sanofi are loaded with cash and obviously on the prowl. Gilead raised $5 billion in cash earlier this month by issuing senior unsecured notes at impressively low interests rates. Earlier in September, Sanofi issued $3.3 billion in debt at essentially negative rates.

Low interest rates, dwindling innovation in pharma pipelines, and the recent deal flurry from cash-rich large cap companies made me think - What are some small-cap healthcare stocks that could be (or should be) on the list of potential take-out candidates, if not today, then at least at some point in the not-to-distant future?

Laying Down Some Ground Rules

This article could obviously get out of hand rather quickly. There are 500+ small-cap healthcare names. Far too many to mention here might make excellent targets for larger players; however, to set some ground rules, I've decided to narrow my focus with the following parameters:

1) Stocks must have a market capitalization below $100 million. I want to focus only on the truly small and undiscovered names that investors are likely not paying enough attention to today.

2) The markets must clearly be large and "big pharma" worthy. So in this regard, I'm eliminating biopharma companies that focus on rare or orphan diseases. Yes, Sanofi is a major player in this area, but I wanted to focus my picks on truly large market opportunities where it makes sense for a large-cap company to play.

3) There has to be tremendous upside potential. Tobira is the model here. There are many companies, for example, Depomed or Acadia, that I think will be acquired at some point, but these investments are not going to give investors in excess of 100% return. That's my hurdle rate for this exercise.

4) The companies must have a truly breakthrough or first-in-class approach. I'm a big fan of 505(b)(2) applications and companies that take low risk with reformulating already approved molecules. Cynapsus was that perfect example, and Revive Therapeutics (RVV.V) is another name I am a big fan of today, but for this article, I'm focusing only on new chemical entities or novel products, because that's where big pharma tends to spend its money.

Idea No. 1 - MabVax Therapeutics (MBVX)

MabVax is a biopharma company developing monoclonal antibody (mAb) products for the treatment of cancer. The company’s novel mAb technology involves a unique twist on the generation of fully human mAbs that are derived from patients vaccinated with an anti-cancer vaccine, as opposed to antibodies produced in mice or in vitro. The cancer vaccines are designed to elicit an immune response to a highly specific antigen found almost exclusively on cancer cells. The company’s lead antibody product, HuMab-5B1, was derived from a patient immunized with a cancer vaccine targeting sialyl LewisA (sLeA), a carbohydrate antigen found almost exclusively on cancer cells.

The company is taking advantage of HuMab-5B1's high specificity and minimal off-target binding to develop the drug via multiple pathways: as a therapeutic (MVT-5873), an imaging agent (MVT-2163), and a radioimmunotherapy (MVT-1075) for patients with pancreatic cancer. MVT-5873 is currently in a Phase 1 trial with the primary focus on safety and tolerability (i.e. finding the maximum tolerated dose) in patients with advanced pancreatic cancer. The development plan calls for a Phase 2 trial in 2017 in which MVT-5873 will be used in combination with gemcitabine and nab-paclitaxel. Preclinical data with MVT-5873 shows the drug to have strong antitumor activity, as well as synergy with existing standards of care in pancreatic cancer.

The reason I like MabVax so much is because the company has an astute development plan to expand development of HuMab-5B1 into additional markets, including as an imaging agent and as a radioimmunotherapy. MBT-5873 is the "naked antibody". It is the highly specific and targeted delivery vehicle for the imaging agent or anti-cancer payload, which includes both radionuclide and cytotoxic agents. By demonstrating that MVT-5873 is safe, well tolerated, and has therapeutic-like pharmacokinetics in the current Phase 1 trial, MabVax will derisk progressing MVT-2163 and MVT-1075, which I believe have tremendous commercial potential.

Pancreatic cancer is notoriously difficult to detect and even harder to treat, making it one of the most deadly forms of cancer. This is because pancreatic cancer typically has few if any symptoms early on, and it is not until it metastasizes to other parts of the body that patients begin to experience noticeable symptoms. Due to the fact it is rarely found before metastasizing, the five-year survival rate for patients with stage 3 or 4 pancreatic cancer is only 1-3%.

I believe HuMab-5B1 has the potential to make a real impact due to its high specificity and efficacy in preclinical models, particularly as a radioimmunotherapy or antibody-drug conjugate product. MabVax currently has a market cap of only $20 million! The company just recently raised cash and since a successful pancreatic cancer treatment would easily produce >$500 million in peak revenues, the risk/reward profile for MabVax is quite compelling at its current valuation.

MabVax fits all my above parameters. HuMab-5B1 is a novel drug candidate that targets a large market opportunity. The shares are extremely undervalued and offer tremendous upside potential based on the successful development of MVT-5873, MVT-2163, and MVT-1075. Potential acquirers of MabVax (should) include Celgene, Pfizer, Bristol-Myers, and Novartis.

Read my comprehensive MabVax article from September 2016 >> LINK

Idea No. 2 - VistaGen Therapeutics (VTGN)

VistaGen is developing AV-101 an oral prodrug candidate that has demonstrated impressive antidepressant effects and safety in preclinical and Phase 1 studies. AV-101 is a glycine B (GlyB) receptor antagonist that negatively modulates the N-Methyl-D-aspartic acid (NMDA) receptor and may induce synaptogenesis. It's a fundamentally different pathway from standard antidepressants like SSRI and SNRI molecules, and similar to the glutamatergic AMPA-dependent pathway of ketamine; but, without the potential negative side effects of NMDA ion channel blocking.

AV-101 is currently being studied in an NIMH-sponsored Phase 2a clinical trial taking place at the U.S. NIH Clinical Center in Bethesda, MD, under the principal investigation of Dr. Carlos A. Zarate, MD. Dr. Zarate is one of the nation's foremost experts in the field of depression and has authored over 100 papers on the subject, including paradigm-shifting work with ketamine recently published in Nature. Target enrollment for this study is 24 to 28 adult subjects with treatment-resistant MDD. Data are expected during the first half of 2017.

VistaGen is also planning a company-sponsored Phase 2b study with AV-101 separate from the NIMH-sponsored Phase 2a study noted above. The Phase 2b study will be a randomized, double-blind, placebo-controlled study targeting enrollment of 200-300 patients with inadequate response to standard antidepressants. Oral doses of AV-101 will be studied as an adjunctive treatment to background antidepressants in a sequential parallel comparison design (SPCD).

According to data from the NIMH and CDC, roughly 7% of the U.S. population over the age of 12 years suffer from depression. Based on 2015 Census data, this equates to approximately 20 million individuals. According to NIMH research, about half of U.S. patients with depression experience major depression and receive treatment. Results of the NIMH-sponsored 4,000-patient STAR*D trial showed remission rates of only 36.8% for first-line (generic) antidepressants. The overall cumulative remission rate was 67%, but it is logical to believe that physicians will start to seek alternative treatment options like AV-101 after the second generic antidepressant failure. The numbers work out to a target of around 3-4 million patients in the U.S. each year that might be excellent candidates for VistaGen's novel approach.

One of the primary reasons why existing first- and second-generation antidepressants do not work is because of their slow onset of action. Results from the aforementioned STAR*D trial conducted by the NIMH found that the average time to remission was 5.4 to 7.4 weeks. In other words, severely depressed patients did not begin to see a clinical benefit until over a month after initiation of treatment. This lag time is far too long between initial symptoms such as suicide ideation and clinical efficacy, and this is a major drawback to currently available treatments. Conversely, NMDA-receptor antagonists like ketamine (and potentially AV-101) have been shown to provide rapid resolution of suicidal ideation after only a single dose.

My valuation work on VistaGen tells me the stock is worth many multiples of the current value, which sits at only $35 million as of today. Comparable analysis, including Allergan's acquisition of privately-held Naurex in July 2015, shows that VistaGen should be worth $500 million if the current Phase 2 trials are successful. Depression is obviously a Big Pharma market and AV-101 is a novel approach. Potential acquirers of VistaGen (should) include Pfizer, Eli Lilly, Glaxo, AstraZeneca, and Teva Pharmaceuticals. 

Read my interview with VistaGen Chief Medical Officer, Dr. Mark A. Smith >> LINK

Idea No. 3 - Pieris Pharmaceuticals (PIRS)

Pieris is a biopharma company developing a novel class of drugs called Anticalins®, which are similar to monoclonal antibodies (mAbs) in that they are target-specific binding proteins, but have a number of differentiating characteristics that potentially make them superior to mAbs, such as novel routes of administration including inhalation. Anticalins are derived from lipocalins, which are naturally occurring, non-immunogenic, human proteins that bind to a variety of different molecules, including small hydrophobic molecules, peptides, and other proteins. Just as different mAbs bind to different antigens, so too do different lipocalins bind to different molecules. And similarly to mAbs, the specificity of binding can be manipulated in the laboratory to make an Anticalin bind to any desired target without disrupting structural integrity.

Pieris is interesting to me because the company has developed an entirely new class of molecules. They own the Anticalin platform, and although the market has yet to see the potential for these "biologic-like small molecules", I believe Pieris is exactly the type of company a larger biopharma should be interested in if they are looking to expand early-stage research and discovery.

Pieris’ three fully proprietary lead products are PRS-080, an Anticalin that binds to hepcidin and is being developed as a treatment for anemia due to chronic kidney disease, PRS-060, an Anticalin that binds to the Interleukin-4 receptor alpha subunit (IL-4Rα) and is being developed as a treatment for asthma, and an immuno-oncology bispecific, PRS-343 (CD137/HER2). In fact, the company just announced positive data with PRS-343 earlier this week. Pieris also has a number of partnered and co-development programs with large pharma partners, including Sanofi, Roche, Daiichi-Sankyo, Zydus, and Stelis Biopharma.

Again, what excites me about Pieris is the platform. Advantages of Anticalins over traditional biologics drugs include size, ease of manipulation, ease or production, alternative routes of administration, seemingly endless customization, and tunable kinetics. Rarely have I seen a development platform with such broad-sweeping potential; and those that I have seen usually get acquired. For example, Pieris Pharma, with a market capitalization of only $71 million today, fits the model of many of the "platform-acquisition" deals listed below. Pieris is also well-capitalized as of today, with over $40 million in cash on hand as of June 30, 2016.

Any of the above names, including Roche, Bristol-Myers, Amgen, J&J, Glaxo, Novartis, and Sanofi, should be interested in acquiring Pieris. Companies such as Roche and Sanofi that already have existing collaborative relationships with Pieris might have the edge, but what is true about platform biotech companies is that it only takes one drug to prove the platform has utility. Teva would never have acquired Auspex if it did not believe the deuterated-technology held potential outside of SD-809. Acorda would never have acquired Civitas if it did not see the potential for additional inhaled products beyond CVT-301. The same can be said about Amgen-Abgenix, AstraZeneca-CAT, and Bristol-Medarex. Pieris has three shots on goal with PRS-060, PRS-080, and PRS-343, and the data is only getting better. For shareholders of Pieris, I think it's only a matter of time.

See my article on PRS-060 for asthma >> LINK

Idea No. 4 - BioSig Technologies, Inc. (BSGM)

For my fourth idea, we are going to migrate away from biopharma and into medical devices. BioSig is a Minnesota-based medical device company developing a proprietary technology platform designed to improve the rapidly growing multi-billion dollar electrophysiology (EP) marketplace. The company's lead product is PURE EP™, a Class II medical device that marries together proprietary hardware and advanced signal processing software to improve the signal clarity of cardiac data during an electrophysiology study. BioSig is a clear-cut acquisition target by any of the "Big-3" market leaders in this space, GE Healthcare, Abbott Labs, or Boston Scientific.

Existing EPS recording systems are hampered by high signal-to-noise ratio outputs, limited dynamic range, and low sampling rates. The limitations of these existing systems make it difficult for the electrophysiologist to find and treat arrhythmias such as atrial fibrillation (AF) and ventricular tachycardia (VT) during cardiac ablation procedures. Conversely, researchers at Mayo Clinic have published data showing that BioSig's PURE EP is superior to existing systems because it offers very low noise (1 11V RMS) and proprietary topology features, including high input impedance, high common mode rejection ratio (110dB@60Hz), and rejection of noise generated by an RF ablation generator that delivers a unique and improved look at cardiac signaling.

Work with Mayo Clinic and other leading institutions such as UCLA, Case Medical Center, and Mt. Sinai has allowed BioSig to advance PURE EP such to the point that management anticipates filing the U.S. 510(k) application to the FDA during the first half of 2017. Importantly, PURE EP is classified as a Class II medical device, which commonly does not require human clinical trials for FDA clearance to market. Approval should allow BioSig to start generating revenue from PURE EP in 2018; and, with the data that Mayo Clinic has generated, I expect the product to be a game-changer for electrophysiologists once commercialized.

According to Global Industry Analysis, the electrophysiology device market will grow at a 12.1% compound annual growth rate, from $2.5 billion in 2012 to $5.5 billion by 2019, making it one of the fastest growing medical device segments. Accordingly, the number of catheter ablation procedures done in the U.S. is also expected to see accelerating growth. Health Research International sees the number of catheter ablation procedures on a global basis reaching 160,000 in 2017.

My valuation work on BioSig shows the stock to be tremendously undervalued. The company has been presenting preclinical data over the past several months that I believe sets the stage for major interest from EPS medical device players, like GE Healthcare, Boston Scientific, or Abbott Labs. We have already seen several deals in this area so far during 2016, mostly recently when Abbott Labs agreed to acquire St. Jude Medical. BioSig is a "plug-and-play" acquisition for these leading manufacturers. PURE EP is designed to work in concert with existing systems, improving outcomes for patients and reducing costs to the facility. Filing of the U.S. 510(k) application is expected to take place in 2017, which I believe is the gating factor to a take-out shortly thereafter.

Read my comprehensive article on BioSig from March 2016 >> LINK

Idea No. 5 - 22nd Century Group (XXII)

Big Pharma isn't the only industry that can make strategic acquisitions in small-cap names. For my fifth idea, I present an opportunity to get taken out by Big Tobacco. Names like Altria ($124 billion in value), British American Tobacco ($118 billion in value), Reynolds American ($68 billion in value), and Japan Tobacco ($72 billion in value) are just as large, have just as much cash, and are just as hungry for growth as all the aforementioned big pharma names. All four of these companies should take a hard look at 22nd Century Group.

22nd Century Group is a biopharma company with a proprietary technology in nicotine biosynthesis and tobacco plant biotechnology. This technology allows it to increase or decrease levels of nicotine (and other nicotinic alkaloids) in the tobacco plant. More specifically, the company is engaged in the development of very low nicotine (VLN) tobacco cigarettes and produces a commercially-available cigarette called MAGIC® which yields approximately 95% less nicotine than other leading cigarettes previously marketed as “light” prior to The Family Smoking Prevention and Tobacco Control Act of 2009.

The company also manufactures a VLN research cigarette called SPECTRUM® has part of a CDC/NIDA-sponsored research program looking at the smoking habits of U.S. consumers and how VLN impacts consumer addiction. 22nd Century also markets a low tar-to-nicotine ratio (TNR) cigarette called RED SUN® that is designed to dramatically reduce the tar and smoke consumed by smokers. The company offers premium cigarette contract manufacturing out of its 61,000 square foot facility in Mocksville, NC.

The growth story for 22nd Century Group and the reason why I believe Big Tobacco should be interested in the name is a product called BRAND-A. BRAND-A is currently under U.S. FDA review as a modified risk tobacco product (MRTP). MRTP is a pathway set up by the U.S. FDA following the Tobacco Control Act of 2009 that abolished the use of ad words like "light", "ultra-light" or "mild" that might potentially confuse consumers into thinking these cigarettes are safer than traditional "regular-strength" cigarettes.

Today, if tobacco companies want to use these words, they have to receive U.S. FDA approval via the MRTP application pathway. To date, no tobacco company has been able to successfully achieve approval for an MRTP application. I believe 22nd Century will be the first to do this later this year with BRAND-A.

BRAND-A is similar to MAGIC, the company's approved VLN cigarette in Europe. Recent data published in the New England Journal of Medicine shows that individuals who smoked very low nicotine (VLN) cigarettes during a randomized controlled trial ended up smoking fewer cigarettes per day (video) after six weeks compared to the start of the trial, exposing themselves to less toxic smoke and tar on a daily basis. Besides this NEJM article, the company has presented and made available other published data and abstracts supporting the concept of VLN cigarettes as a harm reduction strategy.

MAGIC® is a concept that the former U.S. FDA commissioner, Dr. David Kessler, MD, JD, summed up rather nicely in a public comment in June 2010, stating, "The FDA should quickly move to reduce nicotine levels in cigarettes to non-addictive levels. If we reduce the level of the stimulus, we reduce craving. It is the ultimate harm reduction strategy."

Approximately 18% of American's smoke. That's nearly 60 million people who smoke 265 billion cigarettes per year. Nearly 50% of all smokers in the U.S. attempt to quit on a regular basis, but only 2-5% will succeed per year. The average number of attempts before success is between 8 and 11 attempts. According to the U.S. CDC, 12.6% of smokers tried e-cigarettes in 2014. Over the counter sales of nicotine gums, patches, and lozenges totaled $2.4 billion in 2014. Pfizer's Chantix® (varenicline) posted sales of $671 million last year and cumulatively has posted over $6 billion since its approval in 2006. Quite simply, the smoking cessation market is enormous.

Prior to the Tobacco Control Act of 2009, cigarettes previously marketed at "light", "ultra-light" or "mild" held 89% market share in the U.S. That's an astonishing number. If approved in December 2016, 22nd Century's BRAND-A will be the first product on the market in the U.S. with a modified risk label. Retail cigarette sales in the U.S. totaled nearly $75 billion in 2015. Only 1% market share would be $750 million in revenues to 22nd Century Group. Big Tobacco currently sells at 6.5x revenues, meaning 22nd Century's current market value of only $95 million in a bargain.


The resurgence of M&A activity has lit a fire under small-cap healthcare stocks. Money is cheap and growth through innovation is a must for large-cap players, especially with the entire pharmaceutical model for pricing now under pressure. Nothing beats waking up and seeing one of your major holdings acquired for multiples of yesterday's closing price. I'm trying to find the next Tobira or Celator Pharma.

The first two names above, MabVax and VistaGen, are developing better products than what is on the market today for conditions with serious unmet medical need. The third company, Pieris Pharma, has a unique platform with incredible potential for exploitation in the right hands. The last two companies, BioSig and 22nd Century, are developing disruptive technologies that should materialize into a serious competitive threat to the larger entrenched players. All five fit the model for exactly what large-cap companies are looking for - attractive valuations with tremendous upside potential.


Please see important information about BioNap, Inc. in our Disclaimer
BioNap owns stock in MBVX, VTGN, PIRS, and XXII


  1. Fantastic article Jason! I am long PIRS and XXII myself. I will definitely look at the other 3 names here.

  2. Hi Jason. I too am long PIRS. Just wondering what do you think would be a good possible price if bought?

    Also on an unrelated topic here, I know you used to be quite bullish on AMBS but haven't heard you talk about it in like FOREVER! Have you given up on it? I've been long AMBS for a long long time, and have made some money in the past trading in and out, but it's just been getting more and more frustrating lately. And now with a 26% drop today, on no news whatsoever, none that I could find anyway, just kinda like to know what your current opinion is on this thing? or is it off your radar completely now and no opinion at all?