MoneyTalks: Pengana’s James McDonald reveals his top three ASX biotechs
MoneyTalks is Stockhead’s regular drill down into what stocks investors are looking at right now. We’ll tap our extensive list of experts to hear what’s hot, their top picks, and what they’re looking out for.
Today we hear from James McDonald, portfolio manager of the Pengana High Conviction Equities Fund along with Jeremy Bendeich.
The Pengana High Conviction Equities Fund holds 20 stocks and delivered 95.4% per annum net of fees for the year to July 31, 2024, and 26.7% per annum net of fees since inception in 2014.
This was achieved without allocations to the so-called magnificent seven of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla.
The fund also eschewed AI-themed stocks and another popular thematic of biotech companies involved with obesity drugs, though its door remains open to tech and AI.
“We want to avoid being pigeon-holed as only investing in a certain sector or a certain style,” Portfolio manager James McDonald said.
“It’s about being high conviction and going where the opportunities are.
“We’ve done well from tech exposure in the past, for example holding Spotify, which increased four-fold during that time, but that was a bit of an outlier in the portfolio.”
He said if there’s a common theme it was that most holdings have global exposure and are small to mid-cap, which was where an active approach makes the most difference.
“We look for companies which are really under-valued, and we try to understand their businesses very well.”
The lion’s share (80%) of the Pengana High Conviction Equities Fund current holdings are ASX-listed stocks with a global market.
“My career started with global stocks and I developed a passion for global stocks and global trends,” McDonald said.
“We have a large universe of opportunities, but we cut this down into a watchlist of a couple of hundred stocks.
“Every year something on this list doubles and triples.”
McDonald said being selective investors the local market offers plenty of opportunities for investors to ride some significant global trends.
Currently, these trends are leading him to invest heavily in healthcare, biotech, and materials.
Here are three biotech stocks which McDonald is particularly excited about.
McDonald said GSS develops molecular tests using its proprietary 3base technology, which allows it to screen for more pathogens at lower cost than competing technologies.
“In June, the US FDA approved the company’s new enteric test, which is a big deal as new molecular tests do not often come to market,” he said.
The test looks for eight different gut bugs which cause 90% of the gastrointestinal illnesses in the US. Accurate diagnosis is important as there are different treatments for each bug.
“The current stool-based test is only about 65% accurate, takes five days, and is not profitable for labs,” he said.
“This new test is 95% accurate, takes one-to-two days, and is profitable.”
Lab promotion is important for biotechs at this stage.
“We think the market will expand as the labs promote this test, with GSS poised to take a big slice of a $500 million market opportunity,” he said.
“The company has a strong balance sheet and $20m of revenue from other tests, primarily influenza tests, in the Australian market.”
Recently, the company appointed Allison Rossiter, the former head of Roche diagnostics Australia, as CEO.
“Roche Diagnostics is the world leader in diagnostics with 20% market share,” McDonald said.
“The current acting CEO and director, Neil Gunn, was former president of Roche Sequencing Solutions and head of global business for Roche Molecular diagnostics, so management are highly experienced.”
Focus on pancreatic cancer
Pancreatic cancer has seen little improvement in survival over the last 40 years with two companies in the Pengana High Conviction Equities Fund focused on improving outcomes for patients with the disease.
McDonald said there were ~60,000 patients in the US and 100,000 patients in Europe diagnosed annually with pancreatic cancer and the five-year survival rates were very low.
“Most patients present with quite advanced metastatic disease that has spread to other organs with expected survival of
8-11 months with existing chemotherapy drugs,” he said.
“We have spent a lot of time studying pancreatic cancer and believed OncoSil Medical and Amplia are two interesting companies in this space,” he said.
“Amplia is earlier stage and high risk, while Oncosil is a more advanced commercial stage business.”
OSL has developed radiation therapy microparticles which are injected into pancreatic tumours under endoscopic ultrasound guidance.
McDonald said the particles emit radiation over an 80-day period with the objective to shrink tumours enough to allow for surgical resection, which leads to longer survival.
“Surgical resection rates have been shown to be about 30% in a small company study, compared to about 8.5% in a retrospective analysis of studies using chemotherapy alone but further larger studies are required,” he said.
“Another benefit of the treatment is that it reduces pain, which can be a significant issue for these patients.
“Oncosil’s treatment is only appropriate for patients with locally advanced cancer, which hasn’t spread to other organs, representing 20% of total patients.”
McDonald said the product was already approved in Europe but there were main value drivers expected later this year including a new European label with less restrictive conditions, a limited approval in the US under a humanitarian device exemption and German health insurance reimbursement for the product and funding of a large randomised clinical trial.
“The company is also enrolling two important clinical studies, which will report next year and will also be major value drivers for the business,” he said.
“PANCOSIL is exploring the possibility of delivering the particles via the hepatic artery under local anaesthesia which would be more convenient than current gastric delivery under general Anaesthesia,” he said.
“TRIPP-FXX, will be the company’s first randomised trial combined with the latest chemotherapy drug FOLFIRINOX.
McDonald said he expected all of these factors to drive substantial revenue growth in 2025.
“Only 500 units of annual sales are required to reach breakeven,” he said.
ATX is developing a drug for metastatic pancreatic cancer called a FAK inhibitor.
“The company is currently enrolling a phase 2A study (ACCENT) combing its drug with existing chemotherapy, which is aiming to enrol 50 patients, with a read out from the first 26 expected over the next several months,” he said.
McDonald said although early stage, the data seems promising.
“We expect final survival data of the expanded study will not be available until later next year but, if successful, we see the
company being in a strong position to partner the drug,” he said.
“It may also be possible to combine this drug with other new drugs under development.”
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As of September 19, 2024 Genetic Signatures, Amplia Therapeutics and Oncosil Medical are all held in the Pengana High Conviction Equities Fund.
