Rachel Gearhart: Good morning, and welcome to Market Wake-Up Call. I’m Rachel Gearhart. With me this week is Marc Lichtenfeld, Chief Income Strategist at The Oxford Club. Welcome, Marc.

Marc Lichtenfeld: Hi, Rachel.

Rachel Gearhart: Now, don’t let the title fool you – he may be Chief Income Strategist, but Marc’s also our healthcare and biotech guru at the Club. And the biotech sector has been on a tear so far this year. In fact, it’s significantly outperforming the S&P and the healthcare sector. Marc, what’s going on?

Marc Lichtenfeld: Well, I think there are two things at play. The first is some general excitement after a big industry conference earlier in the month, but as the market has come back from the lows at the end of the year, from that big sell-off, investors are coming to the market with a risk-on attitude. So as they’re getting more comfortable that the market is either done falling or not going to fall off a cliff, they’re willing to take on additional risk. And certainly the biotech sector is on the higher end of the spectrum when it comes to risk. As investors get more comfortable being speculative, the biotech stocks are where a lot of their money ends up getting plowed into. As you mentioned, it has outperformed. It’s up about 17% year to date, which is more than three times what the S&P 500 has done. Investors are clearly very comfortable with biotech at this moment.

Rachel Gearhart: Now, last year was also a big year for biotech. In fact, 58 biotech companies IPO’d and raised a record-setting $6.3 billion. And just recently, Moderna (Nasdaq: MRNA) stole the headlines. The company IPO’d at $23. What’s happened since?

Marc Lichtenfeld: Well, for Moderna, it hasn’t been that great. The stock is down about 30% from its IPO price, so it’s had a little bit of a rough go. That’s not totally unusual with biotech IPOs, especially ones that have as much buzz as Moderna did. Moderna is the largest biotech IPO in history, so there were a lot of high expectations coming into it. It’s not surprising, especially for a company that’s not going to have any catalysts coming up for a little while. It’s not like a typical company where the quarterly earnings are very important. With biotech companies, often, they’re not profitable and don’t even have any revenues yet. They’re development-stage companies. Sometimes, you really have to look further out on the calendar for a catalyst, and when you don’t have one, the stock can fall.

Rachel Gearhart: Do you expect to see as many biotech IPOs this year? And if so, are there any that you’re watching very closely?

Marc Lichtenfeld: I think we could see a very strong IPO market in the biotech sector this year. Even though we’re in a 10-year bull market, there’s a lot of money still on the sidelines – institutional money that is looking for a home. There are a lot of people – a lot of investors, whether you’re talking about hedge funds, pension funds, venture capitalists or angel investors, who are looking to put money to work in early-stage biotech companies. So I think that’s going to fund the IPO market for biotechs. I think it’s going to be pretty strong.

As far as one that I’m looking at, there’s a company called Kaleido Biosciences. It is involved in the microbiome, which is an area that’s getting a lot of attention throughout the healthcare sector. It’s one I’m personally interested in. I think it’s fascinating, so I’ll be keeping my eye on that one.

Rachel Gearhart: We talked about this last month when Moderna IPO’d. I had asked you, “Is now the time for investors to get in? Should we be getting in at the initial public offering, or should investors wait?” You had indicated that waiting might be the best option. Have you changed your idea on that at all since?

Marc Lichtenfeld: Nope, not at all. The reason is because, as I mentioned, a lot of times with these companies, you don’t have a catalyst coming for a while, especially when they’re early-stage. By early-stage, I mean that these companies are very early in the development of these drugs, so they may not have any clinical trial data coming for a while. Or even if they do have clinical trial data, the trial might be so small that it’s not especially meaningful. So you’re still kind of a long way away from having a clear indication if the drug is going to work or if it’s safe.

And again, with these companies that don’t even generate much or any revenue, the quarterly earnings really aren’t going to matter much. That’s not going to serve as a catalyst. When I enter a stock, generally speaking, I want to know that there are some catalysts coming up, and with these IPOs, very often they don’t have one coming up. The other aspect you really need to consider with these biotech IPOs is that most of them are very, very small and very speculative. You have to be able to handle some significant risk if you’re getting into a biotech IPO, especially a very small one.

Rachel Gearhart: Now, your comment about catalysts ties beautifully into my next question. Obviously, an IPO isn’t the only big event in the life cycle of a company, and specifically a biotech’s. You often write about plenty of other catalysts like FDA approvals, earnings reports and publicity at healthcare conferences. Is there anything going on right now in any of your positions in your Lightning Trend Trader portfolio?

Marc Lichtenfeld: There’s a stock that I’m really excited about that makes synthetic cannabinoids. There’s a lot of buzz right now about pot stocks and things like that. This is not a pot stock. This is not a company with CBD oil. This is real medicine. It has drugs in development for all kinds of rare and inflammatory diseases. These synthetic cannabinoids interact with the endocannabinoid system, which is something that scientists are just starting to really understand. It’s something that helps regulate metabolism, sleep and growth… so many different functions in the body.

There are several companies that are starting to get a better understanding and starting to develop drugs that interact with the endocannabinoid system. And this one particular company that makes the synthetic cannabinoid is in Phase 2 and 3 trials in a couple of really nasty diseases. So I’m very, very excited about its potential, not just as a regular biotech stock, but also because even though it’s not technically a pot stock, when the pot stocks start moving, sometimes it gets lumped in. It has two ways that the stock can move higher.

Rachel Gearhart: Very exciting – it sounds like another exciting year for biotech. What do you think?

Marc Lichtenfeld: You know, that’s the great thing about the biotech sector: It’s always exciting. There are always amazing new discoveries. That’s one of the reasons I love to cover it.

Rachel Gearhart: Well, there you have it. Thanks so much for being here, Marc.

Marc Lichtenfeld: My pleasure. Thanks for having me.

Rachel Gearhart: That’s all for this edition of Market Wake-Up Call. We’ll see you next week.

[End of Audio]