I also won’t reveal the names of his August picks because these picks are fairly new and they are only up 50%. It isn’t late to buy these names because Castor thinks they have 200-300% upside potential. One of these stocks currently trade at $6 and Castor thinks it may eventually hit $40.
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As a thank you gift just for being a reader, I am going to share Michael Castor’s February 2014 stock pick. Michael Castor’s best ideas crushed the market on average because Michael Castor has unique sets of skills and resources that most investors don’t have. However, the most critical component of the puzzle is that Michael Castor has been sharing his “best” ideas with us. His fund is very small, $200 million in assets under management and he is trying to build a reputation as a solid biotech investor. He has done a fantastic job so far.
Michael Castor picked BioDelivery Sciences (BDSI) in February 2014 and maintained since then that this is his best idea. The stock was trading below $9 at the time. It traded as low as $7 in April during a market decline. Here is what Castor said about BDSI in February:
Biodelivery Sciences (BDSI) specializes in developing narcotic drugs (pain killers). One of their key drugs, which is partnered with Endo had positive clinical results (the drug was shown to be highly effective). BDSI at the time had a market cap of a bit over $200 million. BDSI earns a mid to high teens royalty on this drug. Anticipating sales of approximately $200 million, this translates into operating income (via a royalty stream) of about $35 million/year for BDSI. A typical royalty stream is pure profit and can be valued at approximately 5-7x sales, so this is worth $150 million. The market was alerted to BDSI’s meaningful undervaluation and the stock moved up.
In addition, BDSI has three other drugs in late stage development. One of these (and the biggest value driver in our opinion) is Bunavail, to treat opioid addiction. The existing drug on the market for this indication, Suboxone, has sales of approximately $1.5 billion. BDSI’s drug is easier to use and likely to have lower incidence of side effects. If BDSI can capture 10% of the market, revenues of $150 million would justify a valuation of $450 million (using a 3x sales multiple). We think that such sales are achievable. Bunavail has been submitted to the FDA and has a target approval date in June 2014. BDSI’s third drug is Onsolis, an FDA-approved oral agent for cancer breakthrough pain. Other companies marketing similar products include Insys [INSY] and Galena [GALE], both of which have valuations of several hundred million dollars for their similar products. BDSI will begin marketing Onsolis later this year. Finally, BDSI is developing a topical drug for neuropathic pain (the pain caused by nerve damage associated with diabetes). We view this as high risk, but BDSI’s valuation is supported many times over by its other aforementioned products.