The Sick Economist's Blog, page 14
June 30, 2020
WILL INTUITIVE SURGICAL BE PERMANENTLY CRIPPLED BY THE PANDEMIC?
Let’s find out.
By: Matthew Rojas, Biotech Financial Analyst
Company Background:
Intuitive Surgical was founded in 1995 and received FDA approval for its first-generation da Vinci surgical system in 2000 for general laparoscopic surgery. Laparoscopic surgery or minimally invasive surgery uses multiple 0.5-1cm incisions to examine the organs inside the abdomen. A surgeon uses the console within the da Vinci surgical system to control a robotic arm to make these small incisions. After the small incisions are made, the surgeon carefully inserts various instruments into the area to be operated on. On the other hand, in conventional open surgery, the surgeon uses a single incision to enter the abdomen. According to Jefferson Health, minimally invasive surgery has several advantages over traditional open surgery including shorter hospital stays, less trauma during surgery, and fewer complications. Because of these benefits, minimally invasive surgery is becoming increasingly popular all over the world.
Pre-COVID-19 Financials:
Intuitive Surgical had stellar financials for the year ended December 31, 2019. The company generated about $4.47 billion in revenue, a 20% increase from the end of 2018. Their net income was approximately $1.38 billion, giving them an outstanding net profit margin ratio of 30.7% — a 10% net profit margin ratio is considered average. Intuitive Surgical had a solid current ratio of 4.52, indicating that the company could easily pay its short-term debt obligations. Finally, they had about $1.16 billion in cash and cash equivalents, which means that they had a significant amount of liquidity heading into the quarter when the stock market crash would take place.
Moving onto the first quarter ended March 31, 2020, Intuitive Surgical also produced exceptional financials because the disruption in elective surgical procedures did not take place until mid-March. The company earned nearly $1.1 billion in revenue, about a 14% decrease from the fourth quarter of 2019 but still up 13% compared with the first quarter of 2019. Ultimately, Intuitive Surgical was left with approximately $313 million in net income, leaving the company with a slightly lower yet still impressive net profit margin of 30.1%. Their current ratio ticked up to 4.96, so they could handily cover their short-term debt obligations. Lastly, Intuitive Surgical had over $3.2 billion in cash and cash equivalents; therefore, they still had more than enough liquidity to weather the storm ahead. Overall, the company handled the first quarter of 2020 with ease; it is during the second quarter of 2020 that investors predict Intuitive Surgical will suffer.
Hold on Elective Surgeries:
According to the CovidSurg Collaborative, about “28.4 million elective surgeries worldwide will be canceled or postponed in 2020… in other words, less than 30% of scheduled elective surgeries will take place”. Instead, hospitals are prioritizing surgeries for COVID-19 patients. Intuitive Surgical indicated in early April that “in the latter half of March, the company experienced a significant decline in procedure volume and postponements of system placements in the U.S. and Europe”. Not surprisingly, the company also stated the disruptions in elective surgical procedures have caused and will continue to cause a significant negative impact on operations and financial results. There is almost no doubt that the second quarter of 2020 will be weaker for Intuitive Surgical, and the question remains… will they pull through?
The Stock:
Before the pandemic hit, Intuitive Surgical’s stock (NASDAQ: ISRG) was fluctuating between $570.00 to $620.00; however, when economies around the world shut down, their stock price dropped by a whopping 58% to a low of $367.75. Since the crash in early March, the stock has fully recovered by nearly 62% to about $594.00. This recovery is likely because the number of elective surgeries has slowly but surely increased as many countries are seeing less COVID-19 infections. It seems as though Intuitive Surgical is out of the woods; however, many people are skeptical because of the recent resurgence in coronavirus cases.
A Second Wave?
In recent weeks, several countries such as Australia, Germany, and the United States have experienced increased coronavirus infections. These recent spikes may cause hospitals to once again postpone some elective surgical procedures in which case, Intuitive Surgical will likely see another hit to their revenue streams. Dr. Robert Glatter, an emergency physician at Lenox Hill Hospital in New York City, stated that in the fall and winter months, “the intensity of both viruses [COVID-19 and influenza] combined could make our initial COVID-19 look benign”. Although there may be a stronger wave of COVID-19 in the future, countries will have more experience in dealing with the virus in terms of lockdown procedures, social distancing regulations, and adequate hospital equipment. Intuitive Surgical has survived the initial spike in cases and has strong financials to persevere through a potentially more-severe second wave.
Company or Industry-Wide Problem?
People should ask themselves an important question every time they see a company’s share price decreasing: are its competitors experiencing the same setbacks? If the answer “no”, then the decrease in share price is likely due to an internal problem, and one should stay away from investing. If the answer is “yes”, then the decrease in share price is likely an industry-related problem; hence, it is safe to invest if the industry is likely to recover.
Some of Intuitive Surgical’s main competitors are Medtronic and Zimmer Biomet. Medtronic entered the robotic surgery space when they acquired Mazor Robotics in 2018, and Zimmer acquired MedTech SA and its Rosa robotic system for orthopedic surgery in 2016. Medtronic had a share price of around $120.00 before the crisis and then dropped about 40% to $73.00 — its share price has since recovered by about 22% to $94.00. On the other hand, Zimmer had a share price of approximately $160.00 before the pandemic and then decreased about 50% to $80.00; they have since seen their share price recover by 59% to $127.00. Because Medtronic and Zimmer had almost identical stock charts to Intuitive Surgical, we are dealing with an industry-related problem. The robotic-assisted industry is already recovering since elective surgeries are ramping up; therefore, Intuitive Surgical is a safe investment.
The First Mover and Switching Cost:
The advantage that Intuitive Surgical has over its competitors is that it entered the robotic-assisted surgical field before they did. The first mover advantage is powerful, just look at companies like Netflix and Apple to see the proof of this concept. Because Intuitive Surgical was the first mover, it’s stock recovered more than its competitors, keeping the company in first place.
Being the first mover also provides Intuitive Surgical with a switching cost advantage. Even if Medtronic or Zimmer were to come out with the next greatest surgical robot, the majority of surgeons already use the da Vinci surgical system. Training surgeons to use a new robot represents a learning curve switching cost; hence, I believe many hospitals would not go through the trouble to adopt the new systems, especially when they need to catch up on the backlog of elective surgeries.
Buy, Sell, or Hold?
Intuitive Surgical is the clear leader in the robotic-assisted surgical space. Although it has taken hits to its revenue streams due to the hold on elective surgeries, these setbacks are temporary. Elective surgery procedures have increased in recent months, and Intuitive Surgical’s stock price reflects this. Yes, there may be a stronger, second wave of coronavirus cases; however, that does not change the fact that people need surgery. I recommend that people buy Intuitive Surgical because of its highly in-demand products, excellent financials, and first mover status.
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June 29, 2020
DOES DAY TRADING MAKE SENSE IN BIOTECH?
Investors have long debated the best strategy for profiting in the stock market. The two basic strategies of investors are an active and passive approach, with passive investors subscribing to the “buy and hold” method, while active investors preferring to buy then sell stocks frequently, known as trading. There has been an increasing amount of interest in trading, with the elimination of transaction fees for many brokerages. Trading is difficult to do successfully because of the costs beyond transaction fees, however, through taxes accumulated on realized stock gains, known as capital gains tax. The capital gains tax rate is the same as the income tax rate, 22% for the median U.S. income of $60,000, but only if the stock is held for less than a year. By holding a stock for more than a year, the capital gains tax is decreased to only 15% for the same tax bracket. A difference of 7%, or approximately $700 of $10,000 in capital gains. This benefit is even greater for the highest tax brackets, with an income tax rate of 35% for individuals making $207,350 or more and 37% for individuals making $518,400 or more annually both being decreased to 15% and 20%, respectively, with the lesser long-term capital gains rate. This results in a difference of 20% and 17% in the capital gains rate for each, translating to approximately $2,000 and $1,700 for $10,000 in capital gains. With greater capital gains these amounts increase substantially, with a difference of $20,000 and $17,000 for $100,000 in capital gains.
Furthermore, by trading, the investor is exposed to capital gains tax each time they sell for profit, known as realizing their gain. Therefore, a trader in the median tax bracket (22%) who makes 30% capital gains on $1,000 through two trades over a year will have an after-tax profit of $234, whereas an investor that held a stock for a year with a 30% gain would experience an after-tax profit of $255. A small difference in magnitude in this circumstance, but the difference becomes much larger with greater amounts of capital gains and at higher tax brackets. These relatively small percentages also compound quickly over time.
This also ignores the difficulty of trading. Burton Malkiel, the author of A Random Walk Down Wall Street compares those who frequently trade, known as day-traders, to gamblers since short-term stock price changes are unpredictable, thus coined a random walk. Day trading is consequently speculation as opposed to investing since it is baseless, ignoring the characteristics of a business or industry. It has been shown in studies performed by Duke that even market-timing professionals, meant to determine the short-term movements of stocks, are unable to effectively predict short-term behavior of the markets. Ben Graham, the mentor of the famous Warren Buffett, notes in The Intelligent Investor that studies have also shown that trading based on the previous movements of stocks, buying those that continue to rise and selling those that continue to fall, known as momentum investing followed by a group called Dow Theorists, underperforms buying and holding over the long term.
Compounded Gains
An additional benefit of buying and holding stocks is the compounded gains over a long period. The perfect market-timing investor in the 20 years from January 1, 2000, to December 31, 2019, that avoided the 40 days with the largest losses in the stock market would have experienced a gain of $242,117.29 on an initial investment of $10,000, or an annual return of 17.51%, versus an overall gain of $22,192, or an annual return of 6.02%, for Standard & Poor’s benchmark of the top 500 stocks (S&P 500) over the period as a whole. The failed market-timing investor that missed the best 40 days instead of avoiding the worst would have been left with a mere $4,615.42, or 124% less than buying and holding the S&P 500. This is an annual loss of 3.79%. Effectively timing the market over 20 years is impossible based on the random walk theory, however, in buying and holding, there is an almost guaranteed probability of a long term gain that will compound exponentially over time, whereas trading may result in significant losses. Continuing to hold the $10,000 invested in the S&P an additional 30 years beyond 2020 at 6.09% will result in a total gain of $182,185.32. A chart of compound growth for $1,000 is available here.
Many stocks, although a limited number in the biotechnology sector, also provide quarterly payments to investors, known as dividends. These dividends can be reinvested into the equities to contribute to the compound growth in potential gains. Using a $10,000 initial investment in a stock at $10 with an annual dividend of 5% or $0.50, that does not grow, but the share price grows annually by 6%, at the end of 20 years the total gain without dividend reinvestment would be $42,071.35 or 7.45% annually, versus a total gain of $56,403.72, or 9.03% annually with reinvestment. Reinvesting dividends thus led to a 34% greater total gain in value, the result of 758.69 additional shares accrued over the 20 years. These additional shares would also result in $379.34 in surplus annual dividend payments added to the $500 provided by the purchase of the initial 1,000 shares. A growing dividend increases the potential for value growth further.
Minimizing Risk – Maximizing Potential
The potential for losses through buying and holding is less than trading, but not eradicated. By purchasing and holding stock, the stock’s price may decline substantially from the time you invested in it, but rather than selling at a guaranteed loss, there is still potential for the stock to return to its previous price point and become a profitable investment. For example, buying Standard and Poor’s Biotech ETF (XBI), a collection of stocks in biotechnology, in August of 2008 at $22.91, but selling it directly after it dropped to around $16 in November would have resulted in a loss of nearly 30%. To recover that loss, the investor would have to return 40% on the remaining portfolio to break even, since the investment portfolio has decreased by 30%. However, if the investor buys the ETF at the same time, then holds it until June of 2020, the investor would experience a total return of 394%, or an annual return of 14.3%. Despite purchasing at a relatively high price in the short-term leading up to the 2008-2009 financial crisis, the investment provides excellent returns over the long-term period of 12 years. Thus, buying and holding reduces the potential for losses, benefitting from the development and growth of companies, and the economy over time.
Furthermore, the use of dollar-cost averaging, or purchasing additional shares every month, quarter, or year, can also increase potential returns and take advantage of short term declines in stock prices throughout a significant market crash. By investing an initial amount of $10,000 in the Biotech ETF XBI in August 2008 and purchasing an additional $100 a month to June 2020, the total value would have increased to $101,482 or an annual rate of return of 21.64%, excluding dividend reinvestments. Dollar-cost averaging is particularly valuable in an industry as volatile as biotechnology.
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June 25, 2020
BIOGEN: A “BUY” FOR THE BOSTON BRAINTRUST?
Biotech Correspondent John Coughlin investigates…..
Within the broader scope of biotechnology, Boston has emerged as a leader in the field of housing and creating opportunities for biotech companies. According to Biospace, Boston is #1 in the cluster of science jobs, housing a total of 82,075 employees across the city.
Along with the title of job opportunities, Boston is among the most impressive cities regarding education. The Greater Boston area includes esteemed colleges such as MIT, Harvard University, and Tufts University. Among these colleges are talented undergraduates who, after college, will flock to the city to find jobs.
Within Boston, many of these jobs can be found in the Longwood Medical and Academic Area, which hosts prestigious hospitals and academic facilities. Although central Boston may hold the best hospitals, it also holds one of the most known and largest biotech companies, Biogen ($BIIB)
Company Overview
Biogen, which trades with the ticker symbol ($BIIB), specializes in the field of neuroscience. According to their investor section on their website, the company “discovers, develops, and delivers worldwide innovative therapies for people living with serious neurological and neurodegenerative diseases.” Their triple D, discover, develop and deliver, has been in action since its founding in 1978 by “Charles Weissmann, Heinz Schaller, Kenneth Murray, and Nobel Prize winners Walter Gilbert and Phillip Sharp.”
The company currently dominates within the field of medicines which treat multiple sclerosis. Along with multiple sclerosis, Biogen also treats many diseases found in older patients such as Parkinson and Alzheimer’s disease, which is growing into a larger revenue stream. With its prior success in treatments, Biogen is actively evolving their strategies and states the company “is focused on advancing research programs.”
Financials
Due to the COVID-19, many companies have suffered at the hand of closings and a lack of consumer buying. These closings have not affected the goal, and larger, the revenue of Biogen. Within their most recent quarterly earnings, the company stated: “To date, we and our collaboration partners have been able to continue to supply our products to our patients worldwide and currently do not anticipate any interruptions in supply.” Biogen expressed that new developments in COVID-19 could disrupt the company from a larger whole, but expressed later in the report, “We and our third-party contract manufacturing partners continue to operate our manufacturing facilities at or near-normal levels.”
Aside from COVID-19, Biogen has been growing its revenue on-trend for the past four years. In the company’s 2019 annual report, revenue from 2018 to 2019, saw a 4.5% increase and a 35% increase from 2015 to 2019. Along with revenue, the company has seen a drastic jump in its cash flow, from 3.9B in 2018, to 6.2B in 2019. From a small look into the company’s financials, Biogen is an attractive buy from a financial standpoint.
Stock Price
As of June 25th, Biogen’s stock currently sits at a price of $271, under the ticker symbol (BIIB). Over the course of the year, the stock, compared to the broader market, is down 7%. Although the stock is down for the year, Biogen, from a charting perspective, remains neutral. The nearest support remains at the $260 price level, which it most recently tested and held. If BIIB continues to hold this support in the near future, the stock could return to the $300 mark, representing a +10% price increase.
If Biogen’s stock continues to fall, and possibly through the $260 price level, the nearest support or buy level is at $225. Although unlikely, at $225, Biogen is considered a strong buy.
Tecfidera Drug Patent Loss
On June 19th, a West Virginia court ruled that Biogen’s Tecfidera patent was invalid and that Mylan, a global generic company within the field of pharmaceuticals, could produce Tecfidera. This news subsequently led to a 7% drop in Biogen’s stock price. Although, investors seemed to shrug off some of the news on Friday, June 19th, as the stock rose 4%.
Tecfidera, Biogen’s multiple sclerosis drug, accounted for 4.43 billion, or roughly 20% of the company’s revenue in 2019. With the most recent court decision, Biogen will likely see a more significant fall in its revenue for 2020.
Biogen’s Future Outlook
Biogen has and will continue to be a lead producer in the pharmaceutical manufacturing industry. Within the 2019 annual report, the company expressed that the future remains bright for Biogen. In their “Growing our multi-franchise portfolio,” the company added ophthalmology, lupus, stroke, and Alzheimer’s disease to their growing list of opportunities for drugs in the early 2020s. With these possible new streams of revenue in the 2020s, the company’s loss of its Tecfidera drug remains a smaller issue for long term investors.
Along with the expansion into other possible treatments, Biogen reported “continued growth and regional expansion in spinal muscular atrophy.” SPINRAZA, a treatment approved for infants, children, and adults, has shown continued growth within the United States and abroad. In 2019, the company saw an increase in revenue from SPINRAZA from “22% in 2018 to $2.1 billion, driven by 9% growth in the U.S. to $933 million and 34% growth outside the U.S. to $1.2 billion.” With SPINRAZA growing in popularity, the treatment could become a prominent leader within the company’s product revenues and could potentially cut the revenue loss of Tecfidera.
The company has also expressed the growing demand for treatments regarding neuroscience. According to Biogen, “the global population over the age of 60 will be nearly 1.5 billion by 2030.” With dementia and Parkinson’s disease being prominent in the older generation, the company, within its CEO letter, can “capture the neuroscience opportunity.
Analyst Rating…
Biogen can be considered one of the most impressive biotech companies in the world and will continue to be for the foreseeable future. The company continues to grow its revenue through its many selection of products, and will likely continue due to the growing older population.
Aside from the company itself, Biogen’s location in Boston creates an opportunity to funnel many graduates from Harvard and MIT to work for the company.
Biogen’s triple D, discover, develop and deliver, will always be the company’s focus in the future and that is why the company is a BUY.
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June 24, 2020
BETTER BUY? VOYAGER THERAPEUTICS (VYGR) VS. MEIRAGTx HOLDINGS PLC (MGTX)
Biotech Strategist Lee Rivers compares two leading names to see which should gain favor with savvy investors….
Voyager Therapeutics
Business Model
Voyager Therapeutics is a clinical-stage adeno-associated virus gene therapy company that focuses on life-changing treatments for patients suffering from severe diseases of the central nervous system that are both fatal and debilitating. The company’s market cap is around $600 million. Its pipeline includes VY-AADC01, which is a treatment being produced and marketed in a partnership with Neurocrine for Parkinson’s disease in phase I(b) clinical trials. Voyager also has pre-clinical programs that include VY-SOD101 for a monogeneans form of amyotrophic lateral sclerosis (ALS), in which nerve cells break down to decrease muscle functions, VY-FXN01 for Friedreich ataxia, VY-HTT01 for Huntington’s disease, and VY-SMN101 for neuromuscular disease.
In early 2019, Voyager Therapeutics made an exclusive, global strategic collaboration and option agreement with AbbVie to develop and commercialize vectorized antibodies. These antibodies target pathological species of alpha-synuclein in order to potentially treat Parkinson’s disease and other diseases, known as synucleinopathies, like Lewy Body Dementia, that are the result of abnormal accumulations of incorrectly folded alpha-synuclein proteins. The delivery of sufficient quantities of antibodies across the blood-brain barrier has been the most significant limitation of many therapies for neurodegenerative diseases. Typically, this requires frequent systemic injections with large amounts of antibodies, but Voyager’s blood-brain barrier penetrant AAV capsids intend to circumvent this limitation. If successful, the genes that encode the production of these therapeutic antibodies would be potentially delivered in a one-time intravenous administration, ultimately resulting in higher levels of therapeutic antibodies in the brain than the current systemic administration of the antibodies.
Through the agreement with AbbVie, Voyager received an upfront $65 million cash payment and has the potential to earn $245 million in preclinical and phase I option payments. The firm then may receive an additional $728 million in potential development and regulatory milestone payments as well as royalties on future global commercial net sales of each approved alpha-synuclein vectorized antibody that is produced through the collaboration. Furthermore, Voyager has a similar strategic licensing collaboration for four of its gene-therapy collaborations with Neurocrine Biosciences for up to $165 million upfront and up to $1.7 billion in potential milestone payments. These collaborations help to inject capital in Voyager so that it may continue its clinical trials for the programs it is licensing.
Financials
Voyager Therapeutics ended the first quarter of 2020 with $250 million in cash and cash equivalents, which will cover expenses until mid-2022. The company has a current ratio of 3.76 and net working capital of $199.9 million, showing that it is comfortably able to cover short-term liabilities. Voyager also maintains a debt-to-asset ratio of 0.75 and debt-to-equity of 3.04. The company experienced a net loss of $1.21 per share in 2019 compared to $2.75 per share in 2018, despite nearly doubling research and development expenses. This was the result of an increase in collaboration revenues from $7.6 million in 2018 to $104 million in 2019. The firm currently generates and expects to continue to generate in the near future, the majority of its revenue through its collaboration agreements with AbbVie, Neurocrine, and other strategic partnerships they may enter. Successful development efforts will also potentially generate revenues.
MeiraGTx Holdings PLC
MeiraGTx Holdings PLC is a holding company for MeiraGTx Limited, a clinical-stage gene therapy company that focuses on novel gene therapies for inherited and acquired disorders. It has a market cap of about $500 million. Its pipeline consists of AAV-CNGB3, AAV-CNGA3, AAV-RPE65, AAV-RPGR, AAV-AQP2, and AAV-UPF1. MeiraGTx is vertically integrated, thus it is able to license, acquire, and develop its technologies for a wide range of product candidates and potential usages. The company initially focused on treatments of the eye, salivary gland, and central nervous system, but intend to expand their focus to patients suffering from a wider range of diseases.
A significant difference between MeiraGTx and Voyager is MeiraGTx’s ownership and operation of a flexible, scalable viral vector manufacturing facility. The company also plans to establish a second manufacturing facility and a plasmid production facility. Using its extensive understanding of disease models, along with its comprehensive development platform, MeiraGTx expects to have efficient clinical development. It also is in the process of developing a potentially transformative technology that would allow for the ability to turn on and off the expression of gene therapies.
AAV-GAD is a gene therapy for Parkinson’s Disease that has shown effectiveness at improving symptoms in its Phase II trials. The patients in both Phase I and Phase II studies exemplified significant improvements in abnormal thalamic metabolism, which is a key node in the circuitry of movement. This improvement was not present in untreated hemispheres or patients in the placebo group. Furthermore, the company also is in the development stages of its preclinical pipeline of gene therapies that target other neurodegenerative diseases, such as AAV-UPF1 for motor neuron death in ALS, and an Alzheimer’s disease program. Alzheimer’s disease has become increasingly common and costly, with many treatments only having a temporary effect on symptoms. AAV-delivered gene therapies, however, are expected to potentially have a durable, long-lasting effect.
MeiraGTx also has made a partnership with Janssen Research, a subsidiary of Johnson & Johnson, to jointly develop AAV-RPGR. AAV-RPGR is a gene therapy product for the treatment of X-linked retinitis pigmentosa (XLRP), which is an inherited retinal disease. XLRP is considered to be one of the most severe forms of retinitis pigmentosa, causing juvenile-onset and progressing to legal blindness in adulthood. The gene therapy is currently under the fast-track designation and has been granted priority medicine (PRIME) and advanced therapy medicinal product (ATMP) designations. PRIME designations increase interactions, optimize development plans, and accelerate innovative treatments where there is currently an unfulfilled medical need.
Financials
MeiraGTx has $211 million in cash and cash equivalents at the end of the first quarter of 2020, which is expected to fund operating expenses and capital expenditures into 2022. The company also has a current ratio of 5.83, net working capital of $208 million, and a debt-to-asset ratio of 0.39. Furthermore, the firm’s debt-to-equity ratio is 0.65. In 2018, the company had no collaboration revenues, creating a net loss of $82.9 million to fund operations and research. In 2019, the company had $13.3 million in collaboration revenue, decreasing its net loss to $54.7 million. Over the same period, research and development efforts increased substantially but the costs were offset by research funding and research and development tax credits, decreasing total research and development expenses $8 million year over year. MeiraGTx will continue to receive research funding as well as milestone payments and potential royalties from Janssen Research.
And the Winner Is….
Between Voyager and MeiraGTx, it is apparent that MeiraGTx is the better investment. Its vertical integration provides it an advantage over Voyager since it can develop, manufacture, and license gene therapies for its own pipeline. This can ultimately lead to economies of scale, particularly given the company’s understanding of diseases, efficient development platform, and the future additional manufacturing facility or viral vectors as well as the plasmid production facility. Additionally, it has more net working capital and a significantly better debt-to-equity ratio. Consequently, MeiraGTx appears to be in a superior position and a better overall investment.
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June 23, 2020
3 BIOTECH STOCKS THAT WILL SURVIVE THE STORM
By Matthew Rojas, Securities Analyst
The stock market crash on March 9, 2020, courtesy of the novel coronavirus, sent the majority of stocks plummeting to their lowest levels since 2009. All three major indices recorded some of their largest percentage losses: the Dow Jones Industrial Average fell 7.79%, the S&P 500 dropped 7.6%, and the Nasdaq Composite shed 7.29%. However, as the economy gradually began to reopen, several stocks rallied and regained much of what they lost in March. Many investors had high hopes of a v-shaped recovery, that is until recent events such as increasing tensions between the United States and China, the death of George Floyd, nationwide protests, and a fresh spike in coronavirus cases sparked another storm that we would have to weather.
Over the past two weeks, these events have created a high degree of uncertainty in the market. As a result, many companies experienced a setback as the rallies came to a halt. These recent losses are a wake-up call for overly-optimistic investors — the road to recovery will have bumps along the way. Regardless of these hurdles, people need to keep their money in the market and invest in stocks that will pull through these difficult times. One sector of the market that has time and time again shown promise, even in times of economic downturn such as these, is biotechnology.
Here are three stocks that are likely to sail through any hurricane…
Genmab
Genmab is a groundbreaking biotechnology company that specializes in the development of antibody therapeutics, rather than traditional chemotherapy, for the treatment of cancer. Antibodies are critical proteins that protect the body from both bacterial and viral infections by binding to the antigens present in pathogens. Amazingly, Genmab is using hybridoma and recombinant DNA technology so that antibodies can target other molecules besides antigens, specifically cancer cells.
Currently, Genmab has three approved antibodies for various types of cancer such as multiple myeloma. Additionally, the company has patented several technology platforms that they use to create their antibodies. When investing in the biotech industry, especially during a time when most clinical trials not related to COVID-19 have been put on hold, it is critical to invest in companies that already have marketed products and/or technology platforms. That is not to say that you shouldn’t invest in emerging biotech companies, it is just that companies with established products and technologies have a better chance of surviving this storm.
Genmab is also engaged in several strategic partnerships with world-renowned pharmaceutical and biotechnology companies such as Janssen Biotech, Novartis, and, most recently, AbbVie. On June 10, 2020, Abbvie paid Genmab $750 million to jointly develop three of Genmab’s next-generation bispecific antibody products.
Genmab (NASDAQ: GMAB) is a perfect example of a company whose share price has increased over the course of the pandemic. When the market crashed, Genmab’s stock fell to a low of around $17; since then, the share price has increased by over 80% to approximately $31. Furthermore, since the first quarter ended March 31, 2020, Genmab’s market cap increased by approximately 47% from $13.25 billion to $19.51 billion.
After analyzing Genmab’s financial statements, they are in a strong position to continue growing in both the short-term and the long-term. Genmab has a current ratio of 19.04, indicating that they can easily cover their short term debt obligations. Also, the company generated $2.69 billion in net income just during the first quarter of 2020. Moreover, Genmab has an impressive profit margin of 41.70%, which shows its ability to turn sales into huge profits. With Genmab’s patented antibodies and technologies, the recent deal with AbbVie, and their strong financials, they are in a position to confidently survive this storm.
Novavax
Many companies are competing in the race to develop a COVID-19 vaccine. While Moderna is currently winning the popularity contest, Novavax is an underdog that we need to pay attention to. Novavax is an American, clinical-stage biotechnology company dedicated to developing vaccines for a broad range of infectious diseases. Although not the leader in the COVID-19 vaccine race, Novavax has patients scheduled to participate in a Phase I trial starting this month. They are expecting safety results to come back in July 2020, and the Phase II trial will start shortly after that. On June 11, 2020, the company announced that it would receive up to $388 million in funding from the Coalition of Epidemic Preparedness Innovations or CEPI. As with Genmab, securing a multi-million dollar deal is a strong sign that Novavax should be at the forefront of investors’ minds.
Beyond COVID-19, Novavax has several vaccines for other infectious diseases in its clinical pipeline. Their NanoFlu vaccine for influenza for adults 65+ is currently in Phase III clinical trials and showed “stronger and broader immune responses against homologous and heterologous influenza strains” than Sanofi’s Fluzone HD, the leading licensed influenza vaccine for the older adult market. Additionally, Novavax is attempting to be a first-mover by developing a vaccine for respiratory syncytial virus or RSV, which is currently in phase III clinical trials. Although Novavax has no approved vaccines, they have strong candidates in the late stages of clinical trials.
Something that Novavax does have patented, however, is their Matrix-M adjuvant technology. Matrix-M adjuvants “stimulate strong antibody and cell-mediated immune responses induced by low antigen doses, long-duration immune responses, and carry a low risk for allergic reactions or other adverse events”. Because lower antigen doses are required with this technology, there is a cost-saving advantage for manufacturers. With more manufacturers interested in this technology, investors will reap the benefits of increased revenue.
Moving onto some numbers, when the market crashed, Novavax’s stock (NASDAQ: NVAX) was approximately $7.00. The stock has since increased by over 700% to about $56. To put this increase in perspective, their market cap increased by over 2000% since the year ended December 31, 2019 from $128.76 million to around $3 billion.
Additionally, Novavax has some solid financials to back up its skyrocketing share price. Novavax has a strong asset base; hence, their current ratio is 13.45, meaning that they can easily cover their short term debt obligations. Although the company is currently operating at a loss of about $25 million, this is because they are investing heavily in R&D for their various vaccine candidates. Novavax’s stock price is growing at an unprecedented rate and will most likely continue to do so — they will certainly persevere through this storm of economic downturn.
Regeneron
Regeneron is an outstanding biotechnology company that formulates life-transforming medicines for people with chronic diseases. Currently, they have six marketed products for a wide range of diseases including cancer, rheumatoid arthritis, and hypercholesterolemia. Additionally, Regeneron has one of the largest and most diverse clinical pipelines with 30 different products in Phase I, II, and III clinical trials for many diseases.
Like Novavax, Regeneron recently announced that it has started its initial COVID-19 vaccine clinical trials for its antiviral antibody cocktail, REGN-COV2. According to Regeneron, “The antibody cocktail approach may also have long-term utility for elderly and immuno-compromised patients, who often do not respond well to vaccines”. Regeneron is a solid investment choice because it has initiatives dedicated to COVID-19 and other diseases, so the company can capitalize on the current hype while still working on longer-term projects.
Regeneron’s stock (NASDAQ: REGN) has had an outstanding performance throughout the pandemic. At the beginning of the crisis, Regeneron had a share price of around $430 — the stock price has since increased by about 40% to around $600. In the first quarter of 2020, Regeneron had earnings of $6.60 per share, indicating that investors are profiting heavily on each share that they own. Additionally, the company generated about $1.83 billion in sales, about a 7% increase from the first quarter of 2019. Regeneron has a nearly perfect composite rating of 98 out of a best possible 99; this means that Regeneron is in the top 2% of all stocks. Cleary, Regeneron is more than prepared to tackle the current challenges our world is facing.
Looking Forward
Genmab, Novavax, and Regeneron are rock-solid investment choices in this time of crisis. With their patented products and technologies, million-dollar deals, COVID-19 initiatives, and revolutionary clinical pipelines, all of these companies are prepared to take the bull by the horns and emerge from the pandemic stronger than ever. It is always important to recognize that any stock, no matter how successful, will have its ups and downs. The key to successful investing is to remain calm when stock prices decrease and keep your money in the market because, in the end, strong companies will weather the storm.
The post 3 BIOTECH STOCKS THAT WILL SURVIVE THE STORM appeared first on Sick Economics.
June 22, 2020
CAN J&J WIN THE CORONAVIRUS VACCINE RACE?
By Juliette Duguid, Healthcare Analyst
The question that seems to be weighing on the collective population’s mind at this moment in time is that of the development of a coronavirus vaccine–and rightfully so, as a vaccine would bring the world one step closer to achieving herd immunity and life would slowly ease back into its normal rhythm. There has been circulating news of several biotech giants in various phases of developing a vaccine–for instance, Moderno, Inovio, as well as international researchers at the University of Oxford in England and University of Queensland in Australia. Even pharmaceutical companies have jumped on the bandwagon, such as Pfizer and Johnson & Johnson.
Johnson & Johnson is an American based multinational company that specializes in the development of medical devices, pharmaceutical, and consumer packaged goods. Its ability to diversify production to cater to a variety of different sectors is unmatched. The company’s pharmaceutical sector is its most profitable and drives the highest level of growth, with drugs such as Opsumit and Uptravi, medications known to treat hypertension.
That being said, the company has experienced quite a tumultuous year with a plethora of ups and downs, and the root of their problems can actually be dated back to 2018, when 22 women came forward and claimed that the company’s talcum-based baby powder gave them ovarian cancer due to trace amounts of asbestos. Johnson & Johnson was to pay $4.7 billion in damages to the 22 women, which was just one lawsuit of the 9,000 some cases they were dealing with in relation to their baby powder. Later investigations into the composition of the talcum used by Johnson & Johnson and the FDA found no traces of asbestos, and the company managed to win most of the other lawsuits, often on technical terms. Regardless, the company recently announced that they are removing their baby powder from shelves in the United States. According to the New York Times, defense lawyer Nathan A. Schachtman said that it was a smart move on Johnson & Johnson’s part because there comes a point where “…shareholders don’t care whether the science is on your side….Companies have to make very practical and hard decisions about withdrawing products that they don’t think are bad products, or dropping cases because…it is expensive to defend them”. Although baby products, including powder, shampoos and lotions, generated $361 million dollars in sales during the first quarter of 2020, less spending on talc-based baby powder research and development, coupled with less money going to pay outs and lawsuits means more money for coronavirus vaccine and drug development, which has quickly become the focus of every major biotech company.
Despite these setbacks, Johnson & Johnson managed to make a comeback from the depressive lull it was experiencing up until March–since then, it has outperformed the market. The stock has gone up 32% while the S&P 500 has only gone up 26% percent in the same time frame. The stock even jumped up higher than fellow biotech giants Merck (17%) and Pfizer (30%) (Forbes). Analysts are expecting this growth to remain sustained throughout the coming months, especially with the promising development of the coronavirus vaccine on the horizon. Not to mention that this stock has a dividend yield of 2.81% (as of May 22, 2020), and this number has been consistently increasing on a year to year basis. This is greater than the approximate 1.97% dividend yield that the S&P 500 has maintained fairly consistently for the past 10 years.
Operation Warp Speed was an initiative of the Trump Administration to grant money to companies that showed promise in their coronavirus vaccine development in an effort to support the ultimate production of 300 million tests by early 2021. Johnson & Johnson was among the 5 groups to receive funding, and although no details were given as to the reason for the companies’ selection (others included Merck and Moderna), it seems that the niche methods these companies are using to produce treatments and vaccines piqued the interest of the selection board to select them for funding support. Funding from Operation Warp Speed indicates that experts and officials expect Johnson & Johnson’s coronavirus vaccine development venture to be most likely to succeed, which is a big plus for the company.
In late March, the stock took a jump after CEO Gorsky announced that they were on track to developing a vaccine by early 2021. The company partnered with the Biomedical Advanced Research and Development Authority in an effort to begin Covid-19 treatment drugs, and is investing $1 billion dollars into not only the development of the vaccine, but also making sure that methods of production are in place for when the vaccine is ultimately released to the market. In this way, Johnson & Johnson is one step ahead of its fellow biotech companies. The company is on track to be through to advanced trials in September–in fact, according to the company website, they are “…aiming to initiate a Phase I clinical study in September 2020, with clinical data on safety and efficacy expected to be available by the end of the year”. Typically, this process takes around 5 to 7 years, but Johnson & Johnson has managed to successfully expedite the process.
All in all, Johnson & Johnson has long been an investor favorite due to its ability to provide an extremely wide array of products, ranging from common household products like band aids to hip and knee replacements. Admittedly, the stock could continue to suffer from potential lawsuits, but this seems to be a storm the company is strong enough to weather. Its commitment to research and development, as well as its massive development infrastructure will continue to make this stock a buy. Although the company will undoubtedly undergo inevitable drops, an investment in this company today will likely pay off greatly for years to come.
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June 19, 2020
GENEDRIVE, PLC: WILL TESTING FOR THE MASSES EQUAL MASSIVE PROFITS?
The year 2020 will long be regarded as a year of turmoil with the advent of the coronavirus, with phrases like “social distancing” and “work from home” resounding everywhere we turn. In this uncertain time, return to some semblance of normalcy can at times, seem discouragingly far. However, 2020 can be viewed as a game changing year for the stock market, and while sectors like oil, motor and real estate are currently experiencing depressive lulls, other sectors like online entertainment and education industry are taking advantage of the situation and profiting greatly. Biotech is a sector that stands out in this tumultuous time, and rightfully so–biotech companies are the ones driving research on the virus, as well as production of treatments and tests. Additionally, a multitude of biotech companies are racing to find a vaccine for COVID-19. Once this vaccine is developed and distributed to the public, it is safe to say that this will produce a positive reaction in the stock market, and consequently, the economy. Take, for example, the biotech company Moderna, who, after releasing data from its phase 1 trial for a potential coronavirus vaccine, rocked the S&P 500 up 3%. The logic behind this is as follows–with every announcement of research coming close to finding a vaccine, life returning to normal, in investors eyes, is no longer some unrealistic prospect, but rather a tangible reality. Thus, market activity is likely to be heightened.
Genedrive, a molecular diagnostics company, seems to be at the forefront of the stocks rocked by what is known as the ‘coronavirus effect’. The firm’s shares are reportedly up more than a whopping 3200% since late March for a number of reasons. First, the company had developed the 96 SARS-CoV-2 kit, which is a diagnostic testing kit developed to detect SARS-CoV-2, which causes COVID-19. According to Genedrive CEO David Budd, the company partnered with Cytvia Life Sciences to make use of their stabilisation technology. Due to their high-throughput manufacturing process (which is the automation of experiments to the point where repetition on a large scale becomes feasible) that can make over 10,000 tests per hour, Budd believes that “[they are] amongst a small group of companies that have the capability to produce simple assay solutions at a significant scale”. This is promising news for prospective investors, not to mention the fact that this kit recently became approved for wide-spread sale across the European Union with the help of the CE-IVD marking. Because of the tests’ freeze-dry nature, mass delivery and use will now be all the more easy.
In addition to this development, there has been a second coronavirus test in the works, involving point of care testing, which is testing done closer to the location of the patient, diminishing the need to send samples to a laboratory. Supporters of increased point of care testing vouch for the quicker diagnoses as a way of creating better and more efficient healthcare outcomes. If successful, this would be a huge break for the company The release of both of these tests is projected to bring in around 1.5 million pounds a week, which equates to around $1.69 million. This could produce a gross margin of anywhere between 60 and 80%.
There were concerns about the profitability of the company in late 2019, centering around the fact that the HCV ID testing kit (for the detection of Hepatitis C Virus RNA in blood) was undergoing slow commercialisation and shipping orders to the Department of Defense were significantly delayed. However, according to a World Health Organization Prequalification Public Report, the testing kit has recently received approval while also reaching CE certification. This is a huge break for Genedrive, as this is the first portable point of need device to be put on the ‘prequalification’ list.
In an effort to support the development of COVID-19 tests, Genedrive has plans to open 1.25 million shares to retail investors, and although they are being sold at a discounted rate of 80 pounds (down from 300p), this move should bring in around 8 million pounds in total. Not to mention the fact that these shares were priced around 8p-20p before the start of the pandemic.
It should be noted that Genedrive is a Manchester based stock, and the question has to be asked–is it worth it for an American investor to hold stocks in the United Kingdom? Oftentimes, there can be differences in the way the United Kingdom’s economy moves relative to the United States’, so predictors like the S&P 500 may not always be indicative of what is going on in the UK markets. However, we are in an unprecedented time, and no market is immune to the effects of the coronavirus. Moreover, globalization is becoming more prevalent around the world, so international markets are becoming more intertwined.
Although restrictions in the United States and around the world are easing up, no expert is sure of what the future holds in terms of projections for the coronavirus. There is talk of a second wave of the virus hitting in the fall when outside temperatures drop and people spend more time indoors, as well as an increase in cases when some colleges return to campus. In fact, experts have even voiced concerns over the coronavirus becoming a seasonal ordeal–so, it seems reasonable to assume that testing kits and devices will continue to be a necessity, at least for the foreseeable future (or until a vaccine is successfully developed, which could take a very long time). Genedrive, with a yearly budget of around 2.3 million pounds for research and development, is capitalizing on this need, and working to deliver safe and efficient methods of testing globally.
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June 18, 2020
REGENEXBIO, INC…GOOD MEDICINE FOR YOUR PORTFOLIO?
Biotech Strategist Lee Rivers investigates Regenexbio, Inc. ($RGNX)
Regenxbio Inc. is a biotechnology company that focuses on the development, commercialization, and licensing of recombinant adeno-associated virus (AAV) gene therapies. Some of Regenxbio’s potential product candidates include RGX-501, a genetic therapy for homozygous familial hypocholesterolemia that delivers the human low-density lipoprotein receptor gene to the liver cells, RGX-111, a genetic therapy that treats Mucopolysaccharidosis Type I by delivering a human a-L-iduronidase gene to the central nervous system, RGX-121 for the treatment of Mucopolysaccharidosis Type II, and RGX-314 for wet age-related macular degeneration (AMD). Regenxbio has several potential treatments in its internal pipeline undergoing clinical trials in addition to treatments that are licensed to other companies. The company has about 20 total licensing deals for its AAV gene therapies in which it receives royalties, licensing fees, and milestone bonuses. The company currently is pursuing markets in retinal, neurodegenerative, and liver diseases. By pursuing treatments for rare genetic diseases, Regenxbio benefits from little competition, effectively resulting in a natural monopoly. Additionally, Regenxbio differentiates itself from its competitors by producing curative treatments, as opposed to the non-curative treatments of its competitors, particularly in the wet AMD market.
Financials
Regenxbio has a market capitalization of $1.4 billion and an enterprise value of approximately $1 billion. The company has approximately $400 million in cash and cash equivalents at the end of 2019 with sales of about $35 million for the year. Consequently, it lost about $94 million, the result of $124 million research and development expenses associated with clinical trials, personnel costs, and laboratory costs. The company also has a working capital ratio of 10.6 and a debt-to-equity ratio of 0.10.
Revenues for 2020, however, are expected to increase to $189.3 million, more than 400% greater than the year prior. The company is expected to lose $2.49 a share, which is $0.11 narrower than the year prior. These expectations portray the company’s increasing revenue growth and possibly future profitability once sales of its licensed gene therapies accelerate.
Regenxbio is thus able to benefit from increased revenue streams through licensing out its AAV platform, which includes royalties, initial fees, and milestone payments. The company also receives reimbursements from orphan drug designations for research and development performed on two treatments in its pipeline, according to the firm’s 2015 stock offering registration statement.
Licensing NAV Technology
Regenxbio’s primary assets are its AAV gene therapies with NAV technology and its ability to license these assets. This NAV technology allows for genetic DNA to be delivered to a particular part of the body to be encoded in the cells. This technology was used to develop the gene therapy Zolgensma, which has been approved by the FDA. Zolgensma is an AAV gene therapy that delivers a transgene of SMN1 to cure spinal muscular atrophy (SMA). SMA affects between 1 in 8,000 to 1 in 10,000 people worldwide, and nearly 20,000 people in the U.S. alone have the disorder. SMA type 1 is the most common type of SMA, and of infants with the disorder, 68% are unable to see their second birthday, and 95% unable to see their fourth birthday. Zolgensma can fully cure the disorder in infants, and they are seeking to expand the cure to older ages.
The treatment’s price tag stands at $2 million, making the potential market in the U.S. greater than $40 billion. Furthermore, Zolgensma was recently approved in both Japan and Europe, increasing the potential market significantly. Sales of the treatment were previously projected to peak around $2.5 billion in 2025, without consideration for European approval. Zolgensma is marketed through a license agreement with AveXis (a subsidiary of Novartis) in which Regenxbio receives milestone payments and royalties in the mid-single digits to low double digits. Regenxbio has about 20 other licensing deals for AAV gene therapies similar to this agreement with AveXis. Licensing its NAV technology is the company’s primary revenue driver to allow it to produce and perform clinical trials for additional AAV gene therapies in its internal pipeline, as well as pursuing additional licensing deals. The licensing aspect alone of the company’s business model portrays that Regenxbio undervalued, as shown by a DCF with basic assumptions. Moreover, Novartis plans to expand Zolgensma’s demand to increase further through expanded access to older patients with an intrathecal dosing scheme and aggressive targeting of China’s market in addition to the markets of Japan and Europe where the treatment has already been approved.
Undervalued Internal Pipeline
Regenxbio appears to have a strong licensing business that is being overlooked. The primary cause for this is because of the stock market’s apparent focus on its relatively lackluster internal programs. These internal programs are mostly considered to not be competitive relative to established treatments, but this belief could be a mistake. Regenxbio’s primary internal program asset is RGX-314, an AAV gene therapy for wet age-related macular degeneration (wet AMD). Wet AMD currently affects 2 million people in the United States, and is expected to grow to 3 million by the end of this year. Wet AMD is an eye disease that is caused by abnormal blood vessel growth under the macula and retina where the leaking blood vessels cause vision problems, and ultimately blindness. RGX-314 would be the only effective one-time treatment to cure wet AMD by monoclonal antibody fragment designed to neutralize vascular endothelial growth factor activity, modifying the pathway of new leaky blood vessels and retinal fluid accumulation, according to the company’s website. The treatment is currently undergoing phase I/II trials for safety. These trials have shown positive results thus far, with long-term durable treatment effects being demonstrated over two years.
Using a DCF for RGX-314 with rather conservative assumptions we can determine the treatment will provide approximately $3.7 billion in risk-adjusted free cash flow, providing an overall value of approximately $99.2 per share until the patent expiration in 2042, assuming there is no new competition. Key assumptions of this DCF are a price of $40,000, 1.1 million potential patients in the United States, and 10.4 million outside the United States. As mentioned, these estimates for potential market size are quite conservative, and a growing elderly population will make this asset more lucrative with time.
Looking Forward…
Regenxbio faces two risks. RGX-314 for wet AMD must be deemed safe and effective. It has shown already that it is safe and solves the dosing and delivery issues of many comparable treatments. Zolgensma must also continue to be covered by insurers to make it feasible. The probability that sales continue to grow is high given the market opportunity and track record of payors being reimbursed for gene therapy.
Overall, Regenxbio has an approximate value of at least $115, as its licensing platform, headed by the AveXis agreement, is poised to grow revenues significantly for the company over the next five years without any additional efforts from the firm. This will be coupled with continued developments regarding the company’s internal programs, particularly RGX-314, that will also has the potential to provide significant revenue growth. If the firm’s P/E ratio increases to the average of a profitable biotech firm, the price could exceed $1,000 per share in the long-term.
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June 17, 2020
GENE THERAPY: REGAL PROFITS FROM CURING “THE ROYAL DISEASE”?
By Matthew Rojas, Biotech Analyst
A Little Bit of History:
Most people recall learning about hemophilia from the history books. Specifically, Queen Victoria of England, who ruled from 1837-1901, was a suspected carrier of the hemophilia B trait that causes the infamous, potentially fatal bleeding disorder. Since then, hemophilia has commonly been referred to as a “royal disease” due to its prevalence in various royal families throughout England, Germany, Russia, and Spain during the 19th and 20th centuries.
The Current Situation:
In the United States, there are approximately 20,000 people with hemophilia, and an estimated more than 400,000 individuals have the disorder worldwide. In addition to hemophilia B, there is also hemophilia A. The difference between the two conditions lies in which clotting protein is defective or missing — for hemophilia B it is factor IX and for hemophilia A, factor VIII. Nevertheless, the symptoms of both variations of hemophilia are the same and range in severity from excessive bleeding only after an injury to frequent, spontaneous bleeding.
Presently, people with hemophilia A or B need infusions of the respective clotting protein two to three times per week. Not to mention, the weekly injections do not stop all bleeding episodes. Going to the doctor this frequently is extremely time-consuming, making it inconvenient for most individuals. Hence, many people with hemophilia fail to receive adequate treatment for their condition, which puts them at great risk. There is a pressing need for a more efficient way to treat individuals with hemophilia — this is where BioMarin comes to the rescue.
Gene Therapy:
BioMarin is a California-based biotechnology company that focuses on rare diseases driven by genetic causes. Currently, they have something revolutionary in their clinical pipeline for patients suffering from hemophilia A: valoctocogene roxaparvovec or valrox. Unlike traditional methods for treating hemophilia, valrox does not require repeated injections to temporarily mitigate symptoms; valrox uses gene therapy and only requires a single infusion to cure hemophilia A patients. Yes, you read that right — cure. Gene therapy is a complicated process that works by inserting genetic material, via a carrier or vector, into cells so that they can make a protein — in this case, factor VIII. For valrox, the vector is AAV5; a concern arose because people with AAV5 antibodies are ineligible to receive valrox. However, BioMarin estimates that 80% of people with hemophilia A do not have AAV5 immunity, so this should not be a problem.
A cure almost seems too good to be true, but the data are clear. In BioMarin’s Phase III clinical trial, seven out of 16 hemophilia A patients exhibited required levels of factor VIII. The company submitted this data along with three years of Phase I/II data for FDA approval. The application is currently under priority review, and a decision is expected on August 21, 2020. Therefore, now is the perfect time to invest in BioMarin because its current stock price does not reflect the potential revenue from valrox in the near future.
The Power of the First Mover:
According to Hank Fuchs, president, Global Research and Development at BioMarin, “Valoctocogene roxaparvovec has the potential to be the first gene therapy to be approved in any type of hemophilia”. In the gene therapy space, it is critical to be a first mover because once patients are treated, they are taken off the market. After all, people only need a single shot.
Some of BioMarin’s competitors include Pfizer and Sangamo Therapeutics’ SB-525 and Spark Therapeutics’ SPK-8011, both gene therapies for hemophilia A. However, SB-525 is still in the process of Phase III clinical trials, and Spark ran into trouble when one patient ended up in the hospital due to an immune reaction related to SPK-8011. On the other hand, valrox is safe, has already completed its clinical trials, and is currently under priority review by the FDA. Thus, BioMarin is on track to be the first mover.
To further ensure its dominance in the hemophilia A gene therapy space, BioMarin increased the number of doses its gene therapy facility could produce from 4,000 to 10,000. To put that increase in perspective, the company can now treat all of the hemophilia A patients in the United States in two years. If established as the first mover, BioMarin has sufficient capacity to quickly dose hemophilia A patients before other gene therapies are approved to go to market.
Cost-Effectiveness:
As stated above, the current treatments for hemophilia A are weekly, expensive injections of prophylactic FVIII. Patients are dependent on these injections for their entire lives, costing an estimated $700,000 to $750,000 per year. Also, many hemophilia patients have greater costs due to frequent hospital visits, procedures, various tests, etc.
One study analyzes the possible cost-effectiveness of valrox compared to traditional prophylactic FVIII injections. The results are astounding — the average patient cost of valrox is an estimated $16.7 million, whereas the average patient cost of the prophylactic FVIII injections is an estimated $23.5 million. Therefore, valrox provides a reduction in costs of $6.8 million per patient, on average. Because valrox is cheaper and more effective, it is likely to become the dominant way that hemophilia A patients are treated.
Stock and Financials:
Unlike many biotechnology companies, BioMarin’s stock (BMRN) has come out on top at the tail-end of the COVID-19 pandemic. Before the crisis, the company was trading at around $97.00, and now the share price has increased by about 10% to $106.00. This increase in share price is promising because if BioMarin can perform well in times of economic-downturn, imagine what they can do in times of economic health. The reason for this continued growth is likely because BioMarin has steady revenue streams from a diversified portfolio of products for rare diseases; in 2019 alone, the company generated nearly $1.7 billion in revenue from its product lines, a 13% increase compared to 2018. With the likely approval of valrox in late August, I expect that the stock price will increase even further.
Furthermore, BioMarin has solid financials across all of its . As of its most recent balance sheet, BioMarin has a current ratio slightly above 1, indicating that it can cover its short-term debt obligations. Additionally, the company generated over $100 million in revenues in the first quarter, a 25% increase from the fourth quarter of 2019. Lastly, BioMarin ended the most recent quarter with an increase of about $40 million in cash, which shows that it can generate liquidity even in times of crisis. BioMarin’s financials are stronger than ever, allowing it to continually achieve success.
In Summary:
Hundreds of thousands of hemophilia patients around the world have an unmet need: a permanent treatment for their disorder. BioMarin meets that need. With the use of revolutionary gene therapy, BioMarin has developed valrox, a single infusion that will cure hemophilia A patients once and for all. Not only is valrox more effective than the leading treatments for hemophilia A, but it is also much cheaper, saving patients and payers millions of dollars. With BioMarin scheduled to be the first-mover in the hemophilia A gene therapy space, now is the critical time to invest before valrox stops the bleeding.
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June 16, 2020
IS NEXTCURE, INC. A GOOD VALUE?
Stock picker Alex Dinklage analyzes Nextcure, Inc ($NXTC) to see if the valuation holds up to scrutiny…
A couple months ago, hearing about an overvalued stock in the current market conditions would certainly be unusual with the pandemic taking a toll on pretty much every sector in the market. Now, as we saw in the downturn many stocks such as zoom (ZM), and ecommerce platforms such as Shopify (SHOP) have benefited from COVID as people work from home and are frequently shopping online more. With trillions of dollars being printed by the FED many claim this is propping the stock market up as many businesses are barely just recovering and unemployment is still up. All this printed money and excessive unemployment checks have caused the market to begin to climb widely, as the Nasdaq hit a record high close just a few days ago. With all this money in circulation some stocks have begun to rise again and now some trade at an absurd valuation making them clearly overvalued. One of these overvalued stocks is NextCure (Nasdaq: NXTC). As many investors in the biotech world understand biotech is very volatile. These companies have the potential to create revolutionary products that could save lives, which means there is much speculation on whether each company can win federal approval on what they have set out to accomplish.
Company Overview:
NextCure is a clinical-stage biopharmaceutical company, which engages in discovering and developing new immunomedicines that help treat and prevent cancer as well as other immune diseases. They accomplish this by studying various immune cells to discover and understand targets and structural components of different and various immune cells and their functional impact in order to develop immunomedicines. Their mission focus is to bring hope and new treatments to patients who have not responded well to current cancer therapies, as well as patients with cancer types are not adequately addressed by current available therapies. Currently, NextCure has two immunomedicines in clinical trial, NC318 and NC410. They are both believed to treat multiple cancer types, but both are currently still in the clinical testing phase. Like many companies, NextCure has been forced to adjust their protocols and timelines due to COVID and at the moment has been forced to delay both of their drugs trials. While their past trials have had successes, this should be a huge red flag. At the current moment, with no recording data and no trials active, the company cannot begin to test anything and will continue to burn through its cash quickly.
Company’s Financials:
Taking a brief look at NextCure financials we see that it is a small cap company with a market cap of $667.70MM with only two products that have a long way to go to be approved for the general public. Since NextCure has not established itself in the biotech sector yet there is much speculation on whether this company will be profitable in the long run. Taking a quick look at the company’s stock price it us currently trading at $24.18 and is actually trading near its 52-week low. Seems like it could be a good deal? Here’s why we don’t think so. The only reason why the stock seems so low and looks like a bargain price right now is the fact that NextCures stock price jumped 248.9% last year in ONE single day. This was due to leaked information regarding successful clinical trials. As biotechs are known to do, most of these gains washed away as the share price imploded on itself. NextCure used this surgery to raise $150M to be able to secure funding for their next trial rounds; in a sense they got lucky. NextCure’s has never had a profitable year in regards to return on assets or equity. Their operating margin, which measures how much profit a company makes on a dollar of sales after variable costs are paid out is -590%; astronomically high. This just demonstrates the very high risk associated with NextCures as well as can indicate a poorly managed company. Additionally, thinking about the trials on hold, it could be a long time or never that NextCures makes a profit especially considering the current EBITA margin is –71.5%.
Looking more into the quality of NextCures from a long-term perspective, they have a cash burn rate of -1.30 which displays the negative cash flow the company burns each month. You would expect a negative number here for a small cap biotech company that is still in the clinical trials, but the fact that their EBITDA (earnings before interest, taxes, depreciation and amortization) for the last twelve months (LTM) is a little south of negative 20M is super concerning for the upcoming year. Afterall, things for NextCures so far for 2020 have not started out well. Additionally, looking just short term for this upcoming year, NextCure last year (2019) spent $36M on operating activities and $304M on investing activities, as shown in their Cash Flow Statement. Even with this huge cash burn, they only successfully completed 1 phase of testing! With an adjusted interest coverage ratio of –166.48 which measures the ability of a company to pay interest on their outstanding debts, NextCure needs a major breakthrough in its testing to be profitable for the foreseeable future. Using a 5-year discounted cash flow model from FinBox, their revenue actually increases in 2020, but still shows their stock price as overvalued by 31%.
While NextCure does look overvalued and has unhealthy financials at the current moment, there does seem to be reasonably stable growth as they do have a stable EPS. Also, they are very liquid, having 336M in cash and short term investments (Balance Sheet) which will be crucial for their upcoming year in this volatile market.
So, while NextCure at the current moment does look overvalued and does not look like it will be profitable for the upcoming future, that does not mean that there isn’t potential for future success. I would keep NextCure on your watch list for the foreseeable future. If the stock price drops considerably lower or their trials began starting again with success, this early-stage biopharma could be a winner.
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