The Sick Economist's Blog, page 7

ABBVIE, INC: THE ARISTOCRAT OF PHARMA GROWTH

By Dabin Im, Pharmaceutical Analyst

 

AbbVie ($ABBV) is the third largest pharmaceutical company in the world with a 2020 revenue of $45.8 billion and 48,000 employees. AbbVie is a dividend aristocrat, which means that for 25 consecutive years, its dividend yield has increased and is in the S&P 500. Although it was founded in 2013, it is a spin-off of Abbott Laboratories (also a dividend aristocrat). Since its first dividend payment in January 2013, AbbVie’s quarterly dividend has tripled: currently it yields 4.46%. This increase was only possible due to its continuous growth and a strong cash flow. Because dividend aristocrats prioritize giving back to investors rather than re-investing into the business, it means they are that well-established. Only 65 companies are crowned this prestigious title. Considering AbbVie was founded less than 10 years ago, that is an amazing accomplishment. 

But is it worth it to invest in AbbVie just for its dividends? Dividend stocks are notorious for being “boring” due to their limited growth potential because they are already so “big”. But from a positive stance, it just means that they are very stable, profitable, and predictable. Dividends are a nice cherry on top, but it would not make sense to invest in something that keeps losing share value, just for its dividends. For example, people should not invest in a company that continuously loses value (let’s say, 10% annually on average) for a 6% dividend yield. AbbVie really is the best of both worlds because it not only pays dividends, but it is also growing as a company. With further long-term growth and a generous dividend yield, it really is a win-win for the company and investors.

One of the main concerns with AbbVie is the upcoming U.S. patent expiration of Humira in 2023. As one of AbbVie’s leading medications, Humira accounts for about 40% of the company’s sales. In fact, it is the most sold medication in the world of 2020 at $19.8 billion. However, there are a few reasons why losing the patent should not be concerning. Humira came off its European patent in 2018, but it was still able to retain 70% of its patients. International sales only fell by 8% this year. To offset is competitors, AbbVie offered discounted prices. The approved generic biosimilars are also very expensive and not readily accessible to patients. If the pricing remains competitive, there is no reason for physicians to prescribe a new generic version over the proven original.

Moreover, AbbVie is much more than Humira. In fact, it has over 30 products on the market and over 50 drugs in development. Not only that, AbbVie goes the extra mile by finding ways to utilize its existing treatments for other conditions. For example, Humira was first approved for treatment of rheumatoid arthritis (autoimmune inflammatory disease). Now, Humira can be used to treat a total of 11 conditions, including psoriasis (a skin disease) and colitis (inflammation of the colon). These disease states may not sound relevant to the average Joe, but AbbVie is far from average. It knows how to connect the dots and make the most out of its innovations. Expanding the clinical uses for its current medications is a smart, efficient way to increase its revenue. AbbVie is not only developing seeds for money trees, but it is also taking care of and nourishing the trees that they planted years ago. This combination will inevitably lead to a forest of money trees. In fact, AbbVie has at least 70 additional filings for other uses of their products across its various product lines, including immunology, neuroscience, oncology and eye-care.

Other medications that have the potential to make it to Humira’s level are Skyrizi (plaque psoriasis medication) and Rinvoq (rheumatoid arthritis medication). Skyrizi grew in sales by 91.1%, and Rinvoq grew by 600% from 2019 to 2020. These two drugs alone have been filed for approval for dozens of indications. One that stands out is Rinvoq for eczema because in its final-phase study, it topped Dupixent, the first biologic approved for eczema. More patients that used Rinvoq experienced at least 75% eczema clearance by week 16. With its rapid growth, AbbVie expects these two drugs to bring in $15 billion in sales globally by 2025. Sales of AbbVie’s cancer medications, Imbruvica and Venclexta, also increased by 7.3% from Q1 2020 to Q1 2021. 

AbbVie makes medications that can save people’s lives and significantly improve their quality of lives. It made and delivered what patients needed. But through its acquisition of Allergan, it addressed the question, “What do people want?” Well, most people want to look good. Allergan is a medical aesthetics company that makes Botox, Juvederm (fillers), CoolSculpting (body contouring via fat reduction), and AlloDerm (regenerative tissues). AbbVie’s acquisition of Allergan was a bold but smart move. The aesthetics industry is only going to grow as people are living longer but want to look younger. Allergan also has a pharmaceutical division and has medications in eye care, central nervous system (migraines and depression), and gastroenterology (digestive disorders). 

Aesthetics is a very profitable industry as the expenses are usually not covered by insurance and consumers must pay out-of-pocket. To make matters more expensive, there is no price regulation within the aesthetics industry. AbbVie’s expansion into this highly profitable sector does not stop here. AbbVie is currently actively seeking to complete its acquisition of Cypris Medical, a medical device company that specializes in tools and technology for plastic surgery, minimizing its risk and invasiveness. It is also in the process of developing a medical device that performs neck lifts and treats midface descents, which are popular cosmetic surgeries. The global cosmetic surgery market is expected to have a CAGR (Compound Annual Growth Rate) of 5.9% by 2025. Therefore, acquiring Cypris Medical is like planting a grown money tree in AbbVie’s forest to make it grow even bigger.

Pharma + Biotech = Cutting Edge Pipeline

Two is better than one, especially if the two are big pharma and biotech. AbbVie has been strategically collaborating with various biotech companies to create innovative treatments that work outside the box. With these collaborations, AbbVie is not putting all of its seeds in one basket. Below is a list of AbbVie’s current partnerships.

Oncology collaboration with Danish company Genmab  ($GMAB)Inflammatory disease with Japanese biotech Sosei HeptaresImmuno-oncology deal with clinical stage Chinese biotech I-Mab ($IMAB)Autoimmune disease (e.g, systemic lupus erythematosus) research with Alpine Immune Sciences based in Seattle, WA ($ALPN)Oncology collaboration with Chinese company Jacobio Pharmaceuticals Finding a target for a potassium ion channel involved in Parkinson’s Disease and other neurodegenerative conditions with Caraway Therapeutics Cancer cell target treatments with Caribou Biosciences ($CRBU)Next-generation tissue-targeted gene therapies for up to 3 central nervous system diseases with Capsida Biotherapeutics Precision medicine for small molecules that target hard-to-treat protein targets with Frontier Medicines (chemoproteomics to identify small molecules)

AbbVie heavily relies on these partnerships to discover not just one next blockbuster medications like Humira but multiples of them. For example, AbbVie’s oncology drug, Venclexta, was discovered from a partnership with Genentech, a biotech company.  Partnerships are an efficient way to save patients’ lives faster. They are also looking ahead in extremely lucrative disease states, such as Parkinson’s disease, cancer, and gene therapy. Aside from these direct partnerships, AbbVie also invests in fairly small companies in early-stage development for immunology, oncology, and neuroscience, which align with AbbVie’s R&D (research and development) interests. AbbVie Ventures’ portfolio, consisting of 24 companies in the US and Europe, can be found here.

With a continuously growing dividend yield, promising future pipeline, and exponential growth of current medications, it cannot get much better than this. The stock price is even undervalued. Compared to big pharma’s average forward PE ratio of 14.68, AbbVie has a forward PE ratio of 10.45. Also, keep in mind that all of this was done in less than 10 years. It can grow even more rapidly due to the snowball effect. For example, it took 44 years for Microsoft’s valuation to reach $1 trillion. With some simple math, it is reasonable to say that it may take another 44 years for it to reach $2 trillion. But in reality, it only took 2 years for Microsoft’s valuation to double. Money makes money. That is the power of compound interest (exponential growth), which remains the eighth wonder of the world. 

 

Disclosure: The Sick Economist owns shares of $ABBV 

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CASSAVA SCIENCES: A CASE STUDY IN VALUATION

By Owen Marino, Technical Analyst

 

While the recent groundbreaking news with pharma giant Biogen – the approval of its novel Alzheimer’s Disease treatment adumanucab – is hopeful, there are a number of hurdles that need to be overcome before it can effectively come into use. Besides the issue that there may be a number of negative side effects, many private insurance companies are not likely to cover the treatment for patients who take the drug, which is an issue because initial estimates put the cost of taking the drug at around $56,000 per dose. Because of these factors, the market for a treatment that may be more suitable for the general population is still wide open.

Biogen’s treatment, as well as a number of other Alzheimer’s treatments that have been recently developed, have been developed around using what is known as the “Amyloid Plaque Theory.” From brain scans and other tests, researchers have figured out that patients with Alzheimer’s are characterized by a buildup of amyloid plaques in their brains as a result of the breakdown of amyloid precursor proteins. The plaques disrupt connections in the brain and get in the way of normal cellular function, and destroying them has commonly been thought of as the solution for the disease. However, while aducanumab and other treatments like it are specifically programmed for doing just this, there is currently no conclusive proof that destroying these proteins in fact improves cognition. 

Recently, some companies are taking a different route trying to find a cure through other methods. Cassava Sciences, an Austin, Texas based clinical-stage development company founded in 1998, is approaching the Alzheimer’s crisis not through focusing on destroying amyloid plaques, but misfolded proteins in the brain, specifically trying to correct one known as filamin A. So far, the results have been extremely promising. Earlier this year, the company announced that phase II trials of its promising candidate, known as simufilam, improved cognition by 50% over a 6 month period. The company is set later this year to release data related to 12-month cognition trials, where positive results would be a huge milestone in terms of Alzheimer’s research, since little to no other companies have been able to show notable restorative improvements in cognition over a year-long span. 

There are still so many variables still in play and a long time for things to change before simufilam passes trials and is potentially approved for use in the US. The company is only set to begin phase 3 trials later this year at the earliest, and after that it may still be another few years before the treatment is given the green light to hit the market. Hypothetically speaking, however, what could a potential approval look like for the company in terms of revenue? The company’s market capitalization, which is its stock price times the number of shares outstanding, currently sits at around $3.35 billion, and its shares have gone from trading at $7 to over $80 each in the last few months, after the aducanumab announcement. However, could projections show that the company may still be undervalued?

A discounted cash flow model, or DCF, is one way analysts project the total enterprise value of a company. DCFs project estimates of the company’s future cash flows over a defined period of time, and account for the change in dollar value from year to year as a result of the Time Value of Money, or TVM. In order to run some calculations for $SAVA and value the company after a potential successful approval of simufilam for the treatment of Alzheimer’s, we need to make some assumptions about a number of different quantitative variables. 

The first thing that needs to be determined to make an evaluation is what the peak sales of the drug would be if it were to hit the open market. This can be determined by finding an estimate on sales price multiplied by the approximate number of people that would take the drug, which requires establishing a total patient pool as well as the percentage of that group that would choose Cassava’s treatment. This is known in the industry as the drug’s Total Addressable Market. The DCF model in this analysis assumes the following about the information above:

The total pool of Alzheimer’s patients was set at 7.5 million, which is a figure based on the total estimated number of AD patients in the US by 2030, which is just over one million people higher than the current total in the US. While this number is close to 14 million patients for all of the Developed World, there is currently only a clear path to approval in the United States. While European and Japanese approval boards remain open to the possibility of approving aducanumab, for example, they have yet to give the treatment clearance.

The second assumption made was that the treatment will cost an average of $28,000 per patient annually, half of the cost for Biogen’s novel treatment. This figure was obtained based on an average of reports by B Riley, Jones Trading, and Maxim Group, 3 capital markets companies that release periodic information reports on current financial developments. The lower figure compared to Biogen’s treatment can largely be attributed to the fact that simufilam is being designed to be taken orally, whereas two of the other major treatments are injections, which have to use more costly equipment. Additionally, if the treatment ends up costing more than this, the cost assumption on the lower side may help account for patients whose treatments may be subsidized or covered by insurance, and thus who thus the drug’s full price may not be paid.

The next thing that must be estimated is the drug’s market capture, which is the percentage of AD patients in the US that would take simufilam once it is introduced to the market. Currently, there are 28 other drugs for the treatment of Alzheimer’s in phase II/III, at the same stage in the approval process as Cassava’s product. The success rate for treatments once they get to this stage, as later accounted for in the model, is around 52%. In order to simulate this competition, the model assumes that each company will capture an equal 6.7% sales share during the 5 years of peak sales in the forecast. For the first five years, the market capture percentage increases twofold from 0.41% of the market to the full 6.7%, accounting for the fact that the drug will need to be marketed when it first comes out and will have to steadily incline to its full potential as a result of people being unaware of or slightly hesitant to undergo a brand new treatment. During the peak sales period, this comes out to a total of $14 billion in sales annually for a period of five years. 

To get from sales to cash flows, a number of steps need to be taken. First, the model needs to account for all the various expenses the company will incur throughout the development of the drug. This includes things such as lab equipment, facilities costs, and other general operating expenses. The biggest portion of expenses will come from the R&D costs the company incurs to produce the drug. On average, biotech companies producing a novel treatment will spend around 25% of revenues earned on the sale of a drug on R&D alone. While it is difficult and unpredictable to forecast estimates for individual expense factors, analysts should assume that at least 30% of total sales will be expenses the company needs to pay during the process of developing the drug, which is shown in the model. Next, the model accounts for the percentage of profits that the company will actually keep after royalty considerations. This accounts for things such as marketing, distribution, and maintenance costs, as well as deals with other companies for various other tasks. For a big project such as simufilam, the company can expect to keep around 30% of the total profits, with the rest obligated to various other groups. The last thing before taxes that needs to be accounted for is the industry-specific adjustment for risk. As we know, clinical-stage biotech companies are massive gambles that often rely on one single drug or product as the lifeblood of the organization. If a drug fails, the value of the company can often go straight to zero. Therefore, it is necessary to quantify the chances that these high revenues as a result of a successful project will actually come to fruition. As stated earlier, the probability of end success for a drug moving from phase II to phase III of clinical testing is around 52%. By multiplying our calculated revenues by this percentage, we account for the fact that the company’s product could fail during one of the final stages of testing and totally tank the firm’s value. The chances of failure are statistically reduced with each checkpoint the company passes, but this always remains a possibility and thus is needed to be factored into the model. 

At this point, the future cash flows to the firm, or FCFF, are established, but there is still a final step that needs to be performed in order to adjust the projections for the future to the current day, which is to discount all future cash flows back to the present day, accounting for the time value of money. This is done by dividing the cash flow for each year by 1 plus the appropriate discount rate, or the required return on the investment for the company, to a factor of the year. The weighted average cost of capital used in this assessment was 7.2%, the midpoint figure offered by finbox.com. WACC combines factors such as a company’s cost of debt and equity to find the appropriate rate at which a company should expect a return. The model uses a ten year forecast and no terminal value, because pharma companies usually enjoy only a 10 year window of profits before patents on their developments expire. 

In the end, the model values Cassava Sciences should simufilam be successful at around $4.58 billion. This is more than a 25% increase of the company’s current market cap, and one could argue that the assumptions made by the model were even a bit conservative. It could reasonably be estimated that Cassava could capture a bigger market share than 6.7% if current expectations hold that it appears to be more effective than previous treatments, and approval in places outside the US could help the company address even more of the market for the almost 50 million AD patients worldwide. The company is currently in a good position to continue its development, with over $282 million in cash currently on its balance sheet, and a cash burn rate far lower than that number. Should positive news continue to come out through the end of this year, SAVA could prove to be a steal for those who invest in the coming weeks.

 

The post CASSAVA SCIENCES: A CASE STUDY IN VALUATION appeared first on Sick Economics.

WILL BLUEBIRD BIO’S BIG GAMBLE PAYOFF?

By Aidan Asbill, Biotech Analyst 

 

In 2018, Bluebird Bio’s ($BLUE)impressive cell-based therapies propelled the company to stock prices as high as $231, but today the stock has collapsed nearly 90% to prices as low as $24 per share. Bluebird Bio was once at the forefront of innovation in the biotech world, with their leading drug, Zynteglo becoming the first gene therapy approved for the treatment of beta-thalassemia. Zynteglo had tremendous potential, showing promise in reducing the need for blood transfusions after just a single administration of the drug. However, investor sentiment quickly changed as the company had to delay the launch of Zynteglo because of manufacturing issues. On top of this, the company would be criticized for the $1.8 million price of the drug, making it the second most expensive drug in the world. Things went from bad to catastrophic, in 2021, when the company announced it was temporarily suspending two of its clinical trials for LentiGlobin, due to concerns the treatment caused cancer. With things looking grim for the company, Bluebird Bio made a bold move by announcing they would split into 2 companies by the end of 2021. Bluebird Bio will remain focused on severe genetic diseases, while another new company will be birthed to take on its oncology assets. By splitting the company into 2 entities, Bluebird Bio believes this will enable each business to be in a stronger position to deliver on its goals. This bold move has investors both interested and confused, as a move like this could make or break the company. With that being said, let’s look at how Bluebird Bio ended up in this perplexing situation.

Bluebird Bio History

The company was founded under the name Genetix Pharmaceuticals in 1992 by two MIT researchers Philippe Leboulch and Irving London. In 2001, Walter Ogier became the CEO of Genetix Pharmaceuticals and under his guidance, the company was focused on the development of LentiglobinTM in order to treat sickle cell disease and beta-thalassemia. After nearly a decade of research, preliminary results of clinical trials of LentiglobinTM in France showed promising results. A patient with severe beta-thalassemia had been successfully treated with the treatment, which marked the first-ever long-term treatment of a human using gene therapy. Shortly after this, in September 2010, Nick Leschly would become the CEO of the company, as well as the renaming of the company from Genetix Pharmaceuticals to Bluebird bio. In June 2013 the company would go public, with Bluebird Bios IPO selling 6.83 million shares, at $17 a share, raising $116 million. A year later, the company would acquire Precision Genome Engineering for $156 million, which would help bolster Bluebird Bio’s oncology department. With the company on the rise, in 2017, Bluebird Bio secured a collaboration with Bristol-Myers Squibb involving their CAR-T cell therapy candidate bb2121. Later that same year, the company reported bb2121 delivered a 100% response rate, in multiple myeloma patients. This shot up the stock by 33% as investors flocked to biotech’s hottest new stock. The company would continue to gain traction and in 2018, would announce a collaboration with biotech giant Regeneron Pharmaceuticals ($REGN)  to discover, develop and commercialize new cell therapies for cancer. With that being said, Bluebird Bio still didn’t have a product and was burning through cash at a concerning rate.

 The company would burn through cash at a worrying rate of $555 million in 2018 and $789 million in 2019. Bluebird Bio got to change this in 2019, by bringing its proof of concept to life with European approval to commercialize its star drug Zynteglo. However, things took a turn for the worse when Zynteglo, was forced to delay its launch due to manufacturing roadblocks. In January 2020, the company would finally get to commercialize the drug in Europe, but just a few months later, covid-19 would alter the course of the company.

With the Covid-19 pandemic in full swing, Bluebird Bio was once again forced to push back the drug’s launch. In May 2020 the FDA sent a refusal to file a letter to BMS and bluebird bio’s marketing application for its treatment of idecabtagene vicleucel for patients with relapsing multiple myeloma over manufacturing concerns. This was fixed a few months later when the FDA accepted bluebird’s marketing application for ide-cel. However, with so many other gene therapy companies showing promising pipelines investors began to slowly leave the stock as the company still was unable to market Zynteglo. In February 2021, things would go from bad to worse for $BLUE when the company stopped studies of sickle cell gene therapy after one patient developed leukemia during treatment. This has always been a big worry for researchers in the gene therapy space, as in the early 2000s several children developed leukemia after receiving gene therapy treatments. Research in gene therapies has accelerated tremendously in the last couple of years and scientists now use many different tools that are thought to be safer. This was nearly a death sentence for Bluebird Bio, to be associated with such a deadly disease. The stock dropped as low as $24, a share price that hadn’t been seen for the company since its IPO in 2013. 

At this same time, the company was also forced to halt all marketing of Zynteglo in Europe in order to evaluate the safety of the treatment. In April, the company also continued to struggle to market Zyntelgo, with the company withdrawing from Germany over pricing concerns. Last month, Bluebird bio was cleared by the FDA, with it being very unlikely leukemia developed from the lentiviral vector used in LentiGlobin treatment. While the company was able to pass safety evaluations on its treatments, investors have left the company in the dust, flocking to the plethora of other innovative gene-editing companies. 

Bluebird Bio Big Gamble

With Bluebird Bio stock prices near all-time lows, all the pressure is on $BLUE to turn the  company around with the splitting of the company into two at the end of the year. With the split, Bluebird Bio will retain its name as well as the company’s rare blood and brain diseases, including the beta-thalassemia treatment Zynteglo. Meanwhile, Nick Leschly, Bluebird’s current chief executive, will run the new oncology company 2seventy bio which is in charge of researching multiple myeloma treatments as well as drugs for lymphoma and solid tumors. The new company 2seventy bio will seek to further research their compelling oncology pipeline of cellular therapies, which includes treatments for non-Hodgkin’s lymphoma, acute myeloid leukemia, next-generation multiple myeloma, and solid tumors. Recently in March, the FDA approved bb2121, the company’s lead candidate for relapsing refractory multiple myeloma. Bluebird Bio is also hoping to win approval for LentiGlobin a treatment for sickle cell disease gene therapy.  However, the company said in November that it wouldn’t be able to file the drug with the FDA until late 2022, which is a delay of nearly a year compared to previous expectations. Splitting the company into two entities is meant to revitalize fortunes for both divisions of Bluebird Bio, which has failed to capitalize on the company’s lead innovating in gene therapy. Earlier in the year, the stock hit a 52 week low of $24 a share, after the devastating news of a patient developing leukemia. However, the stock has failed to gain much momentum and is nearly 1/10 the value it was at all-time highs, just a couple of years ago. 

Splitting a company into two separate companies is surprisingly not a new concept in the biotech world. In 2012, medical giant Abbot Laboratories split off its pharmaceuticals business . The new company formed would be named AbbVie and become a biopharma giant with a market cap of 206 Billion dollars. Before the split from January 2001 to January 2012 Abbot Labs gained only 37%. Since the company split at the end of 2012, AbbVie is up 250%, while its parent company Abbot is up 270%. Another medical giant Pfizer split off its animal health division into a new company named Zoetis around this same time. During this time Pfizer is up an impressive 73%, while its spin-off company Zoetis is up an astonishing 500%. While these numbers are very impressive, splitting off the company does not always equate to overnight success. Just this year, pharmaceutical giant Merck & Co split off their women’s health and biosimilar therapies into a new company named Organon. Merck has been stagnant, up only 1.5% year to date. While their new spin-off Organon is down nearly 20% in only just a few months since going public. To make matters worse, oftentimes these company splits can be used to alleviate debts off the parent company. With Organon going public, the company also brought with it an estimated $9.5 billion in debt. At the start of the year, Bluebird bio had $1.3 billion in cash on hand, however, the company is burning cash at an alarming rate with the company losing $600 million in just the last 3 quarters. Bluebird Bio splitting into two companies should alleviate debt as it will split its spending across two companies instead of one, which may be a good or bad thing depending on the investors. With that being said, while the split should slow down spending it may also reduce future growth as revenues are split between both companies.

Bluebird Bio’s Future

Bluebird Bio split is a defining moment that will make or break the company. Undoubtedly, the company has been extremely unlucky with its commercializing of Zynteglo. In 2019, before all the setbacks, Zynteglo was projected to make $1.87 billion in sales by 2024. However, the market is much different today, with many similar gene therapy companies ready to steal market share in just a couple of years. Last year the company made $250 million in revenue, but the vast majority of this came from royalties, while sales of Zynteglo have yet to be disclosed. Current estimates from GlobalData’s analyst forecast have Zynteglo’s sales expected to reach $906m by 2026. Much of this value hinges on Zynteglo getting FDA approval which it plans to apply for some time this year.  Pricing concerns over the steep $1.8 million price continued to plague the company, with them going as far as pulling out the drug from Germany over pricing concerns earlier this year. Bluebird is continuing discussions with other major European countries, including the U.K., Italy, and Spain. Recently, the company also announced it is the first ever to bring second gene therapy to the market with the EU approving its treatment for cerebral adrenoleukodystrophy Skysona. The disease is extremely rare and will probably only bring in a project $74 million in peak sales still, the company is proving that it is still at the forefront of gene therapy. Despite the setbacks, the company can still be near the front of countless companies to commercialize a sickle cell cure. When looking at Bluebird bio’s new spin-off 2seventy bio things get even more intriguing. 2seventy bio’s lead drug, bb2121 CAR-T therapy for relapsed multiple myeloma recently got FDA approval. Bluebird and Celgene signed a deal that will be a 50% split of U.S cost and profits and the drug could make over $2.5 billion in potential revenue. The company should further develop its Myleomma treatment options as well as treatments for Carcinoma and solid tumors in the early testing stages. The new split-off 2seventybio looks very promising.

Bluebird Bio company split is still a longshot in the sense that it won’t fix the company’s lack of sales overnight. However, if Bluebird Bio is able to secure FDA approval for Zynteglo, this may get investors excited again. Investors should be wary that Bluebird Bio’s splitting into two companies always has risk associated with it, especially when just a few months ago Organon, Merck spin-off had a 20% sell-off. If investors believe in Bluebird Bio long term, however, with FDA approval of Zynteglo the company may be interesting stock with the company sitting near IPO prices. Ultimately, it will be up to investors if they believe Bluebird Bio will be able to regain its footing or if it will continue to falter with setbacks.

 

Disclosure: The Sick Economist Owns $BLUE 

 

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3 POTENTIAL ACQUISITION TARGETS

By John Kehoe, Equity Analyst

 

In the biotech industry, companies that are successfully developing medicine rarely go bankrupt. These companies are often swallowed up by larger candidates and large pharmaceutical companies. After these types of mergers, the new entity’s share price is traditionally higher than the underlying companies prior to the merger. The promise of a higher share price makes these “takeover targets” attractive investments within the biotech industry. These takeover targets are sometimes hard to identify until the blueprints for a merger have already been drafted, and by then, it is usually too late to buy shares in the smaller company at a discounted price. Therefore investors must try to analyze the patterns and reasonings behind these mergers and acquisitions. When it comes to the biopharmaceutical industry, these takeover targets all share one common trait: valuable intellectual property. Some takeover targets have seen moderate success in their development and sale of medicine and have piqued the interest of larger companies. Other takeover targets have had a more turbulent path and found obstacles in the development and sale of their product, but their ideas and intellectual property show great promise and could benefit from more consistent cash flow and improved resources. Regardless of the reasoning for their acquisition, these smaller biotechs suddenly become blockbuster stocks after their merger with a larger company. Finding these biotechs pre-merger is an imperfect and risky process, but it offers great reward. 

1) BioLineRx ($BLRX) 

One of these candidates for a  possible takeover in the near future is BioLineRx ($BLRX). This company is involved in the oncology market and specializes in the process of ”hematopoietic stem-cell mobilization for autologous bone marrow transplantation in multiple myeloma patients”. BioLineRx is a late-stage clinical company and has not been able to sell any of its products, so its $455 million market cap is based solely off of its intellectual property and its milestones throughout drug development. One of BioLineRx’s main problems in its recent history has been its constant need for cash. This is a very common problem for smaller biotechs that are unable to make money from their product during years of development and research. It has been trying to solve this problem by selling shares of their company but this dilutes the value of each of its shares. BLRX is currently being traded at a relatively cheap price, but could see success soon if a larger pharmaceutical company takes interest in their product. This potential interest could have already begun as one of the more likely suitors for an acquisition of BioLineRx is their current partner Merck ($MRK).  Merck is a pharmaceutical giant with a market cap close to $200 billion. They are heavily invested in the oncology industry and have an existing partnership with BioLineRx. If BioLineRx receives FDA approval for any of its potential products a deal could be struck very quickly. In May of 2021, BioLineRx announced positive results from its phase 3 testing of the drug Motixafortide for stem-cell mobilization. If BioLineRx eventually receives FDA approval for this drug, they will need a significant amount of cash to commercialize this asset. Companies like Merck could buy this drug, or even better the entire company, at a huge premium and massively increase its stock value. Taking a gamble on an acquisition like this one is a high-risk investment, but with how close BioLineRx is to FDA approval they can be identified as a takeover target. 

2) Ocular Therapeutix

While many blockbuster biotechs are involved in the oncology and rare disease market, there is still billions of dollars to be made in drugs that solve the inconveniences in people’s everyday lives. This could prove true for Ocular Therapeutix ($OCUL), a relatively small biopharmaceutical company that focuses on developing treatment for diseases and conditions of the eye. Ocular Therapeutix is a commercial stage company and has seen recent increases in sales. Even with these recent increases, Ocular Therapeutix finished the year 2020 with a significant net loss because the company is still in its infancy stage. Ocular Therapeutix would greatly benefit from a merger with a larger company that could supply their operations with the necessary cash and resources to continue their innovations within this industry. Ocular Therapeutix is attempting to take advantage of the $24 billion worth of addressable market within the eyecare industry. Their most popular drug is currently Dextenza which has only been approved for post-surgical use. This drug is inserted into the tear duct and releases a steroid called dexamethasone onto the surface of the eye therefore eliminating the need for post-surgical eye drops. This same drug is currently under review (phase 3) by the FDA to also treat allergic conjunctivitis. The company believes the post-surgical use of this drug has the potential to reach $1 billion in revenue in the near future. While Ocular Therapeutix does not have any current partnerships with larger pharmaceutical companies, the continued approval of their post-surgical drugs could be a valuable asset to a company that already dominates the world of cataract and vitreoretinal surgery care industry, such as Alcon ($ALC). The possibilities of these combinations make Ocular Therapeutix a viable takeover target at its current low price. 

3) ALX Oncology

ALX Oncology ($ALXO) is another takeover target that is slightly larger than the two previously mentioned. Its market cap of $2.14 billion makes it uniquely expensive for a clinical stage company. ALX is an immuno-oncology company that focuses on fighting cancer by “developing therapies that block the CD47 checkpoint pathway and bridge the innate and adaptive immune system”. This company’s most promising product is ALX148, which has had positive clinical responses during its most recent phases of testing. The most exciting part about the research and development of ALX148 is the combination studies that are occurring with other pharmaceutical giants. Right now ALX is collaborating with Merck ($MRK) and trying to partner its treatment with KEYTRUDA (one of the top five most profitable drugs in the world). They are currently in phase 2 of testing the efficacy of this combination. If this combination were to earn FDA approval, ALX would become an obvious takeover target for Merck. 

Not only is ALX working with Merck while searching for effective combinations of its product ALX148, but it has also begun testing combinations with another pharmaceutical giant, Eli Lilly and Co ($LLY). This clinical collaboration consists of a, “randomized Phase II/III study to evaluate the efficacy of ALX148 in combination with ramucirumab, trastuzumab, and paclitaxel”, Eli Lilly will provide the ramucirumab. If this study is successful ALX could once again find itself as a prime takeover target for one of the largest pharmaceutical companies in the world. These two collaborations along with their positive clinical results means ALX Oncology could be acquired during phase 3 or shortly after FDA approval. Their stock price is not quite as low as many other smaller biotechs, but their relationships with larger companies makes the expensive price worth the risk. 

 

As stocks gain and lose momentum in the biotech industry, they become more interesting to potential investors. Those stocks that lose their momentum and hype are often undervalued and have the ability to skyrocket if they exercise the right relationships and are acquired by a larger company. Even those stocks that are performing well have the ability to increase in value if they combine with an even more successful company. These three stocks all have extremely valuable intellectual property and would benefit from a larger budget and more advanced resources. Investing in these companies before a merger would be a great way to see massive returns on your investment. 

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3 CLINICAL STAGE ONCOLOGY COMPANIES TO WATCH

By John Kehoe, Biotech Analyst

 

Some of the most exciting investing opportunities in the world of biotech exist within the field of oncology. The global cancer therapy market was valued at $158 billion in 2020 and is expected to increase to a revenue of $268 billion in 2026. The monumental size of this industry leaves opportunities for budding biotech companies to experience meteoric rises through the success of their innovative therapies. The majority of this market is dominated by large pharmaceutical companies and well-established biotech’s such as Pfizer, AstraZeneca, and Johnson and Johnson to name a few. These biopharmaceutical giants reap massive profits through their oncology drugs and treatments that are already in the market and serving an important purpose. Most of these giants are seen as safe investments because they have an established presence in the world of medicine but they lack the blockbuster appeal that many investors are searching for when it comes to biotech companies. As the market for oncology continues to grow, investors can look for substantial value in companies that have yet to release a commercial product and are still in the stages of clinical development. These companies are publicly traded based on their potential and their current progress towards developing medicines that could eventually lead to profit. When it comes to these pre-clinical and clinical stage companies, it is impossible to use traditional metrics to measure their worth. Their revenue and earnings will be substantially less than their market cap but this is no reason to shy away from their low share prices. 

Kronos Bio ($KRON) 

One of the most exciting names in the oncology industry right now is Kronos Bio ($KRON). Kronos has set out to develop drugs that address dysregulated transcription in cancer. This basically means that they are trying to develop treatments to amend proteins which do not have obvious pockets that traditional small molecule treatments can bind to and were previously thought to be undruggable. Kronos has three major drugs that are under development, one of which, Entospletinib, has recently launched its phase 3 clinical trial which is meant to evaluate its ability to treat patients with NPM1-mutated acute myeloid leukemia (AML). Like all oncology drugs, this drug has huge potential if it can survive the process of FDA approval. Kronos just began trading shares in October of 2020 and its price is currently nearing its all-time low. This low price is attractive to potential investors who have identified the potential value that can be recognized given the results of entospletinib’s stage 3 testing. Kronos has an experienced Board of Directors and Scientific Advisory Board who have found success all throughout the biotech industry and have helped this company build a healthy fund through their investors. The President and CEO of this company, Norbert Bischofberger, was formally employed at Gilead Sciences and has helped Kronos Bio develop a sturdy relationship with this biotech giant. Kronos Bio is set up for a fruitful future considering their position within the biotech industry and their journey towards FDA approval.

Agenus Inc. ($AGEN) 

Another exciting company that is working to develop treatments for cancer is Agenus Inc. ($AGEN). Agenus is a biotech company that is focused on the treatment of cancer through immunotherapy and immuno-oncology. With a current market cap of $1.23 billion, Agenus is a well-funded clinical stage biotech company, but it has yet to explode within its expanding industry. This is subject to change in the near future as Agenus is searching for the approval of numerous cancer drugs that will open their commercial services to a massive market. One of Agenus’s most promising drugs, Balstilimab, has been granted fast track status by the FDA for its use to treat cervical cancer. Agenus’s product pipeline is rich with numerous drugs in phase 2 of development, any of which could catapult the company to considerable revenue. 

When looking for the next cash cow of the oncology industry, it is important to research how well each company is funded and will finance their plans for the future. The executives and partners involved with these companies can often be indicators of the legitimacy and potential that exists within their operations. In the case of Agenus, their current partnerships as well as their plans for the future indicate a great confidence in their future ability to earn profit. Agenus has just purchased a 120-acre parcel of land in Vacaville California which will house its new 400,000 square foot facility. Agenus has also just struck a deal with one of the largest biotech companies in the world for its promising drug, AGEN1777, that improves anti-tumor activity within the immune system. As a part of this deal, Bristol Myers Squibb has paid Agenus $200 million up front with $1.36 billion in biobucks and royalty sales still on the table. These types of deals are what can help smaller biotech’s to break into the upper echelon of their industry. Garo Armen, PhD, Chairman and Chief Executive Officer of Agenus summarized his thoughts and satisfaction with this deal by stating, “Through such transactions we are able to balance between advancing our portfolio with highly qualified collaborators, while retaining our other innovations for speedy development and commercialization by Agenus.” Agenus looks towards a promising future and could be a worthwhile long-term investment.

Argenx ($ARGX)

Argenx ($ARGX) is already a relatively big name in the biotech industry despite being a clinical stage company. Argenx is working to develop antibody-based therapies for the treatment of severe auto-immune diseases and cancer and has already been valued with a market cap of $13.44 billion. This high evaluation is worlds ahead of Argenx’s 2020 revenue of $36 million. Argenx has a lot of catching up to do if it wants to live up to its current evaluation, but if it is awarded some crucial FDA approvals it could quickly exceed this lofty price. In 2021, Argenx will likely be transitioning from the clinical to commercial stage as it awaits its FDA approval for some of its leading drugs. Similarly to Agenus, Argenx has drawn interest from some of the world’s most successful pharmaceutical companies. In 2018, Johnson and Johnson signed a deal that was centered around the drug cusatuzumab, which is meant for the treatment of acute myeloid leukemia. This deal provided Argenx with $1.6 billion in funds at the time. The process of development and approval for this drug has been slow but has seen recent strides. In the past month, Argenx has regained the global rights to cusatuzumab which could become a blockbuster drug barring FDA approval. Having sole rights to this drug increases the potential for this company’s stock in the future. 

Not only is Argenx an upcoming star in the oncology industry, it has also made progress in developing drugs that combat autoimmune diseases. Partnering this industry with the oncology industry could be their key to success. If they are able to bring their autoimmune treatment, Efgartigimod, to the commercial stage in 2021, this company could finally begin recognizing revenue that is relevant to their overall worth. This company appears to be a daunting investment considering its high share price and market cap despite its low revenue, but its potential to evolve into a biotech giant makes this stock interesting. 

 

Most of the big money that exists within biotech is in the oncology industry. As cancer cases continue to rise  along with our aging population, markets for these kinds of drugs grows even more valuable. Finding the next blockbuster cancer drug is a difficult task but is not based on complete luck. Tracking the milestones throughout the approval process as well as identifying companies with strong ties to successful corporations can help classify a company as a potential success. Each of these three companies have shown commitment to their future as well as promising results in the testing of their products. Investing in these companies before their approvals could provide massive returns on these investments. 

 

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TOP 3 CRISPR GENE EDITING STOCKS

By Aidan Asbill, Biotech Analyst 

 

Intellia Therapeutics ($NTLA) shocked the gene-editing field with the announcement of data from the first-ever human study using CRISPR gene editing therapy. Intellia and partner Regeneron ($REGN) announced data from a phase I study evaluating their CRISPR genome editing candidate, NTLA-2001, that showed promise in patients with transthyretin amyloidosis (ATTR). ATTR is a deadly disease that affects the nervous system, destroying nerves and eventually crippling and killing those who suffer from the disease.  Remarkably, patients with ATTR were given a single dose novel treatment which led to an 87% reduction in TTR levels, going up to 96% reduction after a month. In comparison, the current treatments options for ATTR have show reductions of TTR levels of about 80%. This news made Intellia shares nearly double, while other CRISPR gene editing therapies saw their shares soar as well with investors flocking to the potential of the gene editing. The technology works by injecting patients with CRISPR-loaded nanoparticles, which when injected alter a gene in the organ to halt the production of the proteins causing the disease. However, this gene-editing breakthrough may have huge potential in treating other deadly illnesses such as Alzheimer’s or cancer. With CRISPR technology, scientists may be able to eliminate or repair the source of the disease within their patient’s bodies. Investors looking to invest in a company researching CRISPR genomic editing should look at Intellia Therapeutics ($NTLA), CRISPR Therapeutics ($CRSP), and Editas Medicine ($EDIT)

 

Intellia Therapeutics ($NTLA)

With Intellia being the first to prove the potential of CRISPR technology in humans, investor sentiment is at an all-time high. In the past, CRISPR technology was limited to editing cells outside the body or in the eye. Now in the most recent trials of NTLA-2001, researchers at Intellia were able to genomically edit nanoparticles, and then inject them back into the body with a single dose. This was the first time researchers were able to successfully target the gene causing the disease en vivo (inside the body). This milestone bodes very well for the future of genomic editing.

With that being said, trials have only been conducted on 6 people, and it’s too early to say that the CRISPR treatment will completely eliminate the symptoms of the disease. Currently, NTLA-2001 has shown to be effective in patients with transthyretin amyloidosis, which is a hereditary disease affecting approximately 50,000 people worldwide. However, the drug may have much more widespread applications for other single-cell amyloidosis diseases. Currently, an estimated 250,000-550,000 people suffer from some form of amyloidosis. Intellia and other CRISPR gene-editing companies’ technology looks very promising, but they will have to compete with other treatments for TTR amyloidosis. One thing that sets CRISPR technology apart, however, is its simple and effective usage in comparison to other treatments on the market. One of these competitors, Alnylam is a company with an RNA-based therapy that requires an infusion every three weeks.  Another competitor, Ionis Pharmaceuticals requires regular injections as well, although they can be self-administered. Both treatments are priced at about $345,000 per year, and Alnylam ($ALNY) has added cost when taking into account medical office visits to get the infusions. 

Intellia’s one-time dosage gives the company a clear edge over its competitor and may become the preferred option for patients and administrators, due to its fast and effective use. While amyloidosis treatments may seem like a niche market, Alnylam was able to generate $306 million in sales and Tegsedi was able to generate $70 million. Things look even better for Intellia when considering the premium patients will pay for a one-time infusion. Bluebird Bio ($BLUE) another gene therapy company, has a one-time treatment that costs about $1.8 million. All things considered, Intellia’s TTR amyloidosis treatment has the potential to make the company billions of dollars.

Intellia Therapeutics is looking to be an early leader in CRISPR gene editing however, investors will need to remember that these results are from a very early phase 1 trial and the company valuation has skyrocketed to a market cap of roughly $11 billion. The company is up 550% year to date and is already starting to correct, down 10% from all-time highs. With that being said this technology could be ground-breaking for treating a multitude of diseases, especially those that are based on a singular gene. The company also has a very intriguing pipeline, with NTLA-2001 showing really good early results in their in vivo category. On the other hand, their CRISPR technology is looking really promising in autoimmune diseases in their ex vivo pipeline. These are drugs made using CRISPR outside the body. Intellia is currently running clinical trials for QTQ923 which is a CRISPR-based treatment for sickle cell disease, which affects about 70,000 to 100,000 Americans. The company is also getting close to running early clinical trials on NTLA-5001, which is a treatment for Acute Myeloid Leukemia (AML). There were 20,000 new cases of AML in 2018 alone, with the 5-year survival rate being under 30%  making it one of the deadliest diseases in the world. Intellia is looking to use its CRISPR technology to precisely edit a patient’s immune cells and reinject them into the body. While this may sound like a long shot, if this technology is able to train the body to stop tumor antigens, it would be the biggest innovation in medicine of the 21st century. Intellia is still very early on and will need several years to conduct several years of trials and continue to innovate to get an edge on its competitors. However, if the company is able to stay at the top of CRISPR gene-editing technology the sky is the limit.

CRISPR Therapeutics ($CRSP)

CRISPR Therapeutics is a gene-editing company focused on developing transformative gene-based medicines for serious human diseases. The company’s lead pipeline candidate is CTX001, which has the potential to treat transfusion-dependent beta-thalassemia (TDT) and sickle cell diseases (SCD). The company struck a deal with Vertex Pharmaceuticals to collaborate on the treatment which is currently in mid-stage studies. CTX001 looks very promising with the gene-editing therapy showing consistent and sustained response to treatment in the ongoing clinical trial involving 22 patients tested so far. About 120,000 infants are born with SCD every year worldwide, with much of it being hereditary. Many born with the disease don’t end up getting symptoms, but those that do can suffer muscle breaking down, glaucoma, and in rare cases kidney cancer. CXT001 is very unique because it seeks to edit a patient’s own blood stem cells and reinject them into the body to stop symptoms. The results so far are very compelling, with none of the patients with TDT requiring blood transfusions and all of the SCD patients free of Vaso-Occlusive Crisis, which is the most frequent complication in patients. With the potential of CXT001 becoming a blockbuster drug, Vertex pharmaceuticals revised its agreement to pay $900 million upfront for a 60% cut of sales. With gene treatments being very new and innovative technology, a dose of CTX001 could be between $1-2 million dollars. If CRISPR could treat just 1% of the 70,000 people suffering from SCD this could be $700 million in revenue. CRISPR therapeutics lead candidate CTX001 has the potential to become the go-to treatment option for patients with SCD and TDT. However, they will need to continue to wow investors with compelling results if they want to beat out the countless other companies with similar products.

CRISPR also boasts 3 other candidates in their immuno-oncology pipeline that they currently own 100% of the rights to. One of these treatments that the company is developing is CTX-110, an immunotherapy treatment consisting of gene-edited, donor-derived cells for fighting cancer. During an interim phase 1 data release, the study found that four out of 11 patients with aggressive non-Hodgkin lymphoma developed complete responses after receiving CTX-110 infusions. In other words, a complete response means that there was a disappearance of all tumor activity after the treatment was given. In the coming months, the company would see its stock price nearly double with prices as high as $210 per share. Since then the stock has corrected and fallen 31% from all-time highs and 10% from the Intellia news which boosted the gene-editing market. Despite this, CRISPR is still up an impressive 65% year to date and may still have room to grow. The company is also independently developing cell therapies using CAR-T receptors to cure B-cell cancers, which if successful can be a major breakthrough in cell therapy research. Currently, all approved cell therapies need to be manufactured every time based on a patient’s own cells. However, this breakthrough could allow CAR-T therapies to be manufactured on large scale, resulting in lower cost and could propel the company to become the market leader in CAR-T therapies. If future trials can continue to bring good news, CTX110 can be a major revenue driver for the company. CRISPR Therapeutics has one of the most compelling pipelines in the gene-editing space, their own problem is they have yet to make any recurring revenue. The company also has 5 consecutive quarters of increasing its spending losing $348 million in 2020, with $220 million of that just in the last 2 quarters. The company is burning through cash quickly, but thankfully the revised agreement with Vertex will help alleviate some of that. While CRISPR products look promising, they are still years away from a product and there is no guarantee they will get FDA approval. With the company sitting close to an $11 Billion dollar market cap and a very volatile stock chart, this may scare off investors. With that being said, the company has tremendous potential, and if it’s able to get approval for CTX001 or CTX110 the stock will almost certainly go to all-time highs.

Editas Medicine, Inc ($EDIT) 

Editas Medicine is a gene-editing company harnessing the power of CRISPR to develop a variety of treatments for people living with serious diseases. Unlike Intellia and CRISPR, Editas has an ocular focus, with a pipeline of gene-editing therapies aimed at eradicating the inherited retinal disease. The company’s lead pipeline candidate is EDIT-101, which utilizes CRISPR gene editing to treat LCA10, a rare genetic illness that causes blindness in children. The company is currently undergoing the first pediatric testing in its phase I/II BRILLIANCE study, which is evaluating EDIT-101 effectiveness in treating LCA10. Back in May, the brilliance study was the first CRISPR study to change DNA in a living human. A surgical procedure was done in an attempt to prevent blindness from a patient suffering from retinal dystrophy. The disease is a genetic disease that can cause complete blindness in patients suffering from it. During the procedure, scientists were able to successfully snip out abnormal DNA in the cells causing retinal dystrophy. This was a groundbreaking achievement for gene-editing proving in vivo, or within the body, treatments were possible. The company finished up initial dosing in its first group of patients in earlier-stage human trials. Editas expects to report initial data from its phase 1/2 study of EDIT-101 in September, which with good results should bode well for the stock price. The company also has an early study on EDIT-102 which is a treatment for Usher Syndrome (USH). USH is a condition that causes partial or total vision and hearing loss. It is estimated that 3-6% of all childhood deafness and 50% of children that are deaf and blind suffer from the disease. With promising results from EDIT-101 and the potential in EDIT-102, the company’s ocular focus could be groundbreaking in curing blindness in children. While the company’s main focus is on ocular diseases, Editas also recently commenced a phase 1/2 study of EDIT-301 in treating sickle cell disease. The drug had previously looked like a best-in-class for people living with sickle cell disease, driving the stock to $90 per share. However, investor sentiment quickly went down after a partial clinical hold, which the FDA wanted an improved potency test. This was quickly cleared up, but with other competitors and a stock correction, the company hasn’t been able to recover from all-time highs.

Sitting at a mere $3.3 Billion market cap, Editas has a much lower valuation when compared to peers. The company is down 45% from all-time highs and down 15% from the Intellia news boost. Still impressively the company is up nearly 40% in just a month and looks to be a lot cheaper than its peers. While the company is still losing money, its revenue numbers are looking good with $90 M in revenue in 2020 up 341% year to date. In contrast, this revenue is nearly double Intellia’s while boasting a market cap 3 times less. The company is still spending money at a high rate, similar to other gene-editing companies. However, funding has actually grown from about $140 million in December to $354 million in the first quarter of 2021. While the company may not have pipelines as lucrative as other gene-editing companies, the company has found a very strong and compelling niche in ocular research, especially in cases with children. Editas Medicine still has the potential to crash and burn; with even one failed clinical study investors will certainly flock to other lucrative gene-editing stocks. However, with the potential to cure hereditary blindness the company looks very promising.

 

CRISPR gene-editing technology is still very early on and relatively unheard of by most people. Still, if the technology can continue to innovate and produce impressive results, the gene-editing space could grow to be a trillion-dollar sector. The potential to edit genes on the fly and reintroduce them into the body to cure rare diseases sounds like something straight out of science fiction. It will be up to investors to figure out which company will create the first successful gene-editing treatment for humans. However, as positive research continues to come out it’s seeming like gene-editing could become too lucrative to pass up.

 

 

DISCLOSURE: The Sick Economist owns shares in $EDIT

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HCA AND THE FUTURE OF HEALTHCARE

By Aidan Asbill, Equity Analyst

 

As we discussed in the last article, HCA Healthcare signed a huge deal with Google cloud to utilizes Google’s new data and analytics to bring the hospitals into the future. Many hospitals chains have been slow to adapt to the digital age, with many still using slow and archaic records systems. HCA’s partnership with Google is looking to change that with Google’s innovative use of information technology to create a digital transformation within the company.

This partnership is a win-win for both companies, as Google gets a chance to prove its innovative cloud technology and HCA gets to be brought into a new digital age as the company tries to expand the capabilities of its existing hospital structure. With more than 2,000 sites in 20 states, HCA has established itself as a major hospital chain, ranking No. 67 in 2019 in the Fortune 500. Google is slowly starting to unveil the possibilities that cloud technology can have in healthcare and HCA seeks to benefit from this greatly as they collect data from 32 million patient visits per year. This patient data can help Google fine-tune their cloud computing for healthcare and allows the company to prove their technology in the healthcare sector. HCA gets to take advantage of Google’s innovative cloud technology, which should hopefully allow HCA to create analytic platforms that can better assist their patients. With this partnership, HCA and Google both hope to increase the efficiency of their hospital chains systems, which in turn means more profits. However, HCA wasn’t always a powerhouse in the health care industry and they were met with many setbacks on their way to the top.

HCA Healthcare’s Controversial Past

Hospital Corporation of America (HCA) is a for-profit owner of health care facilities that was founded in 1968 in Tennessee. HCA started with 11 hospitals during their first IPO in 1969, but this would quickly change as the company aggressively expanding in the Health Care industry throughout the 1970s. By 1981, in a little over a decade, the company was operating 349 hospitals, with operating revenues of $2.4 billion. HCA’s rapid expansion into the Health Care sector continued and by 1986 the company was operating 463 hospitals. With this massive success, HCA looked to grow even bigger when it merged with Columbia Hospital Corporation in 1994. However, the company hit its first stint with controversy when in 1997 the FBI and IRS conducted a federal investigation on the company. Amidst the controversy, the CEO at the time, Rick Scott, was forced to resign amongst evidence that the company was falsifying its books to show more expenses than were actually listed. Thomas Frist, a co-founder of HCA was tasked with fixing the mess and returning to the company as a CEO in 1997. In 2003, HCA and their partner Columbia plead guilty to 14 felonies and admitted to overcharging the government, and the company was ordered to pay $2 billion in fines for defrauding the federal health care programs. This is still to this day considered the biggest case of healthcare fraud in U.S history. Unfortunately for HCA, the company found itself in even more controversy in 2005 when Senator Bill Frist, brother of the former HCA CEO, sold all his HCA shares 2 weeks before disappointing earnings. This opened up a huge insider trading scandal as shareholders had claimed the company gave false revenue numbers to drive up the price. Senator Frist claimed he sold his shares as he was running for president and didn’t want a potential conflict of interest, however, it was later found out that 11 other HCA senior officers also sold at this same time. HCA later settled the lawsuit in 2007, paying out shareholders $20 million, but the company refused to admit to any insider trading. With so much controversy surrounding the company, HCA would have to make some big moves to get back on track.

HCA’s Big Comeback 

HCA was at a critical point, with the company spending billions in fines, as well as countless controversies, the company needed to make a big move to turn things around. In 2006, HCA made that move when it became a private company for the third time by completing a blockbuster merger by a private investor group that included the likes of Bain Capital, Merrill Lynch, and the original co-founders of the company. Going back to a private company proved to be very lucrative for the company, with the total transaction valued at approximately $33 billion, making it the largest leveraged buyout in history at the time. By going private the company was able to re-evaluate things moving forward and more importantly raise a massive amount of money while doing it. However, this adjustment period didn’t last very long with HCA announcing it would go public again in 2010. In 2011, the company went public with a $4.6 billion IPO as HCA Holdings. The company sold 126.2 million shares for $30 each, which netted them close to $4 billion dollars. HCA had finally regained its footing.

This period of time would be pretty uneventful for the company. With all the controversies, the company made no new mergers or acquisitions between 2003 and 2017. With that being said, the healthcare giant would change this in 2017 when it acquired the Memorial University Medical Center in Savannah, Georgia. That same year it would acquire 3 more hospitals in Houston from Tenet Healthcare. The company continued its aggressive acquisitions in 2019 when the company purchased Mission Health System, a hospital chain out of North Carolina with 12,000 employees for $1.5 billion. Now most recently, the company bought an 80% stake in Brookdale Senior Living Inc for $400 million. Brookdale is the largest operator of senior housing in the United States, with over 700 senior living and retirement communities. This merger will add 57 home health agencies, 22 hospice agencies, and 84 outpatient therapy locations to HCA healthcare extensive healthcare portfolio, in a market of seniors who are in desperate need of quality care. This deal will extend HCA’s reach beyond hospitals, surgery centers, and allow them to expand into the lucrative home health sector. With over 70% of healthcare spending coming from people ages 50 and up, this deal can be very impactful for the company’s revenue growth for the future. With the company’s willingness to expand into new markets through acquisitions, HCA’s aggressive mindset gives the company interesting future potential. 

HCA & The Future

HCA healthcare has gained traction very quickly, with the stock up 162% since March last year and up 30% this year. However, with the company’s partnership with Google and their aggressive acquisitions, the company may still have room to grow. This sentiment may be even more true when looking at HCA’s strategy of reaching expanding into new markets through acquisitions.  In 2020, the company spent over $500 million on acquisitions that will expand its market share, as well bought a 40% interest in a telemedicine company as well. The company’s aggressive acquisitions will be great for future revenue growth by expanding their hospital chains into new markets. However, these acquisitions have also greatly increased HCA’s debt which was as high as $35 billion in 2019. Since then the company has taken great measures in order to relieve some of this debt by offsetting some assets to pay off its debt. The company agreed to sell Redmond Regional Medical Center, GA to advent health for $635 million, as well as selling four more of its hospitals in Georgia for nearly $950 million. These efforts helped the company alleviate its debt significantly, with the company’s debt now at $31 billion, down nearly $4 billion. The company only increased its year-to-year revenue by 0.38%, however, its net income was up 7% from 3.5 billion in 2019 to 3.75 billion in 2020. Most impressive though, the company was able to nearly triple its cash on hand from $620 million in 2019 to $1.8 billion in 2020. The company has averaged an impressive 8.6% revenue growth over the past three years, but these revenue numbers may be unsustainable for the future. This year HCA is expected to bring in $54-55.5 billion in revenue, which would be a 4.7-7.7% increase from last year’s revenue of $51 billion.  These numbers won’t wow investors, but with that being said the company has a 15.34% operating margin, which ranks it in the top 85% of the industry. 

HCA may have growth concerns in the short term, as its revenue begins to lag, scaling the company further may prove to be difficult. However, when looking at HCA’s long-term growth, things may change. The company’s deal with Brookdale Senior Living came at a perfect time as the demand for high-quality health care is at all times highs after Covid-19. According to Statista, the American population aged 65 years or older accounted for around 16.5% of the total population in 2019. This percentage is likely to increase as the aging population is expected to make up 22% of the total population by 2050. The healthcare sector has also seen a shift in consumers opting into outpatient procedures for their lower cost. The demand for inpatient care has gone down significantly with the national occupancy rate for hospitals declining from 77 percent in 1980 to 61 percent today, putting pressure on margins. With healthcare spending being strongly linked with age and the U.S. senior population growing steadily, demand for outpatient care can drive more cost-conscious consumers to opt into outpatient facilities. With 84 outpatient therapy locations included in the Brookdale merger, this will be a great way for HCA to extend their revenue streams outside their hospitals.

Should you buy the stock?

HCA has proven to be a healthcare giant in the industry that has weathered many storms. The company’s aggressive acquisitions have allowed the company to stay competitive and ahead of the competition and at the same time, the company has managed to impressively reduce debt while doing so. With that being said, there may be some concerns about lagging revenue growth as HCA may struggle to scale revenue to new heights, with how big the company has gotten.

On the high end, HCA could make an estimated 7.7% increase in year over revenue, however, on the low end, the company will only make 4.7% which is nearly half of what it has averaged over the last 3 years. The stock has already gone up significantly and much of the value of their partnership with Google and Brookdale Senior Living may already be priced into the stock today, which may not appeal to today’s short-term investors. With that being said, the company’s long-term growth is very intriguing, with HCA proving to be at the forefront of aggressively expanding its revenue through acquisitions. With life expectancy going up every year, and HCA expanding its revenue streams, the company may be able to expand its revenue growth to new highs in the future. The company is also very early on with their Google Cloud partnership and if Google’s innovative dynamic data analytics platform can live up to the hype, this may serve to further reduce costs and increase the company’s net income. HCA healthcare management has done an excellent job in preparing the company for the future demand for high-quality healthcare, but it will be up to investors to determine if they will become the future of healthcare.

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3 PROMISING NEUROSCIENCE COMPANIES

By Owen Marino, Biotech Analyst

 

Arguably the hottest topic in biotech this past month has been the approval of Biogen’s groundbreaking Alzheimer’s treatment aducanumab. The approval, while highly controversial with the FDA advisory board, marks the first FDA-approved treatment aimed at treating Alzheimer’s in nearly two decades. In addition, aducanumab is one of the only drugs ever developed that tries to treat any degenerative neurological disease at the source instead of just mitigating its symptoms. This is extremely important in the field of neuroscience, which is an area where biotech has still made so little progress.

What is neuroscience? Simply put, the field describes the scientific study of the nervous system. This system is made up of the central nervous system (CNS) which consists of the brain and spinal cord, and the peripheral nervous system which is nerves and extremities found in muscles, tissues, and organs. The nervous system is the part of the body responsible for coordinating the body’s response to sensory information, with different neurons interacting with each other through synaptic transmission. Neuroscience is an interdisciplinary field that uses biology, physiology, and other fields to functionally “map” the brain. Modern neuroscience focuses more specifically on neurological conditions and disorders in an aim to understand how they arise, and how they can be prevented. In large part, this involves the study of how the system’s parts interact with each other, what causes them to function incorrectly, and how they can be changed.  

Neurological diseases can be caused by genetic malfunctions, injury, or other causes, and conditions of the nervous system include Parkinson’s disease, Alzheimer’s disease and ALS. These disorders impact a person’s normal motor functions – things such as reading, eating, and speaking – and often negatively affect things more specifically associated with the mind, such as mood and memory. Many of these conditions are degenerative, meaning that they cause cells in certain areas of the body to slowly die without regeneration. Not only do those afflicted have to live with the debilitating operative effects of these diseases in their daily lives, they continue to get worse and worse over time until they eventually lead to death. 

Research and development for neurological disease treatment has been historically underwhelming and ineffective. There are currently no available cures for Parkinson’s or ALS, and the only available treatments for Alzheimer’s, such as memantine, can help mitigate the conditions’ effects for only a limited period of time until the conditions inevitably impact a person’s basic motor functionality. In fact, research has suggested that only around 6% of drugs targeting the nervous system end up successful, which is less than half the success rate of drugs for other conditions. There have been many late-stage failures with recent Alzheimer’s drugs, and the clinical trials for neurological treatments are often much more complex than other drugs because of factors such as high R&D costs as well as the difficulty of diagnosing neurological diseases because their origins are far less understood. 

While novel developments in neuro research point to the potential of better things to come, Biogen’s recent Alzheimer’s treatment is clearly wrapped in controversy, and there are doubts as to whether the treatment will actually be able to help anybody anytime soon. Nonetheless, progress has been made in recent years that paints an encouraging picture for the future of neuroscience and treatments for these debilitating conditions. 

In the midst of all this potential progress, investors want to know what implications positive developments in the coming years will have on their portfolio profitability. Three neuro-focused startups in particular have made great strides in the field, and have promising developments that could enter the market in the next 18 months to two years. These are companies investors should keep in the back of their minds as more developments on these long term projects are released throughout the rest of the year.

1) ANAVEX LIFE SCIENCES ($AVXL) 

The first of these is Anavex Life Sciences, which is currently developing a number of treatments, including blarcamesine (or Anavex 2-73) for Alzheimer’s disease, Parkinson’s disease, and Rett syndrome, a rare genetic mutation that inhibits neurological development in young girls. In the latest trials, the company’s drug blarcamesine was correlated with an increase in the concentration of SIGMAR1, a protein found in the CNS which is thought to be correlated with neurological disorders, as well as a decrease in the inhibition of motor function when compared to a placebo. A 14-week trial of a 50mg dose was shown to boost performance on a Parkinson’s movement test by 11 points, a 18.9% increase from the initial baseline. The results indicated not only that the treatment may help reverse Parkinson’s symptoms during the 14-week trial, but that the treatment did not have notable adverse effects on REM sleep or cause general sleep impairment, which seem to paint a much more stable path to approval. While blarcamesine is the Anavex’s most prominent current development, the New York-based company is also in the process of developing Anavex 3-71 and 1-41 for conditions such as frontotemporal dementia, depression, and stroke caused by neurological conditions.

2) CLENE, Inc ($CLNN) 

Another clinical-stage company with a number of potential remedies is Clene, which is prepared to release information early in 2022 pertaining to phase 2/3 clinical trials for CNM-Au8, an oral treatment for ALS that has shown promising early results for increasing nerve cell communication and survival. The Salt Lake City-based startup’s RESCUE-ALS phase 2 trial, currently going on in Australia, is specifically testing adults with early ALS and is scheduled to release unblinded results, which will compare the drug’s effectiveness to a placebo, sometime this month. Earlier this month, the company announced that it would host an Expert Perspectives Webinar on Cellular Energetic Failure as well as ALS and MS therapy developments on July 14th. The conference will feature professors Matthew Kiernan and Benjamin Greenberg who will field questions and offer insight about current developments in the ALS and MS fields, along with a presentation by Clene’s management team. The company hopes to have more information pertaining specifically to its RESCUE-ALS phase 2 trial available later this summer or fall.

3) IMMUNIC THERAPEUTICS ($IMUX) 

The last neuro-research company investors will want to keep their eyes on is Immunic, which announced this week that it has received FDA approval to begin phase 2 and phase 3 testing of its lead drug IMU-838 for progressive multiple sclerosis (PMS) and for relapse-remitting MS (RRMS), respectively. The latter, if successful, could be on the path for straightforward regulatory approval sometime in the next few years. The company expects these new studies to begin during the later half of 2021. The company’s phase 3 trials have already enrolled 1,050 patients from 14 different countries, and continues to impress established voices in the MS community. The orally-ingested remedy’s phase 2 RRMS results “showed an encouraging balance between efficacy, safety, and tolerability and I look forward to the phase 3 program in this indication,” said Robert Fox, M.D. of the Cleveland Clinic Mellen Center for Multiple Sclerosis. “There is a clear unmet need for new therapeutic options which can help delay or arrest this process and I look forward to seeing data on IMU-838’s neuroprotective potential.”

With the results of these crucial trials so far in the future, buyers may be inclined to stand pat and wait until more news about tests is revealed. However, the earlier investors board the proverbial train of these young companies, the more gains that can be realized from a successful treatment hitting the market in due time.

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STRYKER & BOSTON SCIENTIFIC: DEVICE DOMINATION

By Tammy Tran, Biomedical Analyst 

 

Stryker Corporation ($SYK) is a medical device company that was founded in 1941. Since then, they have become a worldwide leader in medical technology. They create innovative products and services in orthopedics, medical and surgical, and neurotechnology and spine that help improve patient and hospital outcomes. 

There are many factors that explain Stryker’s excellent performance and ability to differentiate themselves from other companies that have not been as successful. One of these factors is that Stryker is a diversified company, with multiple and complementary sources of revenue. Stryker offers about 60,000 different products, with one of the most diversified portfolios within the MedTech industry. As mentioned above, they are able to bring in sales from orthopaedics, medical and surgical, and neurotechnology and spice. The orthopaedics segment alone brings in 37% of the company’s net sales, which primarily focuses on the Mako Robotic-Arm Assisted Surgical System along with hip and knee joint implants. The medical and surgical segment is their largest source of revenue at 44%, which sells products such as surgical equipment, endoscopic systems and other medical devices. Lastly, the neurology and spine segment brings in the remaining 19% of sales with instruments for neurosurgical, neurovascular, ENT and spinal interventions. Their diversity of products allows them to maintain a large presence and continuous source of customers. They are able to sell not just in the country but across the globe and even to third-party dealers and distributors.Therefore, a company that only possesses one product that serves as their only major source of revenue will not be able to expand and become a leader in the market. 

Another factor that makes Stryker so successful is that they are present in markets that have extremely large growth potential. In order to be successful, there has to be favorable market dynamics and relative positioning. Stryker aims their market at the aging global population, international expansion, and robotic surgery. Geriatric populations in developed countries are expected to increase, meaning that the industry is expected to grow at a CAGR of about 5.6% up to 2024, meaning that worldwide sales would reach $595 billion. Robotic systems is also a powerful emerging industry that results in greater precision and faster recovery for surgeries. As a result, the worldwide surgical robotics market is expected to enlarge at a CAGR of 8.5-10.5% through 2024. It is hard for non-dominant companies to compete in these markets since there are such high barriers to entry such as patents, high R&D costs, industry relationships, etc. Although the competition against large MedTech companies may be tough for smaller companies, the buyers are always looking for lower prices and higher quality. Any newcomers in the industry have to be able to show enough evidence that their product is better than their competitors before they achieve any widespread acceptance. This is definitely a tough process for small startup companies and where a lot of them end up struggling.

In addition to looking at future growth potentials, it is also important to look at a company’s history to gauge their success, showing that they have a strong foundation of risk management and capital allocation. In Stryker’s case, they have been able to consistently increase sales over the past 10 years. Even beyond that, they have had 40 consecutive years of revenue growth since going public in 1979. Unlike other companies, Stryker has been able to avoid stagnation and continually grow not just as a whole, but by each segment of their company. 

Although there are other factors that contribute to a company’s success, the ones mentioned above are crucial to a successful startup and expansion. A smaller medical device company that has the potential to reach Stryker’s success is Boston Scientific Corporation ($BSX). Boston Scientific Corporation was founded in 1979 and develops, manufactures, and markets medical devices for use in medical specialties worldwide. Similar to Stryker, Boston Scientific operates through 3 different segments: MedSurg, Rhythm and Neuro, and Cardiovascular. They offer various devices to: diagnose and treat GI and pulmonary conditions, treat urologic and pelvic conditions, and cardiac implants and pacemakers.This is really important to note because the three different segments allow them to bring in revenue from different areas, which ensures business growth. Those three segments bring in about 98% of the company’s consolidated net sales with MedSurg bringing in 31%, Rhythm and Neuro bringing in 27.8% and cardiovascular bringing in 39.1%. The other 2% are from specialty pharmaceuticals which is not significant to the company’s growth. 

In addition, looking at Boston Scientific Corporation’s past, they have reported continuous sales growth within the last ten years. Although there is a recent decline, a majority of it is due to the pandemic. Their performance in the stock market in the past ten years has also exceeded expectations. The 10 year return rate of the NYSE composite index was 6.83%. For Boston Scientific Corporation, it was 20.3%. This means that the Boston Scientific Corporation has returned 197% higher compared to the NYSE composite. They have also made several valuable acquisitions, and plan on launching over 20 new products within the next year, which is going to accelerate their global market share.

For the future, their plan is to target markets in order to consistently grow sales faster than the average market revenue growth, by expanding their leadership in each of their segments. Arterial disease has a $3.2B market with about a 5% growth, venous disease has a $1.4B market with about 8% growth and interventional oncology has a $1.6B market with also about 8% growth. This means Boston Scientific has over a $6B market with large opportunities for expanding into high-growth adjacencies. Boston Scientific’s Revenues could grow by 30% from the estimated $10.0 billion in 2020 to around $13 billion by 2023, representing a growth rate of about 9% a year. There are many reasons why this prediction is strongly favored right now. First of all, there have been deferred surgeries due to the pandemic between Q1 and Q2 that have affected Boston Scientific’s sales. Since these surgeries are only delayed, they will eventually have to be attended to. Boston Scientific is in charge of making several products and devices for these procedures and as the surgeries are attended to the company will see increased sales. After the decline from Covid-19, and the company begins to see strong earnings from past investments in R&D and product development, their sales will begin rising again and are expected to improve their Net Margins by over 20% levels by 2023 or sooner. In addition, they are also globalizing R&D centers in countries all over the world such as China, India, Costa Rica and Ireland. Therefore, with so many opportunities for expansion and growth for Boston Scientific in the near future, they have the potential to reach if not surpass Stryker’s level of success. 

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3 UNDERVALUED BIOPHARMA STOCKS

By John Kehoe, Equity Analyst

 

Valuation within the biotech industry can be extremely difficult. Many biotech and pharmaceutical companies go into public trading before earning a profit or any revenue. These companies are staking their value based on their intellectual property and their potential for earnings in the future. Investing in these fledgling companies can be risky, as many of them are awaiting FDA approval on drugs that will have massive implications on their ability to produce profit. On the bright side for investors, the limited information surrounding many of these companies and their somewhat risky future can lead to an undervaluation of their stocks. 

Other companies are undervalued in the biotech and pharmaceutical industries for completely different reasons. These companies are sometimes even harder to seek out, as they do not have an obvious catalyst on the horizon that will skyrocket their revenue from zero to $1,000,000,000. When searching for this type of undervalued company, one must still search for a potential stimulant that will help the company grow in the future, but also analyze the ratios and figures that are relevant to the current operations within the company. Two of the most popular ways to measure the value of a stock are using the P/E ratio (Price/Earnings Ratio) and EPS (Earnings Per Share). The P/E ratio is the most widely used metric to measure a stock’s value because it shows the relationship between a stock’s price and the company’s total earnings. A simple way to think about a P/E ratio is to say that if a company has a P/E ratio of 20, you are paying $20 to claim $1 in earnings. Certain industries have a higher P/E ratio because people are willing to pay more within an industry that they believe is more likely to provide returns on their investments in the future. Therefore, when using this metric to evaluate a stock, it is most useful to compare the P/E ratio across the same industry. 

EPS is another popular method to search for value in a stock. EPS is calculated by taking the earnings left over for shareholders and dividing by the number of shares outstanding. The final product can be used to compare how much each company has made for each of its shares. Once again, comparing this metric between companies in the same industry can signify whether something is a good investment. These two metrics are important in comparing companies across an industry and can help investors find value.

For earlier stage biotech a lot of these traditional metrics, including P/E ratio and EPS, are not applicable. For these pre-commercial companies, most of their valuation is reliant on their total addressable market and the probability that their product will be passed by the FDA. The pre-clinical and the clinical stage companies are often valued on where they are in the process of approval. If investors can identify a pre-clinical company that that shows great promise, more often than not, this company will be undervalued relative to its future returns.   

Bristol Myers Squibb ($BMY)

Bristol-Myers Squibb Co. ($BMY) is a global biopharmaceutical company which focuses on many areas of disease and illness. It is prominent in its industry for manufacturing drugs in areas such as cancer, cardiovascular disease, diabetes, HIV/AIDS, hepatitis, and psychiatric disorders. Most of its revenue comes from its dealings in oncology, which now accounts for roughly 66% of its total revenues (more than $27 billion last year). With a market cap of $148.48 billion, it is already considered a relative giant in its industry but is currently undervalued in the stock market. This company is undervalued and will hopefully see increases in its value in the future due to its upcoming catalysts in the near future and its already low share price. 

One of BMY’s most popular drugs, Opdivo, has run into some problems lately. Opdivo is a drug that can be used to treat certain types of esophageal cancer, stomach cancer, non-small cell lung cancer, along with a few other types of cancer. In the first quarter of 2021, sales for this drug have fallen 3% and competition from a similar drug, Keytruda, is growing stronger. These problems seem worrisome to some investors and has caused the share price to decrease. Many investors fail to see that Opdivo still has the potential to act as a catalyst for future success. The FDA is expected to issue a decision on the use of “Opdivo as an adjuvant therapy in patients with muscle-invasive urothelial carcinoma by Sept. 3, 2021”. This decision could prove to be extremely lucrative for BMY as it opens a new addressable market for this drug which is expected to increase sales by an additional $3.5 billion per year between 2025 and 2028. This drug also holds future potential for partnerships and combinations with different drugs and companies in the field of oncology. BMY has just entered a partnership with AVEO Oncology and combined the use of the drugs Opdivo and Fotivda for patients with advanced relapsed or refractory renal cell carcinoma. There is still profitability through the use of this blockbuster drug despite the recent uptick in competition. 

Not only is BMY at the forefront of innovation within its industry, it also is undervalued when comparing its stock price to its earnings. BMY’s P/E ratio is currently 10.33, which sits well below the industry average of 30.72. It also bolsters a healthy 2020 EPS of $1.84 which is extremely competitive for its industry. Both of these metrics contribute to the fact that BMY is currently undervalued and could prove to be a smart investment.

SIGA Technologies ($SIGA) 

Another company that is currently undervalued is SIGA Technologies ($SIGA). This stock has extremely sound fundamentals and an impressive balance sheet that shows stability within its field. As opposed to many biotech companies that are surviving on fumes and the hopes of a breakthrough, SIGA is cashflow positive and its revenue has remained steady over the past three years. SIGA even had a 365% increase in revenue from 2019 to 2020, and has continued this trend of success in the first quarter of 2021. SIGA has found much of its success in its sale of its drug TPOXX which is used for the treatment of smallpox disease in adults and pediatric patients. While outbreaks of smallpox are mostly a thing of the past, this disease must still be researched and combatted due to the fear of the smallpox virus being used as a bioweapon in the future. With a P/E ratio of just 7.65 compared to the industry average of about 30.72, SIGA exhibits great value. Once again, a lower P/E ratio when compared to the industry average demonstrates that the stock price is low relative to earnings. It is sometimes dangerous to place too much importance on the financial metrics that cause a stock to appear undervalued, especially within biotech when so many factors can drastically change the trajectory of a company. In this case, this risk seems small because SIGA technologies has a consistent revenue and free cash flow while its stock price remains lower than competitors in its industry. 

SIGA has also continued its innovation and improvement towards the treatment of smallpox, indicating sustainable increases in the future. SIGA recently filed a New Drug Application for the approval of an intravenous formulation (IV) of TPOXX. This new method would hypothetically be used to administer this drug to those who are too sick and unable to take the capsule orally. These types of improvement are important when marketing to governments and potential customers for this method of defense for bioterrorism.  Most of the customers for this type of medication are national governments that may have to defend against a biological attack in the future. SIGA has established collaborations and partnerships with the U.S government and the Public Health Agency of Canada. If SIGA can continue to sign deals in new markets, their low price and inconsistent market performance will both improve. This stock has a lower ceiling and is slightly less exciting than many other investments in the biotech industry, but it is still undervalued and could prove to be a worthwhile investment in the long term. 

Fate Therapeutics ($FATE)

Some biotech companies are undervalued due to the simple fact that they have not been able to generate revenue through the sale of their products. These companies are in the clinical or pre-clinical stages of drug development and have not been able to release their products in the market. Despite their lack of revenue, these companies are still able to be publicly traded at a large volume. Many liken this phenomenon to the real-estate industry and the process of buying land under the presumption that its value will increase due to a facility/building that will eventually be installed. Biotech companies that are in phase 1 of drug development are being valued on the milestones they reach in their stages of development. These milestones indicate that there will likely be profit in the future. In the case of Fate Therapeutics ($FATE) their market cap of $8 billion is significantly larger than their yearly revenue of $40 million, yet their stock price has seen recent increases. 

Fate Therapeutics is a company that focuses on oncology and immunology treatments based on natural killer T-Cell programs. The development of programs FT500 and FT516 for the treatment of advanced solid tumors has drawn the interest of many investors and helped the company’s stock performance. This performance will most likely continue its momentum for the short-term future due to their positive feedback during their phase 1 testing of FT516. The field of oncology has a massive addressable market and Fate Therapeutics has the ability to capitalize on this market with its innovations. The current market cap of $8 billion may seem alarmingly high for a clinical-stage company but the oncology market is home to some of the most successful biotech products of all time and has huge upside. For example, the product Keytruda, (used to treat diseases like melanoma, lung cancer, head and neck cancer) generated $14.4 billion in 2020 alone. While the lack of information concerning this stock’s P/E ratio and EPS make this stock difficult to evaluate, it provides great upside for investors. The evaluation is almost based purely on the phase 1 progression and success of the company’s medicine, as well as the capacity that exists in the desirable market. 

 

Conclusion

Investing in biotech and pharmaceutical companies is a unique process where one can pay high prices for a share of a company that has not made a single dollar of revenue. The success stories within the biotech industry are the causes of this early stage investing, but it is difficult to determine which of these pre-clinical and clinical companies will make it through the approval process. More than 90% of drugs fail to make it from phase 1 clinical trials to the market, making these investments extremely risky. Investing in these companies’ requires extensive research concerning their progress through the approval process and the market that they are entering. The other half of the biotech industry, those companies that have begun the sale of their products in the market, can still be evaluated using these same methods. The development of new drugs is always an important factor to consider when analyzing a biotech company, but commercial-stage companies must also be analyzed using the metrics and statistics used to discern the values of traditional stocks.

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