ADVERUM BIOTECHNOLOGIES ADVM
June 09, 2017 - 3:17pm EST by
Handley
2017 2018
Price: 2.70 EPS 0 0
Shares Out. (in M): 43 P/E 0 0
Market Cap (in $M): 116 P/FCF 0 0
Net Debt (in $M): -210 EBIT 0 0
TEV ($): -94 TEV/EBIT 0 0

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  • Negative EV
  • Biotech
 

Description

Historically I’ve found that investing in a basket of biotech companies that are trading with substantial negative enterprise values relative to their market capitalizations and have drugs in development where the jury is still out has been an attractive strategy.  The list of opportunities has dwindled as several have seen the market become more optimistic on their prospects so far this year including  TTPH (up 82% year to date), LIFE (up 59% year to date), VSTM (up 95% year to date), and  ZFGN (up 18% year to date).

 

Although I will at times invest across a wide basket of biotechs trading with negative enterprise values, I prefer to invest when there is:

A)     At least three years of cash left on the balance sheet at their current burn rate

B)     At least one year of cash burn built into their current valuation before they would be at a positive enterprise value

C)    The drugs at the forefront of their pipeline have never missed their primary endpoint in any study and they have the potential to generate substantial revenues if they are approved.

   

Frequently the reason that these opportunities exist is that a prior drug didn’t demonstrate statistical significance / missed its primary endpoint and the existing shareholder base sold to move on to the next interesting story.  These stocks are usually orphaned until they are able to advance another drug into their pipeline far enough to allow a new story to be told.  The key in my view is avoiding companies that lack the capital to advance the next drug in their pipeline or where the management team continues to try to advance the same drug that has already missed its primary endpoint in a way that seems unlikely to lead to different results in the next trial.

 

In this write up I’m going to focus on Adverum Biotechnologies.

 

 

 

 

 

 

ADVM

Price / Share

 

$          2.70

Shares Out

 

               43

Market Cap

 

              116

 

 

 

 

Cash

 

 

              210

Total Liabilities

 

                21

Cash minus Total Liabilities

 

 

            189

Net Cash / Share

 

             $4.41

 

 

 

 

Firm Value

 

              (73)

 

 

 

 

Last Quarter's Burn Rate

 

               12

 

 

 

 

Quarters to break even EV

 

               6

Quarters until the cash runs out

                18

 

 

 

 

Net Cash/ Market Cap

 

162%

 

The key takeaways are that the company has six quarters at its current burn rate before the enterprise value would become positive and it has 18 quarters until it would run out of cash.   The burn rate will likely increase as they advance their product candidates but it is clear they have substantial time to advance their pipeline before they have the possibility of running into financial difficulties.  

 

Pipeline

ADVM-022  

This is a gene therapy candidate for treating wet age related macular degeneration (wAMD).  The company plans to initiate IND studies by the end of this month.

There are 1.2 million Americans who suffer from wAMD and the number is expected to double by 2050 as the population ages.

Currently, wAMD is treated with frequent injections of anti-VEGF protein into the eye. This creates a burden for both patients and physicians, and limits access for those who are not able to comply with frequent office visits to receive injections.

 

ADVM-043

This is a gene therapy candidate for treating alpha-1 antitrypsin (A1AT) deficiency.  The company plans to enroll patients for a Phase 1/2 trial in Q4 2017 .

A1AT deficiency is a rare genetic disorder that causes defective production of A1AT that may result in serious respiratory disease in adults and/or liver disease at any age. The current standard of care for patients with A1AT deficiency involves chronic replacement of A1AT protein through a weekly intravenous infusion to address their lung disease. Prevalence of A1AT deficiency is estimated at 1 in 5,000 to 1 in 3,500 people with European ancestry, leading to approximately 100,000 A1AT deficiency patients in US alone

 

ADVM-053

This is a gene therapy candidate for treating hereditary angioedema (HAE).  The company plans to initiate IND studies by the end of this month.

HAE is a life threatening genetic condition with approximately 10,000 patients diagnosed across major markets.  It intermittently causes painful attacks that require infusions every three or four days to prevent.    

 

Regeneron Partnership

AVA-311 is one of three gene therapy candidates being researched in partnership with Regeneron through 2020.  This partnership was renewed in February 2017.

 

Editas Partnership

ADVM is collaborating with Editas Medicines to explore the delivery of up to five genome editing medicines for the treatment of inherited retinal diseases. This partnership was announced in August of 2016.

 

The key takeaways from the pipeline are that all of their drugs are very early in their development and that Regeneron and Editas thought enough of their technology to partner with them or renew their partnership within the last twelve months.  

 

Company History

 

April 22, 2014 - $55 million raised from Venrock, Deerfield, Adage, etc

May 5, 2014 – Partnered with Regeneron to develop novel gene therapy drugs for the treatment of ophthalmologic diseases

July 31, 2014 – IPOed by selling 6 mm shares at $17 / share

January 8, 2015 – Sold 2 mm shares at $59 / share in a secondary offering

June 15, 2015 – Announced disappointing results for its lead drug candidate but spun the results as positive to the street.  Stock dropped from $38.88 to $17.05

July 23, 2015 -  The CEO resigned, likely due to a loss of credibility.

August 13, 2015 – The company reported earnings and announced it would not initiate additional trials of its lead drug.  The stock dropped from $13.83 to $10.01.

November 20, 2015 – Names Paul Cleveland as CEO

February 1, 2016 – Announces a stock for stock merger with Annapurna Therapeutics.  Existing shareholders own 62.5% of newco.

May 12, 2016 – Closes deal to acquire Annapurna

August 9, 2016 – Announced a collaboration with Editas Medicine to explore genome editing medicines to treat up to five inherited retinal diseases.

October 14, 2016 -  Amber Salzman has been promoted from President to CEO.  Paul Cleveland moves from CEO to Executive Chairman of the board

February 2017 – Regeneron extends the term of their research collaboration by three years to May 1, 2020.

 

The key takeaway from the company history is that their first drug failed to perform as expected and the CEO attempted to mislead investors.  He was fired shortly thereafter and the company abandoned trying to advance it.  The triple blow of a failed drug, an attempt to mislead investors by the old CEO, and their pipeline being so far from being approved is what has led to the stock trading at 55% of its net cash.

 

Summary

I don't believe that anyone is currently able to predict the value of their pipeline.  That said the market is extremely pessimistic at the moment and I believe that ADVM is a strong risk/reward trade given the potential for a new story to be formed over the next six quarters prior to it having a positive enterprise value.

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

Positive news in one of their product candidates

The announcement of a new product discovery partnership

 

    sort by    

    Description

    Historically I’ve found that investing in a basket of biotech companies that are trading with substantial negative enterprise values relative to their market capitalizations and have drugs in development where the jury is still out has been an attractive strategy.  The list of opportunities has dwindled as several have seen the market become more optimistic on their prospects so far this year including  TTPH (up 82% year to date), LIFE (up 59% year to date), VSTM (up 95% year to date), and  ZFGN (up 18% year to date).

     

    Although I will at times invest across a wide basket of biotechs trading with negative enterprise values, I prefer to invest when there is:

    A)     At least three years of cash left on the balance sheet at their current burn rate

    B)     At least one year of cash burn built into their current valuation before they would be at a positive enterprise value

    C)    The drugs at the forefront of their pipeline have never missed their primary endpoint in any study and they have the potential to generate substantial revenues if they are approved.

       

    Frequently the reason that these opportunities exist is that a prior drug didn’t demonstrate statistical significance / missed its primary endpoint and the existing shareholder base sold to move on to the next interesting story.  These stocks are usually orphaned until they are able to advance another drug into their pipeline far enough to allow a new story to be told.  The key in my view is avoiding companies that lack the capital to advance the next drug in their pipeline or where the management team continues to try to advance the same drug that has already missed its primary endpoint in a way that seems unlikely to lead to different results in the next trial.

     

    In this write up I’m going to focus on Adverum Biotechnologies.

     

     

     

     

     

     

    ADVM

    Price / Share

     

    $          2.70

    Shares Out

     

                   43

    Market Cap

     

                  116

     

     

     

     

    Cash

     

     

                  210

    Total Liabilities

     

                    21

    Cash minus Total Liabilities

     

     

                189

    Net Cash / Share

     

                 $4.41

     

     

     

     

    Firm Value

     

                  (73)

     

     

     

     

    Last Quarter's Burn Rate

     

                   12

     

     

     

     

    Quarters to break even EV

     

                   6

    Quarters until the cash runs out

                    18

     

     

     

     

    Net Cash/ Market Cap

     

    162%

     

    The key takeaways are that the company has six quarters at its current burn rate before the enterprise value would become positive and it has 18 quarters until it would run out of cash.   The burn rate will likely increase as they advance their product candidates but it is clear they have substantial time to advance their pipeline before they have the possibility of running into financial difficulties.  

     

    Pipeline

    ADVM-022  

    This is a gene therapy candidate for treating wet age related macular degeneration (wAMD).  The company plans to initiate IND studies by the end of this month.

    There are 1.2 million Americans who suffer from wAMD and the number is expected to double by 2050 as the population ages.

    Currently, wAMD is treated with frequent injections of anti-VEGF protein into the eye. This creates a burden for both patients and physicians, and limits access for those who are not able to comply with frequent office visits to receive injections.

     

    ADVM-043

    This is a gene therapy candidate for treating alpha-1 antitrypsin (A1AT) deficiency.  The company plans to enroll patients for a Phase 1/2 trial in Q4 2017 .

    A1AT deficiency is a rare genetic disorder that causes defective production of A1AT that may result in serious respiratory disease in adults and/or liver disease at any age. The current standard of care for patients with A1AT deficiency involves chronic replacement of A1AT protein through a weekly intravenous infusion to address their lung disease. Prevalence of A1AT deficiency is estimated at 1 in 5,000 to 1 in 3,500 people with European ancestry, leading to approximately 100,000 A1AT deficiency patients in US alone

     

    ADVM-053

    This is a gene therapy candidate for treating hereditary angioedema (HAE).  The company plans to initiate IND studies by the end of this month.

    HAE is a life threatening genetic condition with approximately 10,000 patients diagnosed across major markets.  It intermittently causes painful attacks that require infusions every three or four days to prevent.    

     

    Regeneron Partnership

    AVA-311 is one of three gene therapy candidates being researched in partnership with Regeneron through 2020.  This partnership was renewed in February 2017.

     

    Editas Partnership

    ADVM is collaborating with Editas Medicines to explore the delivery of up to five genome editing medicines for the treatment of inherited retinal diseases. This partnership was announced in August of 2016.

     

    The key takeaways from the pipeline are that all of their drugs are very early in their development and that Regeneron and Editas thought enough of their technology to partner with them or renew their partnership within the last twelve months.  

     

    Company History

     

    April 22, 2014 - $55 million raised from Venrock, Deerfield, Adage, etc

    May 5, 2014 – Partnered with Regeneron to develop novel gene therapy drugs for the treatment of ophthalmologic diseases

    July 31, 2014 – IPOed by selling 6 mm shares at $17 / share

    January 8, 2015 – Sold 2 mm shares at $59 / share in a secondary offering

    June 15, 2015 – Announced disappointing results for its lead drug candidate but spun the results as positive to the street.  Stock dropped from $38.88 to $17.05

    July 23, 2015 -  The CEO resigned, likely due to a loss of credibility.

    August 13, 2015 – The company reported earnings and announced it would not initiate additional trials of its lead drug.  The stock dropped from $13.83 to $10.01.

    November 20, 2015 – Names Paul Cleveland as CEO

    February 1, 2016 – Announces a stock for stock merger with Annapurna Therapeutics.  Existing shareholders own 62.5% of newco.

    May 12, 2016 – Closes deal to acquire Annapurna

    August 9, 2016 – Announced a collaboration with Editas Medicine to explore genome editing medicines to treat up to five inherited retinal diseases.

    October 14, 2016 -  Amber Salzman has been promoted from President to CEO.  Paul Cleveland moves from CEO to Executive Chairman of the board

    February 2017 – Regeneron extends the term of their research collaboration by three years to May 1, 2020.

     

    The key takeaway from the company history is that their first drug failed to perform as expected and the CEO attempted to mislead investors.  He was fired shortly thereafter and the company abandoned trying to advance it.  The triple blow of a failed drug, an attempt to mislead investors by the old CEO, and their pipeline being so far from being approved is what has led to the stock trading at 55% of its net cash.

     

    Summary

    I don't believe that anyone is currently able to predict the value of their pipeline.  That said the market is extremely pessimistic at the moment and I believe that ADVM is a strong risk/reward trade given the potential for a new story to be formed over the next six quarters prior to it having a positive enterprise value.

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise do not hold a material investment in the issuer's securities.

    Catalyst

    Positive news in one of their product candidates

    The announcement of a new product discovery partnership

     

    Messages


    SubjectRe: batting average
    Entry06/09/2017 06:34 PM
    MemberHandley

    That's a great question and I think it would require a systematic study to be able to answer it properly.  In practice what I've found is that the stocks tend to be volatile and offer the opportunity to trade back out at a small discount to cash even before they announce news of real importance.   When important news hits it is frequently bad although the low valuation helps to cushion some of the blow, in other words they never immediately file for bankruptcy so you have the chance to consider the news and exit.  When the news is good they tend to appreciate dramatically since they suddenly have a story to go to market with.  All in all, I've found it to be a high IRR strategy for me.

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