$XBI remains highly challenged on multiple fronts.
First – there are too many companies/ assets chasing after same targets.
Second – biotech management teams had been too fixated on prior valuation and did not raise money – now there is massive financing overhang
Third – biotech management team credibility is hitting all time low – they promise one thing, and you see a completely different thing when you flip the card. We saw so many failed trials now that nobody wants to take clinical risk.
On that backdrop, $XBIO is now down -39% over the past year.
As a group, biotech remains uninvestible, but there are select companies that are extremely interesting as long as you follow specific criteria.
These qualities drive my long thesis for many core holdings – which I think are worth reading for readers.
FIRST: BEST-IN-CLASS OR FIRST-IN-CLASS COMMERCIAL LAUNCH STORY THAT BEATS EXPECTATIONS
I like this theme because they have multiple ways to get paid. These companies should retain premium valuation given they are the first and/or best-in-class. They tend to be supported by long-term holders. If they are down a lot, they have some floor valuation protection because these assets / companies always attract strategic interest (large pharma).
If the product is launching, you will also get paid immediately – there could be data that investors wait for on weekly or monthly basis. They could be script data or claims data that give real time performance indicator on the launch.
One of the companies that could potentially fit this criteria is Argenx ($ARGX).
They are launching first in class anti-FcRn product Vyvgart. Vyvgart is not only the first in class product, but also is generally perceived to be best-in-class with most tolerable side effect profile.
Vyvgart had a strong quarter out of the gate – it remains to be seen if it can sustain launch momentum.
SECOND: PROFITABLE PHARMA WITH MARGIN IMPROVEMENT AND BEAT-AND-RAISE STORY
In rising rates environment, we are seeing significant bid on value names. This is expected as investors look for cash now vs. later as discount rate goes up.
Value name with margin expansion story is very exciting because estimates going up means stock price goes up defensively. They are value names – therefore, multiple compression is largely limited (at least vs. growth names) and margin expansion should raise estimates to a point where it can more than offset multiple compression (if any).
Predictable growth with no financing risk is a safe haven in this type of environment.
One stock that could be a candidate for this is Alkermes ($ALKS).
ALKS does not have mega blockbusters – but they have products that are growing durably and predictably with a new product launch and a cost savings program that are driving significant margin expansion.
With two activists looking over management shoulders (Elliott Management and Sarissa Capital), the profitability targets are more credibly with external pressure on the management.
THIRD: MAKE SURE THEY HAVE STRONG BALANCE SHEET / CASH RUNWAY AND CAPITAL EFFICIENT DEVELOPMENT PROGRAMS
This is tough times and last thing I want is getting hit with a random equity raise on a company while I am long. Now, it is illegal to get heads up on financing, but you can reduce this risk by focusing on companies that have significant cash runway (if you are looking for biotechs).
Also capital efficiency is highly important for development – for that, it is worth while to find companies that are pursuing pipeline-in-a-product opportunities.
Argenx could be candidate for this section – Argenx has $2.9bn of cash as of 1Q22 and the company is focused on pipeline-in-a-product opportunities – one of the most capital-efficient development pathway.
As shown in the table below, Argenx is pursuing at least 8 indications with Vyvgart.
Tough market environment means the bar should be HIGHER for investments.
I am taking criteria approach to identify LONG investments in biotech so that I can really focus on owning companies that I CAN COMFORTABLY BUY THE DIP WITH CONFIDENCE.
FIRST: BEST-IN-CLASS OR FIRST-IN-CLASS COMMERCIAL LAUNCH STORY THAT BEATS EXPECTATIONS
SECOND: PROFITABLE PHARMA WITH MARGIN IMPROVEMENT AND BEAT-AND-RAISE STORY
THIRD: MAKE SURE THEY HAVE STRONG BALANCE SHEET / CASH RUNWAY AND CAPITAL EFFICIENT DEVELOPMENT PROGRAMS
Happy Investing and we will develop into even stronger and more mature investor coming out of this biotech winter!
*not investment advice
