I have a ton of respect for deep fundamental value investors – especially in biotech. They deal with massive volatility – stick it through the tough times, and then generate strong returns over time.
Avoro is slightly different from other biotech hedge funds in that they can be aggressive in terms of engagement with portfolio companies.
In early 2019, venbio/Avoro had a key position in Immunomedics ($IMMU) – In January 2019, they held 17.7mm shares, valued at $319mm as shown below.
At the time (as we know now), Immunomedics was developing sacituzumab govitecan (now approved as Trodelvy) – an ADC (antibody-drug conjugate) drug to treat mTNBC (metastatic Triple-Negative Breast Cancer) for 3rd line and potentially earlier. It is expected to grow into a blockbuster for following reasons:
There is no competition: there is no good therapy for 3L in mTNBC at the moment. Post-approval, almost all patients will receive this drug – leading to a very fast uptake. At the same time, Trodelvy is the new standard of care, and all the following therapies will need to show superiority to Trodelvy – a very high bar in itself, but will be challenging from execution point of view. It is extremely difficult to enroll patients into a clinical study that will randomize patients into investigational drug (there is risk that the patient will not get the standard of care – a risk most patients are not willing to take if it is a life/death situation). At the same time, the trial will be WAY more expensive to run as new therapy will have to purchase comparator arm drug at WAC (wholesale acquisiton cost).
ADC has stronger durability of cash flows: it will be extremely difficult / next-to-impossible to develop biosimilar for ADC products. Biosimilars of biologic drugs are hard to develop because it is difficult to show bio-equivalence to the original/reference product to the FDA. However, ADC is magnitude more difficult than current biologic drugs like Humira because of ADC structure. ADC has antibody, toxic payload, and linker – ideally, the biosimilar developer will need to prove bioequivalence for each of the element and as a whole. This is technically extremely challenging and costly.
Back to Immunomedics story
The origin of venbio-Immunomedics saga goes back to February of 2017, when Seattle Genetics, a powerhouse in ADC therapy development, signed a license agreement for $2bn.
At this time, venbio/Avoro came out and essentially said that 1) this is a ridiculously low price, 2) management team is destroying shareholder value, 3) we will replace board members that are covering management team, 4) we will annul this transaction, and 5) we will put in new management team. They continue on their battle through shareholder vote, and the fund won the battle in a few months.
This is a classic case that shows in the importance of having strong and capable management team – let’s see the stock price of Immunomedics between January 2015 and January 2019.
Immunomedics share price was only $4 and stock went as high as $26 in 2018. The weakness in 4Q18 was combination of 1) macro weakness in equities market and 2) concern around on-time approval from the FDA.
Upon taking control of the board and management team, venbio led equity financing to EXPAND R&D and brought in new management team to develop Immunomedics into ADC powerhouse.
We all know the outcome of the aggressive investment into the platform and product development under capable investor and management – SALE of company to Gilead for $88 per share or $21bn.
While Trodelvy is a very attractive asset, the ADC platform must have been extremely attractive platform that can prolifically pump out drugs for Gilead – the franchise that Gilead is building as a focus area as the next stage of durable growth for the company.
My old boss always told me “competition kills stocks” – there is always high premium for highly competitive products and I believe it is well-deserved premium. What is your “Immunomedics” in your portfolio? Please let me know!
*not investment advice
