Description

The biotechnology sector is in a deep bear market, with the S&P XBI Biotech Index down ~(36%) over the last year. Analysts have pointed out the historic number of companies trading for less than net cash (60+ as of a few months ago). Many recent VIC write-ups have outlined cheap small-cap biotechs. Unfortunately, most of these suffer from perennial biotech afflictions – risk of FDA approval, years to meaningful revenue, uncertain funding positions, binary outcome risk, and misaligned management.

I present to the forum my favorite biotech investment, 2seventy bio (“TSVT”), a recent spin-off that I hope will contribute to the long VIC legacy of outperforming spin-offs with ridiculous corporate names.

2seventy is inspired by the “maximum speed of translating human thought into action – 270 miles per hour.” If that doesn’t pique your interest, I think the math will. Relative to a current price of ~$14 / share, TSVT benefits from ~$10.50 of net cash, 50% ownership of a currently marketed cell-therapy called ABECMA worth more than $30 / share (more on this below), and a meaningful pipeline. Said differently, the current liquidation value of TSVT is nearly 3x the current price, and even full depletion of the cash would yield liquidation value more than 2x the current price.

TSVT was spun-out of bluebird bio (“BLUE”) on November 4th, 2021, to separate its oncology assets from its problematic genetic disease business. BLUE’s genetic disease business suffered from severely delayed approvals, multiple clinical holds, and coverage / reimbursement issues. Then BLUE CEO Nick Leschly migrated to TSVT and the business was spun-off into a sea of abandoned small-cap biotechs. Despite a large cash balance and an approved product, TSVT shares have declined 63% since the spin-off and 43% YTD, significantly underperforming the XBI (down 27% YTD). TSVT conducted an equity raise earlier this year to elongate its funding profile through critical milestones (not specified) spanning through 2025. Notably, CEO Leschly invested $6mm personally in the raise.

TSVT owns 50% of ABECMA, a first-in-class CAR-T treatment for multiple myeloma marketed in conjunction with Bristol-Myers Squibb (“BMY”). Demand for ABECMA has greatly outpaced capacity for the treatment since launch, especially due to limited lentiviral vector supply because of competition from COVID vaccines. Nevertheless, ABECMA will likely produce more than $275mm of 2022 revenue, on its way to peak revenue of more than $1.4bn according to BMY consensus estimates.

ABECMA benefits from first mover advantage, the channel strength of BMY, broad coverage, and a favorable toxicity profile. While currently only available after 4th line treatment, the therapy is widely expected to eventually become available for earlier line treatment. Moreover, given the nature of cell therapy, ABECMA does not suffer from the inherent patent cliffs associated with typical small molecule therapeutics and could potentially benefit from a very long economic life. A modest 2x peak revenue multiple for the product implies 2 x $1,400mm = $2,800mm x 50% TSVT ownership = $1,400mm of value to TSVT or $37 / share. The investment is durable to significantly lower peak sales levels for ABECMA.

I include in an Appendix excerpts from my research into multiple myeloma cell therapy market and the competitive threat posted by Legend’s new product cilta-cel. In short, my research suggests that cilta-cel and ABECMA will share the market, with some modest advantage to cilta-cel over time.

Beyond ABECMA, TSVT has a pipeline of CAR-T development candidates in Phase 1. While these products are too early and too speculative to have a meaningful impact on the intrinsic value, I would emphasize that TSVT is one of the few companies in the world to have successfully developed a CAR-T therapy. Given the company’s experience and the large personal investment by the CEO, I am inclined to believe that the TSVT R&D ROI is better on an expected value basis than CAR-T peers. Nevertheless, I believe the shares are cheap even if all the cash is frittered away. In the event that TSVT reaches 2025 without little to show for the substantial R&D investment, I expect the concentrated and sophisticated shareholder base to push for a sale of the company / ABECMA. 

In sum, I believe investor awareness issues from the spin-off and the biotech bear market have resulted in TSVT trading substantially below intrinsic value. TSVT offers 2 – 3x upside with little-to-no long term downside risk due to the presence of ABECMA. Margin of safety in biotech – who would have thought!      

Appendix:

ABECMA (ide-cel) vs. Cilta-cel

Cilta-cel is the only other CAR-T therapy approved for late-line multiple myeloma. It is a similar treatment developed and marketed by Legend Biotech in tandem with Janssen Pharmaceuticals, but has a superior clinical profile to ABECMA:

Despite cilta-cel’s superior clinical profile, I have conducted numerous physician calls and believe ABECMA will continue to succeed commercially:

1) Current demand for treatments in relapsed / refractory multiple myeloma greatly surpasses current supply. Physicians will prescribe whatever is available between cilta-cel and ABECMA.

2) Janssen + Legend have faced rollout and manufacturing issues and physicians expect these difficulties to continue.

3) Physicians have some concerns with cilta-cel’s safety profile, particularly the slightly high incidences of neurotoxicity, especially associated with movement disorders

4) Certain physicians find it incorrect to directly compare ABECMA and cilta-cel: Later-line population for cilta-cel was on average healthier vs. later-line population for ABECMA. Since CAR-T therapies are directly correlated with the health of the patient, a healthier patient population would lead to better clinical results

5) Current insurance paradigm only allows coverage for one CAR-T therapy per patient. Once someone is put on a waitlist for ABECMA or cilta-cel, they cannot switch to another CAR-T therapy even if it’s available.

Please see below for some key quotes from physicians:

“We get one or two spots a month for each of these products, so availability is a huge determinant of who gets what product”

“I would prefer to prescribe ide-cel to older patients, those who are 75+, as ABECMA is an easier product for patients in terms of CRS neurotoxicity”

“I see the potential for ide-cel to improve in earlier-line settings vs. cilta-cel. Cilta-cel’s median PFS did not improve materially in earlier-line patients … perhaps the population for cilta-cel was healthier vs. ide-cel in later-line settings”

“Subsequent patients will be better if we choose patients … patients who have more disease control going in”

“I have negative feelings towards both companies [due to slow rollout] … Janssen is having rollout issues now”

Catalyst

While TSVT will benefit from product-specific catalysts such as ABECMA moving to earlier lines of therapy and data read outs on its Phase 1 development candidates, I believe much more important catalyst is seasoning of the security and greater investor awareness. Having reviewed many dozens of sold-off small cap biotechs over the last few months, I believe that TSVT is nearly unique in that it trades near cash while having a meaningful, cash-flow generative product already on the market.