Description

This is a 2nd run at this idea.  My first time i caught a falling knife on a greater fool trade and got caught by further bad news.  The stock appropriately continued to de-rate as prior management/strategy only offered certainty of continued burn with no real strategy.

Fast forward to 2022 and the company is now a turnaround story.  Obviously, turnarounds take a long time and frequently fail, but this appears to have a handful of greenshoots and an even more attractive skew.

1) New CEO.  The founding CEO was booted after too many failures.  He basically greenlighted trials for risky molecules with limited data and everything failed.  They brought in the former CSO at JNJ.  I don't know if he's any good, but at least he was at a firm that focused on value from innovation.  He has already started with culling the pipeline and adding a couple new assets.  In particular, he culled a Ph 2 drug for IPF, which easily could have been kept as a "free call option".  A bullish view is that he's got a warchest and a bunch of internal science from which to create value with no sacred cows.  With a negative $1B EV, the market is clearly viewing this more like a busted SPAC.  He's ~60 years old, so he's gonna try to turn this ship in the next five years.  His equity vests around then, so he's playing the long game.

2) Large margin of safety.  It is the largest market cap in its sector with a negative EV.  $3.3B for $4.4B in cash does create a headwind for compounding returns.  However, it also creates a very attractive skew.  The burn is $500M, but it should start to decline with revenue growth and culling of pipeline.  They will deploy the balance sheet, so it is a race for the market to start ascribing asset value.

3) Jyselca actually selling.  The single success at the company was the development of their internal JAK asset with Gilead.  While the market (and I) wrote it off, it looks to be doing decent and the company raised 2022 guidance.  It seems reasonable they could reache their $500M long term guide, which would make the product profitable and offer an actual asset away from the cash.

4) Clarity at analyst event.  The company is planning an event for this Fall.  While I don't think it will be stock moving, it does seem like a window into how management is now thinking about creating value.  My hope is they focus on fewer programs with higher probability of success.  Also, they could bring in a commercial asset to get the business to break even more quickly.

5) Thin shareholder base.  There is one health care hedge fund and one long only in the name.  This looks like a classic "why bother" name for institutional money.  Thus, if there is any good news it should offer some decent upside.  If they continue to flounder, there shouldn't be much downside.

6) Gilead partnership cuts both ways.  They are locked in with Gilead, so there will not be the takeout lottery ticket that is key to biotech investing.  Also, they will have to pass any promising asset on to Gilead and split the economics.  However, this could actually be a positive where they get paid for their early work and get to reduce risk on later trials.  It definitely reduces the upside, but again, the play here is just to get a positive EV out of this company.

Risks:

It's going to come down to capital allocation.  However, with a negative EV he can have some whiffs and investors could still do okay.  If they do a huge science deal it could end badly.  I expect small acquisitions/partnerships of early clinical assets.

Valuation:

I'm looking out a few years and saying the cash will be down to $3B, but the company has a shot to create $1-2B of EV.  Jyselca could be worth 3x$200M= $600M.  A single clinical asset with real optimism could be worth a material amount even for half the asset.  The old rule of busted biotechs trading for 2x cash doesn't apply anymore, but $4.5B for $3B of cash (2/3rd cash) would still be 40% upside from here.

Catalyst

Analyst event this Fall

Jyselca quarterly ramp

Additional business development deals