Paper Boat Creative
Topline Summary and Update
ImmunityBio (NASDAQ:IBRX) has been a fascinating story to watch, coming about as close to “meme stock” as we have seen in the biotech space due to the convergence of a highly dedicated shareholder base, successful clinical execution, massive short interest, and a CEO who has been unusually accountable and responsible for the operations of the company.
I want to revisit the company as an investment thesis now that they have moved their first drug into approval for bladder cancer, and they also had a key announcement about the future of this drug outside of bladder cancer. So let’s consider these clinical updates to see why I feel IBRX has made itself worthy of upgraded sentiment relative to my last article.
Pipeline Updates
Anktiva
IBRX’s main drug of interest is the fusion protein Anktiva, designed to stimulate an immune response to tumors. I have covered the clinical data supporting approval in bladder cancer in prior articles, and the company has made good on this potential, gaining market approval in April 2024 for patients with non-muscle invasive bladder cancer that has not responded to standard BCG therapy.
No further clinical trial data with respect to bladder cancer have been announced or presented since that approval. However, IBRX is continuing to study Anktiva in various other forms of cancer, and one of the biggest surprises for 2024 (since approval was fully expected, given prior favorable results) was the announcement of positive top-line findings from QUILT 3.055, a phase 2 study evaluating Anktiva in combination with an immune checkpoint inhibitor for patients with advanced non-small cell lung cancer after progression on prior checkpoint inhibitor-based therapy.
Anktiva treatment yielded overall survival that would appear to be a substantial improvement over the historical use of chemotherapy in the second- and third-line settings. The company met with the FDA in June to discuss a pathway to approval for Anktiva, although the substance of this meeting has not been disclosed to date. Likely, IBRX is now planning a confirmatory phase 3 trial to formally test the benefit of Anktiva in this setting.
I personally doubt that these findings are sufficient in themselves to justify an accelerated approval, given how many options are now available for patients with NSCLC. However, at a minimum, the phase 2 study results definitely justify further study in this area.
Financial Overview
As of their most recent quarterly filing, IBRX held $133 million in cash and equivalents, with another $37.5 million in marketable securities. They also had $610 million in various convertible notes, representing short-term liabilities held by companies owned by IBRX’s founder, Patrick Soon-Shiong.
Operating expenses for the quarter were $95.2 million, and after considering interest income ($3.1 million), interest expense ($29.5 million), and other accounting factors, the company recognized a net loss of $134.1 million for the quarter. They did gain another $100 million in non-dilutive funding based on the approval, which is not accounted for in the filing.
Given this cash burn rate, IBRX has somewhere in the realm of 1 to 2 quarters of cash runway on hand to continue funding operations. This does not take into account the fact that Anktiva has launched commercially and received insurance coverage.
Strengths and Risks
Strength – An approved drug puts IBRX in a new class of company
Anktiva is approved and already launched, currently generating sales for the company that are yet to be disclosed. But the next quarterly filing is going to be the first look at the potential success of this franchise for the near term. By projection, at a dosing price of around $36,000, and the ability to store 170,000 doses for 2 years, this implies a ceiling for the sales of Anktiva in the realm of $3 to $6 billion.
Specifically in the bladder cancer space, with around 83,000 new cases per year (around 80% of which are in this non-muscle invasive space), 30%-40% will experience disease recurrence after BCG treatment. This puts a rough estimate of the new patients eligible for Anktiva therapy in the realm of 20,000 per year, each receiving 6 induction doses and 15 doses of maintenance therapy. This puts the theoretical sales ceiling for Anktiva at 420,000 doses, which would be worth upwards of $15 billion in annual sales.
So there’s a lot of potential here, but I wouldn’t get ahead of the sales too much until we know more about how much it’s being used, which we’ll get a sense of in the next earning report. And those lofty sales figures have to face the reality that many patients will not receive Anktiva and that IBRX cannot currently manufacture and store that upper limit of 420,000 doses. However, it indicates that the market potential is very real here.
Strength – Strong signs of life for Anktiva in other indications
The announcement of positive overall survival findings in lung cancer was the wildcard for me, personally, in following the IBRX story. While I question the relevance of this potential approval in the face of an advancing standard of care, Anktiva is clearly showing potential to move into other tumor areas outside of bladder cancer, which is definitely going to be necessary if IBRX wants Anktiva to become a blockbuster drug on par with something like pembrolizumab. The news bodes quite well for the future development of Anktiva.
Risk – Cash position remains weak
IBRX continues to operate on that razor’s edge quarter to quarter. Yes, they have a deep well of friendly debt they have been able to gain time and again, but even friendly debt comes at a cost, in particular the near-$30 million in quarterly expense to service the debt they have right now. This is higher than a lot of company’s entire operational expense lines, and I doubt the sales figures for Anktiva are going to substantially impact this in the very short term.
Strength and Risk – Investor dedication creates almost meme stock potential for volatility
Addressing what one might consider to be the elephant in the room, I have been a somewhat-steady naysayer about the potential for IBRX as an investment vehicle, and it goes without saying that if you had followed the opposite of my sentiment on this company, you would be up almost 50% (and at times since then even higher) on the investment. This is the nature of this kind of analysis, of course, but part of it is due to the highly unusual investment base for this company, centered in part on the very real positive data in very real areas of unmet need. However, it is also based in faith on the company’s CEO and his dedication to seeing the Anktiva project to its first approval.
Moreover, there is massive short interest in the company. According to Seeking Alpha, at the time I write this, it is as high as 33%. When you start to brew all of these factors together, you get speculation about the possibility of massive short squeezes and the potential of IBRX as, essentially, a trading stock. Downside risks from things like dilution or possible negative data readouts are hedged by the “true believer” investors, creating this reality of a stock that just seems to be unable to fall, no matter what a cogent, realistic analysis of the fundamentals say it should be worth.
I mark this as both a strength and a risk because it creates a lot of potential for said short squeeze, whether the stock deserves this much attention or not. But at the same time, that support could evaporate if shareholders are pushed a bit too far. In essence, there’s more driving the $4+ billion valuation than just a single drug approval (and a promising pipeline for Anktiva), and that’s something that is highly unpredictable.
There are multiple factors that may impact on Anktiva’s ability to gain traction in the bladder cancer space. For starters, approval does not mean, in itself, that all practitioners who would prescribe it are aware. Also, discounts and payer negotiations could lower the revenue generated per dose. By way of a comparison in the bladder cancer space, consider enfortumab vedotin, which was granted accelerated approval for metastatic bladder cancer in 2019. Seagen was generating $34.5 million in net product sales in the first quarter after being available. By Q3 2023, these sales had grown to $571 million, after launching enfortumab vedotin in the frontline space.
Metastatic disease is around 10%-15% of new bladder cancer cases, a smaller pool of patients than IBRX may be able to help with Anktiva. It’s difficult to know for sure that IBRX can mobilize sales in the same way that Seagen was able to, but you can see the strong potential here.
Bottom-Line Summary
Bottom line, IBRX has gotten to a drug approval, and they’re already moving sales. This is a highly positive development. So why is my sentiment still not a categorical “Buy?” My last article suggested to “Hold” due to an elevated valuation prior to their drug approval. I still maintain that at today’s $4 billion market cap, IBRX is being valued as a company that is already executing on sales at a high level, with basically no cash concerns to worry about.
However, IBRX is just now making the foray into sales, and they have very substantial debts to service that are going to be a drag on the execution, even though these debts are held by friendly hands.
Long term, there is growth potential here, and for those among you who are tolerant of the near-term fluctuations, I feel a long-term “Buy” could be justified here. However, I also think that, at these price points, there will likely be a relatively short-term opportunity to find a better buy-in point to justify the investment thesis. If IBRX is able to execute like Seagen in year 1, then they’ll reach $125-$150 million in yearly sales, which covers approximately one quarter of expenses. This would put them at a price to sales ratio of around 29.
Relative to peers like Exelixis, who have price per share of around 3.8 to 4.0 (and are profitable), IBRX is looking valued as a pretty steep premium with a successful first quarter launch. Today, if IBRX launches to $150 million in annual sales, then the fair market valuation would be more in the realm of $600 million to $1 billion.
This comes off as pretty ludicrous to long-term shareholders of IBRX, and the proof is in the pudding that IBRX is worth what it’s being paid for (and has even commanded higher valuations). This calculation is only intended to say that there is downside risk in the short and near term while Anktiva sales are built out, with the share price continuing to trend toward that “fair” market value for as long as they have not demonstrated growth.
In all, this leads me to a cautious sentiment, as we don’t know yet how the launch of Anktiva will proceed for the company. Until we have more solid data, then the market valuation is likely to trend lower from here. The long-term story for IBRX looks great, and if you are strictly a long-term holder, then this is likely a “Buy,” but in July 2024 I think the company is likely not yet ready to command the hefty valuation that it has garnered so far. As I re-evaluate the situation in the coming years, I expect that this sentiment is going to continue to change. “Hold” could very well be the wrong sentiment down the road, but for at least right now, IBRX sits at a very generous valuation, with lots of room to prove me wrong as they focus on sales execution.
