Turning Point IPO: Targeting A Massive Market

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About: Turning Point Therapeutics, Inc. (TPTX)
by: Wilsonville Capital
Summary

Turning Point is a clinical-stage biopharmaceutical company developing a novel, small molecule to design new oncology therapies.

With one candidate, TPX-0005 (Repotrectinib), at Phase 1/2 of development and three more candidates at the preclinical stage, the company is still at an early stage of development.

The underwriters decided to give the company a valuation of $257 million. It could be lower as there are competitors like CytomX with a valuation of $53 million.

The company expects to provide additional information at the 2019 annual meeting of the American Society of Clinical Oncology. This meeting should take place from May 31, 2019, to June 4, 2019.

Global lung cancer market has disclosed a total market of $36.92 billion by 2023 and a CAGR of 13.5% from 2017 to 2023.

Turning Point (TPTX) has many appealing features. Firstly, there is a long list of institutional investors as shareholders. In addition, cash in hand increased by 124% in 2018 as demand for the company’s equity increased. With that, underwriters priced the stock a bit expensive as compared to other peers like CytomX (CTMX). The total enterprise value is expected to be equal to $257 million with CytomX reporting a valuation of $53 million.

Source: Prospectus

Source: Prospectus

Business

Founded in 2013, Turning Point is a clinical-stage biopharmaceutical company developing a novel small molecule to design new oncology therapies.

With one candidate, TPX-0005 (Repotrectinib), at Phase 1/2 of development and three more candidates at the preclinical stage, the company is still at an early stage of development.

The image below provides the pipeline of Turning Point:

Source: Company’s Website

The company’s leading candidate, TRIDENT-1, is being tested to treat patients with ROS1+ advanced non-small-cell lung cancer (NSCLC) and patients with ROS1+, NTRK+ or ALK+ advanced solid tumors. According to the prospectus, Turning Point expects to finish its Phase 1 with 75 patients soon and should start developing Phase 2 in the second half of 2019. Share price increases should be expected after the release of Phase 1 data.

New investigational drug applications are also expected for candidates TPX-0046 and TPX-0022 in the second half of 2019. The share price may also increase as these new developments are released. However, most sophisticated investors should wait for the company to finish Phase 1 or Phase 2.

The market opportunity is huge. Note that 1.8 million people were expected to die of lung cancer in 2018. Global lung cancer market has disclosed a total market of $36.92 billion by 2023 and a CAGR of 13.5% from 2017 to 2023.

TRIDENT-1

Repotrectinib is a low molecular weight macrocyclic TKI of ROS1, TRK, and ALK. The data obtained from 75 patients shows that majority of adverse events were of Grade 1 and Grade 2 nature. The table below provides further details on this matter:

Source: Prospectus

While the market already owns a large amount of data about the safety of Repotrectinib, the company expects to provide additional information at the 2019 annual meeting of the American Society of Clinical Oncology. This meeting should take place from May 31, 2019, to June 4, 2019. Investors should follow it. The management may decide to provide additional information, which could move the share price. The lines below provide further details on this matter:

Source: Prospectus

Balance Sheet

As of December 31, 2018, with $101 million in cash and $103 million in total assets, the recent increase in cash should please shareholders. Cash in hand increased by 124% from that of 2017 as demand for the stock increased in 2018. It is a very beneficial feature, which shows that the market appreciated the clinical data released right before the IPO. A list of assets is given in the image below:

Source: Prospectus

On the liabilities front, Turning Point should also please investors. The asset/liability ratio is 19x and the financial risk close to zero. The image below provides a list of liabilities offered in the IPO prospectus:

Source: Prospectus

With regards to the contractual obligations, market participants should not worry either. As shown in the table below, they amount to only $2.5 million:

Source: Prospectus

Equity Structure And Expected Conversion Of Convertible Securities

Like most biopharmaceutical companies, Turning Point raised money through the sale of convertible preferred stock. As such type of securities may create certain fear in market participants, a remark should be done. Turning Point expects to convert these securities before the IPO goes live. As a result, market participants should not suffer potential stock dilution from the conversion of preferred stock. Check the table below and note that the pro-forma financial statements don’t show convertible preferred stock:

Source: Prospectus

Cash Burn Rate

Turning Point reported CFO of $23.5 million and $12.6 million in 2018 and 2017, respectively. With $101 million in cash, certain investors may think that the company has the cash to operate for about three to four years. Be careful about such type of assumptions. Turning Point should increase the total amount of operating expenses as the company develops Phase 2 of TRIDENT-1 and Phase 1 of TPX-0022 and TPX-0046. According to the prospectus, the company expects to have sufficient cash for about 18 months. Read the lines below for further details:

We believe that the expected net proceeds from this offering, together with our existing cash and cash equivalents, will be sufficient to enable us to fund our operating expenses through at least the next 18 months, through our expected initial data release from the planned Phase 2 portion of TRIDENT-1 and early Phase 1 clinical development for TPX-0022 and TPX-0046.” Source: Prospectus

The image below provides the cash flow statement that was reported in the S-1 document:

Source: Prospectus

Use Of Proceeds

Market participants should appreciate the use of proceeds. The company does not expect to acquire shares from existing stockholders or pay a debt. The money should be used to finance the Phase 2 portion of TRIDENT-1 and the development of TPX-0046 and TPX-0022 among other purposes. The lines below provide further details on this matter:

Source: Prospectus

Stockholders

A large number of institutional investors trusted the company. This feature should increase the demand for the stock. Keep in mind that other institutional investors should be interested in this name after reviewing the list of stockholders.

Having said this, it is not ideal that many of the shareholders, including directors of the company, are reducing their positions. Take a look at it in the image below:

Source: Prospectus

Competitors, Capitalization And Valuation

Repotrectinib is expected to compete with other drugs like crizotinib sold by Pfizer Inc. (NYSE:PFE), ceritinib owned by Novartis Pharmaceuticals (NYSE:NVS), and larotrectinib commercialized by Loxo Oncology (NASDAQ:LOXO). Those companies are too large to be comparable to Turning Point. Investors should not use them to assess the company’s valuation.

F. Hoffman-La Roche AG (OTCQX:RHHBY) and Betta Pharmaceuticals Co., Ltd. are also developing product candidates that could compete with Repotrectinib. However, RHHBY is large and Betta Pharmaceuticals is a private company, so they don’t serve for the valuation of Turning Point.

According to Owler, the following companies compete with Turning Point:

Source: Owler

Among these companies, CytomX Therapeutics, Inc. is the only peer similar in size to Turning Point. In addition, the pipeline of CTMX is not much more advanced than that of Turning Point. CytomX Therapeutics reports four candidates at Phase 1/2 of development. The image below provides further details on this matter:

Source: CytomX

With 27,757 million shares outstanding immediately after this offering at $17, the expected market capitalization should be equal to $471 million. With $214 million in cash that the company expects after the IPO, the total enterprise value should be equal to $257 million. The image below provides the expected capitalization:

Source: Prospectus

CytomX Therapeutics, Inc. has cash worth $436 million, no debt, and a total enterprise value of $53 million. With these figures in mind, at $17, Turning Point is overvalued as compared to CytomX Therapeutics.

Having said so, Turning Point may start trading at $17 with a total enterprise value of $257 million. Note that CytomX commenced trading with an enterprise value of $300 million and reached $900 million in 2018.

Take a look at the image below for further information on the volatility of CytomX:

Source: YCharts

Conclusion

While Turning Point is still at an early stage of development, the underwriters decided to give the company a valuation of $257 million. It could be lower as there are competitors like CytomX with a valuation of $53 million. Having said so, CytomX traded one year ago with a total enterprise value of more than $900 million. While this mark appears to be very expensive, Turning Point Therapeutics could reach similar levels. Keep in mind that the pipeline of CytomX is as advanced as that of Turning Point Therapeutics.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.