I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years. - Warren Buffett
In bioscience investment, it is wise to choose a young growth company with several blockbuster prospects. When there are three blockbuster candidates, chances are that you found yourself a pot of gold. If one or two franchises fail, there is still the third one to deliver outsized profits. That being said, Avalon GloboCare Corp. (NASDAQ:NASDAQ:AVCO) epitomizes this type of growth equity. The young grower, Avalon is attempting to capture fortunes in regenerative medicine, CAR-T, and precision medicine diagnostics. As such, the company is positioned to hit a trifecta (i.e. three fruitful developments) that yield outsized investment profits. A "trifecta biotech" usually delivers strong investment returns due to three layers of blockbuster diversification built into one company. If you've been reading my research, you'd realized that diversification is highly imperative for successful life science investment.
Figure 1: Avalon stock chart (Source: StockCharts)
Since biotech equities are risky, there are correspondingly high rewards. To mitigate the risk, you should employ "diversification both within a pipeline" like Avalon as well as in purchasing a basket of equities. Keep in mind that this form of diversification is different than the diversified pipeline of a giant pharmaceutical innovator. In my opinion, it's nearly impossible for a giant company to double or triple in the next several years. Investing in young growers like Avalon is the way to generate outsized returns in the long run. If confirmation is needed, you can view the phenomenal profits from the SPDR S&P Biotech (XBI) that focuses on bioscience growth equities. In this research, I'll feature a fundamental analysis of Avalon and provide my expectation on this Phillip Fisher growth stock.
Founded in 2016, Avalon GloboCare operates key subsidiaries (Avactis Biosciences and Genexosome Technologies) and is headquartered in Freehold, New Jersey. Only several years into operations, Avalon GloboCare already built a reputation for itself as the leading cell-based technology company. In delivering hopes to countless patients worldwide, Avalon is focused on the development and innovation of medicines and diagnostics to serve the strong unmet needs in cancer and various diseases. As follows, the company is poised to capture three highly promising niches, including exosomes diagnostics, regenerative medicine, and cellular immunotherapy.
Figure 2: Avalon subsidiary (Source: Avalon)
Powering the diagnostic portfolio is precision medicine based on "exosomal biomarkers." Accordingly, Avalon is delivering a diagnostic avalanche against oral cancer, nonalcoholic steatohepatitis ("NASH"), leukemia, colorectal cancer, and macular degeneration. Notably, exosomal biomarkers can quickly pinpoint a diagnosis to give physicians an edge against dreaded diseases. In the battle of life and death, I believe that accuracy and precision are of paramount importance. That aside, Avalon is brewing various potential blockbusters, including AVA-101, -201, and -203 as depicted below.
Figure 3: Diagnostic and therapeutic pipeline (Source: Avalon)
Aside from the strong proprietary core technology and intellectual properties, Avalon has a unique growth infrastructure. Specifically, the company has the capability to accelerate its product development and commercialization through three strategic laboratories, including Weill Cornell Medicine, Beijing Lu Daopei, and Nanjing BenQ hospitals.
You guys are probably familiar with the caliber of Cornell Medicine. Lu Daopei hospital is no less than Cornell, as it was founded by a stellar physician who is held in high regard in China. That aside, the aforementioned subsidiaries allow for great flexibility in research and development. Moreover, it enabled international investors to build shares in a company that has a strong foothold in North America and especially overseas.
Figure 4: Strong vertical integration (Source: Avalon)
Shifting gears, I'll analyze the secret sauce that differentiates Avalon from other bioscience innovators. Representing the industry tailwind and fundamental shift, precision medicine embodies a therapeutic that is tailored to the individual patient. As such, it confers excellent efficacy and safety. The fine quality of precision medicine is like a custom-made suit that is superior to clothing available at Walmart (WMT) stores.
As the pinnacle of medical management, precision medicine operates on the principle that the same drug can exhibit distinctive responses in different patients. The unique genetic makeup of one individual compared to another translates to different enzymatic expression and drug metabolism. By developing specific medicine for a patient, the treatment outcomes are greatly improved.
Of note, a key component of precision medicine is a liquid biopsy. Traditionally, most confirmatory tests employ a tissue biopsy. Aside from having a higher rate of potential complications, a tissue biopsy is cumbersome and time-consuming. Like a magnet that has drawn innovation toward progress, the trend nowadays is shifting in favor of liquid biopsy. With a simple blood draw, a liquid biopsy provides invaluable data on molecular biomarkers which improves the diagnostic "sensitivity and specificity." In other words, a liquid biopsy expedites the diagnosis time, lowering the costs, and improving the diagnostic accuracy as well as treatment outcomes.
Figure 5: Liquid biopsy (Source: Avalon)
Traditionally, there are three biomarkers employed in a liquid biopsy. They include circulating tumor cells (CTCs), circulating tumor DNA (ctDNA), and exosomes. In my view, the trend nowadays is moving away from CTCs. Only ctDNA and exosomes remain dominant. As part of cancer cells that get pinched off and travel into the bloodstream, I believe that exosomes hold the greatest promise. Exosomes are like leaves that provide invaluable information about a tree (i.e. the cell). By getting a hold of the leaves, you can pretty much tell if the tree has a disease. And given that exosomes are readily accessible in many biological fluids (blood, urine, and saliva), tapping into exosomes for diagnosis is ingenious.
Figure 6: Exosomes (Source: Avalon)
One can gauge at the industry tailwind for liquid biopsy by assessing the growth in this market. Specifically, Market Research Future estimated that the global liquid biopsy market is valued at $3.9B. Growing at the 28% compound annual growth rate (“CAGR”), this market will reach $17.3B by 2022. In capturing a small percentage of this pie, Avalon shares should be worth much higher than its current valuation. If this story is yet to kindle your "inner Buffett," Avalon is brewing the "ultimate CAR-T" for various cancers.
In this Golden Age of CAR-T, Avalon captures lightning in a bottle by innovating the CD19xCD22 CAR-T (i.e. AVA-101) that is far ahead of its time. As a monarch among CAR-T, AVA-101 attacks multiple cancer targets to limit these rogue cells' ability to evolve for escaping immune detection. Additionally, AVA-101 circumvents setbacks of the previous generation CAR-Ts (Yescarta and Kymriah). As I recalled, two of IBI's CAR-T stocks were acquired for substantial profits (i.e. Kite Pharma and Juno Therapeutics). Nonetheless, I'm more enthusiastic at the profits potential from Avalon, as I analyzed AVA-101. After all, the ramifications of this novel CAR-T for shareholders and patients are tremendous.
For instance, other gene-edited CAR-T employs an RNA virus. However, an RNA viral vector suffers from size limitation. Specifically, it can only carry enough genes for one single target like a CD19. As a rule of thumb, the fewer target the lesser the efficacy. In contrast, AVA-101 employs the jumping gene (i.e. transposon) technology which comes with far "greater bandwidth." As such, transposon enables AVA-101 to carry the genes for receptors that simultaneously latches to both CD19 and CD22 found on cancer cells. With two targets, the "General" T-cells can better seize the rogue cells. As a result, this translates into improved efficacy against deadly cancers that is second to none. Interestingly, this novel CAR-T is leveraged on the "built-in" combination therapy that is the cornerstone of stellar cancer management.
And by having a"kill switch," AVA-101 enjoys far less toxicity (i.e. cytokine release syndrome) that dampens the prospects of other CAR-Ts. Despite that AVA-101 is precision medicine, the T-cells of patients can be harvested, engineered with CD19/CD22 targeting, and reintroduced back into the patients in a matter of days. Riding the dragon CAR-T, Avalon will make AVA-101 available in the clinic as soon as 2Q2019. In all probability, I believe that its ingenious design provides AVA-101 an excellent chance of eradicating resistant cancers.
Due to the expertise of its founder, Avalon is also attempting to conquer the fertile land of regenerative medicine. Accordingly, Allied Market Research estimated that the global regenerative medicine market is growing at a staggering 32.2% CAGR. At this rate, this market is anticipated to reach $39.3B by 2023. To gain an edge, Avalon is innovating cell-derived exosomes from high-quality stem cells.
Figure 7: Regenerative medicine operation (Source: Avalon)
Since they are exosomes-based, I believe there are excellent purity and flexibility. As such, these stem cells have vast applications such as hair restoration, skincare, anti-scar, anti-wrinkle, diabetic foot ulcer, wound care, anti-fibrosis, and etc. Of note, stem cells and its exosomes work for regenerative medicine because they can be matured into other tissues that are needed for the regeneration process.
In my view, there is no other sector in which the management is crucial to investment success than the bioscience industry. With the right captain, the ship can navigate through tough waters. When the leadership team is cream of the crops like Avalon, your chances of banking a profit in the company is more than favorable. For instance, if a company has a subpar pipeline the prudent management can in-license additional molecules to give the pipeline more depth. As I analyzed Avalon's roster, I'm quite impressed with the President and CEO (David Jin, M.D., Ph.D.). As a physician and scientist, Dr. Jin provides Avalon an intellectual advantage in pipeline development.
Due to his background and expertise, Dr. Jin has the capability to quickly size up a pipeline prospect for its chances of success. Correctly forecasting which drug has the best chance of success can save the company from billions of dollars that otherwise go into unfruitful and lengthy studies. It's interesting to note that Dr. Jin was the CMO of another company BioTime from 2009 to 2016. That experience enabled him to bring his regenerative medicine and stem cell technology expertise to Avalon. That aside, Dr. Jin served as the physician/scientist at the Howard Hughes Medical Institute and the Ansary Stem Cell Center at Weill Cornell Medical College of Cornell University.
In pharmaceutical investment, you want a chief who knows the "ins and outs" of innovation like Dr. Jin. As the principal investigator of more than 15 pre-clinical and clinical studies, he authored over 80 peer-reviewed medical publications. With his background as the faculty of internal medicine, hematology, and clinical oncology at the New York-Presbyterian Hospital (NYPH), he trained a breadth of talents from Cornell and Columbia Universities. That aside, the good doctor garnered two heavyweight belt as the Top Chief Medical Officer by ExecRank in 2012 and Leading Physicians of the World in 2015.
Just as you would get an annual physical for your well-being, it's important to check up on the financial health of your stock. For instance, your health is affected by "blood flow" as your stock's viability is dependent on the "cash flow." With that in mind, I'll analyze the 1Q2019 earnings report for the period that concluded on March 31. As follows, Avalon procured $284.1K in revenues compared to $307.9K for the same period a year prior. It's interesting for a developmental-stage bioscience company to procure a revenue.
Since a young bioscience company has yet to launch a medicine, it's the norm to expect the firm to operate without revenues for several years. Hence, let's assess more meaningful financial metrics. Accordingly, the research and development (R&D) registered at $152.4K. Despite its vast pipelines, most molecules are in their early stages. As such, I expect the R&D to be low at this point in its growth cycle. That aside, there was a $4.4M ($0.06 per share) net loss compared to a $1.4M ($0.02 per share) decline for the same period of comparison.
Regarding the balance sheet, there was $1.8M in cash versus $2.1M for last year. On top of the $6.0M from a direct offering raised back in April 25, the total cash position increased to $7.8M. Based on the $4.4M quarterly operating expense (OpEx) rate, it's likely that Avalon will conduct a public offering this quarter. In my observation, investors usually shy away from a public offering. Contrarily, I prefer a young bioscience company to raise capital this way rather than incurring substantial bank debts. Short-term bank debts can be recalled anytime that can prompt a company to file a Chapter 11. The key to a public offering is to execute it when the shares are trading high.
Though I do not mind a public offering, it's important for you to determine if you are holding a "serial diluter." A firm that employs dilution as a "cash cow" will render your investment essentially worthless. As the shares outstanding increased from 69.7M to 73.7M for Avalon, my rough arithmetic yields the 5.6% dilution. At this rate, Avalon easily cleared my 30% dilution cutoff for a profitable investment. Looking at the financial metrics, it's quite clear that Avalon is working for the best interests of the shareholders and patients.
In investing, it's imperative that you value your stock. Else, there is no way to know if you are buying an equity that is overvalued or undervalued. Purchasing a stock without valuation is like buying a home without appraising its true worth. Be that as it may, biotech valuation is highly difficult because it requires knowledge synthesis from various disciplines. Accordingly, I adapted my own valuation technique that is most applicable to developmental-stage bioscience companies. My approach employs comparative market analysis, appropriate discounts for the assets' current phase of development, and valuation of the sum-of-parts. The table below elucidates the value of the individual franchises.
Molecules and franchises
Market potential and penetration
Net earnings based on a 25% margin
PT based on 73.7M shares outstanding and 10 P/E
"PT of the part" after appropriate discount
|$500M (from the $3.9B market for liquid biopsy)||$125M||$16.9||$2.5 (discounted at 85% rate due to its very early stage of development).|
|$1B (estimated based on the $11.9B acquisition of Kite by Gilead)||$250M||$33.9||$5.0 (same discount as above)|
|$1B (from the peak $39B market)||$250M||$33.9||$5.0 (same discount as above)|
Table 1: Valuation analysis (Source: Dr. Tran BioSci)
After appropriate discounts for chances of trial success and/or commercialization failure, my valuation revealed the $12.5 per share. This is Avalon's true worth or intrinsic value. Again, it's imperative to discount for aggregate chances of trial failure at this stage in the company's growth. As the assets progress further in its development, I'll reduce my discount accordingly to align its increasing value.
Since investment research is an imperfect science, there are always risks associated with your stock regardless of its fundamental strength. At this point in its growth cycle, the main risk for Avalon is if the firm can deliver positive clinical outcomes for various franchises. Given that the bulk value of the company resides in CAR-T, a negative clinical reporting for AVA-101 can cause the stock to tumble over 60% and vice versa. Due to many favorable variables, I expect that AVA-101 should deliver positive results. As such, the odds of negative data are roughly 35%. The other concern is that the company might grow too aggressively and thereby runs into a potential cash flow constraint.
In all, I recommend Avalon GloboCare with the strong buy and five out of five stars rating. On a one to three-year horizon, I anticipated the $12.5 price target to be reached. Keep in mind that my PT is highly conservative because I discounted it by 85%. In a more realistic scenario, if one of the three franchises hits it should easily increase Avalon's valuation to over a billion. After all, a stock usually trades in multiples of its revenues based on comparative market analysis. However, that's its valuation several years from now. Additionally, I ascribed the 65% "investment profitability score" for this stock. In a nutshell, you are going to make money on Avalon, provided that you hold the stock for the long haul.
Harnessing the power of exosomes, Avalon is brewing a prodigious pipeline of precision medicine that includes diagnostics, immunotherapy, and regenerative medicine. I strongly believe that Avalon will disrupt the CAR-T space and medical diagnostics. Either the diagnostic for NASH or macular degeneration alone can easily garner blockbuster sales. Nonetheless, the low-hanging fruit is the premier CD19xCD22 gene-edited CAR-T that is powered by transposons. Gene-editing via transposon is highly advanced and thereby generates results that will rival CRISPR/Cas9. Looking ahead, I expect this novel CAR-T to play a dominant role in this Golden Age for CAR-T. Else, there's still the regenerative medicine and diagnostics for you to fall back on. If trifecta hits, then you're set for a mega win.
Author's note: This is an example of the higher level intelligence that I share exclusively with IBI members.
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