IGM Biosciences: Early Stage Of Development, But With Janus Inside

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About: IGM Biosciences (IGMS), Includes: ABBV, AMGN, AZN, BMY, GMAB, INBX, MRK, NVS, PFE, REGN, RHHBY, XNCR
by: Bilbao Asset Management
Summary

IGM Biosciences is a biotechnology company developing cancer treatments based on engineered IgM antibodies.

The preclinical data appears to be quite promising, the company received a large amount of financing, and well-known investors bought shares.

Notice that Janus decided to trust the company, which will most likely interest other large investors.

Note that the company will have cash in hand until 2022. It may sell additional equity to finance research for its other clinical trials, which could push the valuation of the stock price down.

In our view, the trading range will be between $50 million to $250 million. We believe that a buying opportunity could commence below $75 million.

Sophisticated pharma investors will need to review the IGM Biosciences (IGMS)' preclinical data. Janus Capital Management acquired shares, and the company holds a significant amount of cash. It means that preclinical research impressed institutional investors and may impress others. Having said that, IGM Biosciences is still at an early stage of development, which some participants will dislike. With this in mind, we believe that the enterprise value could fluctuate from $50 million to $250 million.

Source: S-1

Source: S-1

Platform And IGM's Product Candidates

Founded in 2010, IGM Biosciences is a biotechnology company developing cancer treatments based on engineered IgM antibodies.

Source: Igmbio's Website

IgM antibodies or Immunoglobulin G are a type of antibodies, which are naturally produced by the immune system. The image below offers its structure:

Source: S-1

Source: S-1

In our opinion, the market participants will appreciate that IgM antibodies offer stronger binding to the cell surface and improved ability to cross-link cell surfaces. Read the lines below for more details on the matter:

Source: S-1

The company's most promising candidate, IGM-2323, is a T cell engaging IgM antibody. This candidate, which targets CD20 and CD3 proteins, will be tested in Phase 1 clinical trial for the treatment of relapsed/refractory B cell Non-Hodgkin's lymphoma ("NHL") patients.

The other lead program is an IgM antibody, which targets Death Receptor 5 proteins. We don't believe that investors will be very interested in this product candidate as it is still at an early stage of development. The company plans to file an IND for the treatment of solid and hematologic malignancies in 2020.

See the pipeline in the image below and note that the company expects to release the results of Phase 1 clinical trial in 2020:

Source: S-1

The company's research is still at a preclinical stage. The company has yet to offer a lot of results for the evaluation of efficacy and safety. With that, the company's preclinical data will most likely impress market participants. The company's lead candidate IGM-2323 appears to be offering 70x stronger binding as compared to a bispecific IgG antibody with the same concentration of CD20 and CD3. The lines and the chart below offer further information on the matter:

Source: S-1

In IGM-2323 vitro studies, IGM Biosciences observed 68% more cancer cells than bispecific IgG antibodies. The image below offers further information on the matter:

Source: S-1

Balance Sheet

The company is at an early stage of development, which may not be appreciated by most investors. With that, the company received a significant amount of cash in a short period of time. From December 31, 2018, cash in hand increased from $1.88 million to $82.67 million. It means that several investors appreciated the research conducted by IGM Biosciences quite a bit. This fact will most likely encourage other institutional investors. Check the image below for more details on the matter:

Source: S-1

On the liability side, investors will not worry much. The company reports a small debt from a related party. Besides, the asset/liability ratio is expected to be equal to 13.19x. See below a list of liabilities:

Source: S-1

Market participants never appreciate related party transactions. With this in mind, let's understand the loan received by IGM. In 2017, a shareholder called Haldor gave the company a note worth $37.3 million, which was converted into preferred shares. The notes included interest of 3.6%, which most investors will not consider significant. Read the lines below for further details on the matter:

Source: S-1

Cash Flow Statement

In the first half of 2019, the company reported CFO of -$17.6 million. After the IPO, the company expects to have cash in hand of $195 million.

With that, investors will most likely expect an increase in the cash burn rate in the future. Notice that the company will be executing several Phase 1 trials at the same time. It will have to test a significant amount of patients, which costs millions.

See the image below for more details on the cash flow statement:

Source: S-1

Use Of Proceeds

IGM Biosciences expects to use the proceeds to finance the clinical development of IGM-2323 and finance the IND of DR5 IgM antibody and its Phase 1 clinical trial among other purposes. Read the lines below for more details on the matter:

Source: S-1

The company expects to have cash in hand to finance its operations until 2022. Market participants will have to remember the date. If the company runs out of cash, the management may try to sell additional equity, which may lead to share price decline. The lines below offer further information on the matter:

"Based on our current business plans, we believe that the net proceeds from this offering, together with our existing cash and cash equivalents, will be sufficient to fund our planned operations into early 2022." Source: S-1

Sale Of Preferred Stock, Expected Capitalization And Valuation

The company expects to convert its preferred stock into common stock. As shown in the lines below, each preferred stock will be equal to one share of common stock:

"Each share of our convertible preferred stock will automatically convert into one share of our common stock or our non-voting common stock, as applicable, immediately prior to the completion of this offering." Source: S-1

In our view, it is interesting to be aware of the price at which IGM sold the preferred stock. The previous valuation will indicate whether the IPO price is expensive or not.

In 2016, Series B preferred stock was sold at $6.61. Besides, in July 2019, the Series C preferred stock was priced at $13.22. The company is selling shares at $15 to $17, which does not seem to be extremely expensive as compared to the previous valuation. Notice that anybody will be able to buy shares in the IPO. Thus, the company has to place a higher price than that given to buyers of large stakes. See the image below for more details on the matter:

Source: S-1

After the IPO, the equity structure and the expected capitalization will be more simple. The company will have only common stock and no convertible securities, which seems to be favorable. See the image below for more details on the capitalization of IGM Biosciences:

Source: S-1

After the IPO, with ~$26.9 million shares outstanding at $16, the company will have a market capitalization of $430 million. If we deduce $195 million in cash, the enterprise value totals $235 million.

IGM Biosciences competes with large institutions. See the list of competitors given by the company:

As shown in the chart below, most competitors are too large. They will not serve to assess the valuation of IGM Biosciences.

Source: Ycharts

Let's use the smaller competitors. These include Amgen, GMAB, and REGN. As shown in the image below, GMAB commenced trading in the United States at an enterprise value close to $2 billion. The company was not at an early stage of development when it organized its IPO. As a result, we cannot use GMAB to assess the valuation of IGM.

Source: Ycharts

In the 1990s, Regeneron had an enterprise value between $100 million and $500 million. We studied the company's 10-k in 1996. We found that the company had several product candidates at Phase 1 and 2 of development. IGM Biosciences is still at a preclinical stage. Thus, in our view, the company will most likely have an enterprise value of $50 million to $250 million. We don't expect the company to hit an enterprise value of more than $300 million before having several Phase 2 product candidates.

See more on Regeneron's 10-k and its valuation in the images below:

Source: 1996's 10-k

Source: Ycharts

Amgen commenced its operations in the 1980s and did not receive approval for its first product candidate until 1989. The lines below offer further information on how the company started in the industry:

Source: Wikipedia

As shown in the charts below, in the 1980s, the company started trading with an enterprise value of less than $250 million. With this in mind, after the IPO, we believe that IGM will have a similar valuation.

Source: Ycharts

Source: Ycharts

Shareholders: Janus Capital Management Owns 7.3% Stake

Investors should take a look at the list of shareholders. Note that one stakeholder owns more than 43.9% of the total amount of shares, which does not look that ideal. This owner will have significant influence over major corporate decisions.

Beneficial takeovers may get blocked. Also, notice that Janus decided to trust the company, which will most likely interest other large investors. See the image below for more details on the matter:

Source: S-1

Risks

In our view, the most significant risk could be that the company does not deliver favorable data in 2020. As a result, the share price will most likely go down to hit the company's cash per share if not lower. Notice that the company will have cash in hand until 2022. However, it may sell additional equity to finance research for its other clinical trials, which could push the valuation of the stock price down.

Conclusion

IGM Biosciences is at an early stage of development. As a result, the ratio of risk/reward is quite significant. Investors who don't understand the company's research should pass on this name. On the contrary, the preclinical data appears to be quite promising, the company received a large amount of financing, and well-known investors bought shares. With this in mind, sophisticated investors will have to take a look at the company's research. Regarding valuation, in our view, the trading range will be between $50 million to $250 million. We believe that a buying opportunity could commence below $75 million.

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.