- Vir Biotechnology lags significantly behind Gilead Sciences in development of Covid-19 treatment.
- The current valuation does not leave much upside even if the company reports positive results from Phase 2 trial of VIR-2218.
- Investors should wait for a much lower entry point.
The decision to buy or sell a stock is dependent not only on the company fundamentals but also on its trading price. Many strong businesses enter the avoid or sell zone, simply because of exaggerated prices and seemingly little to no upside potential. One such stock that a value investor needs to shy from is Vir Biotechnology (NASDAQ:VIR).
Today, we will see why fundamentals fail to justify Vir Biotechnology's valuation levels.
Vir Biotechnology is a clinical-stage immunology company focused on developing novel treatments targeting infectious diseases. The company's four therapeutic platforms, antibody platform, T Cell platform, Innate immunity platform, and siRNA platform, are working on enhancing the immune response to pathogens. The company's lead asset, VIR-2218, is currently being evaluated in Phase 2 in HBV (hepatitis B) indication. Besides, the company also has multiple early-stage investigational drug candidates being evaluated in tuberculosis, influenza, and HIV indications.
Recently, though, the stock has jumped over 100% on news of its involvement in researching antibodies that can work against the novel coronavirus or COVID-19 virus strain.
Vir Biotechnology is deeply overvalued on coronavirus hype.
On February 12, Vir Biotechnology announced that it has identified two monoclonal antibodies that bind to the SARS-CoV-2 virus which causes the COVID-19 disease. These antibodies are targeting the SARS-CoV-2 spike protein in the region that the virus uses to enter cells through the cellular receptor ACE2. On February 25, the company announced a manufacturing collaboration with WuXi Biologics to advance and produce human monoclonal antibodies for the potential treatment of COVID-19.
Although these are promising developments especially in a world fighting a pandemic, the fact remains that the company is not even close to commencing first-in-human trials for the investigational COVID-19 therapeutic. The company has isolated antibodies from patients who survived SARS and is studying it for COVID-19 in the preclinical stage. The company may require around 10 months, provided everything goes without a glitch, to get the first human dosed with this therapy.
Gilead Sciences (GILD) seems to be much ahead in the quest of COVID-19 therapy. On February 26, the company announced the initiation of two Phase 3 clinical studies to evaluate the safety and efficacy of remdesivir in adults diagnosed with COVID-19. In these randomized, open-label, multicenter studies, the company plans to enroll 1,000 patients at medical centers primarily across Asian countries, as well as other countries globally with high numbers of diagnosed cases, beginning in March to evaluate two dosing durations of remdesivir, administered intravenously. FDA has already reviewed and accepted the company's IND (investigational new drug) filing for remdesivir for the treatment of COVID-19. This follows the article published in The NEJM (New England Journal of Medicine) which highlighted clinical benefit witnessed by a COVID-19 patient in the U.S. on the administration of remdesivir.
Remdesivir is already being studied in two clinical trials, in China's Hubei province led by the China-Japan Friendship Hospital as well as the recently initiated clinical trial in the United States led by the National Institute of Allergy and Infectious Diseases.
Then, there is Regeneron (REGN), also working on an antibody approach to finding a cure for COVID-19. The company's technology platform demonstrated robust outcomes in the Ebola outbreak of 2015.
There is also much activity in the vaccine space for COVID-19. We also have Moderna Therapeutics (MRNA) working with the NIH (National Institutes of Health) to evaluate mRNA-1273 as a vaccine candidate for COVID-19 in the Phase 1 trial. The company will be studying the vaccine candidate in the healthy-volunteer study expected to begin in April. If proven safe, Moderna and NIH plan to enroll hundreds of more patients to determine whether the vaccine protects against infection. We also see other companies such as Sanofi (SNY), Inovio Pharmaceuticals (INO), CureVac, and GlaxoSmithKline (GSK), analyzing various vaccine candidates in the preclinical stage.
Vir Biotechnology is definitely not a forerunner in this race for COVID-19 treatment. Hence, the investor exuberance and the more than 100% jump in share prices since February 24 does not seem justified by company fundamentals.
Vir Biotechnology expects to report results from the Phase 2 trial of investigational HBV drug, VIR-2218, in the first half of 2020.
Vir Biotechnology and Alnylam Pharmaceuticals (ALNY) are working on investigational subcutaneously administered HBV-targeting siRNA (Small interfering RNA), VIR-2218, in Phase 1/2 clinical trial. This drug is designed to inhibit the production of all HBV proteins including HBsAg (HBV surface antigen). HBsAg is developed by the HBV virus to inhibit T-cell activity against the infection.
In January 2020, Vir Biotechnology announced new pipeline data from the ongoing Phase 2 trial of VIR-2218. The data demonstrated substantial reductions in HBsAg and also high tolerability of the therapy. All HBeAg negative and positive patients who received two doses of 200 mg of VIR-2218 reported at least a 1.0 log10 decline in HBsAg as well as a mean decline of 1.5 log10 in HBsAg at day 85.
Further, none of the patients demonstrated ALT (alanine amino transaminase) greater than or equal to three times the upper limit of normal, validating the manageable tolerability profile of the therapy.
Vir Biotechnology expects 16-week data across all cohorts in the first half of 2020. The company also plans to commence two new trials with VIR-2218 by late 2020. These include a Phase 2 trial in China in collaboration with Brii Biosciences, and another Phase 2 combination trial of VIR-2218 and pegylated interferon-alpha (PEG-IFN-⍺). The company is also working on advancing CTA (clinical trial application) for the investigational HBV vaccine, VIR-3434, in the first half of 2020.
Despite these growth catalysts, the current valuation of Vir Biotechnology is not justified.
Although there are impending milestones and catalysts for Vir Biotechnology in 2020, none of them justify the company's current valuation multiples. Currently, Vir Biotechnology is trading at a price-to-sales multiple of 626.43x and price-to-cash flow multiple of 19.95x.
Other hepatitis B players such as Ionis Pharmaceuticals (IONS), GlaxoSmithKline, Arrowhead Pharmaceuticals (ARWR), and Arbutus Biopharma are trading at much lower price-to-sales multiples of 6.88x, 2.55x, 22.46x, and 30.80x, respectively.
Besides the valuations, there are many other risks associated with this company. Vir Biotechnology is a clinical-stage company and can continue to report losses for many more years. Infectious disease players have historically got the short end of the stick in terms of biopharmaceutical funding. Unlike chronic lifestyle conditions, there may come a stage when a majority of infectious disease patients are cured. We have seen this for the Gilead Sciences Hepatitis C franchise. There remains a high possibility that after the initial bolus of patients, hepatitis B players may also face a rapid decline in the addressable market and extraordinary profits.
The company is also in the early stage of clinical development and faces significant R&D failure risk. It does not have a history of advancing molecules in the late-stage of clinical development or of securing regulatory approvals. The company also does not have experience of successfully commercializing products. This exposes the company to a significant degree of market uncertainty.
One upside for the company, however, is its stable cash balance of around $320 million at the end of September 2019. Assuming that the company's cash burn rate is similar to the cash spent on operational activities of around $120 million in 12 months ending September 2019, the company may not need dilutive financing at least till the end of 2021. However, the company may still choose to go for equity dilution to take advantage of its stratospheric valuations.
What price is right for Vir Biotechnology?
According to finviz, the 12-month consensus target price for the stock is $26.33. On February 27, Baird analyst Madhu Kumar downgraded Vir Biotechnology to Underperform from Neutral and reiterated the target price of $17. On February 4, JPMorgan analyst Anupam Rama downgraded Vir Biotechnology to Neutral from Overweight but raised the price target from $25 to $26.
In November 2019, Goldman Sachs analyst Paul Choi initiated coverage with a Buy rating and $37 price target. Barclays analyst Gena Wang initiated coverage with an Overweight rating and $25 price target.
Here again, we see that the modest fiscal 2020 revenue and EPS estimates do not support Vir's high valuations.
In this backdrop, I believe that a target price range of $25 to $28 is a fair estimate of the true growth potential of Vir Biotechnology in 2020. This is definitely a promising biotechnology company, but investors should not pick this company at unsustainable valuations. Instead, it is advisable even for aggressive investors to wait for a better entry point to pick this stock in 2020.
This article was written by
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