BioTech: Seeking Intelligent Discourse on ADC Therapeutics (Cancer)

I want to add two disclaimers here: 1) neither do I hold any position here or ever have, or have I ever looked to invest in any biotech company as a stand-alone. 2) Cancer is a deadly disease, and I'd like to have it fully exterminated ASAP (in addition to other diseases like Alzheimer's, Parkinson's). Not saying that other diseases are not as important, but this is a personal preference borne from personal context. It's a shame people/companies have taken advantage of others to do fraud in this field (I am thinking of Theranos here). 

That said, given the relative long-term path to profitability for biotech companies, it sometimes makes me skeptical of how much actual and determined effort/progress companies are making towards achieving their stated goal vs. going at a more leisurely pace. Here I want to talk about ADC Therapeutics, which I have spent some time reading. Some things that I find odd or peculiar about the company, and I am left scratching my head on how those equate to its current valuation level. I would like some intelligent pushback on what I am about to say, rather than a 1st year chimp healthcare IB analyst butting in, because his boss told him to run a 20 year DCF a certain way, and it makes sense to him. 

An important metric for any biotech company is its productivity of R&D, and how that translates into drug approval (pipeline development, and evolution of drugs from one phase to the next). Sales and marketing efforts are equally important to be able to convince the medical community about the utility of the drug under consideration. So, as I looked to analyze biotech companies that are focusing on cancer treatment - which is the purview of ADC Therapeutics - I noticed a few things. 

1) Qualitative Metrics: 

  • ADC Therapeutics has been around since 2011 and prior to going public in 2020, had raised about $560 million in equity capital. To date only 1 of their drug has reached Phase 3. I would not know how to think through it, so I looked at other analogs, prepared by Capital IQ and working in this space, who've been around from 1980 to 2017. In a sample of 10 companies, from 2014 to Present, 4 companies had 0 drugs reach Phase 3, while 6 had atleast 3 or more drugs reach phase 3 or approved by FDA. Conclusion: ADC lags here.    

  • Further I am not entirely sure if healthcare community needs ADC's drug. There seem to be existing drugs in the market solving what ADC is doing, namely Yescarta and Kymriah. Understand that product portfolios develop, but for ADC's existing (potentially first-to-get-approved drug), if these are the alternatives there, then how do I justify ADC's valuation to myself? 

  • ADC in one of its earnings call said to analysts that bulk of the interest was coming from academia (rather than community). Am I wrong in thinking that interest from community would be a more meaningful or impressive metric to consider? Second, I am really not sure what kind of rigorous checks were done on them by the FDA when they were given the green light to move their Zylonta drug into Phase 3 (their only one). Chief Medical Officer of ADC stated that FDA in the last few years hasn't really needed a meeting, but for a confirmatory approval, I presume that FDA would want to diligence the management and the drug more closely, equally important, I am REALLY unsure of how strict or enforceable FDA has been during this virtual pandemic environment (are they letting things pass as long so long as the data makes sense?)   

2) Financial Metrics: 

  • The above drug pipeline evolution (and corresponding ability to monetize if it really is that differentiated) should be understood in the context of how much money has been plowed in relative to the revenue brought in. I look at cumulative numbers since the accounts are available. I find that ADC's Cumulative Revenue to Cumulative Expenses Incurred (for which I sum up its COGS, R&D, Sales and Marketing as I believe all three are essential for a successful first-time monetization), is very conveniently and comfortably below that of its peers (Molecular Partners, Immatics Oncopeptides, Idorsia , ImmunoGen, BioNTech SE, Jounce Therapeutics, UroGen Pharma, Nurix Therapeutics , Fate Therapeutics). Again these numbers are based off the years for which CapIQ has provided financials. 

- Similarly, another metric that I use to gauge how much cash each company has burnt/generated on average for the years since financials are available on CapitaIQ, is cash flow from investing and operating activities (essentially free cash flow) / number of years for which I have accounts. Barring Oncopeptides AB, Idorsia Ltd, and BioNTech SE that could be considered outliers based on cash generated/burnt, on average, the 7 companies have burnt through 44% of what ADC Therapeutics has

- As most of these companies on this list have been around for much longer than ADC, I use Jounce Therapeutics, Inc. (established 2012) as an analog for direct comparison. Jounce to date has 0 drugs in phase 3, but a cumulative revenue to expenses ratio of 0.68x (vs. 0.05x for ADC), cumulative revenue to cash flow generation ratio of (74%) vs. (1910%) for ADC. To put the last point another way, it has burnt through 25% of what ADC has. It also has just 1 office/facility vs. 4 for ADC Therapeutics (Switzerland, SF, London, NJ). Why and how does that make economic sense for a company that doesn't seem to have hit its performance milestones is beyond me. Going one level further, the ADC's strategic alliance only happens to be with GenMab, which seems to be very important for the former, but not so much for the latter (from what I understand as GenMab seems to have many partners); contrast that with Jounce, which seems to have an exclusive partnership with Gilead that is a much larger player than GenMab, and when then gives me an indication of some kind of moat with respect to what Jounce might be doing. Unless the math is wrong, Jounce is trading at a Price to Book Value of 1.5x vs. ~7.0x for ADC Therapeutics. The median price to book value for ADC's comparables in this list is ~4.6x, so clearly ADC is the one that is overvalued here. Before a first year chimp healthcare IB analyst comes and argue with me that he didn't see Price to Book Value for biotech companies mentioned in his vault or M&I guide and so I am wrong, I will politely respond that given the volatility in revenues, longer paths to profits, P/BV is the ONLY valuation metric that makes sense. Maybe I could use EV / Invested Cash Capital, but I don't see how much additive could be, and I don't trust a DCF for obvious reasons any sane person should be able to articulate. Relative value matters.   

So this is it. I don't want to play with people's lives if it's really doing something important as they claim, but if there is some kind of sluggishness at play here, it needs to be called out and the business should eventually wind down. Pls chime in if you have conflicting thoughts.   


Comments (1)

Mar 17, 2022 - 7:52pm
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