Thursday, September 5, 2019

IBI Research On Avalon: Poised For Market Conquest

Summary
Avalon's CAR-Ts are ahead of their time due to key advantages over conventional medicines. AVA-101 shuttles enough genes to decimate two oncology targets (CD19 and CD22).
In July 2019, Avalon launched its first CAR-T (AVA-001) into the clinic for relapsed/refractory acute lymphoblastic leukemia and non-Hodgkin lymphoma.
The most advanced CAR-T in the market (AVA-101) recently entered a process development and validation phase. As such, it will be advanced into human studies in 1Q2020.
The medical diagnostics franchise is progressing rapidly. AVA-201 will be made available in the clinic for oral cancer by 4Q2019. A regulatory filing is expected a year later.
The regenerative medicine segment is projected to deliver AVA-202 for diabetic wounds by year-end.
This idea was discussed in more depth with members of my private investing community, Integrated BioSci Investing. Get started today »
In the development phase, don't forget stability. And in stability, don't forget development. - Li Ka Shing (Billionaire Investor and Philanthropist)
Author's note: This an example of the IBI research available exclusively for our marketplace members.
A theme that I particularly like in bioscience investing is when a company layered excellent diversification within its pipeline. Diversification lowers investment risks while increasing the chances of finding a blockbuster. A prime example of this phenomenon is Avalon Globocare (OTC:AVCO), as the company is gearing to hit a "trifecta." Accordingly, Avalon is brewing the next-generation CAR-T, precision medicine diagnostic, and regenerative medicine. Though all three franchises have a high probability of generating winners, you only need a single blockbuster for the stock to appreciate multiple folds.
What makes this investment enticing is that the shares have depreciated significantly due to the overall biotech downturn in recent months. As such, its financial and valuation are highly favorable. In this research, I'll feature a fundamental analysis of Avalon and provide my expectation for this stellar growth stock.
Figure 1: Avalon chart (Source: StockCharts)

About The Company

As usual, I'll deliver a brief corporate overview for new investors. If you are familiar with the firm, I suggest that you skip to the subsequent section. Operating out of Freehold New Jersey, Avalon is focused on the development and commercialization of disruptive medicines and diagnostics to serve the strong unmet needs in cancer and various diseases. Using a trident-like approach of Poseidon, Avalon captures opportunities in three lucrative niches. They include exosomes diagnostics, regenerative medicine, and cellular immunotherapy.
For the diagnostic portfolio, Avalon harnesses the power of "exosomal biomarkers" to launch an avalanche against oral cancer, nonalcoholic steatohepatitis ("NASH"), leukemia, colorectal cancer, and macular degeneration. In my view, exosomal biomarkers can promptly pinpoint a diagnosis to confer physicians an edge against dreaded diseases. When it comes to the fight for life, accuracy and precision are of paramount importance. As depicted below, there are several potential blockbusters such as AVA-101, -201, and -203.
Figure 2: Diagnostic and therapeutic pipeline (Source: Avalon)

Seeds For Growth

To transform stellar science into medicines, Avalon built two world-class facilities: Avactis Biosciences and Genexosome Technologies. Back in July 2019, Avalon inked a colossal partnership with GE Healthcare to expedite research and development. The GE collaboration is proof in the pudding of its pipeline quality. Moreover, it signifies the company's capability to form meaningful partnerships.
That aside, Avalon is working with other esteemed partners, including Weill Cornell Medicine, Beijing Lu Daopei, and Nanjing BenQ hospitals. With powerful ties, Avalon spans its reach from North America to China. Ultimately, this will enable the company to fully unlock the value of its medicines and diagnostics. Figure 3: Avalon subsidiary (Source: Avalon)
Since its founding in 2016, Avalon is already wrapping significant progress under its belt. With crucial partnership instituted, the firm is now poised to capture various niches. Amid ongoing developments, the stage is now set for Avalon's upcoming growth that, in and of itself, is tied to crucial catalysts. Framed the essence of recent developments in the most poignant terms, the President and CEO (David Jin, M.D., Ph.D.) remarked,
We are pleased to provide updates on our progress in advancing clinical studies using our cellular therapeutic platforms in CAR-T and stem cell-derived exosomes. We have successfully evolved into an active clinical-stage company which we have the technology, partnerships, and talent, all committed to delivering clinical execution and leadership in the areas of cellular immunotherapy and exosome technology.

Dragon CAR-T

That being said, I'll shift gears to analyze pertinent catalysts. Since the most value of Avalon resides in the CAR-T franchises, I'll update this franchise first. Accordingly, Avalon sent AVA-001 into the first-in-human clinical study for relapsed/refractory B-cell acute lymphoblastic leukemia and non-Hodgkin lymphoma in July 2019.
In my opinion, AVA-001 will deliver robust efficacy and excellent tolerability. Be that as it may, I'm much more interested in AVA-101, the most advanced CAR-T known to man. As follows, AVA-101 recently entered a process development and validation phase. By 1Q2020, investors can expect AVA-101 to be launched into a clinical trial. I elucidated in the prior research,
In this Golden Age of CAR-T, Avalon captures lightning in a bottle by innovating a 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 and thereby renders 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 bought out for substantial profits. Specifically, Kite Pharma and Juno Therapeutics were correspondingly acquired by Gilead Sciences (GILD) and Novartis (NVS) back in 2017 and 2018. Nonetheless, I'm most enthusiastic at the profit potential from Avalon due to AVA-101. After all, the ramifications of this novel CAR-T for shareholders and patients are paramount.
When it comes to battling cancer the goal is to simultaneously trounce multiple targets. Epitomizing the cornerstone of stellar cancer management, combination therapy substantially reduces the time these rogue cells have to evolve for escaping immune detection. Interestingly, combination therapy can be achieved with either several drugs or a single molecule hitting multiple targets at once.
Of note, conventional CAR-Ts cannot achieve the astronomical feat of suppressing multi-targets with one drug. In other words, most gene-edited CAR-Ts utilizes an RNA virus to transfer the sequence coding for a T-cell receptor like CD19. Though efficacious, an RNA virus CAR-T suffers from size limitation. As such, its maximum carrying capacity is adequate for only one target.
Powered by jumping gene (i.e. transposon), AVA-101 comes with far "greater bandwidth" that shuttles enough genes for both CD19 and CD22 receptors. Having both receptors, the "General" T cell can easily seize and destroy these rogue entities. Hence, the superb design by the illustrious Dr. Jin translates into improving the efficacy against deadly cancers that is second to none. Aside from stronger efficacy, AVA-101 is by far less toxic than first-generation CAR-Ts. Having a "kill-switch," AVA-101 can be shut down at the first sign of cytokine release syndrome that dampens the prospects of other CAR-Ts.
Though precision and individualized medicine can be time-consuming and cumbersome, AVA-101 cleared this hurdle with flying colors. For instance, the T-cells of patients can be harvested, engineered with CD19/CD22 receptors, and reintroduced back into the same patients within several days. Due to stellar design and excellent management, it's not surprising that the development of Avalon's CAR-Ts is advancing rapidly. Looking ahead, I expect positive news from this clinical front.

Precision Medicine Diagnostics And Therapeutics

Avalon's exosome technology is as promising as its CAR-T. Exosome serves as the basis for Avalon's precision medicine empowered diagnostics and therapeutics. On this end, Avalon is projected to commence the human study of AVA-201 in 4Q2019. Thereafter, a regulatory filing is anticipated to occur in 4Q2020. Of note, AVA-201 is a novel miR-185 enriched exosome that has both diagnostic and therapeutic value against oral cancer.
From the mechanistic view, miR-185 is discovered to suppress cancer cell invasion, proliferation, and migration in cell culture. Similar findings were observed in the proof-of-concept animal studies that Avalon presented at the 2019 ISEV Conference in Kyoto, Japan. Additionally, AVA-201 data was featured in the international journal dubbed Artificial Cells, Nanomedicine, and Biotechnology. The title of the article is "Delivery of Mesenchymal Stem Cells-Derived Extracellular Vesicles with Enriched miR-185 Inhibits Progression of OPMD."
Signifying an industry tailwind, precision medicine embodies a therapeutic customized for the individual patient. As such, precision medicine confersfavorable efficacy and safety. After all, patients have differentiated responses that are tied to their unique genetic makeup. Of note, the key component of precision medicine is a liquid biopsy which epitomizes the fundamental shift away from a tissue biopsy. As a ramification, a liquid biopsy expedites the diagnosis time, lowers costs, and improves the diagnostic accuracy as well as treatment outcomes. I explicated in the prior research,
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 is moving away from CTCs. Only ctDNA and exosomes remain dominant. As part of cancer cells that get pinched off and travels 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 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 4: Exosome mechanism (Source: Avalon)
Growing at 28% CAGR, Market Research Future projected that the global liquid biopsy market will reach $17.3B by 2022, If Avalon can capture a tiny fraction of this market, the stock should be worth multiple folds higher.

Regenerative Medicine

As the overlooked franchise, Avalon's regenerative medicine has the potential to become a big winner. I particularly like the fact that Dr. Jin has deep expertise in regenerative medicine. Asides from Dr. Jin's leadership, the quality of Avalon's exosome and an industry tailwind support robust growth ahead. Having great flexibility and robust efficacy, exosome regenerative medicine can be employed for hair restoration, skincare, anti-scar, anti-wrinkle, diabetic foot ulcer, wound care, anti-fibrosis, etc. In my view, this technology works because stem cells and its exosomes mature into other tissues that catalyze the regeneration process.
Leveraging Weill Cornell Medicine, Avalon recently completed the standardized bio-production process for tissue-specific, clinical-grade exosomes derived from endothelial cells. Due to their endothelial origin, these exosomes have wound healing properties. As a result, they can regenerate blood vessel damage. In 4Q2019, Avalon will push the lead candidate (AVA-202) into a global multi-center clinical trial for vascular diseases and wound healing (i.e. diabetic foot ulcer). Soon, the company will also commercialize the Actex-based products for skincare, scar removal, and hair growth.
Figure 5: Regenerative medicine operation (Source: Avalon)
Investors need to keep in mind that an outstanding drug can be rendered obsolete if it doesn't have a significant market. For Avalon's shareholders, there is also good news on this landscape. Specifically, the global regenerative medicine marketis growing at 32.2% CAGR. And, it will reach $39.4B by 2023. Therefore, if both CAR-T and diagnostics fail, Avalon still has this lucrative franchise. As Avalon is aiming for the "trifecta" development, the future is bright for this growth stock.

Financial Assessment

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 2Q2019 earnings report for the period that concluded on June 30. As follows, Avalon procured $399.7K in revenues compared to $496.0K for the same period a year prior.
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. Therefore, let's assess more meaningful metrics. Accordingly, the research and development (R&D) registered at $949.7K. The R&D increase is reflective of the rapid pipeline advancement. That aside, there were $4.4M ($0.06 per share) net loss compared to $1.4M ($0.02 per share) decline for the same period of comparison.
Regarding the balance sheet, there were $3.4M in cash versus $2.2M for last quarter. Based on the $4.4M quarterly operating expense (OpEx) rate, Avalon will likely execute 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 conduct it when the shares are trading high.
Though I do not mind a public offering, you need 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 71.9M to 75.1M for Avalon, my rough arithmetics yield the 4.4% dilution. At this rate, Avalon easily cleared my 30% dilution cutoff for a profitable investment. Viewing this financial metric, it's obvious that Avalon is working for the best interests of the shareholders and patients.

Potential Risks

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 concern is if Avalon can generate positive data for the three business segments. In case of a negative clinical binary for its CAR-T, the stock is most likely to tumble over 60% and vice versa. This is because most of Avalon's value resides in AVA-001 and AVA-101. Leveraging my clinical forecasting framework, I ascribed a 70% (strongly favorable) chance of positive outcomes for both CAR-Ts. As a young growth company, Avalon can grow aggressively and thereby runs into a potential cash flow constraint. Moreover, investors tend to lose interest in a young stock and thereby causes the share to depreciate in the short-to-medium terms.

Conclusion

In all, I maintain my strong buy recommendation on Avalon Globocare with the five out of five stars rating. On the two to three years horizon, I anticipated the $12.5 price target to be reached. You can refer to my detailed valuation of Avalon in the previous research. And, I ascribed the 70% "investment profitability score" on this stock. In a nutshell, you have a strongly favorable chance of making money on Avalon, provided that you hold your shares for the long haul.
With keen science and stellar management, Avalon is rapidly advancing its therapeutic and diagnostic pipeline. In recent months, AVA-001 is launched into the clinic. And, the most advanced CAR-T (AVA-101) is expected to reach patients in less than six months from now. The medical diagnostics and regenerative medicine powered by precision medicine are precisely on target. Specifically, AVA-201 will go in a clinical trial by year-end. Furthermore, the highly advanced regenerative molecule (AVA-202) will reach the patients within a similar time frame.
As usual, the choice to buy, sell, or hold is ultimately yours to make. Notwithstanding, it's prudent to accumulate more Avalon shares to anticipate positive clinical data and ride the Dragon CAR-T as it delivers hopes to patients and rewards shareholders worldwide.
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