Monday, December 16, 2019

IBI Research On Avalon GloboCare: Hitting Mega Rallies

Summary
Amid ongoing pipeline advancement and increasing investor's awareness, Avalon's shares are rallying aggressively.
Riding a Trifecta, Avalon is most likely to deliver at least one blockbuster.
Of the countless CAR-Ts that I studied, I believe that AVA-101 is the most advanced drug. And, it will be made available to patients soon.
That aside, the regenerative medicine asset is set to reach patients in a similar time frame.
Despite the recent appreciation, the stock is still trading at 25% of its current true worth.
Does the management have a determination to continue to develop products or processes that will still further increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited? - Phillip Fisher
Among countless CAR-T innovators, I like Avalon GloboCare (AVCO) the most. In my view, Avalon has the best CAR-T in the market. The reason is that its CAR-Ts are superior to conventional molecules. First, the company uses a non-viral vector for CAR-T gene delivery. Therefore, it limits the dreaded side effect, cytokine-release syndrome. Second, the firm employs the premier transposon technology which enables a greater bandwidth (i.e. two CAR-T targets). Third, there's a killed-switch to shut down the CAR-T in case the patient is not receptive. Fourth, the CAR-T can be made available to patients within days.
As you can see, Avalon has the best CAR-T in the market. And yet, it's still flying under Wall Street's radar. Not a lot of investors know about Avalon, except IBI members. The 25.5% rally that you recently saw is when more investors are becoming aware of this hidden treasure. In my view, there are significant further upsides. That's because I believe Avalon has several incoming high probability events. In this article, I'll feature a fundamental update on Avalon and provide my forward expectation on this Phillip Fisher growth equity.
Figure 1: Avalon chart (Source: StockCharts)

About The Company

As usual, I'll present a brief corporate overview for new investors. If you are familiar with the firm, I suggest that you skip to the subsequent section. Headquartered in Freehold, New Jersey, Avalon Globocare is dedicated to the innovation and commercialization of forefront medicines and disruptive diagnostics. Driven by tireless efforts, the company is poised to serve the global 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 (i.e. CAR-T). As shown below, the company is brewing several potential blockbusters, including AVA-101, -201, and -203.
Figure 2: Diagnostic and therapeutic pipeline (Source: Avalon)
About 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. Though there are many different biomarkers, I strongly believe that using exosomes is ingenious. That's because exosomes can pinpoint a diagnosis to confer physicians an edge against deadly conditions.

Revealing Hidden Treasures

If you've been following my work, you'd notice know that I emphasize the need for top-notch management. In my view, the management is the hidden treasure of a mega growth stock. Even with a mediocre pipeline, prudent management can improve the company's prospects by in-licensing new medicines. Don't get me wrong. I'm not saying that Avalon has a subpar pipeline. In fact, the company has an extremely robust portfolio of multiple potential blockbusters.
Now, I like the management because they're unlocking significant pipeline value. A prime example is the colossal partnership they inked with GE Healthcare. Taking helm by the CEO and Founder, David Jin, M.D., Ph.D., I strongly believe that Avalon has a strong edge in medicinal design. As a pharmaceuticals consultant and former FDA reviewer, Dr. Jin is an expert in navigating the regulatory landscape
On the financial front, Dr. Jin and his CFO (Luisa Ingargiola) are also bringing home victories. In other words, they made the prudent decision to feature Avalon at the 12th Annual LD Micro Main Event in Bel Air, California. As one of the largest independent conferences, the event heralded over 1,300 participants and 250 companies. Asides from the corporate presentation, it enabled Avalon to meet institutional investors and analysts. Though Avalon already presented on December 10th, the event is ongoing until tomorrow.
Due to their proactivity, I believe that CEO Jin and CFO Ingargiola captured the hearts of market bulls. That explained why Avalon appreciated over 25.5% on the 10th. Today, the stock continued its rally, thus adding another 14.8% profits. With IBI members building more stakes, I strongly believe that there are further upsides in the coming days.
That's in contrast to a lot of small biotech. Despite having a good drug, those companies can fail in the market. As I mentioned, the management needs to have the skills in navigating the scientific, financial, and regulatory landscapes like Avalon. Even with a blockbuster, if investors lose interest in the stock it can depreciate.

Rapid Pipeline Advancement

Shifting gears, I want to cue you into the other aspects of Avalon's fundamentals. Simply put, I don't want you to just follow others to build shares. You must understand the underlying fundamentals and pipeline advancement of Avalon.
Just to give you a recap, the lead CAR-T (AVA-101) is anticipated to reach the clinic in a matter of months. AVA-202 will follow suit in a similar time frame. Now AVA-001 is already made available to patients. And, I projected that the interim results could come in as early as sometime next year. For an in-depth discussion of pipeline progress, I recommend that you check out my prior research.

Much More Upsides

I know you enjoy seeing your stock rallying. Notwithstanding, you should ask yourself, whether there are more upsides. That way, you'll know if you should add more stake or sell out. To arrive at this answer, you need to determine the stock's true worth. Warren Buffett often refers to a stock's true worth as intrinsic value. He learned that term from his Columbia professor and mentor, Benjamin Graham.
Of note, calculating the stock's intrinsic value for a young development stage biotech isn't straightforward as it is for blue-chip equities. For mature companies, you should employ the discounted cash flow and net present value techniques. After all, there is a stable cash flow for you to discount. With a young company like Avalon, I modified my valuation.
For instance, I leverage comparative market analysis, appropriate discounts for the assets' current phase of development, and valuation of the sum-of-parts. As shown below, even the CAR-T franchise alone is worth twice as much as the stock's current share price. At $2.09, Avalon is trading at only 25% of its true worth. And, it's a no-brainer there are multiple fold upsides.
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
Diagnostics
$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).
CAR-T franchise
$1B (estimated based on the $11.9B acquisition of Kite by Gilead)$250M$33.9$5.0 (same discount as above)
Regenerative
Medicine
$1B (from the peak $39B market)$250M$33.9$5.0 (same discount as above)
Figure 3: Valuation analysis (Source: Dr. Tran BioSci)

Financial Assessment

Just as you would get an annual physical for your well-being, it's important to check 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 3Q2019 earnings report for the period that ended on September 30.
As follows, Avalon procured $264.1K in revenues this quarter. This is remarkable because early-stage biotech isn't expected to garner any revenues for many years. That's because it doesn't have an approved medicine. Interestingly, Dr. Jin gave the company revenues through his expert consulting. You may say that it's a small amount of capital. However, it's an indication of the management's depth.
That being said, let's check other more meaningful metrics. Accordingly, the research and development (R&D) registered at $2.1M compared to 569.9K for last year. The higher R&D spending is due to the rapid pipeline advancement. Of note, I view the 269% R&D increase positively because the money invested today can turn into blockbuster profits tomorrow. After all, you have to plant a tree to enjoy its fruit.
Additionally, there were $4.4M ($0.05 per share) net loss compared to $2.4M ($0.03 per share) decline for the same period last year. On a per-share basis, that underlies a 66.6% bottom-line depreciation. I'm not worried about this because Avalon is aggressively advancing its pipeline. As such, it's expected to encounter a wider loss. If Avalon is mature blue-chip equity that's losing money, I'd drop it in a heartbeat.
Regarding the balance sheet, there were $1.0M in cash. On top of the $20M credit facility fromthe Chairman (Daniel Lu), the cash position is raised to $21.0M. Against the $5.5M quarterly OpEx, there should be adequate capital to fund operations into 3Q2020. As Avalon is backed by the extremely wealthy and successful Chairman Lu, you don't have to worry about its cash. As a young executive, Chairman Lu has many decades of fire to lead Avalon to the Promised Lands of mega-profits while he delivers hopes for patients globally.
Despite my confidence in Avalon, you should still check its balance sheet to see if it's a serial diluter. A company that serially diluted will render your investment essentially worthless. Given that the shares outstanding increased from 72.5M to 75.6M, my math reveals a 4.2% annual dilution. At this rate, Avalon easily cleared my 30% cutoff for a profitable investment.
As you can see, the low dilution made sense. With huge insider ownership, they have strong motivation to increase Avalon's value rather than diluting. Hence, the company aligns its best interests with you. If you make money, Avalon insiders make money. Conversely, if you lose your capital they'll suffer the same fate.

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 whether Avalon can generate robust data for its Trifecta molecules. As I strongly believe in AVA-101's chances of success, I ascribed a corresponding 25% chance of failure. In such a scenario, the stock is likely to tumble by 50% and vice versa.
The other risk is that Avalon might grow too aggressively and thus runs into the potential cash flow constraint. Notwithstanding, I doubt it'll be an issue because Avalon has the backing of the Titan Lu. The other concern is that Avalon can lose investor's interest because most of its assets are still early in development.

Conclusion

In all, I maintain my strong buy recommendation on Avalon with the five out of five stars rating. However, I made several upgrades. First, I expect the $12.5 price target to be reached in a year. My rationale is that whale investors are discovering Avalon. Due to its small market cap, institutional investors' commitment can quickly drive shares to a new high. Though I keep my investment risk medium, I increased the stock's investment profitability score to 75%. In a nutshell, you're going to make money on Avalon, provided that you hold it for at least a year.
From the trading viewpoint, my gut feeling (i.e. instinct) tells me that Avalon will continue to trade substantially higher going forward. Specifically, there are over 75% chances of high probably events approaching Avalon. As there might be sentimental shifts, be sure to tune into IBI for ongoing updates.
Riding stellar medicine and powering by top-notch management, Avalon is set out to make history in the biopharma space. The company's CAR-T franchise is undoubtedly the best known to man. By ingenious design, AVA-101 hits two cancer targets (i.e. CD19/CD22) at once. As such, it'll post stronger efficacy than other drugs. As it'll go into the clinic soon, I expect AVA-101 to deliver hope to countless patients. Likewise, the exosomes-empowered regenerative medicine (AVA-202) will follow suit. Interestingly, AVA-001 is already in a clinical trial. I anticipate good interim data from this drug in the near future. And, it's remarkable that all three franchises are gearing to hit mega-blockbuster markets. The truth is that you only need one molecule to succeed to see your investment appreciate multiple folds.
As usual, I'd like to remind investors that the choice to buy, sell, or hold is ultimately yours to make. In my view, If you already bought Avalon and thereby enjoyed significant profits, I'd take some gains off the table. If you're contemplating, now is an excellent time to build your shares. It's important that you accumulate your stock in a "stepwise" fashion to enjoy a lower average cost in case volatility hits.
As we're approaching Christmas (or Hanukkah) and the New Year, I hope you'll continue to make more profits now. That way, you can enjoy your holiday better.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: Due to my medical and market expertise, companies and third parties like GuidePoint Advisors hired me as a paid consultant. Though being in the industry gives me expert insight on the forefront, my views may not be completely objective. On October 4th, 2019, I established a paid consulting relationship with Avalon. And, I renewed my consulting relationship with Avalon thereafter. See complete disclosure and disclaimer http://www.drtranbiosci.com/p/dr-trans-complete-disclaimer-and.html
Additional disclosure: As a medical doctor/market expert, I’m not a registered investment advisor. Despite that I strive to provide the most accurate information, I neither guarantee the accuracy nor timeliness. Past performance does NOT guarantee future results. I reserve the right to make any investment decision for myself and my affiliates pertaining to any security without notification except where it is required by law. I am also NOT responsible for the actions of my affiliates. The thesis that I presented may change anytime due to the changing nature of information itself. Investment in stocks and options can result in a loss of capital. The information presented should NOT be construed as a recommendation to buy or sell any form of security. My articles are best utilized as educational and informational materials to assist investors in your own due diligence process. That said, you are expected to perform your own due diligence and take responsibility for your actions. You should also consult with your own financial advisor for specific guidance, as financial circumstances are individualized.