Friday, February 4, 2022

IBI Research On Avalon: Leading The CAR-T Revolution

 

Summary

  • Amid the Biotech Bear market, many fundamentally robust companies are trading at a deep bargain to their intrinsic value.
  • During this special time, I continue to feature you with promising companies that are potential multi-bagger.
  • The aggressive down market has greatly widened the margin of safety for investing in Avalon GloboCare.
  • Even a single asset (be it the COVID or CAR-T franchise) valuation indicated that Avalon is worth far more than its market quotation.
  • By mid-year 2022, the most powerful CAR-T (i.e., Dragon CAR-T, AVA011) will enter the clinic.

Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble. - Warren Buffett

As a maverick biotech investor, you should focus on two key factors associated with highly profitable investing. The first consideration is to acquire leading companies in their particular niche. In my decade-plus investing, I realized that stocks giving you the best returns are top innovators in an emerging industry. The second is to accumulate equities during a market downturn to get the best average cost.

That being said, you should revisit Avalon GloboCare (AVCO) because the company satisfied both aforesaid conditions. As a leading CAR-T innovator, Avalon shares tumbled substantially amid the 2021 Biotech Bear market. In the coming years, you can bet that Avalon will do extremely well as the stock market will enter into a new bullish cycle. As such, your Avalon shares will be worth several folds higher. In this research, I'll feature a fundamental analysis of Avalon and provide you with my expectation of this stellar Phillip Fischer growth equity.

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. I noted in the prior research,

Avalon is a relatively new and young company. Founded as early as 2016, Avalon GloboCare already transitioned into a clinical-stage biotechnology company. With powerful therapeutics, Avalon is poised to make waves in the cellular therapy space. Though Avalon is tinkering with various types of molecules, the company is a dominant cellular therapy innovator poised to fulfill the unmet needs in cancer treatment. In harnessing the power of smart medicines (i.e., CAR-T), Avalon is advancing a promising organic pipeline as shown below. The lead medicine (AVA001) already completed its Phase 1/2 trial in China for patients afflicted by relapsed/refractory B-cell acute lymphoblastic leukemia (i.e., R/R B-ALL). On this pathway, Avalon is advancing its development through the China FDA for AVA001. That aside, the company is innovating AVA011 for patients afflicted by relapsed/refractory B-cell lymphoblastic leukemia and non-Hodgkin lymphoma (i.e., R/R B-ALL/NHL). Furthermore, there are two COVID franchises brewing in early development.

Figure 2: Therapeutic and vaccine pipeline (Source: Avalon)

Huge Opportunity In Biotech Bear Market

Back in 2021, you can see that the bio-stock market has been hit tremendously. As of this writing, the biotech benchmark (XBI) is trading at $94.94 which is 41.84% lower than its $163.24 this time last year. As you expected, the biotech bear market has exerted ravaging effects on many stellar equities like Avalon.

Adding further injury to the insult, the same bearish pressure seems to be expanding into the larger stock market. In the past month, the Dow Jones Industry Average (DJI) moved on a downtrend from 36,585.06 to 35,405.24. Despite signs of a rebound in the past few days, you're still deep in a down-market cycle as Omicron does not seem to abate. Coupled with the rising interest rate and hyperinflation, many fundamentally robust bio-stocks are trading at a deep bargain to their true worth.

Amid this special time, you can acquire the same great companies for a fraction of their true worth. On that note, I strongly believe your best stocks to accumulate are biotech. As a general rule-of-thumb, companies falling the hardest during a bear market are poised to rebound the most robustly at the next bull market cycle.

You don't have to believe me. I want you to look back into the 2008 Great Recession when financial stocks were decimated. During the time, I bought Genworth Financials (GNW) at $1.45 to enjoy its rebound to $11.59 in December 2009. Asides from Genworth, you can pick up most financial stocks back then to enjoy a huge upside in less than a year.

Just as there are night and day, the market move in cycles (from bearish to bullish like what you saw in 2008). Let me share with you another example. Remember how most biotech stocks recovered from the 2020 Corona Bear market in just a month? If you averaged down during that abbreviated bear market as I recommended, you'd enjoyed multiple-fold rewards when the market quickly transitioned to bullish. 

Due to the cyclical nature of the market, you can expect fundamentally robust companies like Avalon to rebound to a much higher valuation. Now, as you purchase the few leading innovators like Avalon amid a decline, you're poised to capture the most lucrative opportunity. This is your land of multi-bagger investment opportunities. After all, you have the two powerful factors (buying in a bear market and purchasing a leading innovator) to work in your favor. Plant your seeds now to reap the rewards in the future.

Leading The CAR-T Revolution

Given that Avalon is a leader in the CAR-T space, it is worthwhile your time to analyze the specificity of the CAR-T Revolution. That way, you can appreciate the ramifications of this niche on your investment. Notably, you tend to think of the IBI stocks that I cover like Kite Pharma (KITE) or Juno Therapeutics (JUNO) when you hear about CAR-T cellular therapy. After all, both Kite and Juno were high-flying. And, they were correspondingly acquired by Gilead Sciences (GILD) for $11.9B in 2017 and Celgene (CELG) for $9B in 2019.

Since Kite and Juno took the stage, there are already five CAR-Ts on the market, including Kymriah, Yescarta, Tecartus, Breyanzi, and Abecma. Adding more catalysts to this therapeutic revolution, there are over 500 clinical trials for CAR-T brewing in the background. Riding such statistics, you can bet that CAR-T is not simply here to stay. In fact, it's growing stronger by the day.

Figure 3: FDA approved CAR-T (Source: UPMC Hillman)

In light of such growth, you can imagine there have to be certain underlying catalysts. In other words, CAR-T is special because it is a leading form of smart medicine. Specifically, CAR-T galvanizes the general (i.e., T-cells) of the body's natural defense (i.e., immune system) to coordinate a highly efficacious attack on the enemy (i.e., cancer cells). Patients who were told that they would die can now have a second chance to live.

Looking at the figure below, you can appreciate the intricate procedure in which CAR-T is harvested and galvanized into the body. First, you tap into the patient's blood to get General T (i.e., the most important cell) of the immune system. Second, you delivered intelligence into those T-cells with gene introduction for them to better recognize the cancer target. Third, you reintroduce those CAR-Ts back into the patients for cancer eradication.  

Figure 4: CAR-T development process (Source: Knight Cancer Institute)

As you can see, the aforementioned process is time-consuming and extremely complex. As Albert Einstein said it best, simplicity is beautiful and ingenious. On that note, Avalon is delivering ingenious next-generation CAR-Ts that are beautifully designed. Known as FLASH-CAR, these are off-the-shelf CAR-Ts engineered from a universal donor. As such, Avalon can expedite the delivery process to patients in a matter of one to two days instead of the industry standard of weeks. Obviously, that is a substantial time advantage to give patients in the fight for life/death against cancers.

If you recall from the step above (i.e., for the gene delivery into T-cells), most companies employ a viral vector. Transferring genes by a virus is effective yet safety can become an issue. For instance, patients can encounter the adverse effects of neurotoxicity and cytokine release syndrome (i.e, CRES) which are huge limiting factors.

Being a solution provider, Avalon strategically circumvents the potential toxicity by employing a non-viral approach which is much safer. As he shared his deep insight, the stellar physician-scientist who is the lead investigator of the UPMC Hillman collaboration with Avalon (Dr. Yen Michael Hsu) remarked,

With Avalon GloboCare FLASH-CAR technology, we will use an innovative messenger ribonucleic acid (i.e. MRNA)-based technology platform that will allow researchers to create CAR cellular therapies much faster than before—in just one to two days. We also believe this approach will reduce toxicity and overall cost associated with current CAR T-cell therapies, meaning more cancer patients could be eligible for this type of cellular therapy.

Additionally, there is a biological switch that allows the physicians to turn off the CAR-T at the first sign of toxicity. Asides from the aforesaid advantages (i.e., excellent safety and expedited delivery), FLASH-CAR also exhibited superior efficacy to Yescarta as I elucidated in the prior research. Precisely speaking, Avalon's first CAR-T (i.e., AVA001) demonstrated the 91% complete remission rate for R/R B-ALL in its Phase 1/2 trial versus the 51% rate for Yescarta. Interestingly, Avalon CAR-Ts would also be available at a lower cost to reach a larger number of patients.

The Road Ahead

Of note, AVA001 regulates the CD28 co-stimulation pathway with CD19 target suppression. Another way of viewing AVA001 is that it ramps up the immune system while eradicating cancers having the CD19 marker. As you know, AVA001 is being advanced via the China FDA pathway.

Now, Chairman Daniel Lu is connected to the magnanimous Lu Daopei hospital network in China. Lu Daopei would be like the MD Anderson of the US. Therefore, his connection confers you with an advantage in developing AVA001 in the vast China market. Based on my market observation of over a decade, US companies that can capture the China market tend to do extremely well in the long run.

In addition to AVA001, Avalon is advancing the Dragon CAR-T AVA011 (i.e., the byproduct of FLASH-CAR and mRNA technology platform). This most powerful CAR-T known to man is poised to enter the clinic in just a few months from now. Innovated to deliver hope to as many patients as possible, AVA011 will seek approval from both the China and US FDA.

Here, the Dragon CAR-T is eager to alleviate the suffering of patients afflicted by the deadly cancers, R/R B-ALL/NHL. In capturing the current 2.0 Growth Phase of Avalon, the esteemed physician-scientist, President, and CEO (David Jin) enthused,

We believe we have made significant progress in 2021, advancing our scientific and clinical programs focusing on immuno-oncology and cellular medicines. Our goal is to address the unmet needs of patients utilizing innovative technologies that transform cellular therapy and regenerative medicine. We have partnered with world-renowned research centers and universities on cutting-edge research, and are accelerating our own innovative research, bioprocess development, clinical programs, and product commercialization.

Valuation Analysis

As you know, valuation is important because it helps you gauge how much your investment is worth. When it comes to valuation, most investors defer to Wall Street analysts. Nevertheless, I encourage you to conduct your own valuation with me. That way, you can better appreciate Avalon and your stocks. 

Notably, most Wall Street analysts heavily rely on Discount Cash Flows (i.e., DCF). This simple plug-and-chug approach is widely employed because Warren Buffett and Benjamin Graham popularized the approach. That aside, there are other techniques such as price/sales and price/earnings. While there are different modalities available, you should use the right technique for the appropriate type of stocks.

As I focus on developmental-stage bio-stocks that have yet to generate any revenues, I found little utility in DCF. After all, DCF is most appropriate for much larger bluechip equity having a stable cash flow. For a young biotech company, it's more appropriate for you to focus on qualitative and quantitative variables.

In other words, you should account for the quality of the drug, comparative market analysis, chances of clinical trial success, and potential market penetration. Qualitatively, it's more tricky because you have to base it on your own intuition and forecasting experience. For me, I heavily rely on my intuition and forecasting experience because I've done this for over 10 years.

Molecules and franchises

Market potential and penetration

Net earnings based on a 25% margin

PT based on 79.5M shares outstanding and 10 P/E

"PT of the part" after appropriate discount

CAR-T franchise

$1B (estimated based on the $11.9B acquisition of Kite by Gilead)$250M$31.4$4.71 (85% discount)

COVID therapeutics and vaccine

$500M (Estimated from the $29.9B COVID market)

$125M$15.7$1.57 (90% discount)

The Sum of The Parts

$6.28 per share

Figure 5: Valuation analysis (Source: Dr. Tran BioSci)

With their early stage of developments, I discounted various franchises heavily, i.e., by as much as 90%. You should ascribe a huge discount to widen the margin of safety for prudent investment. That's also a concept taught by Ben Graham.

After appropriate discounts, the CAR-T franchise alone should give you $4.71 per share. The COVID franchise adds another $1.57. Putting both assets together in the sum of the part (SOTP) valuation, you're looking at over $6.28 per share.

Insider Transaction

As my valuation revealed, Avalon is trading at a deep discount to its true worth. That makes sense because the insiders have not sold a single share. If you're holding a company you know is worth much more than what the market is paying, would you sell it? I'd say, no. 

Here's more proof in the pudding of Avalon's intrinsic value. Back in December 2021, Chairman Daniel Lu put more money where his mouth is. As you know, Chairman Lu gave Avalon $20.0M line of credit for the company to draw upon. Of that figure, Avalon already drew $3M in corporate debts.

Instead of asking for the debt payback, Avalon's illustrious Chairman converted it all into common stocks at a whopping 45% premium (i.e., $1.25). That tells you two things. One, the Chairman believes that Avalon's stock is worth far more than $1.25. Second, he strongly believes in the company's prospects. Third, he aligned his interest as you in seeing Avalon succeed in the future. 

Figure 6: Avalon's insider transaction (Source: OpenInsider)

Competitor Landscape

Regarding competition, Avalon squared up against several established innovators and many emerging players. All the established innovators that I recommended are now acquired. For instance, Gilead Sciences (GILD) acquired Kite Pharma (KITE) back in 2017. Celgene also bought out Juno Therapeutics (JUNO) two years later. In a turn of events, Novartis (NVS) acquired Celgene.

You shouldn't be worried about the competition here because this market is extremely vast. Growing at the 19.7% CAGAR, research estimated that the CAR-T cell therapy market is anticipated to reach $19.1B by 2027. Coupled with the fact that this is a frontier market, there is plenty of room for upcoming and especially differentiated players like Avalon.

Importantly, Avalon's FLASH-CAR and mRNA technology platform confers tremendous advantages: rapid time to deployment, superior safety/efficacy, highly convenient, multi-target attaching, and lower cost. You can expect those differentiating characteristics to put Avalon on the throne as the CAR-T King in the coming years.

Potential Risks

As investment research is an imperfect science, there are always risks associated with your stocks regardless of their fundamental strength. At this point in its growth cycle, my main concern for Avalon is whether the company can continue to advance both AVA001 and AVA011.

No matter how great the chances of any drug to pass its clinical studies, there is no such thing as a guaranteed forecast. Hence, there is a small chance that Avalon's CAR-T can flop in advanced clinical trials. The other concern is that Avalon might grow too aggressively and thereby run into potential cash flow constraints. Be that as it may, you have the capital commitment from the Chairman.

Conclusion

In all, I raised my recommendation on Avalon Globocare to a strong buy with a 4.8 out of five stars rating. On the two to three years horizon, I expect the updated $6.28 PT to be reached. I also ascribed a new 65% "investment profitability score" on this stock. And, I maintain Avalon's investment a medium investment risk. In a nutshell, you have a strongly favorable chance of making money on Avalon, provided that you hold your shares for the long term.

From the trading view, my intuition tells me that Avalon shares break the bearish trend to surpass their former high. Despite the volatility, Avalon is regaining its momentum.

Dr. Tran BioSci's M7 CriteriaStars Rating (Max 5 stars)Rationale
Medicine and technology5/5FLASH-CAR/mRNA CAR-T (AVA001 and AVA-011)
Market5/5$19.1B global CAR-T market, $29.6B COVID market
Money5/5

$20M credit facility from Chairman Lu. With its modest cash burn rate, Avalon is in a strong financial condition.

Management5/5Good
Maturity4/5Rocky transition due to the 2021 Biotech Bear market and COVID19 can delay clinical trials
Must-know catalysts5/5AVA011 to hit the clinic by mid-2022
Money making5/5Long-term investment
Overall rating4.8/5

Figure 7: M7 Criteria (Source: pioneered by Dr. Tran with inputs for advancement from IBI colleagues)

As Avalon is being led by a scientifically and medically esteemed Chief (Dr. David Jin), you can expect the company to experiment with various growth strategies to deliver the most value/growth. After all, scientists are into experimentation. For instance, Avalon sized up the potential SenlangBio acquisition to see if it can add value. As it was found to be unfruitful, Avalon shifted its focus on other value drivers. That's the same approach that the firm takes toward therapeutic and diagnostic innovation. In other words, Avalon would look at the world's most renowned innovators and universities to form partnerships to enhance its therapeutic design.

In harnessing the therapeutic design prowess of Dr. Jin with the backing of the illustrious Chairman Lu, you can expect Avalon to bring tremendous value and rewards for loyal supporters of innovation in the coming years. Ultimately, the patients would benefit the most in terms of hope for life in beating their cancers.

Going forward this year, you can expect the Dragon CAR-T AVA011 to enter the clinic by mid-year. That'll be a powerful catalyst that potentially galvanizes the stock to trade at a new high. Moreover, other pipeline programs will continue to advance. Moreover, I believe that the company will push forward its tireless efforts to ensure Avalon succeeds in this 2.0 growth phase.

As usual, I'd like to remind investors that the choice to buy, sell, or hold is always yours to make. In my view, you should hold your shares "as is." If the stock tumble, you should average down some more to enjoy a lower average cost. You then wait patiently for the next bull market cycle to reap your rewards.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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. In August 2020, I finished my consulting work with Avalon. In August 2021, I re-engaged my consulting relationship with Avalon. See complete disclosure and disclaimer www.drtranbiosci.com/...

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'm also NOT responsible for the action of my affiliates. The thesis that I presented may change anytime due to the changing nature of information itself. Investing in stocks and options can result in a loss of capital. The information presented should NOT be construed as recommendations 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 action. You should also consult with your own financial advisor for specific guidance, as financial circumstances are individualized. That aside, I'm not giving you professional medical advice. Before embarking on any health-changing behavior, make sure you consult with your own doctor.