Friday, March 4, 2022

IBI Research On Avalon: Another Milestone With Revolutionary CAR-NK

 

Summary

  • Initially commenced as a Biotech Bear, the global equity market is now in a free-falling mode across all sectors.
  • Amid the market downturn, fundamentally sound biotech companies are trading at a fraction of their true worth.
  • Like other bio-equities, Avalon GloboCare is suffering from the broader market decline due to various macroeconomic factors.
  • In the 2.0 Growth Phase, Avalon is boosting its fundamentals on various fronts to fuel upcoming growth.
  • Among various developments, the recent CAR-NK addition and the appointment of additional talent positioned Avalon to potentially trade several folds higher at the next bull market cycle.

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

In the thick of a bear market, most of your stocks are suffering from substantial share price depreciation. Like wildfire, the macro-conditions (i.e., hyperinflation, global conflicts, and the pandemic) are burning through your equity. Nevertheless, that does not mean the fundamentals of our holding are deteriorating. Contrary to conventional wisdom, the fundamentals can be improving while the stock is tumbling. As you know, I'm a firm believer that order will arise out of this market chaos. In order to reap the full benefits of this special opportunity, you should ascertain the fundamentals of your stock to average down. Buying stocks during a bear market is a bodacious strategy to gain multiple-fold returns at the next bull market cycle. After all, you're paying cents on the dollar for the same fundamental companies.

As you overcome your fear to purchase, I want to bring to your attention a highly promising stock that is enjoying extremely robust fundamental appreciation. That is to say, Avalon GloboCare (AVCO) continues to boost its business by advancing another novel chimeric antigen receptor molecule. In this research, I'll feature an analysis of other Avalon 2.0 developments and provide my expectation of this stellar 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,

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), the firm 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)

Ongoing Innovation To Fuel Future Growth

Shifting gears, let us dive deeper into the analysis. As part of your assessment, it's important to focus on a company's business model. After all, the business model can foretell if the company would become an investment success. On that note, let me share with you an intriguing business model that is usually indicative of an investment bonanza. Using this prudent approach, a young company like Avalon would experiment with various therapeutic niches until it finds some of the most promising avenues. 

Once the company sized up a lucrative segment, it would leverage the expertise gained in that discovery process to advance similar medicines. You can imagine the aforesaid strategy as similar to discovering certain valuable trees in the jungle, and then growing similar tree species. This is a highly risk-deleveraged approach because the expertise and experience gained would improve the chances of innovation success. As you know, there is no guarantee when it comes to developing a blockbuster (i.e., a drug that generates at least $1B in annual sales). However, you can certainly improve your odds.

As Avalon is exercising a sophisticated and high-yield approach, the company is capturing lightning in a bottle to deliver chimeric antigen receptor (i.e., CAR)-T cell therapies like AVA001 and AVA011. Riding superb early data and garnered intelligence, the company indeed improved its chances of success and is now growing aggressively by launching a differentiated CAR medicine. Precisely speaking, Avalon disclosed on February 14 that the company is advancing a CAR-Natural Killer cell (i.e., CAR-NK).

In galvanizing "smart medicines" like CAR-NK and CAR-T, Avalon is poised to deliver hopes in seemingly hopeless situations. Simply put, patients (who are told to go home and "button up") are now offered a second chance to live with these cellular therapies like CAR-Ts. Do not take my words for it. Instead, I highly encourage you to talk to patients afflicted by cancers who took this uncanny medicine. Keep in mind, these are examples of patients taking conventional cellular therapies. Imagine what the effect would be with the newer and superior meds like the ones that Avalon is developing.

A Novel CAR-NK Molecule

To appreciate the ramifications of Avalon's novel CAR-NK, you should explore the underlying science of CAR-NK itself. Here's how the process works. In the first step, NK cells can either be harvested from the patient's own blood or from universal donors for genetic modification. With the new genes introduced (in the second step), these NK cells would now express receptors to a specific target found on cancerous cells.

Like a smart missile that zones in on its target, CAR-NK exhibits a highly specific receptor-to-target interlocking mechanism for extremely efficient/accurate tumor destruction. In the third step, these cells are amplified by growing in the lab. Subsequently, the ample supply of bio-engineered CAR-NK cells is reintroduced into the patient (as the fourth step) for complete cancer eradication and relapse prevention.

Figure 3: CAR-NK process (Source: Nature.com)

You know that I often referenced T-cells as the "General" of your body's natural defense (i.e., immune) system. Similar to the Navy Seals, NK cells also constitute important components of the defense unit. That is to say, NK cells are adept at killing rogue cells while conferring intelligence to the immune system. And, they accomplish their task by searching abnormal and cancerous cells for the kill.

As part of counter-defense, tumors “mask” themselves from immune attacks. Consequently, the typical NK cells are less effective against cancer that exerts such immuno-suppression. Here's where the power of your CAR-NK comes in. Accordingly, the NK cells that have the "CAR" (i.e., engineered receptors) now gain intelligence on the enemy's camouflage to unmask and thereby deliver high-specificity killing. Hence, the battles against cancers are shifted in favor of the patient taking CAR-NK.

Potential CAR-NK Targets

It is interesting to note that there are various proteins expressed on cancer cells. Therefore, you can design a multitude of CAR-NKs to hit different targets. Some examples include CD19 and CD123. Asides from having a diversity of targets, CAR-NK also confers an "immune memory" for the immune system to remember the rogue cells for future battles. Ultimately, the galvanized immune system is adept at subduing cancers with excellent efficacy and safety.

Figure 4: Various CAR-NK targets (Source: Lancet)

Similar to an eagle flying above, Avalon takes its cellular therapy innovation to the highest level by harnessing the power of the stellar mRNA-based FLASH-CAR platform. In other words, FLASH-CAR enabled Avalon to develop medicines that can attack multiple targets simultaneously. When it comes to battling cancer, the more targets you hit the better. After all, combination therapy is the cornerstone of prudent cancer management, because it reduces the time that cancer cells have to evolve for escaping immune detection.

Superiority of FLASH-CAR for CAR-T/NK

In unlocking FLASH-CAR's power, Avalon is launching autologous and universal (i.e., off-the-shelf) CAR-T/NKs for treating both blood and solid tumors. As you remember, the first-generation CARs like Yescarta and Kymriah can solely treat blood cancers. In contrast, Avalon's FLASH-CAR therapeutics are superb at subduing both blood and solid tumors. As such, it epitomizes the paradigm shift in cellular therapy via CAR-T and CAR-NK (ie., CAR-T/NK or CAR-meds).

You can appreciate Avalon's CAR-NK because it's quite differentiated from the first-generation CAR-Ts. In other words, Avalon's CAR-NK is safer due to the use of a non-viral vector for gene delivery. Specifically, Avalon employs an mRNA-based technology instead of a virus. Moreover, the FLASH-CAR platform enabled rapid CAR-T/NK deployment. For instance, Avalon's CAR-meds can be executed in a matter of 1-2 days compared to the 2-weeks requirement for conventional CAR therapies. That is a huge advantage. After all, when it comes to the battle for life/death time is truly of the essence.  

As you saw from early Avalon's CAR-T data, the efficacy is also superior. Just as important as the efficacy/safety/delivery is the fact that Avalon's CAR can be bio-manufactured at a deep discount to patients. The affordability encourages utility, thus procuring higher sales while reaching more patients.

Better yet, Avalon has deep ties to the premier hospital network in China (i.e., Lu Daopei Hospital) that is like the MD Anderson of America. Hence, the company can quickly execute clinical trials overseas to expedite the innovation process. With its prowess in capturing the two most dominant markets in the world (i.e., USA and China), Avalon is solidifying its position as a global CAR-T/NK leader. While the CAR-NK development is still in its early stage, Avalon's CAR-T (AVA011) is set to enter the clinic by mid-year. Along with AVA001, I expect Avalon to continue its fundamental boosting through this fiscal and beyond.

Deepening Talent Pool

As you've been following my research, you know that I emphasize management quality. One sign of great leadership is when the management seeks and recruits deep talents. Here, you can appreciate that Avalon management recently appointed Dr. Dongfang Liu to the Scientific and Clinical Advisory Board. Now, this is beyond a simple management addition. Rather, Dr. Liu fills a crucial space in the innovation of this novel CAR-NK.

As an Associate Professor and Director of the Immunoassay Development Program at Rutgers University Medical school, Dr. Liu wrapped over two decades of experience in NK cell research under his belt. When you search top-tier scholarly journals (like Nature Immunology, Immunity, Nature Medicine, Nature Communications, JACI, and PNAS), you'd see the prolific Dr. Liu’s authorship on many prints. Taken altogether, you can appreciate how Dr. Liu's tremendous NK cells research experience would translate into more innovation success for Avalon. As the Chief leads Avalon to the next potential conquest for shareholders and the delivery of hope to patients, the esteemed physician/scientist and CEO (Dr. David Jin) remarked,

CAR-NK represents a powerful and innovative tool in the fight against cancer, and we believe our mRNA-based FLASH-CAR platform will enable us to develop best-in-class therapies. We are especially pleased to welcome Dr. Dongfang Liu to our Scientific and Clinical Advisory Board. Dr. Liu will become an invaluable part of the team in expanding and supporting Avalon’s pipeline. We also appreciate the support of our world-class clinical partners, including the researchers and clinicians at the prestigious Lu Daopei Hospital, as we develop our cellular immuno/oncology programs for hematologic malignancies as well as other unmet medical needs.

Estimated CAR-NK Market

Since Avalon is adding a CAR-NK molecule to its growing pipeline, you should estimate the market size of this improvement. Growing at 17.4% CAGR, the global NK cell therapeutics is projected to reach $5.0B by 2026. And viewing the figure below, you can see that the fastest growing market for CAR-NK is Asia-Pacific. In light of that favorable statistic, it's highly strategic that Avalon's stellar management is building a dominant presence in Asia to complement its leading position in the U.S.

As you know from my prior research, the estimated size for the CAR-T market alone is $19.1B by 2027. When you combine the CAR-T and CAR-NK segments, you're looking at a total addressable market (i.e., TAM) of $24.1B. Therefore, the 26.1% TAM increase is quite significant. As Avalon's innovation progresses, it'll correspondingly translate into a higher share price for you in the future.

Figure 5: Global CAR-NK presence (Source: AlliedMarketResearch)

Valuation Analysis

I believe that most investors do not like to conduct a valuation analysis because of its "perceived" difficulty. Nevertheless, it's more straightforward than you might think. And, you should value your investment to see how much your shares are truly worth (i.e., to get their intrinsic value). There are a couple of things that you should keep in mind in valuation. Though various valuation techniques are available, there is no right or wrong technique. The key is to match the appropriate approach with the proper type of company (in its respective growth phase).

Interestingly, most Wall Street analysts leverage the Discount Cash Flows (i.e., DCF) model. Other modalities include price/sales, price/earnings, etc. Contrary to conventional wisdom, DCF is simply a plug-and-chug approach that is widely employed because Warren Buffett and his mentor (Benjamin Graham) popularized it. As you can imagine, DCF is most helpful for bluechip equities (i.e., matured companies) having stable cash flow for you to discount.

Figure 6: Buffett (left) and Graham (right) Source (Big Money Book Club)

For a developmental-stage biotech firm like Avalon (that has yet to generate revenue), there isn't much utility in DCF. On this front, you should leverage qualitative and quantitative variables such as the quality of the drug, comparative market analysis, chances of clinical trial success, and potential market penetration. Of note, qualitative variables are more tricky because you have to base it on your own intuition and forecasting experience. Here, I'm heavily reliant on my intuition and over a decade of forecasting experience. That aside, if there is any pertinent development, you should incorporate it into your valuation model. You can see that I added the CAR-NK advancement to the calculations shown below.

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)

CAR-NK

$260M (estimated based on the potential $5.0B market) and the relative value of 26% TAM of the CAR-T franchise$65M$8.17$1.27 (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

$7.55

Figure 7: Valuation analysis (Source: Dr. Tran BioSci)

Given that Avalon's drugs are in their early developmental stages, I placed high discounts ranging from 85% to as high as 90%. By ascribing a high discount, you widened the margin of safety for prudent investment. As taught by Graham, the margin of safety is an important concept that you should not overlook. It's better to underestimate your valuation than to overestimate.

When you look at the figure above, it's quite revealing that any one of the three franchises alone is worth far more than the current $0.76 share price. In other words, the CAR-NK alone is appraised at over $1.57. The sum of the part (SOTP) valuation gives you $7.55 per share for Avalon. Now, the reason that Avalon is trading at such a deep bargain is because this stock is flying under Wall Street's radar. Additionally, the Biotech Bear market creates a deep bargain that you typically don't see in a normalized market.

Competitor Landscape

About competition, Avalon is going toe-to-toe with established companies as well as emerging innovators. Most of the cellular therapies focusing on CAR-T that I recommended are now acquired. For instance, Gilead Sciences (GILD) bought out Kite Pharma (KITE) back in 2017. Celgene also purchased Juno Therapeutics(JUNO) two years later. In a turn of events, Novartis (NVS) acquired Celgene. I noted in the prior research,

You shouldn't be worried about the competition here because this market is extremely vast ... 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.

Regarding CAR-NK, there are many other companies entering this niche. As such, competition would be significant. Nevertheless, Avalon offers highly differentiated solutions that have tremendous advantages as mentioned above.

Figure 8: CAR-NK developers (Source: ResearchGate)

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, the main risk for Avalon is whether the company can continue to advance AVA001, AVA011, and CAR-NK assets.

Despite the high chances of success for Avalon's cellular therapies, you can not make a guaranteed forecast. No one can. Not even Buffet. As such, there is a small chance of clinical failure. Moreover, Avalon can also grow too aggressively and thereby risks a potential cash flow constraint. Notwithstanding, the strong capital commitment from the Chairman should negate such a risk.

Conclusion

In all, I maintain my strong buy recommendation on Avalon GloboCare with the 4.8 out of 5 stars rating. Nevertheless, I raised the previous price target from $6.28 to $7.55 to reflect the novel CAR-NK development. On the two to three years horizon, I expect the PT to be reached. Now, the stock could reach its PT sooner depending on how long the Biotech Bear market would last. I also increased the "investment profitability score" on this stock from 65% to 70%. And, I maintain Avalon as 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 will break the bearish trend to surpass their former high. Despite the volatility, Avalon's management is persistent in adding fundamental value to the stock like the CAR-NK development. When you have such determined management, the stock is likely to break bearish trends.

Dr. Tran BioSci's M7 CriteriaStars Rating (Max 5 stars)Rationale
Medicine and technology5/5FLASH-CAR/mRNA CAR-T (AVA001 and AVA-011) and CAR-NK
Market5/5$19.1B global CAR-T market, $29.6B COVID market; $5.0B global CAR-NK 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 catalysts5/5

AVA011 to hit the clinic by mid-2022; recent advancement of CAR-NK

Money making5/5Long-term investment
Overall rating4.8/5

Figure 9: M7 Criteria (Source: pioneered by Dr. Tran with inputs for advancement from IBI colleagues)

Essentially, a company is a reflection of the personality of its management. Like Leonardo DaVinci, the scientifically and medically oriented Chief (Dr. David Jin) loves to experiment to uncover new grounds. Through experimenting with various therapeutic development and corporate advancement strategies, Dr. Jin continually refines the best practices for you. Based on the latest unfolding catalysts, it seems that Dr. Jin is eager to launch various cellular therapy programs, including CAR-Ts and CAR-NK. Just as important as the CAR-NK advancement, the esteemed physician-scientist recently recruited a world-renown NK therapeutic researcher (Dr. Liu) to his team for expediting the innovation process.

In synchrony with the illustrious Chairman (Daniel Lu), you can bet that Dr. Jin is unlocking tremendous value for shareholders. Though the share price is yet achieved (mainly due to the Biotech Bear market), there is a high likelihood that the multiple-fold appreciation would come in the future. Importantly, the various cellular therapeutic innovations by Avalon would allow countless patients to enjoy a new and better life.

As an investor, you should keep your eyes on various CAR-T and CAR-NK developments. The most notable catalyst is the deployment of AVA011 to the clinic by mid-year. That would be an important corporate milestone for Avalon. As the company progresses in its 2.0 growth phase, I forecast that there will be additional developments this year. After all, the management is continually improving the fundamentals to be ready for upcoming growth.

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 average down if you haven't done so. Now is a prime opportunity to pick up more shares of Avalon at a mega discount. Make sure you purchase in tranches and 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.