ETNB - 89Bio: A Promising NASH Innovator

2023-03-17 18:18:37 ET

Summary

• As pegozafermin has a differentiated mode of action from Madrigal's resmetirom, 89bio, Inc. can offer an intriguing solution for NASH.
• Early pegozafermin data showed extremely strong liver fat reduction as well as improvement in NASH.
• The upcoming ENLIVEN data can move the needles on 89bio, Inc. stock.

Risk comes from not knowing what you are doing. - Warren Buffett.

In biotech investing, you can make multiple-fold profits by holding a powerful growth company over the years as its various clinical and regulatory catalysts materialize. This is particularly true for a company having a powerful drug, designed to penetrate a huge market without available any medicine. On that note, I want to introduce you to 89bio, Inc. ( ETNB ), which is another promising NASH innovator.

Notably, the stock is enjoying a vigorous comeback in the past year as its lead medicine pegozafermin generated highly promising data. As you can see, there is another upcoming clinical outcomes release that can give the shares another boost. In this research, I'll feature a fundamental analysis of 89Bio and share with you my expectation of this intriguing equity.

Figure 1: 89Bio chart.

About The Company

As usual, I'll present a brief corporate overview for new investors. If you are familiar with 89bio, Inc., I recommend that you skip to the next section. Headquartered in San Francisco, 89Bio is a clinical-stage biotech firm that is highly focused on the development and commercialization of medicines for patients afflicted by liver and cardiometabolic diseases.

Powering a highly focused pipeline is pegozafermin (i.e., Pego). Potentially the best-in-class fibroblast growth factor 21 analog (i.e. mimicker), Pego is currently being investigated in two Phase 2 studies for non-alcoholic steatohepatitis (i.e., NASH) and severe hypertriglyceridemia ((SHTG)).

Figure 2: Therapeutic pipeline.

NASH - A Lucrative Market

To appreciate the ramifications of 89Bio's therapeutic development, you should go over NASH's underlying science/medicine. On the advanced spectrum of non-alcoholic fatty liver disease ((NAFLD)), NASH is a serious and silent liver condition that is characterized by fat building up in the liver. Over time, that causes inflammation, liver scarring (fibrosis), and cirrhosis. Ultimately, the liver loses its normal architecture and thereby becomes non-functional.

As you can see, NASH tends to occur with other co-morbid conditions, including obesity, Type 2 diabetes, and metabolic syndrome. Due to our increasingly sedentary lifestyle coupled with fast foods, you can bet there is a high prevalence of NASH and its associated conditions. Consequently, you can imagine that the global NASH market would reach $180B in the foreseeable future.

Asides from therapeutic lifestyle changes, there are currently no FDA-approved medicines for this silent killer. A liver transplant is the only viable solution. Provided that you can find a match, the wait can be quite lengthy. Even with a transplant, the immunosuppressants that patients have to take would subject them to deadly opportunistic infections. Putting all that together, you can see there is a huge demand for a therapeutic solution for NASH.

Figure 3: NASH disease process.

Pegozfermin for NASH

Shifting gears, let us analyze how Pego fits into this picture. Viewing FGF21's underlying physiologic processes, you can appreciate that Pego is likely an excellent solution for NASH. Being a peptide hormone secreted by the liver, FGF21 regulates energy metabolism which is similar to the beta-thyroid agonist (i.e, Resmetirom).

Depending on the energy metabolic state, FGF21 can act on nearby cells (autocrine), in local tissue (paracrine), and through the body (endocrine). Hence, you can anticipate that this hormone has a wide-ranging function, one that drives the balance of burning/storing of fat/sugar in the liver and throughout the body.

Figure 4: Pego's mechanism of action.

Notably, you can see that 89Bio added a sugar group to FGF21 via pegylation/glycosylation. As a ramification, this increased FGF21's half-life by many folds. Simply put, this molecular modification boosted FGF21's function by leaps and bounds. The result is an improvement in fat-burning and sugar reduction.

Figure 5: Pego's chemistry.

Here is where it gets quite interesting. Do you know that the liver is the only organ in the body that has "self-regenerative" capability? Says, you cut part of the liver off, it can still regrow itself. There is no other organ in your body that can regrow itself like the liver. The important catalyst is to burn off the excess liver fats for the balance to shift from inflammation/fibrosis to self-healing. Simply put, Pego gives the liver the boost that it needs for aggressive self-regeneration.

Superb Early Data

As you know, all of the sound underlying science/medicine is meaningless, unless Pego can demonstrate excellent clinical data. As proof in the pudding of its efficacy, Pego proved its therapeutic prowess in a Phase 1/2 trial. That is to say, Pego's liver fat reduction is far superior to the placebo. Precisely speaking, the reduction ranges from as high as 50% to 64% while patients who took the sugar pill (placebo) saw a 10% increase in liver fat.

Figure 6: Strong early data.

Look at Cohort (i.e., Group) 7, the results on NASH improvement are highly remarkable. Specifically, all patients in that group had either an improvement or no change in ballooning/inflammation. Moreover, 63% of patients had at least 2 points improvement in their NAS score and no worsening of fibrosis.

Figure 7: Intriguing Cohort 7 outcomes.

Overall, the drug was well tolerated. Contrary to conventional wisdom, I'd like to see more diarrhea in patients afflicted by NASH. After all, diarrhea can be a sign that the fats are being burned off so fast that it has to exit the body via the fecal route.

Figure 8: Excellent safety profile.

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 assess the 4Q2022 earnings report for the period that ended on December 31.

Like nearly all developmental-stage companies, 89Bio has yet to procure any revenues. When the company becomes a product-stage operator, sales discussions would be more meaningful. That being said, the research and development (R&D) registered at $25.3M compared to $26.2M for the same period a year prior. I prefer an increasing R&D trend. The money invested today can turn into blockbuster profits tomorrow. After all, you have to plant a tree to enjoy its fruits.

Additionally, there were $24.5M ($0.48 per share) net losses compared to $26.3M ($1.30 per share) decline for the same comparison. On a per-share basis, the bottom-line earnings improved by a remarkable 63.0%. Perhaps, it signals that this management is adept at cutting expenses.

Figure 9: Key financial metrics.

About the balance sheet , there were $188.2M in cash, equivalents, and investments. Against the $25.3M quarterly OpEx, there should be adequate capital to fund operations into 3Q2024. Simply put, there are roughly seven quarters of cash runway. Hence, the cash position is strong relative to the burn rate.

While on the balance sheet, you should check to see if 89bio is a "serial diluter." After all, a company that is serially diluted will render your investment essentially worthless. Given that the shares outstanding increased from 20.2M to 50.0M, my math reveals a 147.5% annual dilution.

At this rate, 89Bio far exceeded my 30% cut-off. Maybe, this is an outlier (i.e., an anomaly). Perhaps, the company wanted to opportunistically raise as much cash as possible from the robust recent rally. That way, they can have adequate capital to ensure Pego's success.

Potential Risks

Since investment research is an imperfect science, there are always risks associated with your stock regardless of its fundamental strengths. More importantly, the risks are "growth-cycle dependent." At this point in its life cycle, the main concern for 89Bio is whether Pego can clear its Phase 2 trial for NASH soon. Given the critical importance of Pego in passing its study, a negative trial result here can cause the stock to collapse. Moreover, there is a risk that Pego won't clear its studies for SHTG. The fact that there is only one molecule here substantially heightened the investment risk.

Concluding Remarks

In all, I issue a speculative buy recommendation on 89bio, Inc. with a 4.8/5 stars rating. On the wings of its strong Phase 1/2 NASH data, Pego puts 89Bio on the map as a solid contender. Though 89Bio is years away from getting its drugs to the market, the robust Pego results indicate that it has a superb shot of getting there one day. As you can imagine, Madrigal Pharmaceuticals, Inc. ( MDGL ) is extremely likely to be the first mover in the NASH market and thereby enjoy a monopoly.

Given the vast nature of NASH, there is plenty of room for Pego and other molecules as well. Oftentimes, there can be multiple blockbusters in a single market. Though this is a highly speculative play, the odds are greatly in your favor. Looking ahead, 89bio, Inc. is posted to release its Phase 2 (ENLIVEN) trial data soon. If positive, the said catalyst can significantly move the needles on this stock.

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