ETNB - 89bio: Risk And Reward Balance In NASH Therapeutics

2023-10-26 01:30:02 ET

Summary

• 89bio shows promise in NASH therapeutics, backed by robust Phase 2b trials of its drug pegozafermin.
• Financially stable with a significant cash runway, but a sharp YoY increase in operating expenses without a partnership to offset some costs is a concern.
• Market shows a mix of skepticism and interest, highlighted by high short interest and extensive institutional ownership.
• Investment Recommendation: Maintain a "Hold" stance; despite stable financials and promising R&D, market and clinical uncertainties justify a cautious approach.

At a Glance

In the volatile space of Nonalcoholic Steatohepatitis [NASH] therapeutics, 89bio ( ETNB ) appears to be treading a delicate balance between clinical promise and financial exigency. With R&D expenditures spiking to $57.2M, the company seems committed to advancing its drug candidate, pegozafermin, demonstrated by promising Phase 2b trial results. However, this has come at the cost of an increased net loss and share dilution. The financial standing remains strong, signaled by a robust current ratio and a cash runway that ostensibly negates the need for near-term additional financing. While Madrigal inches closer to FDA approval, setting a potential market precedent, 89bio's financial stability could offer it the cushion needed to navigate the ensuing competitive landscape. Nonetheless, its underperformance against SPY and high short interest reflect underlying market skepticism that should not be overlooked. A detailed examination of upcoming regulatory milestones and Phase 3 trial designs will be essential for prospective investors.

Q2 Earnings

To begin my analysis, looking at 89bio's most recent earnings report for the six months ended June 30, 2023, there's a notable increase in operating expenses from $49.8M in 2022 to $70.7M in 2023, largely driven by a surge in R&D costs from $39.5M to $57.2M. General and administrative costs also increased but at a lesser degree, from $10.3M to $13.4M. The net loss widened from $50.6M in 2022 to $67.2M in 2023. Share dilution is evident, as the weighted-average shares used for calculating net loss expanded from 20.3M to 63.7M, affecting loss per share which improved from -$2.49 to -$1.06 despite the net loss increase.

Financial Health

Turning to 89bio's balance sheet , the firm had $245.4M in 'cash and cash equivalents' and $232.6M in 'short-term available-for-sale securities,' summing up to $478M in highly liquid assets as of June 30, 2023. The 'current ratio,' calculated by dividing total current assets of $491.9M by total current liabilities of $25.9M, is approximately 19, indicating robust short-term financial stability.

Examining cash flows, the 'Net cash used in operating activities' over the last six months was $64.5M, translating to a monthly cash burn rate of approximately $10.8M. This suggests a cash runway of about 44 months, taking into account the total liquid assets of $478M. It's imperative to note that these calculations are based on past performance and may not project future financial viability.

Based on the positive current ratio, low monthly cash burn relative to liquid assets, and a total liability that's a fraction of these assets, the odds of 89bio requiring additional financing within the next twelve months appear low. However, these metrics should not foster complacency; market dynamics and R&D expenditures can rapidly shift, affecting the firm's financial outlook.

Market Sentiment

According to Seeking Alpha data, 89bio's market capitalization stands at approximately $529.88M, a figure that seems to signal some market doubt, particularly when benchmarked against the cash reserve of $478M. Revenue projections indicate an irrelevant YoY increase from $267.86K in 2023 to $8.26M by 2025, as 89bio figures to be a few years away from commercialization. The stock has significantly underperformed SPY in the short and medium term, with a 1-year decline of 17.22% compared to SPY's 11.86% increase. Short interest is rather elevated at 9.97%, indicating that a significant portion of the market is bearish on the stock.

Technically, ETNB displays a bearish trend. The stock is trading below both the 50-day (14.18) and 200-day (15.38) moving averages. Notably, there's a sharp volume spike in mid-October, accompanied by a drastic price drop, suggesting strong selling pressure. The RSI (21.66) indicates oversold conditions but hasn't shown a reversal signal. Meanwhile, the MACD remains below zero, further affirming the bearish momentum.

Institutional ownership is extensive at 84.93%, with new positions (3,058,031 shares) marginally outnumbered by sold out positions (3,478,760 shares). Noteworthy institutional holders include RA Capital Management with 11,416,948 shares, BlackRock with a significant 272% share count increase to 4,650,183, and State Street Corp at 4,643,191 shares. Insider trading shows a net sale of 19,635 shares over the last three months, contrasting with a 12-month net positive activity of 2,624,609 shares, implying a more bullish intermediate-term sentiment among insiders.

NASH Dash: Akero, 89bio, and Madrigal's Therapeutic Race

In the evolving landscape of NASH treatment, three pharmaceutical players, Akero ( AKRO ), 89bio, and Madrigal ( MDGL ), have made significant strides with their respective drug candidates, efruxifermin, pegozafermin, and resmetirom.

In a recent mid-stage trial, Akero tested its FGF21 analogue, efruxifermin, on 153 NASH patients suffering from severe liver scarring or cirrhosis. Over a span of 36 weeks, a bracket of 22% to 24% of the patients demonstrated at least a one-stage amelioration, albeit sans statistical significance . However, secondary objectives were achieved, as a notable percentage of patients saw a resolution of NASH symptoms compared to the placebo group. The trial is set to extend to 96 weeks, providing a window for efruxifermin to potentially hit statistical significance with prolonged impact. Preceding trials of efruxifermin on non-cirrhotic NASH patients and diabetic individuals highlighted its promise, positioning it as a significant contender in NASH therapeutic landscape.

89bio's pegozafermin also displayed promise in reducing liver scarring in a Phase 2b trial . Both efruxifermin and pegozafermin, functioning as FGF21 analogues, aim to regulate lipid and carbohydrate metabolism to mitigate NASH symptoms. They both showed improvement in fibrogenesis markers, indicating potential in managing liver fibrosis associated with NASH? . Specific trials revealed varying degrees of efficacy between the two in achieving NASH resolution without worsening of fibrosis. Efruxifermin, for instance, had a significant efficacy signal in two different doses , although the signal was lower when all patients were included. Pegozafermin, on the other hand, exhibited a notable percentage of patients meeting the criteria for NASH resolution at a dose of 15 mg????. Furthermore, the once-weekly administration of both drugs showed significant efficacy over placebo, with pegozafermin also showing efficacy when administered every two weeks , possibly offering a more flexible dosing regimen??.

Madrigal's resmetirom is making headway as it nears the finish line to become potentially the first approved therapy for NASH in the US, following positive outcomes from its pivotal Phase III MAESTRO-NASH clinical trial?. The success in late-stage studies has catapulted Madrigal to a leading position in the NASH treatment race, with the FDA granting priority review for resmetirom, expediting its journey towards market approval??. The market entry of resmetirom is significant, with projections indicating it could garner revenues upwards of $3 billion , per my own estimates, contingent on several factors??.

The competitive and evolving space of NASH therapeutics showcases distinct advantages and challenges for each drug candidate. While Madrigal appears to lead the race towards market approval, the nuanced differences in the mechanisms, trial outcomes, and dosing regimens of Akero's and 89bio's FGF21 analogues could significantly impact the therapeutic options available for NASH patients in the near future. Each drug's journey through clinical trials and towards market approval will play a critical role in shaping the NASH treatment landscape, providing a glimpse into the future therapeutic arsenal against this liver disease. Within this context, the NASH market of the future is likely to be shared amongst a few medicines, some with focused markets like diabetes-associated NASH and a select one or two drugs garnering a fat share of the pie.

My Analysis & Recommendation

The NASH treatment landscape is burgeoning with potential, yet laden with uncertainties. For investors eyeing 89bio, its financial health, shown by a substantial liquid asset base and low debt, alongside aggressive R&D spending, depicts a proactive stance toward clinical advancements. Despite a widened net loss, the firm's robust short-term financial stability underscores its capacity to navigate near-term operational exigencies. However, the elevated short interest, underperformance against SPY, and increased operating expenses cast a shadow of market skepticism.

The comparative analysis with Akero accentuates the competitive dynamics within the NASH therapeutics domain. While Akero's efruxifermin has shown promise, 89bio's pegozafermin, with its potential for a more flexible dosing regimen, could carve a niche, provided the impending regulatory engagements and Phase 3 trials unfold favorably. It's pivotal that 89bio leverages the upcoming FDA and EU discussions to elucidate and perhaps expedite its clinical development trajectory. The proposed parallel Phase 3 trials could, subject to regulatory nods, hasten the journey to market, although this expedited pathway doesn't come without heightened risk, warranting a cautious optimism.

Investors should closely monitor the regulatory interactions, trial designs and outcomes, alongside market dynamics and competitive advancements, especially Madrigal’s nearing market entry which could recalibrate market expectations. Diversification within the NASH or broader biopharma sector, and a keen eye on 89bio's operational and clinical milestones, could serve as risk mitigation strategies.

The path forward for 89bio is laden with both opportunity and challenge. A prudent investment strategy would be to maintain a diversified portfolio to cushion against sector-specific volatilities. Given the outlined financial and clinical landscapes, along with the competitive milieu, I ascribe a confidence score of 45/100, leaning slightly bearish , landing an investment recommendation of "Hold". Although the current valuation ascribes nearly zero value to efruxifermin, investors are likely pricing in the high costs associated with getting a NASH drug to the finish line. In this context, 89bio would significantly benefit from a partnership to offset some costs. Until then, it's difficult to imagine the company successfully navigating these complex landscapes alone. Nonetheless, the forthcoming months could be pivotal in reshaping 89bio's market position, and by extension, its attractiveness to the investment community.

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