IMVT - argenx: Q1 Earnings High Stakes Biotech Play - Soaring Success Or Icarus' Fall

2023-05-20 21:19:49 ET

Summary

• argenx impresses with $218M Q1 Vyvgart revenue, exceeding consensus due to cyclical factors and early gMG therapeutic sequence adoption.
• The CIDP ADHERE trial carries inherent risks due to historically high placebo responses and mechanistic limitations, which could put the current valuation into question.
• Despite a strong financial position and potential for franchise expansion, the frothy valuation and clinical development risks warrant cautious investor sentiment.
• We maintain a hold rating due to the looming uncertainties around the CIDP readout and inflated $21Bn valuation.
• We are a big fan of argenx long term and view it as one of the most high-quality biotech stories of all time, and our analysis focuses on short-to-mid term concerns.

Q1 earnings and our take

Despite impressive 1Q 2023 earnings numbers from argenx SE ( ARGX ), we maintain a hold rating on the Dutch biotech darling.

argenx reported a net 1Q 2023 Vyvgart revenue of $218M, exceeding the consensus of $183M, and our cautious expectation (due to the distributors' cyclicality) in our previous analysis . We commend this laudable performance, aided by the adoption of Vyvgart earlier in the gMG therapeutic sequence, and look forward to the potential expansion of the franchise's overall opportunity with the availability of the subQ form (with PDUFA expected on June 20).

However, with the recent rally in stock price and the valuation reaching $21Bn, we remain cautious, primarily due to two factors: a) uncertainty surrounding the CIDP readout and b) a high current valuation. Firstly, the CIDP readout carries a high degree of risk. Historically, CIDP trials have demonstrated high placebo response rates (~40%+), which could distort the results of the upcoming ADHERE trial, which we believe may be the reason why the company is delaying the readout date (now July). Moreover, we believe the mechanistic rationale for efgart's potential to cater to most of the CIDP population seems insufficient (not all CIDP cases are IgG driven). Thus, the risk-reward balance going into the ADHERE data does not appear favorable, especially at the current valuation, and even positive results could be fully priced in.

Secondly, we are concerned about argenx's frothy valuation of ~$21Bn, which we believe seems excessive (even with a peak sales multiple of x3, efgart needs to reach a peak sales of ~$7Bn), and the current valuation priced in positive approval and launch of most of the upcoming label expansion opportunities (ITP, CIDP, and PV), which we are positive about. Still, there is always a risk that the nightmare from cusatuzumab repeating again (trial failure). The company's shares currently offer minimal room for upside, while any negative outcome could result in a drastic sentiment change, potentially driving the stock price down by 20-30%.

Financials

The reported 1Q 2023 net loss was $29M, with R&D and SG&A expenses of $166M and $149M, respectively. We believe, despite the operating loss and a projected 2023 cash burn guidance of $500M, argenx's cash and equivalents of $2B, coupled with continued operational success, should position the company well to reach profitability and additional capital raise in the near future is unlikely.

Risks

1. Clinical Development Risk: argenx's portfolio heavily relies on the success of its lead drug, Vyvgart (efgartigimod), in various indications. Any adverse clinical trial results or regulatory setbacks in CIDP, myositis, or other planned indications could significantly impede the company's growth prospects.

2. Commercialization Risk: While Vyvgart has received regulatory approval in the US, EU, Japan, UK, and recently Israel, successful commercialization is not guaranteed. Key concerns include market penetration, reimbursement issues, and competitive dynamics, particularly as Immunovant ( IMVT ) and other competitors develop new-generation delivery methods such as autoinjectors.

3. Reimbursement and Pricing Risk: argenx's future growth is contingent upon successful price negotiations, particularly in the EU markets where German federal pricing is pending (September 2023).

Conclusion

Net-net, argenx pulled off an impressive 1Q 2023, with Vyvgart revenue outperforming consensus and our expectations. However, we are maintaining our non-consensus hold rating on ARGX given a double-pronged concern: high risk surrounding the CIDP readout and an excessive $21Bn valuation that leaves limited room for upside but substantial downside potential. The CIDP ADHERE trial data poses a substantial risk due to high historical placebo responses and insufficient mechanistic rationale. Furthermore, argenx's lofty valuation seems to have already priced in most upcoming label expansion opportunities (and perhaps an M&A speculation has aided the recent gain in stock price). In the face of these uncertainties, we urge investors to exercise caution despite the company's strong financial position and potential for franchise expansion.

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