IBRX - ImmunityBio: Ongoing Dilution And Regulatory Uncertainties Blur Investment Prospects

2023-08-09 16:26:20 ET

Summary

• ImmunityBio is facing financial and regulatory challenges, resulting in a 50%+ stock drop after an FDA Complete Response Letter.
• The company's financial situation shows high cash burn and dilution, despite recent fundraising.
• The updated investment recommendation for ImmunityBio is a definitive "Sell" due to ongoing dilution, mixed financial signals, and regulatory uncertainty.

Introduction

ImmunityBio ( IBRX ), a clinical-stage biotech firm, works on therapies and vaccines for cancers and infectious diseases like SARS-CoV-2 and HIV. They are conducting 26 trials on nine agents, with Anktiva receiving FDA Breakthrough Therapy status for bladder cancer. A recent FDA complete response letter [CRL] concerning Anktiva led to a 50% stock decline.

In May, I analyzed the stock drop after the CRL from the FDA and I attributed it to the drug's importance to the company and investor sensitivity amplified by financial fragility. Though the FDA didn't request more studies, uncertainty remains. Despite optimism about Anktiva's potential, I advised a "Hold" recommendation on the stock.

Recent developments: Following the CRL, Piper Sandler downgraded ImmunityBio to neutral, cutting its price target to $4 from $10 due to a CRL and concerns over the firm's finances. In July, ImmunityBio secured financing through a registered direct offering , expected to result in gross proceeds of $40 million, with potential additional proceeds of up to $48 million from warrants.

The following article details ImmunityBio's financial and regulatory challenges, underlying financial vulnerabilities, mixed valuation metrics, and negative momentum. It culminates in a "Sell" recommendation for the stock.

Q2 2023 Balance Sheet

ImmunityBio's balance sheet as of June 30, 2023, displayed a significant decline in current assets to $66.83 million from $140.58 million at the end of 2022, with cash and cash equivalents reducing sharply from $104.64 million to $43.51 million. The net loss for the first six months of 2023 was $254.80 million, signaling a high cash burn rate. However, it is essential to note that the company raised approximately $40 million in July via a registered direct offering, which would extend the cash runway. This additional financing partially alleviates immediate liquidity concerns, but the underlying trend of increased operating loss and cash burn still highlights the potential need for careful financial management and possibly further financing down the line.

Valuation, Growth, & Momentum

Taking a look at Seeking Alpha data: ImmunityBio's financial situation demonstrates mixed trends. Valuation metrics are challenging to interpret, with unavailable P/E ratios and an extremely high EV/Sales [TTM] at 2,576.69, earning a C- rating. Growth looks promising in the short term, with substantial YoY sales increases forecasted for the next few years; however, longer-term growth metrics like 3-Year revenue [CAGR] at -52.23% present a conflicting picture, leading to a B+ rating. Momentum is clearly negative, with the stock trailing the S&P 500 significantly over various periods, resulting in an F rating.

Together, these factors suggest a complex and uncertain investment landscape, with promising growth prospects offset by negative momentum and unclear valuation.

My Analysis & Recommendation

ImmunityBio's financial standing, especially after the recent CRL from the FDA for Anktiva, casts a shadow over the company's prospects, revealing serious vulnerabilities that cannot be overlooked. The abrupt 50% drop in the stock, while partially reflective of the setback with Anktiva, underscores broader investor concerns about the company's overall financial health.

The trend of ongoing dilution, as seen in the recent $40 million direct offering, adds to these worries. Although such funding extends the cash runway in the short term, it also indicates, in my view, an underlying desperation in financial management. Coupled with a high cash burn rate and a significant net loss in the first half of 2023, these signals, in my opinion, raise red flags about the company's long-term sustainability.

In the coming weeks and months, investors should brace themselves for possible further dilution, financial strain, and potential setbacks in Anktiva's development. These factors could lead to additional declines in stock value and reveal deeper systemic issues within the company.

Given the substantial uncertainties surrounding ImmunityBio's valuation (which remains considerably high at $1.5 billion in enterprise value), coupled with negative momentum and conflicting growth prospects, the risk for investors appears high. Balancing this with the company's long-term potential, it becomes challenging to justify a positive outlook, especially considering the underlying trend of increased operating loss and cash burn.

Therefore, my updated investment recommendation for ImmunityBio is a definitive "Sell." In my view, the mixed financial signals, ongoing dilution, regulatory uncertainty with Anktiva, and overall market dynamics present a precarious investment landscape. The potential for further erosion in value is real, and a conservative approach that minimizes exposure to these risks would be a prudent strategy at this juncture. Investors should consider reallocating funds to more stable opportunities until ImmunityBio demonstrates tangible progress in addressing its financial and regulatory challenges.

Moving forward, I hope to see ImmunityBio attain FDA approval for Anktiva, put into action strategies to reduce costs, and secure non-dilutive financing beyond debt (e.g. partnerships/licensing agreements with big pharma), before I reevaluate my thesis.

Risks to Thesis

When the facts change, I change my mind.

The "Sell" recommendation for ImmunityBio is not without its risks, and I acknowledge that several factors could challenge this stance. First, if ImmunityBio successfully navigates the regulatory hurdles and gains FDA approval for Anktiva or other promising therapies in their pipeline, the stock could rebound sharply. This biotech firm operates in a highly volatile sector where positive clinical trial results or partnerships could lead to rapid appreciation in value. Second, the recent fundraising, though indicative of dilution, may provide the necessary capital to achieve crucial milestones that could transform the company's prospects. Finally, the "Sell" recommendation assumes a continuation of current negative trends; any strategic changes in management, cost control, or other positive financial restructuring could alter the investment landscape.

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