SANA - Sana Biotechnology's One-And-Done Solution For Diabetes Impresses In NHP Model (Rating Upgrade)

2024-01-11 07:30:00 ET

Summary

• Sana Biotechnology's novel T1D treatment, not requiring immunosuppression, shows encouraging results in a non-human primate study.
• Sana displays improved Q3 financials with a current ratio of 4.03, but faces high cash burn and potential funding needs.
• Investment Stance: Shift from "Sell" to "Hold" based on Sana's financial management and R&D progress, with a watchful eye for further clinical and financial developments.

Sana Biotechnology at a Glance

In revisiting Sana Biotechnology (SANA), its stock is up nearly 25% since my "Sell" recommendation in August. Back then, I expressed concerns about the market's apparent high expectations of Sana, as evidenced by a $1 billion market capitalization despite a young pipeline, high cash burn, and inherent clinical uncertainties. Sana recently presented data at the annual JPMorgan Healthcare conference, which is always important for biotech firms. Sana's Wednesday presentation on its preclinical efforts in Type 1 diabetes [T1D] boosted its stock price by 39% on heavy volume. The following article reassesses Sana's stock in light of their JPM presentation and recent financials.

Sana's Sweet Solution: A Shot at Conquering Type 1 Diabetes

For some background, Sana previously revealed the potential of HIP-modified primary pancreatic islet cell transplantation in mouse models to alleviate signs and symptoms of T1D (e.g., high blood glucose). This process is unique because, unlike other investigational therapies like Vertex's (VRTX) VX-880, for example, Sana's therapy does not require immunosuppression, which is utilized to prevent rejection but is often associated with complications. Sana upped the ante at the 2024 JPMorgan Healthcare conference, presenting data in one non-human primate [NHP]. The data is promising. Six months after the intramuscular injection of HIP-modified primary pancreatic islet cells, they were still functioning and maintaining glucose levels.

This is important because if it proves effective in humans, T1D, a serious and prevalent disease, can be alleviated. Currently, patients with T1D have to administer injections of insulin on a daily basis-sometimes as many as four times per day. This is a great burden. Even with insulin, people with T1D still experience symptoms and are more likely to fall victim to complications like stroke or heart attack. A one-time, intramuscular injection would eliminate the need for insulin and most likely lead to better health outcomes.

As always, caution is advised. At one point, Vertex's VX-880 had an "aha" moment, too, that has since subsided to caution in Phase 1/2 clinical trials. Most recently, Vertex reported two deaths (out of fourteen treated patients). Although the deaths are not believed to be drug-related, Vertex has paused the trial until further review. As a rule, most therapies that advance to, and ultimately fail in, human trials were once promising in preclinical models. To state the obvious here: humans differ from NHPs, and 1 is a very small number. To be relevant, Sana's therapy will have to prove safe, effective, and durable in hundreds of humans with T1D.

Nonetheless, the market opportunity for such a therapy as Sana's, assuming it proves safe, effective, and durable, is massive and cannot be understated. So, one should not completely dismiss these results. The road ahead, however, is long and uncertain. Think of the road gene therapy took to provide a "potentially curative" option for sickle cell disease. For example, bluebird bio's (BLUE) stock has suffered massive losses despite the clinical advancement and eventual FDA approval of its revolutionary gene therapy, LYFGENIA. Moreover, even if a "potentially curative" therapy like Sana's achieves clinical and regulatory successes, there is no guarantee it will see rapid uptake on the market.

Q3 Earnings

Looking at Sana's most recent earnings , for the three months ending September 30, R&D expenses were $65.6 million, slightly down from last year. General and administrative costs were $19.2 million, compared to $15.5 million in 2022. Due to $82.6 million in "research and development related success payments and contingent consideration," Sana reported a net income just short of $1 million, a significant improvement from a net loss of $85.1 million in the same period last year. Diluted net shares experienced an increase from 189,303 to 200,473, suggesting modest dilution.

Financial Health

Sana's financials reveal intriguing insights. Their liquid assets, at $268.6 million, comprise $168.4 million in cash and $100.1 million in marketable securities. Notably, they hold no long-term marketable assets. Liabilities, however, paint a different picture. They include $9.9 million in accounts payable, $24.3 million in accrued compensation, $18.9 million in other current liabilities, and $13.5 million in operating lease liabilities, cumulatively amounting to $66.6 million. This results in a current ratio of 4.03, showcasing Sana's capacity for meeting short-term obligations.

Over nine months, Sana utilized $201.6 million in operating activities. Their monthly cash burn stands at $22.4 million. Given their negative operating net cash flow, Sana's cash runway extends to roughly 12 months. However, these calculations stem from historical data and may not accurately forecast future trends.

The likelihood of Sana seeking additional funds within a year appears significant, considering their current cash depletion rate. In essence, while Sana's short-term financial health seems sound, their long-term stability hinges on effective cash management and fundraising.

Notably, in October, the company announced a headcount reduction and more focused R&D efforts to aid in cost control. Subsequently, Sana anticipates their cash runway now extending into 2025.

Market Sentiment

According to Seeking Alpha, Sana's market cap is $1.02 billion. Impressively, the stock surpasses the S&P 500 (SPY) over various periods. Such performance reflects investor confidence in its future.

However, a high short interest of 19.85% raises concerns. This interest consists of 21.24 million shorted shares. The days-to-cover stand at 13.42. This high interest points to market doubts.

Institutional ownership stands out at 63.09%. Major stakeholders are noteworthy. Flagship Pioneering Inc. holds 25,001,856 shares. Fmr LLC owns 15,898,729. Baillie Gifford & Co has 10,204,375. Yet, there's a declining trend in institutional investments. Insider trades present alarming signals. A net 12,774,475 shares were sold in the past year.

Summing up, Sana's market sentiment can be described as "fragile."

SANA Stock - My Analysis & Recommendation

In conclusion, Sana intrigues yet warrants caution. Its T1D research, unveiled at the JPMorgan Healthcare conference, sparked a stock surge with a compelling volume spike.

This is a signal , in my experience. Their innovative HIP-modified pancreatic cell transplant shows promise. Yet, the journey from lab to clinic is uncertain, echoing past biotech ventures.

Financially, Sana's Q3 showed reduced R&D costs and better net income. This suggests successful cost-cutting and sharper R&D focus. Their current ratio stands at 4.03, signaling short-term financial strength. However, long-term viability is uncertain, given high cash burn and likely future capital needs. Sana's strategy to extend cash into 2025, through workforce and R&D cuts, is both laudable and vital.

Market views on Sana remained mixed. High short interest and dwindling institutional backing counterbalance its SP500 outperformance. This volatility stresses the need for prudent optimism.

I'm shifting my stance from "Sell" to "Hold," conditional on Sana's continued fiscal prudence and targeted R&D. Before shifting gears to "Buy," I'd like to see more cash (preferably non-dilutive) and clinical momentum.

For risk-averse investors, diversification remains key. Balance high-potential yet risky firms like Sana with steadier healthcare players. Keep tabs on Sana's clinical, financial, and market updates. This strategy could leverage Sana's potential gains while buffering against biotech's inherent risks.

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