View this email in your browserGood morning !Welcome to a new...

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Good morning ! Welcome to a new Rare Triples analysis. This week, we’ll be looking into a biotechnology company that is advancing a pipeline of oncology technologies. The company has attracted significant retail investor interest due to their success with early stage activities and backing from prominent biotech investor Paul Hopper. Despite the market cap and retail investor backing, it is important to dig deeper into the company and analyse both its good and bad qualities beyond the asset level. Hopefully, by the end of this, you’ll have a good understanding on whether Imugene Limited (ASX:IMU) is in fact a “Triple Threat”. Let’s take a look.

Threat #1 - Setting goals

It is important for management to set goals for their company and what they anticipate can be achieved. Not only does this give investors information about the state of their investment, but also manages what they can expect in the future. As a biotechnology company, it is extremely important for investors to be fully across the company's goals and whether they are on track for achievement. This is because of the risk profile most biotech companies have and therefore understanding how close the company is to specific company making/breaking milestones is crucial. For Imugene, the company has the added dynamic of concurrently advancing multiple high-impact technologies, with each possessing company making value upon any success. Let's have a look at whether the company has faithfully set and followed goals across the last 2 years. In Imugene's 29 July 2021 Investor Presentation, the company indeed outlined a list of milestones for the next 12-24 months:

Let's examine how many of these goals have been met since then. onCARlytics

PD1-Vaxx

VAXINIA

HER-Vaxx

CHECKvacc

As we can see, Imugene's goal fulfilment was biased towards Vaxinia, HER-Vaxx and Checkvacc while a few goals outlined for onCARlytics and PD1-Vaxx was not distinctly addressed or met. Yet we also can see that this coincided with a broader development focus towards the Vaxinia, HER-Vaxx and Checkvacc - with numerous goals added to the pipeline and achieved in the same 12-24 month pipeline. This likely implies that resources were shifted away from onCARlytics and PD1-Vaxx. Overall, the company has achieved most of their outlined goals albeit with some delays which is great to see in a fast moving biotech company with a wide range of developments.

Threat #2 - Equal capital raise access

As we know, facilitating the involvement of existing shareholders is an extremely important quality to have in companies. There are far too many cases where directors take on external capital only in the name of simplicity, timeliness etc., yet overlook the fact that existing shareholders still own the majority of the company and must therefore be prioritised. In the small-medium end of the market, there is generally higher retail investor interest due to their ability to take on higher investment risk profiles compared to institutional investors at the blue-chip end of the market. This dynamic is no different at Imugene which has attracted a solid cohort of retail investors who have backed the company in great numbers to date. Since Imugene is also a relatively early stage company with on-going funding needs, it is important that retail shareholders also receive a fair opportunity to participate equally in these capital raise opportunities, and the dynamic is not overly skewed towards new incoming investors. For Imugene, we can examine the last 3 years of capital raising transactions to ascertain how well existing shareholders have been treated. Capital raises: 18 August 2023: $35m placement at $0.084 per share with a 1:1 $0.118 listed option (link) + $30m SPP 13 September 2022: $80m placement at $0.20 per share + 1:2 $0.33 unlisted option (link) 29 July 2021: $90m placement at $0.30 per share with a 1:2 $0.45 listed option (link) + $5m SPP (link) As we can see, Imugene has allowed for relatively equal access across 2 of the last 3 capital raises. In the case of 13 September 2022, the company advised that the raise was only to 2 institutional investors; this may have driven the rationale behind not offering a shareholder participation facility. It's great to see that across these raises, the current SPP (share purchase plan) being offered to shareholders has the capacity to raise the most, is at the cheapest price and has a generous free option structure. This not only gives shareholders a way to maintain their shareholding with a low chance of scale back but also free exposure to upside via the high option ratio.

Threat #3 - Spending to grow

Developing oncology technologies is an expensive business model where substantial investment is required over numerous years with no guaranteed success at the end. For Imugene, this is especially the case due to the numerous lines of development, so maintaining efficient use of capital is extremely important. Fortunately, despite the large investment in research and development, the company has rationalised staff and administration costs to ensure that a big majority of cash spent on value accretive activities. To analyse this, we simply need to compare the R&D cash outflows relative to the staff + administration and corporate costs - data which is available in quarterly reports. We deliberately exclude grant income and tax incentives as the may obscure the true spending efficiency.

As we can see, despite the large development program, Imugene is investing on average (over the last 2 years) ~$2.5 into R&D for every dollar of “overheads”. This is before any grants/incentive payments which would have essentially subsidised part of the overheads. This is a solid ratio should it be maintained going forwards as it shows that the company's spending is materially geared towards growth.

Our Final Takeaway

Imugene is pushing ahead with an ambitious pipeline of oncology developments and is likely one of the most well-known biotech stocks in the small-mid cap section of the market. It holds admirable threats across goal achievement, treating shareholders equally during capital raises, and effective spending of shareholder capital. Yet it is worth nothing that several directors have sold meaningful parcels of stock in the last 18 months and there have been very few instances of on-market buying by directors during the same period. Although key directors such as the MD and Chairman have historically converted options (for a profit) which is positive, we note that this is below some examples set by others, such as Race Oncology (link to Rare Triple case study). Furthermore, the company could further improve information asymmetry by increasing Q&A opportunities between management and the vast shareholder base. Overall, however, we view Imugene as a rare Triple Threat. Want to see more? Read our other ASX company case studies here and keep an eye out for our next Rare Triples email next week.

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Nice analysis. Hope this formats properly. They touched on a good few points - they've only done 2 biotech companies (other being RAC) so something must've stood out.