Imugene (IMU -ASX) - A Market analysis by WMHB
Despite being sold down considerably from a $0.625 high two years ago, during the past few months Imugene has seen a resurgence in share trading volumes. This is due in no small part to their Vaxinia (MAST) Trial which recently highlighted encouraging clinical trial results in gastrointestinal tumor patients (i.e., colorectal, bile duct, pancreatic and liver cancer). As a consequence of these trial results research house Bioshares recently rated IMU a speculative HOLD CLASS A. Biosharesnote that thirty-four patients with a range of solid tumours have been treated so far with Imugene’s novel oncolytic virus drug candidate, CF33-hNIS, (i.e., Vaxinia), with initial results released from the first 25 patients. The strongest treatment effect was seen in patients with gastrointestinal tumours, where stable disease was achieved in seven of the eight patients, with one patient achieving a complete response. All patients enrolled in the study had previously undergone extensive treatment with other therapies that had either failed to control their cancer or provided only limited benefit. Bioshares highlight the fact Imugene will now expand the study with an additional 10 patients for the notoriously difficult to treat bile duct cancer which is considered 'immunologically cold,' meaning that it does not respond well to checkpoint inhibitor therapies.
Having researched IMU - ASX announcements you are no doubt now aware Imugene has been granted Fast Track Designation from the FDA for the bile duct cancer treatment program. This designation may expedite the approval process (on smaller studies with a surrogate endpoint rather than for instance a survival benefit which can take longer to establish) and grant the study Priority Review (six months for FDA assessment of the NDA or BLA). In their analyst coverage Bioshares note Vaxinia has received a high level of interest from clinicians following the early bile duct cancer treatment results.
Given these results I am of the opinion analyst coverage from Roth Capital, Bell Potter and Diamond Equity Research, collectively undervalues IMU - ASX. As an example Roth Capital, who have a 12 month price target of .46 cents for Imugene, assume that in 2031 revenue from Vaxinia is forecast to be 346,566 Million. From my way of thinking that’s more than a touch on the light side. If Vaxinia is granted FDA Approval in the indication of bile duct cancer, one could reasonably assume other approvals in gastrointestinal patients may follow. Biospace forecast the global stomach cancer treatment market was estimated at USD 3.94 billion in 2021 and is expected to hit around USD 11.5 billion by 2030, growing at a CAGR of 12.64% from 2021 to 2030. To assume a drug successful in combating this illness only earns approximately 334 million out of the estimated 11.5 billion market, is over cautionary in my opinion.
That said I guess like many analysts I would like to perform a risk analysis when assessing a stock. In doing so when performing my risk analysis Imugene well and truly achieves a pass mark. But that is not without a few red flags, as is so often the situation with biotech stocks (see herein).
IMU RISK ANALYSIS
| Fail | Is their share price liquid and stable? Highly volatile share price over the past 3 months
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| 1 | Fail | Do they have meaningful levels of revenue? Makes less than USD$1m in revenue ($0)
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| 2 | Fail | Have shareholders been diluted over the past year? Shareholders have been diluted in the past year
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| 3 | Pass | Are they forecast to achieve profitability? Imugene is currently unprofitable but with the recent azer cel acquisition areforecast to become profitable over the next 3 years
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| 4 | Pass | Has there been substantial insider selling in the past 3 months? There has been no significant insider selling over the past 3 months
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| 5 | Pass | Are revenue and earnings forecast to grow? Earnings are forecast to grow from zero to 63,674M by late 2026 (see Roth Capital projections) |
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| 6 | Pass | Do they have negative shareholders equity? IMU does not have negative shareholders equity.
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| 7 | Pass | Do they have sufficient financial data available? They have sufficient analyst coverage
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| 8 | Pass | Is their dividend sustainable? They do not pay a dividend
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| 9 | Pass | Are they in a good financial position? They have sufficient cash for at least 1 year of operations
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| 10 | Pass | Are there any concerning recent events? No concerning health and safety events detected
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| 11 | Pass | Do they have a meaningfulmarket capitalisation? Market cap is meaningful ($651M AUD )
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| 12 | No data | Do they have high quality earnings? Unprofitable so not applicable
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| 13 | No data | Have profit margins improved over the past year? Insufficient data or unprofitable |
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My Imugene (IMU - ASX) risk analysis therefore concludes, (in summary):
Strength
- Debt is well covered by earnings.
Weakness
- Shareholders have been diluted in the past year.
Opportunity
- Has sufficient cash runway for more than 3 years
based on current free cash flows. - Trading below my estimate of fair value by more
than 20%.
Threat
- Debt is not well covered by operating cash flow.
- Unless azer cel is approved, which is at present an
unknown quantity, Imugene is not expected to
become profitable in the next few years
Most analysts believe that a company's value is the present value of all of the cash it will generate in the future. More often than not they assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value. This is known as a discounted cash flow model. Modelling assumes the total value, or equity value, is the sum of the present value of the future cash flows, which in Roth’s example is $1.3 billion. When we then divide the equity value by the number of shares outstanding (I.e., 7.17 Billion), we find that relative to the current share price of AUD 9.3 cents, Imugene appears undervalued, at a significant discount to where the stock price trades currently.
Photo courtesy of Unsplash
As with any analysis calculations are dependent on two assumptions. The first is the discount rate and the other is the cash flows. In reaching a price target estimate, or valuation of a stock, most analysts assess a company’s terminal value, which accounts for all the future cash flows after an initial ten year period. For a number of reasons they utilise a very conservative growth rate that cannot exceed that of a country's GDP growth. In my analysis I use the 5-year average of the 10-year government bond yield (2.2%) to estimate future growth. In the same way as with the 10-year 'growth' period, I discounted future cash flows to today's value, using a cost of equity of 6.2%, based on interest rate forecasts. But as you can appreciate there are many variables associated with such assumptions.
My followers are aware I have had a 12 month price target on Imugene of approximately $1 AUD, based predominately on the estimated cash flows attributable to the company’s PD1 Vaxx and Vaxinia drugs.In the near term I envisage these future cash flows to be underpinned by revenue from the company’s recently acquired Azer Cel allogeneic therapy, which is predicted to start earning revenue in the ensuing three years. Even taking into account the risk of future dilution, the estimated cash flows applicable to Imugene’s drugs, which aim to meet what is currently a huge unmet need, far outweigh such erosion in shareholder equity. Since floating with 5.36 billion shares, Imugene currently has 7.17 billion shares outstanding. That’s an increase of approximately a quarter from the number of shares initially on offer. Big deal I say, when one considers estimated revenue from azer cel alone more than compensates for this additional share issue.
Dr Jakob Dupont - Photo Courtesy of Imugene.com
Unfortunately though all the analysis, modelling, discounted cash flow forecasts and estimated revenue streams are simply that, forecasts and estimates. No-one can predict whether or not the FDA shall even approve Imugene’s safe and one assumes efficacious vaccines, at this point in time. That is where one needs to assess the quality and track record of the company personnel engaged. Having done so I feel confident company representatives of the ilk of Dr’s Jakob Dupont, Paul Woodard, Nick Ede and Brad Glover are well placed to realise FDA product approvals for many if not all of Imugene’s existing suite of immunotherapies.
As outlined in this post I do believe from a personal point of view Imugene is significantly undervalued. Though despite having studied economics and traded consistently for over two decades with success, I have been out of the market for a long time now, in particular the institutional market. And of late I have been wrong more times than I have been right when it comes to predicting the IMU share price. In short whatever you do don’t take my opinion, make up your own, based on your own reading and research.
In conclusion I must confess what worries me when it comes to Imugene is the lack of significant institutional investment in IMU-ASX. Admittedly the stock is trading on the ASX, a bourse with a penchant for mining and banks, as opposed to biotech stocks. I guess I’m hoping the lack of institutional investment is symptomatic of the fact large Australian fund managers are reticent to invest in a stock these days until all the I’s and T’s have been dotted and crossed. Or until the proverbial penny drops as it were. Perhaps another round of Vaxinia results, the recent expansion in trial numbers and the forthcoming JP Morgan institutional Investor Conference on January 7 could change all that. Maybe the overseas fund managers present may not be as hesitant as their Australian counterparts are to pull the trigger on an Imugene acquisition, when they see what happens when Vaxinia fires its shots into solid tumours.
Enjoy your weekend.
WMHB
DYOR Seek investment advice as and when required Opinions only
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