A primeira tese de investimento deste tópico trata-se de uma
hidden gem para a qual acredito ter um enorme potencial de crescimento. "Ahnn?" - dizem voces. "Um value investor a investir em growth stocks invés de cigarbutts ou net-nets?!?"
Pois é, contrariamente ao que muitos pensam value investing é mais do que a procura por accoes baratas olhando simplesmente para indicadores como PERs ou Book value.
Claro que o Preco é importante, aliás é essencial. Mas growth é uma componente da equacao quando queremos determinar o valor intrinsico de uma empresa.
Inicialmente escrevi esta tese para publicacao no
https://www.valueinvestorsclub.com. Infelizmente a ideia foi rejeitada pelo club supostamente por se tratar de uma biotech micro-cap com uma capitalizacao inferior a $500M.
Deixo aqui um copy/paste da tese escrita inicialmente em ingles.
OncoCyte: A 5x Bagger In The Rough
OncoCyte’s EV was $90.66M and $1.50 share price at the time of this analysis.
Investment thesis
* The author believes Mr. Market is overlooking OncoCyte’s recent transition from a development-stage to a revenue generating, commercial-stage, biotech company during the past Q2 of 2020.
* OncoCyte’s share price continues heavily penalized by the Jun 30th failed clinical validation of DetermaDx while in the meantime the company entered commercialization of two products.
* Significant revenue growth expected in the short-term from commercialization of DetermaRx™ with a global market opportunity of 450M$/year and further fueled by DetermaIO™ test at 2,600M$/year.
* This represents a multibagger investment opportunity. Based on DetermaRX™ commercialization the business capitalization is expected to grow 5x within 3 years, let alone if we add further revenue growth from DetermaIO™.
Business description
Oncocyte is developing molecular diagnostic tests for the detection of cancer segment. During Q2 2020 it has quietly moved to a commercial-stage biotechnology company and significant revenue growth is expected from its two already commercially available products. In the short-term sales growth will come primarily from DetermaRx™ commercialization, while also advancing the commercially available for research DetermaIO™ test. By late 2021 DetermaIO™ is expected toto expand commercialization to clinical use and thus further expanding its revenue potential.
Product portfolio
DetermaRx™ is the first and only predictive test for lung cancer that identifies patients who remain at high-risk for micro metastatic disease after initial (hoped) surgical cure. The test is currently the only way to detect progression before it happens and while it’s still curable with routine application of chemotherapy. Moreover, DetermaRx™ may also help low risk patients avoid the toxic side effects associated with unnecessary chemotherapy.
In the US alone there are 40,000 applicable patients per year, at ~3,500$/test, the US market represents a 140M$/year opportunity. The test has medicare coverage for 70% of US eligible patients and 30% have commercial insurance.
Globally the total market potential is estimated between 450M$ to 500M$ per year. OncoCyte’s management has recently celebrated several distribution agreements in countries/regions such as Israel, India, Middle East, Africa, Germany and other EU markets.
This test received recognition from multiple peer-reviewed studies and renowned medical oncologist academics from university of Texas, California, San Francisco and Yale. The current physician adoption rate is growing at 60% QoQ (despite sales rep restrictions due to COVID-19 lockdown) and is showing a high 60% reorder rate (note that a 30% is considered good for the industry).
DetermaIO™ test identifies tumors poised to respond to immune therapy which may enable more accurate predictions of which patients will benefit from treatment regardless of the tumor origin. It is in initial commercial phase of market development with current sales limited to biopharma diagnostic development and research only.
It has an analytical accuracy of 98.1% thus significantly outperforming currently available tests from Merck, BMS and AstraZeneca’s IO drugs – which are barely more reliable than a coin flip in identifying both responders and non-responders to immunotherapies.
There are close to 3,000 ongoing immune-therapy clinical trials in the US alone, and up to 750,000 worldwide patients who may be eligible for immunotherapy treatment each year. US-only market represents a 2,200M$ for clinical plus 400M$ for pharma opportunity per year. Moreover, the micro diagnostics market for testing is expected to grow to over 5bn$ globally by 2026. This test is also receiving recognition from key opinion leaders and academics.
ValuationFor purposes of valuation the author based his calculations solely on potential revenues generated by DetermaRx™ test. Needless to say that any sales from DetermaIO™ commercialization or pharma services represent pure upside on top of current valuation.
For DCF method the author used a 10% discount rate and conservatively restricted market penetration to 60% of total eligible patients. The onboarding of US patients was estimated to be completed by end of 2023. The internationalization to tap into 60% of the 350,000 non-US patients was estimated to be complete by end of 2026 (author extrapolations).
In light of the above, the firm is expected to turn cash-flow positive by mid-2022 and concludes with an intrinsic value estimated at more than 530M$ based on DetermaRx™ alone.
Author's own calculationsManagement (CEO scuttlebutt)
Ronald Andrews joined OncoCyte’s board of directors since April 2018. On July 2019 he agreed to step into President and CEO role with the mission to diversify the company with high value cancer tests who were at, or close to, commercial stage.
Mr. Andrews served as President of Genetic Sciences Division of Thermo Fisher Scientific; was the CEO and Vice Chairman of the Board of Clarient, a cancer diagnostics company; and in 2013 served as CEO of GE Molecular after GE Healthcare acquisition of Clarient. He seems to bring extensive experience in integrating companies acquired in mergers.
On Oct 1st 2019, OncoCyte acquired rights to commercialize Razor Genomics’ product currently named DetermaRx™ for a total of 10M$ in cash and 5M$ of its own stock.
On Feb 5th 2020, OncoCyte closes merger agreement to acquire Insight Genetics for a net of a 0.6M$ cash, plus 1.9M shares of OncoCyte common stock valued at 5M$. Through this agreement the company gained access to its DetermaIO™ test together with a full suit molecular analysis services needed to support pharma drug development.
Prior to these acquisitions, the company was a pure single-test R&D stage company solely focused on its – now cancelled – DetermaDx product. Today its management has transformed OncoCyte into a more diversified, derisked, commercial stage, revenue generating company.
The author commends management decision to pause investments on DetermaDx (for which would take another 18 to 24months to finish the development) in order to preserve cash flow and focus on the expansion of its two already commercially available products.
Insider activity
Management currently owns 5.92% of the company or 9.40% if option and stock awards are fully exercised. Average option exercise price is above 2.90$/share with the lowest being 950k securities for 2.51$/share. The vast majority of the options expire after 2028.
The CEO, President & Director, Ronald Andrews, bought 54k$ worth of stock on Aug 3rd, for US$1.35 per share, representing 11% of his annual salary (excluding option awards). This is his second purchase this year after buying over 61k$ at 2.26$/share in Mar 30th.
This activity was followed by the CFO, COO and CAO. Albeit all these purchases represent less than 5% of their individual annual salaries.
“Show me the incentive and I will show you the outcome.” – Charlie Munger.
Total ‘skin in the game’ (author’s metric) measures the current unexercised options as a factor of the insider’s annual salary plus bonus:
• CEO has unexercised options worth 8x his 2020 annual salary plus bonus.
• CSO has unexercised options worth 7x his 2019 annual salary plus bonus.
• CFO has unexercised options worth 5x his 2019 annual salary plus bonus.
The author believes the above remuneration provides sufficient alignment with minority shareholders interests.
Key attention points
• Growth in onboarding of hospitals and physician accounts.
• Maintain reorder rate of 60% for DetermaRx.
• Expect quarterly cash burn below 5M$, increasingly offset by revenue growth of its two products and pharma services. Q2 cash position was 17.1M$.
• Share dilution: during Q2 company completed a 10.7M$ offering priced at market and has recently approved a new total number of authorized shares of common stock that may be issued from 85,000,000 to 150,000,000 shares.
Catalyst
• Product introduction and start revenue generation by Q3 and Q4 of 2020.
• Sales growth shall follow strong physician acceptance.
• Increased understanding from investment community that it’s no longer a R&D developer but has two commercial-stage products ready.
Note: The author is not a specialist in Oncology field nor in natural sciences for that matter.
Disclosure: I am long OCX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.