Updated: Nov 8, 2021
Optifinancial Newsletter - Knowledge is power - Brad Mitchell
This is not financial advice nor recommendations. This is purely our own thoughts and opinions regarding the matter discussed below for entertainment purposes. This is not advice and is never intended to be.
Progenity | $3.46
Exactly why fundamentally this stock is worth $25 (without technicals)
Why use Progenity's products over existing competition?
Recent buyout speculation & thoughts on Ms. Jill Howe
Rational Value comparison to another Biotech (AUPH)
My personal price targets and forecasting
Progenity’s fundamental base value is $25
Here’s a simple analysis which gives you a mathematical & fundamental reason why Progenity is undervalued by the market.
Quick snapshots and descriptions of the spreadsheet below:
Above shows that Preecludia is worth about $2.22-$5.55 to Progenity's stock price with the annual revenue it can bring in. Sources and equations are in the spreadsheet.
Here I took the market valuation of each industry that Progenity is actively pursuing, and took the total sum of them and then forecasted that Progenity will be used in 20% of the sum total. (You could argue that each percentage may be different because of the varying nature per market, however I am keeping it extremely simple). After that, I again took 26% of the possible revenue by using the standard 26% pill manufacturers receive from making the drugs. This lead me to Progenity reaching $3.2 Billion a year in annual revenue. I did not include future growth of the markets, this has room to run even higher. Keep in mind, Progenity has stated they have targeted a $250 billion and not a $61 billion market which I am writing over.
Below shows the added values of Preecludia and the Tech pill as the total share price of Progenity. This shows that Progenity is very undervalued at the moment:
Below are some of the assumptions I made to help you understand where I am coming from on the value analysis:
Thoughts on the Fundamental Value Analysis:
From the analysis, we get a current stock price valuation of $25 a share. I think the market has severely misunderstood Progenity’s value. The current relationships and directions that they are moving towards indicate a massive reevaluation of their stock price.
Progenity commands more value because they are opening a whole new market inside of the medical industry. They can’t be valued like a normal biotech. They have a technology that can seriously impact the healthcare industry. Think about treatment of many diseases, a lot of the medication is given orally. What if it became the standard of care to precisely ingest medication with an exact amount vs guessing when and where the drug may get absorbed? What if you could precisely target the best place for uptake of the drug in the GI system all the while taking diagnostics of the health of the person in real time. I could see even pre-check colonoscopy becoming a service. If this is your first time looking at Progenity look at this article first for a video on the tech pill. More below:
Progenity’s Tech Pill (OBDS & DDS2), why use it over regular pills?
Some of the partnerships between Pfizer, Abbvie, Amgen, NovoNordisk & Eli Lily are not confirmed, but these are the companies that Progenity can help aid in pushing the envelope in healthcare. In my analysis I have treated Progenity like a pill manufacturer where it is common that they receive 26% of the revenue. However, Progenity doubles as an additional tool in effectivity and safety, so one should expect a bit higher percentage of revenue. Progenity’s pill uses liquid and this is where they differ from other pill manufacturers. They are more than the average gel pill. They can actually increase the efficacy and safety profiles of some drugs by injection at a specific point in the GI tract. Normal pills do not have this feature. They typically have a hard casing that survives the stomach acid and then releases over the rest of the GI tract. This current method is inefficient. Progenity’s method is visibly much more efficient. For example, using Tofacitinib (Pfizer’s drug Xeljanz), Progenity showed in a study that they had over 25x more of the drug on the target location and showed that the toxins in the body were much less than the current standard of care. This means in layman terms, that the Tech pill has much more ability to improve the efficacy of drugs and safety which will help patients in treatment better. This will keep patients healthier and allow biotechs to innovate with harsher drugs that are not normally accepted.
A widely overlooked factor about Progenity’s pill is they allow large molecule drugs to be taken orally. This needs to be taken more seriously by the market
What are large molecules and what does this mean?
Large molecules include: monoclonal antibodies, vaccines, cell and gene therapies, as well as proteins obtained from blood plasma and recombinant therapeutic proteins. They are used in treatments for many different diseases including cancer, diabetes, and rheumatoid arthritis and thanks to their efficiency, they are among the top ten best-selling drugs in 2020, according to Nature magazine. And they are just getting started. Think about it, the top 10 drugs in this chart are Large molecules. Does that tell you where medicine is going? I think so. By the way, humira (top on the list) is a product called Adalimumab that is made by Abbvie, a potential partner with Progenity. Progenity has rigorous studies on Adalimumab as well.
Large molecules often require around 1000’s of steps to deliver the drug to a very specific part of the body. I believe Progenity has a way to capitalize on this rapidly growing industry because before, there was no way to deliver large molecule therapeutics orally precise uptake is typically impossible through the gut due to the inability to target the uptake area called the Jejunum (small intestines). This is why 90% of oral drugs are small molecules which have been around for 100’s of years. Large molecules are more complex and are quickly becoming the leading way to direct drugs to target specific points in the body and perform specific tasks. Gene therapy such as Crispr technologies and others may start to look at this company as a way to gain access. Look at the current partnership with Ionis Therapeutics which is held by an institutional investor I follow: Cathie Wood. Ionis is their 5th top holding in their ARKG ETF. If we see success with Ionis's products and Progenity's pill, I could see this establishing further market potential into CRISPR technology. Progenity would be the first and only platform that could allow large molecule crispr cas9 gene editing to be uptaken orally through the small intestines. The value of this market is emerging, right now it is worth 4 billion in revenue world wide, however it is expected to grow tremendously in the next few years.
Preecludia (Preclampsia rule out test), Why even take the test?
This blood test will rule out a condition known as Preeclampsia in pregnant mothers. Around 700,000 in the US alone show signs in their 2nd Trimester. This information is vital to know early as doctors can give them early preventatives and take measures to act faster to make sure that this condition does not end in a fatality. This is why I think prenatal doctors will add this to their check up list. It will increase the effectiveness in their care regime.
Currently there are urinary tests that have a low chance of having correctness. Preecludia is the only test on the market that has biomarkers in the blood that gives accurate information regarding the Preeclampsia medical condition.
Buyout Speculation and buyout price:
Recently Marketbeat published an article talking about partnerships with Pfizer and Abbvie. If this is the case, that’s very essential news which validates Progenity’s product line. A partnership with these companies may reveal further interest in the biopharma buying the PROG outright. The main advantages are that big pharmas would experience an innovation gap amongst their competition and will be able to sell some of their drugs with better efficacy/safety profiles. This means the buyer would take the lion’s share of the market in areas the Progenity's pill services.
Buyout Price Target:
From my earlier analysis, if Progenity was to be bought out, I think it would be bought out for a 114% premium on their basic fundamental market value ($3.5 Billion) which I believe Progenity will rise to at some point in the future, which equates to 7 billion or $55.54 a share. This may happen within a year. Take a look at RnD stage biotech premiums on their underlying share price in the past few years. They seem to be on average around 100% of their value:
Keep in mind that this data above was taken from the specific market value it was in the market at the time the companies were bought out and not my fundamental base value. The takeaway here is showing how RnD buyout premiums such as Progenity are higher due to the variance in value. They can be bought out at 800% premiums - Example below:
Here is Immunomedics price chart pictured below before to the day they were acquired:
The pictorial above shows IMMU’s history and as you can see they were valued at $2-3 a share before people and others started to pick up on the value and potential for a buyout. They were later bought out by Gilead Sciences for $21 Billion or $87 a share.
Ms. Jill Howe - The Deal Closer
Progenity also has a new member on their team. Ms. Jill Howe. She was given 76,754 shares to help Progenity. She is a board/chair member and her function is to be on the Corporate Governance, Nominating and Audit committee.
She essentially can help govern Progenity’s future and can put deals together which may include partnerships and acquisitions. She has a resume full of these types of deals.
Jill’s statement in the press release:
“It’s an exciting time for Progenity as there is incredible depth and potential in the R&D pipeline,” said Jill Howe. “I look forward to working with the team to ensure the company’s potential is valued.”
Her statement tells me directly that they are aiming to be bought and her purpose of being added to the Progenity team is to ensure the potential value. In other words, analyze what they are worth and prove to other companies that they are worth that specific amount. I think $7 billion. It will be interesting to see the future in regards to her work in the company.
The Deal Closer’s (Jill Howe's) resume:
20 years of experience in the biotechnology sector in operational and financial strategy, treasury, global infrastructure, and compliance management
Is the Chief Financial Officer for DTxPharma and serves on the Board of Directors for Codagenix and the MUSC Foundation for Research Development.
Prior to joining DTx, Ms. Howe served as Treasurer and Vice President of Finance for Gossamer Bio, a clinical-stage biopharmaceutical company, where she was the internal project lead for the company’s initial public offering, follow-on, and debt offerings, and oversaw finance for 18 subsidiaries across the U.S. and Ireland.
She previously held Controller and Director of Finance roles at Amplyx Pharmaceuticals, This company was acquired by Pfizer and she was in the main role of selling the company.
Previous Controller and Director of Finance Receptos
Previous Controller and Director of Finance Somaxon Pharmaceuticals
Ms. Howe received a Bachelor of Science in Accountancy from San Diego State University.
Final thoughts on Jill: She will be the 3rd party person who is fresh to the scene and can properly value the company to help negotiate a good partnership deal or acquisition. Ms. Jill Howe, if you are reading this at some point, I hope you can use some of this research as guidance for valuing Progenity.
Upcoming earnings and what to expect:
My thoughts on this are that we should expect a lower cash burn than in Q2. I think that the focus should be on their cashburn. Because Progenity cut the company in half and have been reducing debt since June, I think this won’t show too much yet. I think they will have a cashburn of around 22 million. For their Q3 results (July,August & September) we should expect to see signs of cash burn reduction due to the business cutting half their employees and closing down their facilities.
I see them reaching a quarterly cashburn of 12 million by Q1 2022. If we see this trajectory and they update us with their forecasted guidance on this, we should see the stock rise substantially because this extends their business runway. Even if they dilute, they essentially are buying much more lifetime as a business. This scenario will be very beneficial to the share price.
Do not expect anything material from their corporate update on partnerships. I'd expect that they will share that late Q4. They recently pushed their earnings back about 2 days. Normally they'd have it on Monday however it is on November 10th Wednesday after market close. I think this was due to the recent Precision Oral Drug Delivery (PODD) partnership conference. I think they were busy working with some of the attendees last week. They had some noticeable names attend: NovoNordisk, Pfizer, Leo Sciences, Gentech, Takeda & Roche.
It would be a surprise to hear about a new partnership or a lift on the Preecludia topline data embargo.
Rationality and sanity check using another Biotech and comparing values:
Aurinia Pharmaceuticals (AUPH) is a small Canadian based drug company that has recently gotten their only drug approved in their pipeline. It is an effective drug that treats Lupus Nephritis. The expected peak earnings a year for the drug is around 1 billion a year. The stock is trading around 4.1 Billion in market capitalization. This may be due to the recent buyout possibility of Bristol Myers Squib (BMY) buying them. However it is important to see how biotechs can be 4 times in their market cap of their expected peak earnings.
Progenity could possibly have a peak earnings potential of 3.2 Billion a year. Then we can loosely compare the 4x market cap (extrapolating from Aurinia’s situation) in a possible buyout scenario to be 12.8 Billion or $94.75 a share for Progenity! This is just a rational approach by looking at another company and comparing. Of course you can’t make this the reliable approach to saying Progenity can hit $94 a share, however, it aligns me in the thinking that it is rational and possible. Aurinia is arguably a bit different because they are selling a drug to a niche set of patients, (100,000 people/yr) and they do have better financials with ~300 Million cash on hand and no debt.
I will be posting more on this, but we should have more clarity on the probabilities of dilution after the earnings release on Wednesday 11/10 after the market closes. I think a good rule of thumb is to watch to make sure the cash burn is below the last quarter (Q2) cashburn of $48.5 Million.
I believe we will see 22.5 million ± 5 million reported, (27.5 being the highest and 18.5 being the lowest cashburn). When the report releases look in this section circled in red so you can see their net cash flow:
Price targets | Current Price: $3.46
3 Month Price Forecast: $17-56
Within a reasonable amount of time, we should see Progenity move above their initial public offering price. It takes time and as the market catches up, the stock lays in low visibility and seems to be undesirable due to the non-attention. Since I spoke mostly about the fundamental value, and nothing about the short squeeze and chart technicals, The price can sway higher beyond expectations. Knowledge is power so keep it tight and stay strong through the weather!
Final thought on PROG: Progenity has a high probability of appreciating. The company has been executing and has hired the right people. The tough decision to cut half the company and become lean in June I think will pay off. Their financial position is in a much better place from a few months ago. They have also cut their debt in the recent dilution by 38% which is something to note. The PROG community/awareness is just reaching escape velocity and we should see solid growth in the market capitalization near term.
A fun video below that I made, this is a shout out to the growing reddit communities: r/Progenity_PROG & r/Shortsqueeze that have been passionate about this company. Their due diligence and work has been amazing to watch, grow and learn from! Very smart people and it's been great seeing all of the different perspectives. The Frog emojis are used as the representation of community. 🐸
You never know what's inside unless you take a close look!
Disclosure: We do own PROG securities/shares at the time of publication.
All stocks talked about we have invested in, and do not intend to give advice nor recommend acting upon the information.
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Until next week,
and the Optifinancial Team
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