BridgeBio Pharma Surges on Positive Heart Drug News
BridgeBio Pharma (NASDAQ:BBIO) is a clinical-stage biopharmaceutical company that focuses on developing transformative medicines for patients with rare diseases. Its product pipeline categories include Mendelian, Genetic Dermatology, Oncology and Gene therapy. The company has two approved products, more than 30 programs in its pipeline and more than 30 clinical trials across the globe.
These stocks are highly volatile, move a lot in response to news, and in most cases, their fundamentals are completely disconnected from their valuations for one simple reason - most will never produce a blockbuster drug. After some positive news about one of its drugs related to heart diseases, the market is bidding BridgeBio higher as if it's going to become one of those rare blockbusters, but personally, I believe chasing this stock is a bad idea - here's why.
BridgeBio surges nearly 76% on positive news
Shares of BridgeBio closed at $32.04 on July 17, which was nearly 76% higher than the previous day, as a direct result of news that BridgeBio's experimental drug to treat a kind of heart disease showed statistically significant improvement in reducing hospitalizations in a late-stage study. BridgeBio's shares have now gained nearly 320% year-to-date, which is an astonishing return.
The company said no safety concerns were identified in patients, adding that it intends to submit marketing applications to the U.S. Food and Drug Administration before the end of 2023, with regulatory filings in additional markets to follow in 2024. The drug, acoramidis, is being developed to treat a rare disease that can lead to heart failure, the company said.
BridgeBio does have an economic moat
I won't deny that BridgeBio does appear to have a strong pipeline of rare disease drug candidates. The company has over 20 drug candidates in various stages of development, targeting a wide range of rare diseases. This gives the company a first-mover advantage in many areas, and it also provides a high degree of optionality.
BridgeBio has developed a proprietary platform for drug discovery and development that is specifically designed for rare diseases. This platform gives the company a competitive advantage in terms of its ability to identify and develop new drugs for these diseases.
BridgeBio has a strong track record of execution, having successfully developed and launched several rare disease drugs. This track record gives investors confidence that the company will be able to successfully develop and commercialize a higher than normal number of its drug candidates.
The downsides of focusing on rare diseases
Despite the positives, it is important to note that BridgeBio is still a relatively young company, and it has not yet generated any significant revenue. As such,the power of its economic moats to generate returns for shareholders are still unproven. I believe that with the company's strong pipeline, proprietary platform and track record of execution, it has the potential to build sustainable economic moats over time.
Unfortunately, investors need to consider that BridgeBio's focus on rare diseases doesn't lend itself to high profitability. The cost of developing and commercializing rare disease drugs is typically very high, which creates a barrier to entry for other companies, but it also means the profitabilty of each drug is extremely limited as there are not as many patients that will buy it compared to, say, heart disease or Alzheimer's.
Fundamentals and valuation
BridgeBio's fundamentals and valuation are key examples why I and many other value investors tend to avoid biopharma stocks, regardless of how promising any of their drug candidates might be. With GuruFocus profitability and financial strength ratings of 1 out of 10, it is clear the company is unprofitable and needs a liquidity injection in order to keep funtioning.
The Altman Z-score of -4.47 is in the distress zone, implying a bankruptcy possibility in the next two years. The company has a market capitalization of nearly $5.14 billion after the 75% surge in its stock price, and yet it reported revenue of just $69.72 million in 2022 at an operating margin of -565%.
I am also very concerned about the free cash flow trend, which is negative for the whole period of 2018 to 2022.
If the company at the very least had some funding to speak of, the outlook would be at least slightly more positive. Well-funded biopharma stocks tend to have high GuruFocus profitabiity ranks due to cash injections from fundraising, but as mentioned above, BridgeBio's balance sheet is in tatters. It has been a net issuer of shares throughout its history as well, meaning the company is continuously diluting its shareholders in its search for more cash. This isn't just a case of holding a stock and waiting for a blockbuster to take off - it's a case of constantly losing money while waiting for an uncertain future.
This article first appeared on GuruFocus.
