Kite: A little reality test, and a thanks

[SaulR80683]

First let me say that I like the company, and think that they will be very successful in time, and I want to thank Bulwinkl for presenting it to the board, but I think we need a little reality testing on things like finances. Here goes:

Share count – About 50 million.
Share price – About $50
Market Cap - About $2.5 billion
Revenue – In 2015 they had $17 million in revenue. They had none in previous years. So far in 2016 they’ve had $17 million in the first three quarters. This must be all support grants, as they have product on the market yet that I know about. It puts them priced at about 150 times revenue.

Now let’s look at net income (loss) :
In 2013 they lost $6 million
In 2014 they lost $42.6 million
In 2015 they lost $101.6 million

How about 2016?
In the first three quarters they lost $43 million, $64 million, and $74 million, for a rough total of $182 million, so far. Estimates for the fourth quarter are for losses of $88 million, which would bring losses up to $270 million for the year (well more than double the losses of 2015, which were more than double the losses from 2014). That’s more than $5 per share, and more than 10% of their market cap, and a lot to make up in order to break even.

If they get approved, how soon will they start making money? Well, they are planning a “controlled” launch that will likely rely on using medical experts to educate hospitals and cancer centers about the new technology. They had originally planned to file before the end of 2016, but delayed filing to the beginning of 2017.

This is a complicated treatment, and not like giving a pill or injection. It requires that a patient’s cells be withdrawn, infused with an antigen, and then re-injected back into the patient. This is not an ordinary launch. It’s not like launching an ordinary medicine into the market.

This is the first CAR-T therapy to reach the market. It will require new marketing tactics. There’s going to be a learning curve and they will go slow to make it a positive learning curve. They plan to initially target institutions that are already familiar with the CAR-T administration process. The slow rollout is meant to be a form of quality control. That launch will target 72 institutions, including clinical trial sites, national cancer hospitals, and cancer care network centers.

As I see it, this controlled and educating launch, enlisting and training medical experts, and using them to educate hospitals, will balloon losses in 2017 (if they get approved) from $270 million to how much? $400 million? $500 million? I haven’t a clue. Hospitals will probably be activated only a few at a time, and each will try a new treatment out on just a few patients to start with, to avoid unpleasant surprises. Revenue will be trivial at first, and won’t come anywhere near covering those losses. The way I see it, chances of the stock price quintupling in price in 2017 are infinitesimally small. Investors will be looking for hiccups in the launch and evaluating a prospect for a path to break-even

I think approval by the FDA is already largely baked into the price, given the lack of bad side-effects and the high rate of improvement. I think they will be approved, and that the company will eventually be successful, but an FDA delay is certainly possible, and I would be very careful with any time-fixed instrument like a call. Just saying.

Saul

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[SaulR80683]

In their presentation they say that from when they start they will activate 20 centers in the first three months, and it will be 12 months before they have their initial 72 centers up and running. That means that it will really be a while until they are really up and running with revenue.

I discover that I was giving you GAAP losses and the non-GAAP losses were a little less:

Non-GAAP net loss attributable to common stockholders for the third quarter of 2016 was $54.7 million, or $1.10 per share, which excludes non-cash stock-based compensation expense of $19.3 million.

Cash burn for the third quarter was $54.0 million.

It is expected that the company’s cash, cash equivalents, and marketable securities of $477.1 million as of September 30, 2016 will be sufficient to fund its current operations, including planned clinical development programs, through the first half of 2018.

It’s encouraging that they have that much cash, but discouraging that they don’t expect it to carry them through to break-even.

Saul

[bulwnkl]

Hi Saul,
Thanks for giving this some thoughts. Right now everyone has to take a SWAG. Obviously, no one knows how the cash flow or costs will shake out with certainty. There will definitely be investment and there will also be progress towards positive cash flow. Look at the number for the market cap. Look at the SWAG at the drug cost and numbers of people that will be treated. I have to disagree with you that the numbers are largely baked in. I think the market possibilities for this will eventually be very large. It’s natural for companies to spend larger and larger amounts of money when working through drug trials. Phase 1 is less expensive than phase 2, and phase 3 and new drug applications are more expensive yet.

At the end of the day, the market potential is clear. I get that this is a new process, but that does not mean it is unduly complex or expensive to implement. Some of the best medical and technical solutions of any sort are simple. I’m not sure how you see losses ballooning to $400 million. If it makes you feel better to assume “balloon losses” go ahead. I have not seen where your rational is on that perhaps you could enlighten me.

Honest disagreement makes the market.

Best,

bulwnkl

[SaulR80683]

Hi Bulwinkl, I’m really not meaning to put down the company at all. I meant my appreciation of your bringing it to the board. In fact I’m seriously considering taking a tiny position in it. I’m just thinking that if they get approval they will be hiring a lot of new people, they will be setting up, or, more likely hiring, production facilities and having to monitor those, they will be sure to have hefty expensive inventory produced in advance, and stored, to make sure they can handle unforeseen demand, and they will have a lot of additional start-up cost in holding the hands of 72 centers, training and providing hand holders, travel expenses, hotels, maybe providing some free getting-started meds, and all the rest. They also have 10 or 15 other drugs in various stages of testing so all their testing costs are not going to go away. It seems to me when they advance from a testing company to a real production company, their costs have to go up, but revenues won’t keep pace at first, not at all.

I still like the concept. I still like the company, I still like the product, but I wouldn’t put more than 1% in it (more likely not more than 1/2 of 1%). There are still a lot of things that could go wrong. Just for instance, if the medicine kills 50 people out of the first thousand outright (I doubt it will, by the way), it could easily have missed all of the first 92 that they did their study on. That’s the way statistic distributions work, so don’t bet the family farm on it. That’s all I’m saying, and certainly don’t expect them to be profitable in 2017, or even in 2018. Although they certainly could get acquired pretty fast. And 5x their market cap in one year, would give them a market cap of $12.5 billion. My god! Celgene, with all their established large selling medications is only 7 times that. And this would just be Kite’s first approved treatment, just getting started, with just 7400 patients in the US. Did you see the press release about the China deal from 5 days ago? They figure China has 10 times as many cases per year as the US. They formed a partnership in which they gave up 50% ownership and 60% of the profits in exchange for $40 million dollars and commercial milestones totaling $35 million, plus low single digit royalties on sales. Does that sound as if they have stars in their eyes and are thinking in multibillions of dollars?

Thanks again, and sorry for any misunderstanding,

Saul

[bulwnkl]

Hi Saul,
Thanks for the clarification and kind words. Sorry I misunderstood your intent. I did the valuation off of the cost of “similar treatments” and volume and, this is where I have no idea, but a guess at a 50% margin. That last assumption could be absolutely horrible. So things could be considerably worse. The license in China concerns me. I HATE that foreign governments get cheap drugs, while US citezens foot the bill for the world’s pharmaceutical research. I would like to see more balance to that equation.

If the FDA does its job, there should be a lot of latitude on safety if the efficacy holds up. 43% remission for people that may die soon weighs heavily in favor of Kite. So if we save 430 out of 1000 but loose two, does it go forward? I think it should. If I needed the therapy, I would want the opportunity to try. I think most people would be prepared to take the risk rather than face a high risk of death.

I am looking at the option as a cheap way into a stock that I hope to hold for a few years, but not risk a lot of capital up front. I don’t have the the temperament for your investing, but I have adopted some of your principles and had an uptick in my returns as a result so I thought I would share a peak into an occasional strategy of mine.

Best,

bulwnkl

PS I bet you 3 pounds of Wisconsin’s finest cheese that Kite, at a minimum, doubles in the first month after approval vs. whatever delicacy you New Yorker’s find equivalent.

[iVish]

First let me say that I like the company, and think that they will be very successful in time, and I want to thank Bulwinkl for presenting it to the board, but I think we need a little reality testing on things like finances. Here goes:

Share count – About 50 million.
Share price – About $50
Market Cap - About $2.5 billion
Revenue – In 2015 they had $17 million in revenue. They had none in previous years. So far in 2016 they’ve had $17 million in the first three quarters. This must be all support grants, as they have product on the market yet that I know about. It puts them priced at about 150 times revenue.

For a biotech with little or no revenue stream, this is largely irrelevant. The main risk is, do they run out of money before they can bring something tangible to the market. If not, then the stock will probably be trading in the single digits, hardly at a $2.5B market cap.

Now let’s look at net income (loss) :
In 2013 they lost $6 million
In 2014 they lost $42.6 million
In 2015 they lost $101.6 million

How about 2016?
In the first three quarters they lost $43 million, $64 million, and $74 million, for a rough total of $182 million, so far. Estimates for the fourth quarter are for losses of $88 million, which would bring losses up to $270 million for the year (well more than double the losses of 2015, which were more than double the losses from 2014). That’s more than $5 per share, and more than 10% of their market cap, and a lot to make up in order to break even.

If they get approved, how soon will they start making money? Well, they are planning a “controlled” launch that will likely rely on using medical experts to educate hospitals and cancer centers about the new technology. They had originally planned to file before the end of 2016, but delayed filing to the beginning of 2017.

Again, the current loss is essentially the money they are burning to bring a drug out to the market. If there is a drug that is showing good indications and is approved in the market, then the question is, whether this drug will become a blockbuster. Also, a controlled release is not going to matter, because the growth will be very strong and will come for years or even decades. What the approval does is, 1. It gives the company a revenue stream. So they don’t have to depend on external funding for money and 2. If they have other promising drugs in the pipeline, it helps put money in those for bringing them to the market.

How do you think the big drug companies like Celgene, Regeneron, Gilead etc. became this big? The revenues from this will make them money and can bring a lot more drugs to the market. So if this company is really successful, then it can become very big as well, like the others. At that point (before it becomes too big), there is a very good chance it will get picked up by one of the bigger players at a significant premium. However, having said that, even with the efficacy and safety data that we know of right now, the probability of this succeeding would be pretty low. If I had to put in the chances of success, I would peg them at 20 – 25%. This is partly the reason why these events are binary and the stock can respond so much to any positive news. So when you say, size your position to 0.5 – 1%, that is appropriate. Going lower than that is also appropriate. If you lose, you can lose your entire investment, but if you gain, this 0.5% can turn into a bigger percentage of your portfolio, without you doing much of the heavy lifting.

This is a complicated treatment, and not like giving a pill or injection. It requires that a patient’s cells be withdrawn, infused with an antigen, and then re-injected back into the patient. This is not an ordinary launch. It’s not like launching an ordinary medicine into the market.

This is the first CAR-T therapy to reach the market. It will require new marketing tactics. There’s going to be a learning curve and they will go slow to make it a positive learning curve. They plan to initially target institutions that are already familiar with the CAR-T administration process. The slow rollout is meant to be a form of quality control. That launch will target 72 institutions, including clinical trial sites, national cancer hospitals, and cancer care network centers.

As I see it, this controlled and educating launch, enlisting and training medical experts, and using them to educate hospitals, will balloon losses in 2017 (if they get approved) from $270 million to how much? $400 million? $500 million? I haven’t a clue. Hospitals will probably be activated only a few at a time, and each will try a new treatment out on just a few patients to start with, to avoid unpleasant surprises. Revenue will be trivial at first, and won’t come anywhere near covering those losses. The way I see it, chances of the stock price quintupling in price in 2017 are infinitesimally small. Investors will be looking for hiccups in the launch and evaluating a prospect for a path to break-even

The stock price quintupling is a pipe dream. It can happen, but I am with you that it will not. A double is quite doable. Also, for people considering options, going out of the money (OTM) may be very profitable, if the stock price really responds in kind to the binary event. To protect against any down side, an alternative option strategy could be to buy ratio spreads. 2 OTM calls (perhaps a $65 or $70 strike) and also buy 1 OTM put (perhaps a $30 or $35 strike). If the stock corrects 50% or goes up 100%+, then you could make money in either direction, but also protect the money you are paying. The risk of course is that the stock does not move as much and you lose both ways.

I think approval by the FDA is already largely baked into the price, given the lack of bad side-effects and the high rate of improvement. I think they will be approved, and that the company will eventually be successful, but an FDA delay is certainly possible, and I would be very careful with any time-fixed instrument like a call. Just saying.

I don’t think the FDA approval is baked into the price. As I said above, even with the favorable data, the chances that this company succeeds is a relatively low probability. Human biology is very complex, and it does not take much for the FDA to reject the drugs based on data that may not be openly available. JUNO is still struggling with the deaths, but again the patients that are given this treatment are terminal patients and anything else can cause inadvertent effects and can be blamed on the drug. Having a favorable safety data here definitely is advantageous.

Vish

[SaulR80683]

Well I took my 0.5% position in KITE. And if I lose half of it, or even all of it, it won’t kill me. And if the company is a success it could be worth a lot more in a few years. This is not an investment, it seems to me. It’s play-money. The reason I’m even doing it is that this is an entirely new class of medicines that could, theoretically, revolutionize cancer therapy. We’ll have to wait and see.

Saul