Buying stock in young biotech companies is, obviously, inherently risky; most of the time it involves investing in an unproven drug or technology, with an unproven market. As if that wasn’t enough, there is also always the possibility that the company will run out of funds as they wait for that anticipated revenue and issue more stock, thus diluting the early investor’s holding. Of course, where there is risk there is the possibility of reward, as amply demonstrated this morning by Bluebird Bio (BLUE). As biotech companies revolutionize healthcare even one successful product with a large target market can result in exponential gains.
An investment in a company, therefore, that has significant upside but where at least one of those risks is minimized, if not eliminated, is very tempting. That is why FibroGen (FGEN) is of such interest and in large part why Stifel, for one, have today initiated coverage with a “Buy” rating. FibroGen does not have enormous cash reserves, nor does it have an already marketed blockbuster generating revenue. What it does have is partnership agreements with AstraZeneca (AZN) and Astellas that look like funding ongoing operations until their lead drug Roxadustat does start bringing in money.
That drug is an oral treatment for anemia, particularly for those undergoing dialysis. Stage 2 results suggest great efficacy and the potential for significant cost savings over existing alternative treatments. There have been no reported safety issues so far, but the biggest risk going forward is that the much broader Phase 3 trials unearth adverse reactions. That, of course is an ever present risk in early biopharmaceutical companies, but those partnerships are worth $2.6 billion in upfront and milestone payments, virtually eliminating funding risk.
Cash like that doesn’t come without giving up significant potential future revenue, of course. Eventually, FibroGen will receive around 20 percent of the revenue from sales of the drug in most cases. That is no small amount given a market approaching $13 billion annually, but it is the one exception to that 20 percent number that represents the biggest upside to FGEN. In China, FibroGen’s deal with AstraZeneca represents a 50/50 split of future revenues. Approval of the drug there is by no means certain, even if it is accepted in other major markets so there is an additional element of risk, but the potential rewards on that deal add the juice to the investment.
As you may have noticed, the word “risk” keeps coming up. If you are not prepared for that then FGEN is not for you. While this can be controlled somewhat, the lack of liquidity and sensitivity to news that this kind of stock represents makes stop losses an imperfect vehicle. If things don’t turn out as expected then the likelihood is that FGEN would gap through any stop loss level that you might pick.
Despite that and a recent jump, FGEN is still a decent investment for those who can handle the potential for loss. Stifel are the first to initiate coverage on the stock and, as others follow, it is likely that more will become familiar with the story and see the potential. This is the real play here...getting in front of a speculative move. The ideal scenario is that such a move comes and investors are able to sell some of their original position for a profit, thereby reducing the effective cost basis of the remaining shares. In that way it is possible to reduce the risk on a risky investment to a manageable level.
Whether you decide to trade into a better position, though or just buy, hold and hope, the fact that some favorable partnership agreements have reduced the risk of dilution in the future makes this particular young biotech opportunity more attractive than many.