Weekend Update #126
Welcome to Blue Room's Weekend Update. Each week, we're sharing what companies we're researching and the what, the who and the how that we think makes the companies interesting and unique. This roundup is brought to you weekly by a group of interns, creative minds, artists and investors who believe that through best in class investing along with the democratization of financial education we can do great things together. Enjoy, Explore and Share.
The S&P 500 index ended the week 29 bps lower after inflation data came in light and weekly jobs numbers weakened. Investors also remained wary of the X-day, as party leaders continued to battle for concessions in fiscal policy and the debt limit. JPMorgan CEO, Jamie Dimon said in an interview this week that he and his staff hold a weekly “war room” meeting to discuss ways to hedge the fallout if the debt ceiling is not raised.
Currently, Republicans backing House Speaker Kevin McCarthy are fighting back against plans to raise the debt ceiling without cuts to spending, while Democrats under President Joe Biden argue that the debt ceiling must increase regardless of future fiscal policy actions. President Biden and Speaker McCarthy were set to meet today to attempt to settle the conflict, after finding no resolution earlier this week, but the second meeting was postponed.
In other areas of the market, the health of regional lenders continued to be a concern for investors, and that concern has pushed back on markets attempting surging forward on better-than-feared corporate earnings this season.
On the economic front, MBA mortgage applications rose in the week ended May 5th and Consumer Price inflation came in line with expectations on a month-over-month basis. Year-over-year, the 4.9% CPI print came in 10 bps below the expectation. Although inflation is still not near the Fed’s 2% target, sequential deflation is a positive sign.
On Thursday, initial jobless claims came in higher than expected, up 24,000 week-over-week, while continuing claims came in slightly below expectations, but up 8,000 week-over-week. Also on Thursday, the Producer Price Index (a rough proxy for future consumer inflation) came in lighter than expected. This inflation “beat” is a welcomed surprise for investors as the headline index continues to show lower rates of year-on-year inflation. PPI has stronger implications for the direction of PCE, which will be released in two weeks.
Lastly, on Friday, the University of Michigan Sentiment Survey showed that the overall consumer attitude fell well below expectations, with inflation expectations of 3.2% at their highest level since 2011.
From a high-level, it would appear that the theoretical implications of Federal Reserve rate hikes are beginning to take effect, which has caused swaps markets to increase bets on the probability of 75 bps worth of rate cuts in the back half of 2023.
In this week’s newsletter, we cover earnings from GlobalFoundries (GFS), Paypal (PYPL), ATAI Life Sciences (ATAI), COMPASS Pathways (CMPS), AirBnB (ABNB), Disney (DIS), Precision BioSciences (DTIL), Exact Sciences (EXAS), and Guardant Health (GH).
Friday’s Close (Weekly Performance)
S&P 500 4,124.08 -0.29%
Dow Jones 33,300.62 -1.11%
Nasdaq 12,284.76 +0.40%
Thank you Blue Room Analyst IAN CARTER
The Bureau of Labor Statistics’ latest CPI report for the month of April 2023 showed a 4.9% year-over-year increase in All Items—10 basis points below the expected 5.0% increase. The measure rose 0.40% month-over-month which was in-line with expectations.
Food rose 7.7% year-over-year, but the pace of year-over-year growth has been steadily declining since fall of last year, indicating that we may be “back to normal” by the end of this year. Flour and prepared flour mixes appeared to reverse this trend somewhat, posting a 17.8% year-over-year gain, above the previous month’s 17.5%.
Eggs, which posted a 70.1% increase in January, have since dropped to +21.4% year-over-year—still elevated, but also much lower than the avian-flu induced price spikes consumers saw just a few months ago.
Energy fell 5.1% year-over-year as the economy continues its lapping of last year’s much higher fuel prices caused by the Russian invasion of Ukraine. Fuel oil fell 20.2% from last year, while motor fuel and energy services fell 12.4% and 18.0%, respectively.
OVERVIEW
United States Producer Price Index YoY and MoM
PPI is a family of data that gauges the costs of production. There are three areas of PPI classification that use the same pool of data from the BLS: industry, commodity and commodity-based final and intermediate demand (FD-ID).
Finished Goods YoY~ Finished goods are goods that have completed the manufacturing process but have not yet been sold or distributed to the end user.
Final Demand ~ PPI for final demand measures the average change in prices received by domestic producers of goods, services and construction sold for personal consumption, capital, investment, government and export.
Consumer sentiment tumbled 9% to 57.7 amid renewed concerns about the trajectory of the economy — erasing over half of the gains achieved after the all-time historic low from last June. While current incoming macroeconomic data show no sign of recession, consumers’ worries about the economy escalated in May alongside the proliferation of negative news about the economy, including the debt crisis standoff. Year-ahead expectations for the economy plummeted 23% from last month. Long-run expectations slid by 16% as well, indicating that consumers are worried that any economic downturn will not be brief. Throughout the current inflationary episode, consumers have shown resilience under strong labor markets, but their anticipation of a recession will lead them to pull back when signs of weakness emerge. If policymakers fail to resolve the debt ceiling crisis, these dismal views over the economy will exacerbate the dire economic consequences of default.
good afternoon, everyone. Allow me to digress for a moment to congratulate Universal for the tremendous success of Super Mario Bros. It certainly proves people love to be entertained in theaters around the world, and it gives us reason to be optimistic about the movie business.
Now turning to our results. We're pleased with our accomplishments this quarter, which are reflective of the strategic changes we've been making throughout our businesses. We're also proud of what we continue to deliver for consumers, from movies to television, to sports, news, and our theme parks.
A few recent highlights include Marvel Studios Guardians of the Galaxy Vol. 3, which topped the global box office in its opening weekend with $289 million. The first round of the NBA playoffs was the most watched ever across Disney networks, and we've been averaging 5 million viewers throughout the first 22 games, up 15% versus the comparable point in last year's playoffs.
Precision BioSciences announced no additional delays on any pipeline projects in its Q1 2023 business update, and the azer-cel and 19B stealth cell updates remain on track for May 2023. One highlight is that we will get azer-cel data from 19 patients — including 7 patients on the low lymphodepletion regimen, in addition to the previous 6 patients treated with improved cell manufacturing processes and a mid-level lymphodepletion dose. So, the delays in the allogeneic CAR T data update from the original Q4 2022 timeline have allowed time for Precision to collect more patient data that will hopefully support positive FDA conversations for the pivotal trial. The PBCAR19B update will also have data on 7 patients at DL2 in PBCAR19B, which should give us a good look at efficacy and initial signals on durability.
In the Q1 2023 quarterly cash flow statement, the company recognized $(8) million in deferred revenue contributing to the reported $158 million in cash and cash equivalents. Depreciation, share-based compensation, and CapEx were all slightly lower than estimates, which gives confidence in the Q1 2025 cash runway projection from Precision’s management team. OpEx spend is being managed to maximize that runway, but we should expect to see some steps up in spending as azer-cel transitions to a pivotal trial and PBCAR19B as well as the first in vivo programs progress through the clinic.
The initial collaboration announcement between Precision BioSciences and Eli Lilly happened on November 20, 2020, and just a few years later, Precision is now announcing promising preclinical data from the initial Duchenne muscular dystrophy (DMD) target. As a result of the gene therapy administered to humanized mice, those treated reached 86% of the muscle power in the gastrocnemius, a main leg muscle involved in walking and movement. This means the gene therapy’s “hot spot” target and gene excision is showing initial signs of restoring almost full muscle power for those with DMD.
Not only does ARCUS seem to be executing the gene excision effectively but a gene editing strategy like this is going to give ARCUS a major leg up over other gene editing technologies. Due to ARCUS’s small size, it’s the only gene editing technology that can fit two nucleases on the same AAV vector. If a CRISPR company were to use this same strategy, for instance, they’d need to ship two different CRISPR enzymes on two different AAV nucelases — which would raise the concern of AAV toxicity if the dose is too high or low editing efficiency without enough of the therapy being utilized.
Compass Pathways released their Q1 2023 earnings results this morning. They reported a better-than-expected EPS loss of $0.57 versus the street's $0.69 estimate thanks to benefits arising from other income, foreign exchange gains and a $4.3 million R&D tax credit. Their cash position at the end of March 31, 2022 was $117.4 million—higher than the expected $115.6 million. Cash used in operating activities was $27.7 million, which gives them a cash runway of 1.1 years, extending them into early 2024.
To address the narrowing liquidity picture, the company has continued its sales of American Depositary Shares (ADSs) which it began in Q1 2023. Through March 31, 2023 they sold 157,836 ADSs, resulting in $1.6 million in net proceeds and during the second quarter of 2023, through May 10, 2023," they sold 2,824,202 ADSs, resulting in $26.9 million in net proceeds. Until the company begins to generate revenue the company expects to finance its cash needs through additional equity offerings, debt financings, government or other third-party funding, marketing and distribution arrangements and other collaborations, strategic alliances and licensing arrangements.
In terms of new incremental information, the company stated "our Phase 3 pivotal trials in TRD are now underway and on track, with treatment being administered to patients across numerous sites. With necessary approvals and licenses in place, these sites can now focus completely on training and recruitment."
The latest earnings results revealed no significant surprises and showed the the company is on track with its COMP360 clinical program.
Key Fourth Quarter Financial Highlights
Revenue of $1.841 billion, down 5.0% year-over-year.
Gross margin of 28.0% (up 4 points Y/Y) and adjusted gross margin of 28.5%.
Operating margin of 15.8% (vs. 12% last year) and adjusted operating margin of 17.7%.
Net income of $254 million and adjusted net income of $290 million.
Adjusted EBITDA of $655 million.
Cash, cash equivalents and marketable securities of $3,232 billion.
“In the first quarter, amidst a continued uncertain macroeconomic and cyclical backdrop, GF delivered solid results that are consistent with the guidance we provided in our February earnings release,” said Dr. Thomas Caufiled, president and CEO of GF. “Despite a challenging business environment, GF’s gross margins for the quarter have increased year-over-year due to our continued disciplined focus on profitability by our global team who effectively manage costs, while driving a richer mix of business to our customers. As we look into the remainder of 2023, we will continue to support our customers’ needs, by investing in capacity to strengthen our differentiated solutions, increase our focus on growing end markets and drive value for stakeholders.”
Now during the quarter, we saw a number of really positive business trends. First, more guests are traveling on Airbnb than ever before. Nights and Experiences Booked increased 19% in Q1 compared to a year ago, and we've seen our highest number of active bookers ever despite continued macroeconomic uncertainties. During the quarter, we also saw guests booking trips further in advance, supporting a strong backlog for Q2.
Second, more guests are traveling overseas and returning to cities. Cross-border gross nights booked increased 36% in Q1 compared to last year. Now we were especially encouraged by the continued recovery of Asia Pacific as nights booked in Q1 increased more than 40% year-over-year. And we saw international travel from other regions to Asia Pacific increased 160% during the quarter compared to this time last year. Additionally, cross-border nights booked to North America increased once again, with 34% of year-over-year growth in Q1 relative to 31% last quarter. And we've also seen high-density urban nights booked increased 20% year-over-year.
Third, guests are continuing to use Airbnb for longer stays. In Q1, long-term stays were 18% of total gross nights booked. And over the past three years, we've seen new use cases emerge as guests across all regions and age groups use Airbnb for long-term stays.
And finally, supply growth continued to accelerate. In Q1, we grew supply 18% year-over-year, and this is up from 16% in Q4. We saw double-digit supply growth around the world with the fastest growth in North America and Latin America. Urban and nonurban supply growth, in fact, both grew 18%.
Guardant Health was able to post a solid beat on consensus revenue expectations in Q1 2023, driven by a rebound in Development Services, continued strength in Precision Oncology test volumes, and a more favorable blended ASP thanks to a more profitable mix of products and geographies. Guardant’s newest products, such as Response, Reveal, and TissueNext, all continue to gain traction in the market and will contribute more to sales over time as they pick up reimbursement from payers.
Having already built up a suite of product offerings across the cancer continuum and with the upcoming release of the Smart Liquid Biopsy platform, Guardant can continue to gain more traction and leverage synergies in its go-to-market strategy. In the Therapy Selection portion of Guardan’t business, which makes up more than 95% of current revenues, management is guiding to reach a cash flow breakeven inflection within 6 to 9 months.
Guardant Health hosted an investor call with Key Opinion Leaders in the CRC screening field about the newly released staging data on the Guardant Shield blood-based colorectal cancer screening test from the ECLIPSE study. Participants were all positive on the role that Sheild would be able to play in colorectal cancer screening.
On the adherence front, over 90% of patients tested in real-world situations with Guardant Shield so far have completed the test, compared with adherence rates of only 40-70% among other CRC screening tests. Combined with the fact that Shield’s performance is at least on par with the FIT test, such a high adherence rate could be the key to increasing the percentage of eligible individuals up-to-date with screening to the national goal of 80%. As long as Guardant can collect high-quality data confirming these adherence rates hold in real-world scenarios to present to the USPSTF committee, Shield will have a very strong argument in its favor at a national level as well as from a physician’s perspective.
Shield’s cancer staging data that was released on Tuesday was mixed but revealed similar strengths where one could make a very good argument in favor of the test’s efficacy. At just 55% sensitivity for Stage I colorectal cancer detection, the results seemed to disappoint. However, Shield also demonstrated an outstanding 100% sensitivity rate in detecting Stage II through IV cancers. Guardant management highlighted the statistic that colorectal cancers identified at Stage I through III have a 72% to 91% survival rate 5 years post-treatment, as well as that it is very unlikely that a Stage I cancer would progress to Stage IV within the 3-year screening interval. So, based on ECLIPSE staging results, real-world adherence rates, and the planned 3-year screening interval, Shield should be able to detect nearly all colorectal cancer cases at a curable stage of the disease and save real lives that otherwise would have been lost due to low patient adherence to other screening modalities.
Today the company issued a press release this morning detailing a few updates on its clinical pipeline and financial position.
In terms of incrementally new information, VLS-01 (DMT for Treatment Resistant Depression) was on track to release Phase 1 study results in the first half of 2023. ATAI's update stated that VLS was well-tolerated in Parts 1 (IV) and 2 (OTF (oral transmucosal film)) of the on-going Phase 1 study, and now "in order to further optimize the PL and PD of our proprietary OTF formulation, a protocol amendment was implemented to add Part 3 which will explore further dose ranging. Part 2 of the study "produced generally dose-dependent increases in subjective intensity of psychedelic experience approaching that seen with IV formulation" which suggests atai will be increasing the dosage of the the OTF formulation to achieve effects equal to that of the IV formulation. The company expects to report clinical data in Q3 2023.
Aside from that, the company reiterated updates we've already learned about during the quarter, so nothing new on that front.
On the financial side, the company reported $19.3 M in R&D spend, a 12% sequential quarter decrease, and $14.0 million on G&A, an 11% sequential decrease and a 22% year-over-year decrease attributable to a decrease in VAT, other non-income taxes, stock-based compensation, accounting and legal fees, personnel related costs and D&O and other insurance costs.
atai has $249.9 M of cash and cash equivalents (this does not include the remaining $160 million of their Hercules Capital debt facility). The company reported net cash used in operating activities of $21.1 million. At this run rate, they have enough cash to carry them through the first half of 2026, long after important catalyst events have occurred, including the summer 2024 readout of Pivotal Trial 1 of the COMP360 Phase 3 study and the top-line results of RL-007's Phase 2b study in the second half of 2024.
Exact Sciences posted very strong financial results across the board in Q1 2023 and raised financial guidance for full year 2023 as the outlook improves. Screening revenue surpassed consensus expectations by 13% this quarter, delivering a solid revenue beat driven by Exact’s core growth product. The raise in screening revenue guidance means that Exact’s sales team continues to deliver outstanding growth, even despite 3-year Cologuard rescreens lapping COVID lockdowns. Between Cologuard 3-year rescreens and sales to the recently expanded 45-49 year-old-age group, Exact management is pointing to that combined business growing from around $500 million in annual revenue to over $1 billion in annual revenue in just a few years.
Precision Oncology strength was also a surprise this quarter with the Oncotype business ex-prostate reaccelerating to sequential growth after two quarters of contractions. Commentary in the earnings call was very positive on the growth outlook for the Precision Oncology business with new products such as OncoExTra and Riskguard. Management also noted that international market penetration stands at around 25% today, meaning there is still a lot of runway for the core Oncotype Breast franchise to grow into the future.
On top of the sales strength, OpEx management surpassed expectations with sales and marketing expense down 19.5% YoY and R&D expense down 6.7% YoY, so Exact management now expects to achieve adjusted EBITDA profitability for full year 2023. The adjusted EBITDA profitability delivered in Q1 2023 should go a long way to convincing investors this inflection point is a reality, with free cash flow turning positive as well.
PayPal beat on both revenue and EPS in the first quarter of 2023, reporting $7.04 billion in revenue, beating estimates of $6.98 billion, and EPS of $1.17, surpassing the expected $1.10 figure. Total payment volumes of $354.5 billion exceeded expectations of $345.4 billion thanks to growth in branded checkout of 6.5% and share gains in their unbranded processing segment. However, the company stated their adjusted operating margins would only expand by 100 basis points in fiscal year 2023, a step down from the 125 basis points they had previously guided to as a result of mix shift towards lower-margin business activity. The stock price fell about 13% following the news, but now may present an ideal buying opportunity now that it has reached 52-week lows.
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