Weekend Update #139
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.
Despite a relatively mild CPI readout this week, markets continued their march downward from highs reached in late July. On Thursday, the Bureau of Labor Statistics released the Consumer-Price Index (CPI) for the month of July. On a yearly basis, headline inflation rose 3.2%, slightly lower than the 3.3% expected by economists. Core inflation rose 4.7% on a yearly basis, in line with expectations. According to the Labor Department, home price increases accounted for more than 90% of the overall CPI increase – a sign taken by some that the Federal Reserve is nearing the end of its interest rate hiking cycle as housing prices are a lagging indicator. Swaps markets are now pricing in only a 33% chance that the Federal Reserve will hike rates by another 25 basis points this year.
Friday saw releases for both the Producer Price Index and University of Michigan’s Consumer Sentiment Report. Producer-price inflation saw its first increase in three months, surprising to the upside. The PPI excluding food and energy increased 2.4% on a yearly basis – just above the 2.3% expected by economists. However, any negativity from that report was largely canceled out from a positive Consumer Sentiment reading. Despite preliminary consumer sentiment decreasing on a monthly basis, one year inflation expectations unexpectedly decreased, falling to 3.3% – below the expected 3.5%.
Turning to commodities, oil continued its tear upward. The West Texas Intermediate benchmark reached nearly $85/barrel on Wednesday – a nearly 25% increase from its bottom in mid-June. The International Energy Agency said that global oil demand surged to a record 103 million barrels per day in June – and may even soar higher in August – as demand was boosted by strong summer air travel, increased use in power generation and surging Chinese petrochemical activity.
With respect to company-specific news, Eli Lilly reached an all-time high after an incredibly robust earnings release on Monday that shot the stock up 17%. Lilly was boosted by ever-growing confidence in its weight loss drug, Mounjaro. The Walt Disney Company, who released earnings on Wednesday, saw continued declines in subscribers for Disney+; subscribers totalled 146 million, a 10% decline from the maximum count reached during the fourth quarter of 2022.
In other significant news, Nobel Prize winning economist Paul Krugman shared his perspectives on whether or not we are alone in the universe. He said he believes that it’s “extremely unlikely” that there isn’t some other life form somewhere else in the universe. Krugman, who once wrote an economic paper titled A Theory of Interstellar Trade – which examined the challenge of charging interest on goods shipped across the galaxy given that the passengers on any spacecraft traveling near or at the speed of light would experience time in a different way than those on their home planet – can be thought of as an expert in the field of alien economics. In the event of intergalactic conflict, Krugman concluded “I think that we can say it…almost surely would be inflationary.”
Weekly Performance
S&P 500 4,464.05 -0.61%
Nasdaq 13,644.85 -2.34%
Dow Jones 35,281.40 +0.44%
Thank you Blue Room Analyst SPENCER WOOTTEN
— Earnings Highlights —
Today the company issued a press release detailing several updates on its clinical pipeline and financial position. The Phase 2b study for RL-007, a neuromodulator targeting Cognitive Impairment Associated with Schizophrenia (CIAS), is on track for a readout of topline results in the second half of 2024.
VLS-01 (DMT) for Treatment Resistant Depression (TRD), is currently in Part 3 of its Phase 1 study evaluating safety, tolerability, PK and PD of the compound delivered by IV and by atai’s proprietary oral transmucosal film (OTF) formulation. Additional clinical data will be reported in Q3 2023.
EMP-01 (MDMA) for Post-Traumatic Stress Disorder, is undergoing its Phase 1 study, has completed enrollment, and atai expects to report initial data in Q4 2023.
Atai reported initial Phase 1 results for DMX-1002 (Ibogaine) for Opioid Use Disorder. They demonstrated that oral doses of DMX-1002 at 9 mg/kg achieved plasma concentrations in line with those described in previous studies in which subjects reported psychedelic experiences and obtained therapeutic benefit in OUD. There are well-known cardiac risks associated with ibogaine, and this study confirmed that. One patient experienced QTc prolongation that reached levels near those seen at the 10 mg/kg dose seen in published literature. The patient was asymptomatic, with no cardiac arrhythmias, and the QTc change resolved without intervention or sequela. While QT prolongation is a clinical risk, monitoring can help mitigate the risk to ensure patient safety, especially in medical settings.
COMP360 (Psilocybin) for TRD is currently in its Phase 3 trial which is comprised of two pivotal programs—COMP005 and COMP006—both are “on track” and the former of which is expected to readout topline results in the summer of 2024.
GRX-917 (Deuterated etifoxine) for Generalized Anxiety Disorder (GAD), reported Phase 1 results in January which demonstrated it was well-tolerated, had no dose-limiting toxicities, an improved PK profile relative to non-deuterated etifoxine, a statistically significant increase in beta power, a market of potential anxiolytic effects comparable to that seen with exogenous neurosteroids and benzodiazepines, yet does not reduce alpha power, a marker of potential sedative effects.
Atai has $227.5 million of cash and short-term investments and net cash used in operating activities was $22.6 million in Q2 2023. At this run-rate, the company has about 10 quarters of cash runway remaining, or approximately two and a half years, which is enough to fund operations in 2026 (this does not take into consideration the remaining $160 million remaining in the debt facility provided by Hercules Capital.
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.
Executive Summary
TTWO shares are expected to remain range bound in the second half of the year as the company works through a transitional period following its acquisition of Zynga. The macroeconomic backdrop has been unfavorable for the business which is expected to have minimal growth in consumer spending for Console and PC, while mobile trends are projected to remain stable with Zynga’s ad business continuing to deliver growth. The company has reiterated its confidence in its development pipeline and cost synergies, with major game releases coming in FY2025 which are expected to be a positive catalyst for the stock.
Executive Summary
Eli Lilly posted a historic one-day price increase after sales of Mounjaro rose 6,023% YoY in Q2 2023 and a competitor readout of Novo Nordisk’s SELECT study showed significant benefit of GLP-1 drugs on cardiovasular health, the number one cause of death in the U.S. — strengthening the case for reimbursement wins for the obesity drug. Excluding the sale of Baqsimi, which was recorded as revenue in the Diabetes franchise, Lilly revenue came in line with expectations at $7.492 billion, driven by strength in the Mounjaro launch but weakness from Trulicity, Humulin, and Basaglar. Encouragingly, only 13-14% of Mounjaro prescriptions are comprised of previous Trulicity patients, meaning sales cannibalization is minimal. Lilly significantly pulled forward R&D and MS&A expenses during the quarter, leading to a slight beat in earnings expectations, but a lowering of expense outlook for the full year and a raise in earnings guidance. This means Mounjaro strength is giving management the flexibility both to step up investment in the pipeline as well as a lever to pull to rein in expenses if they need to boost earnings. Either Lilly is pulling some levers here to increase realized prices on Mounjaro given the historic demand and supply constraints or there are a lot more patients getting Mounjaro doses than are being tracked. No matter the exact driver, these dynamics lead investors to believe that the Mounjaro sales ramp will be even better than the already high expectations going into the quarter.
Executive Summary
On August 8, Beam Therapeutics released their second quarter 2023 financial results. Beam elected not to conduct an earnings call – as has been the norm for more than a year – given the fact that the company has little to report on with respect to business updates. Beam continues to expect reporting initial data on three patients from its SCD clinical trial in 2024. Beam has also begun enrollment for its Phase 1/2 clinical trial of BEAM-201 for its CAR-T product candidate and hopes to dose the first patient this quarter. Despite being years away from commercialization, Beam remains well capitalized with $1.1 billion in cash and cash equivalents – enough to fund operations well into 2025.
The most significant aspects of the earnings release:
i.) Beam quoted a recent paper published in Nature Genetics that provided evidence that base editing is both more potent and safer when compared to nuclease editing – implying that older nucleases (such as Cas9) might become obsolete for certain therapeutic cases in coming years as stronger and safer technologies enter the market and are proved best-in-class.
ii.) Beam continues to take an incredibly slow approach to treating patients. It has yet to dose a patient in its BEACON trial, meaning clinical data is likely more than 12 months away. Beam was founded in 2017, went public in 2019, and has yet to dose a single patient.
iii.) There are no meaningful catalysts for the company expected this year, aside from updates on efforts to enroll patients in preliminary trials with incredibly small sample sizes.
Key Second Quarter Financial Highlights
Revenue of $1,845 million (down -7.43% y/y, flat +0.22% q/q)
Gross margin of 28.8% (last quarter: 28.0%; last year: 27.0%) and adjusted gross margin of 29.6%
Operating margin of 14.9% and adjusted operating margin of 18.3%
Net income of $237 million and adjusted net income of $297 million
Adjusted EBITDA of $668 million
Cash, cash equivalents and marketable securities of $3.3 billion
"In the second quarter, GF delivered financial results at the upper end of the guidance ranges we provided in our May earnings release" said Dr. Thomas Caulfield, president and CEO of GF. "Despite the cyclical headwinds impacting our industry and continued macroeconomic uncertainty, we delivered consistent financial performance and generated $146 million of free cash flow in the quarter, as GF’s global teams diligently managed costs, while driving differentiated solutions to meet our customers' needs, across several critical growth markets."
Recent Business Highlights
GF and Lockheed Martin announced a strategic collaboration to advance U.S. semiconductor manufacturing and innovation and to increase the security, reliability and resilience of domestic supply chains for national security systems.
The U.S. Department of Defense accredited GF’s advanced manufacturing facility in Malta, New York, as a Category 1A Trusted Supplier with the ability to manufacture secure semiconductors for a range of critical aerospace and defense applications.
Executive Summary
Despite missing on topline revenue, DIS beat adjusted EPS estimates as the company’s cost saving initiatives are expected to exceed initial expectations. DTC continues to show material sequential improvements in operating losses that put it on path to achieving profitability in FY2024. Parks continue to perform strong as travel remains resilient and as international parks improve from closures last year.
Valuation
FY2023 Adj. EPS: 23.4x $3.74 expected vs. consensus est: $3.76
FY2024 Adj. EPS: 14.7x $5.97 expected vs. consensus est: $5.08
Details
The big drop in subscribers came almost entirely from Hotstar as the company restructured its product offering following the loss of IPL rights. Core subscribers modestly grew 800,000 in the quarter, and the company expects to see net adds to rebound both domestically and internationally in Q4. DTC operating loss decreased $147 million sequentially to $0.5 billion due to a lower loss at Disney+, higher operating income at Hulu and a lower loss at ESPN+. The company also disclosed that it gained 3.3 million ad-tier subscribers since launch, with 40% of new subscribers opting for the ad-supported subscription. Due to increased demand from advertisers on Hulu and the continued ramp up of the Disney+ ad tier, DTC advertising is also expected to partially offset the decline in Linear which is a positive development.
The company is planning to launch ad-tiers in Canada and Europe in November while increasing its domestic premium subscription for Disney+ and Hulu by 20%+ in October. The initial advertising launch and price hike in the U.S. resulted in a $1.19 (20%) sequential increase in ARPU, despite seeing minimal churn, which gives an indication of the potential impact in calendar Q4.
The company reiterated its intention to move to a unified streaming experience, and it estimates Comcast’s share of Hulu at $9.2 billion. With $11.5 billion in cash and $10.5 billion in revolving credit facilities, the company feels they have a strong enough balance sheet to complete the deal in January.
On August 4, Bloomberg News reported that US employers in struggling sectors – such as manufacturing and transportation – are reducing worker hours rather than resorting to aggressive job cuts. Manufacturing and transportation are “among the industries struggling for traction as many consumers change their spending patterns from goods back to services. US factory activity has now contracted for nine months and freight activity has slowed.” However, despite these clear headwinds facing managers in these beaten-down industries, they are taking a cautious approach to their labor management. While manufacturers and transportation firms alike have largely scaled back hiring plans since last year, employment growth in those industries has merely stagnated. Bill Adams, chief economist for Comerica Bank, commented that “while business has slowed in some industries, employers are largely reluctant to let workers go out of fears that rehiring may be difficult when the economy accelerates…That’s translating to a pullback in the average workweek.” To illustrate this point, for US employees working in manufacturing, the average weekly hours for the month of July hit 40.6 – the lowest reading since early July 2020.
But manufacturing, transportation and other struggling industries aren’t the outlier, but rather the norm with respect to their current labor practices. According to a survey of roughly 670 entrepreneurs conducted for the Wall Street Journal by Vistage Worldwide, a business-coaching and peer-advisory firm, only 7% of small business owners intend to reduce their workforce this year.
To this end, businesses across the country are choosing to decrease hours as opposed to letting go of workers. In the July 2023 Employment Situation report issued by the Bureau of Labor Statistics, it was found that decreases in hours worked are commonplace throughout the economy. Since peaking at 35.0 in January 2021, average weekly hours for all employees has steadily declined, hitting 34.3 at the most recent release. To some economists, this decline is not concerning as the drop in average weekly hours is merely a reversion to the mean of roughly 34.5 that was found prior to the pandemic. However, this does not mean that changes in average weekly hours can be discounted as an erroneous data point. In fact, it provides a critical insight into the dynamic between employment and inflation.
Executive Summary
Trimble’s Q2 2023 revenue beat was due to strong demand in the company’s construction software. However, the company noted a large federal government order in the Geospatial segment that occurred earlier than expected, and adjusting for this, revenue came in line with prior expectations this quarter. Trimble continues to experience headwinds from a weakening agricultural market, declines in European business, and distribution network changes the company implemented that are impacting sales. For the longer term, Trimble continues some important strategic focuses to drive growth, and importantly, the company is looking at many ways of implementing AI technology internally and included in products for customers.
Valuation
2023 EPS: 21.0x consensus $2.64
2024 EPS: 19.4x consensus $2.86
2023 Adj. EBITDA: 13.8x consensus $993 Million
2024 Adj. EBITDA: 12.6x consensus $1.088 Billion
FY 2023 Guidance:
Organic ARR Growth: +mid-teens % (maintained from previous guidance)
Revenue: $3.845-3.925 billion (narrowed from $3.835-3.935 billion previously)
Non-GAAP Operating Margin: 23.5-24% (increased from 23-24% previously)
Equity Method Income: $30-35 million (maintained from previous guidance)
Net Interest Expense: ~$155 million (maintained from previous guidance)
Non-GAAP Tax Rate: 17-17.5% (decreased from 17.5-18% previously)
Non-GAAP EPS: $2.57-2.73 (increased from $2.52-2.72 previously)
Free Cash Flow: ~1X Non-GAAP Net Income (maintained from previous guidance)
Q3 2023 Guidance:
Revenue: $945-985 million (below $980.5 million consensus estimate)
Non-GAAP Operating Margin: 22-23%
EPS: $0.56-0.64 (below $0.64 consensus estimate)
August 10, 2023 BLUE ROOM Meeting #122
Hello Team,
Look forward to seeing you for our 122nd meeting!
Today, we would like to celebrate the 2023 Summer Internship Class.
Agenda
1. Company Update by Emily
2. Blue Room Investing Updates
3. + Brand & Marketing by Cole
4. Economic Data Update: CPI by Omar
5. Research Update: Eli Lilly by Jared
6. Sales Update by EliBlue Room Impact Updates:
1. Agriculture
2. Housing
3. Art
Internship Update
+ Superlatives!
Icebreaker Question:
"What do you see in your future for the next 2 to 3 years?
Executive Summary
EOG Resources reported slightly better than expected earnings across the board. Given the fact that, as an upstream oil producer, EOG trades as a proxy for both the price of crude and – to a lesser extent – natural gas, the earnings release was not a significant positive or negative event for the company. Nonetheless, EOG used the opportunity to reinforce its strategic commitment to generating the highest cash flow possible through limiting exploration costs while, at the same time, rewarding the shareholder through a minimum commitment of 60% free cash flow dedicated to shareholder returns.
Notable Quotes from the Earnings Call
i.) As it pertains to the company’s commitment to returning money to the shareholder, Chairman and CEO Ezra Yacob stated “I do want to emphasize, we consider that regular dividend to still be the true hallmark of a strong and improving underlying business, and we like the message that it sends.” Yacob continued “Taking into account our full year regular dividend, we have committed to return $3.1 billion to shareholders in 2023, or about 67% of our estimated 2023 cash flow, assuming a $75 oil price, well ahead of our target minimum return of 60%.”
ii.) With respect to the natural gas portfolio – which has struggled significantly this year – President and COO Billy Helms commented that “[EOG] remains constructive on the longer-term gas story for the U.S., supported by recent LNG project approvals and the growing petrochemical complex on the Gulf Coast. And we are especially pleased with Dorado's place in the market as one of the lowest cost supplies of natural gas in the U.S. with an advantaged location and emissions profile.”
iii.) As it pertains to cost management, EOG remains at the forefront, as exemplified by the fact that their “well costs really only increased about 7% last year compared to the over 20% inflation that we saw in the market. So, yes, it really helps us kind of manage our activity level with confidence as we go through the year. And we certainly remain flexible as we look into next year to see how we can position ourselves for next year.”
Company Profile
BioNTech is a commercial-stage biotech company based in Mainz, Germany. Founded in 2008, the company develops and manufactures immunotherapies for patient-specific approaches using its proprietary mRNA technology. BioNTech has a strong pipeline, with 34 product candidates in its pipeline, 28 of which are in clinical development. The primary areas of focus for BioNTech are twofold: oncology and infectious diseases. Since 2019, with its newly founded North American headquarters in Cambridge, Massachusetts, the company has been publicly traded as American Depositary Shares on the NASDAQ Global Select Market under the ticker symbol BNTX.
Recent Press Releases and Business Updates
Jul. 31, 2023 – BioNTech today announced the completion of its acquisition of InstaDeep Ltd, a leading global technology company in the field of artificial intelligence and machine learning. The acquisition was announced on January 10, 2023 and follows a track record of increasing collaboration between the two companies since 2019 as well as BioNTech’s initial equity investment as part of InstaDeep’s Series B financing round in January 2022.
Jul. 24, 2023 – BioNTech will announce its financial results for the second quarter 2023 on Monday, August 7.
Jun. 29, 2023 – BioNTech and OncoC4 today announced that the first patient and non-small cell lung cancer has been treated in a pivotal Phase 3 trial evaluating the companies’ next-generation anti-CTLA-4 antibody candidate BNT316/ONC-392 (gotistobart). The trial is part of BioNTech’s strategy to initiate multiple pivotal trials in 2023 and 2024.
Jun. 23, 2023 – Pfizer and BioNTech today announced the companies have submitted regulatory applications to the US FDA for their Omicron XBB.1.5-adapted monovalent COVID-19 vaccine for individuals 6 months of age and older.
Jun. 23, 2023 – Pfizer and BioNTech today announced they have initiated submission of a variation to the European Medicines Agency for their Omicron XBB.1.5-adapted monovalent COVID-19 vaccine for the 2023-24 fall and winter season.
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