Stock Down 98% From Peak, Bluebird Bio Could Run Out Of Cash
I have always been puzzled that biotech companies can go public without revenues.
I realize that some investors can’t resist buying in to the story of a team of brilliant scientists getting close to winning FDA approval for a new drug that will cure a horrible disease.
But having spent about a year consulting to a company going through that process, I know two things that make it a very risky investment: there are so many things that can go wrong during that journey and the capital required to jump over all the hurdles is enormous.
Since early 2021, the plunge in biotech stocks has scared investors from throwing their money at such bets. And that means public biotech companies are under the microscope. It could make sense to bet that some of them will run out of money.
Cambridge, Mass.-based Bluebird Bio — a biotechnology company that develops gene therapies for severe genetic disorders and cancer — could suffer that fate. Even though the company could be acquired or receive a capital infusion in some other way, I see three reasons for pessimism:
- Investment climate for publicly-traded biotech stocks poor
- Despite recent layoffs, Bluebird Bio’s cash position is weak
- Bluebird Bio’s revenue prospects are uncertain
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(I have no financial interest in the securities mentioned in this post).
Biotech Stocks Are Way Down
If a greater fool is willing to buy something you are trying to sell, financial markets will become highly liquid. Should those greater fools suddenly wise up, financial markets will freeze.
That is what has happened to the market for publicly-traded biotech stocks. According to the Boston Globe, the XBI XBI , a popular biotech index, was down 27% since the beginning of 2022 and off about 50% from its February 2021 high while the S&P 500 rose around 13%.
Experts argue that biotech stocks have slumped more than ever. Andre Perold, chief investment officer and cofounder of the Boston investment firm HighVista Strategies, told the Globe “It is arguably the worst slump in the space relative to the S&P that we have ever seen.”
After lauding the biotech innovation renaissance, Barbara Ryan, senior adviser of life sciences at the consulting firm Ernst & Young, argued, “We are living through the deepest and longest [stock market] correction that we’ve seen in the biotech indexes since their inception.”
This brings us to the greater fool theory. When public stock investors are enjoying rapid wealth creation, they are eager to take advantage of the opportunities for high returns that come from investing in companies before they go public.
This is what happened at the beginning of the pandemic as investors became interested in funding potential vaccines and therapies for COVID-19. Between early 2020 and February 2021, that interest sent the XBI up 78%.
When the greater fools abandon ship, those pre-IPO companies are likely to lose access to private capital — or to pay a much higher price for the badly-needed capital. This problem is particularly acute for biotech companies that went public without revenues and still lack sufficient incoming cash to finance their operations long-term.
Recently some Boston-area biotech firms have bitten that bullet. As Perold said, “Some of these biotech firms will not survive. They won’t be able to raise money, or if they do, it will be very diluted.”
Indeed, this February and March, Akebia Therapeutics, Bluebird Bio, and Yumanity Therapeutics announced plans to cut employment by 30% to 60%, while in early April “microbiome firm Kaleido Biosciences shut down altogether,” reported the Globe.
Bluebird Bio’s Weak Cash Position
Bluebird Bio’s stock trades a whopping 98% below its March 2018 peak and has lost 80% of its value since going public in June 2013. The company was incorporated 30 years ago this month as Genetix Pharmaceuticals and in September 2010, changed its name to bluebird bio, according to its IPO prospectus.
In 2012, Bluebird reported $340,000 in revenue, down 61% from the year before, reported a net loss of $23.7 million and held cash of around $132 million at the end of 2012.
Nine years later, Bluebird’s finances remained grim. To be sure, it had increased its revenue but nowhere near enough to offset its costs. According to its 2021 10K, Bluebird generated $3.7 million in revenue and a loss of $819 million — after reporting no revenue in 2020 and a loss of about $619 million.
Prospects for the company were not good at the end of 2021. Bluebird burned through $167 million in cash last year, leaving the company with $161 million in cash. According to its 2021 10K, “the Company has suffered recurring losses from operations and has stated that substantial doubt exists about the Company’s ability to continue as a going concern.”
Last November, Nick Leschly, who had presided over the company since October 2010, left the company to run 2seventy bio — Bluebird’s “oncology programs and portfolio” — which went public after as a tax-free spin-off in November 2021. 2seventy bio’s stock has lost 54% of its value since then with a market capitalization of $579 million.
Under a new CEO, Andrew Obenshain, Bluebird announced April 5 that it was taking steps to lower its cash burn rate. According to a press release, the cost cutting initiative will reduce its cash burn rate in 2022 below $340 million, cut 30% of its 518 employee workforce, lower operating costs between 35% and 40%, and “extend the Company’s cash runway into the first half of 2023.”
Uncertain Revenue Prospects
Investors have not reacted enthusiastically to Bluebird’s performance and prospects. On March 31, short interest in Bluebird shares spiked nearly 44% sending its short interest up to 16.6%.
Investors did not react enthusiastically to Bluebird’s announcement of its cost reduction program. Since April 4, when they traded at $5.23 apiece, its shares have fallen 24%.
Is there any hope for new revenue at the company? Bluebird expects to receive FDA approval for two gene therapies this year and to apply for a biologics license application (BLA) for a third one by March 2023.
How so? According to the press release, Bluebird “anticipates FDA approvals for its gene therapies for beta-thalassemia and cerebral adrenoleukodystrophy in 2022, and the potential submission of a BLA for lovotibeglogene autotemcel (lovo-cel) gene therapy for sickle cell disease planned in the first quarter of 2023.”
But there is a fundamental problem with Bluebird’s business strategy of trying to treat so-called orphan diseases — with too few patients to attract investment from large pharmaceutical companies — for which drug makers offer high-priced treatments.
The problem is that regulators are casting a jaundiced eye at reimbursing them. According to InvestorPlace, “European officials [refuse] reimbursement for drugs deemed unaffordable. American regulators, who must allow payment for anything available for sale, are slow-walking approvals…Genetic therapies, which are expensive to develop, don’t always work and often carry high price tags” are the most vulnerable to this regulatory stance.
What’s more, due to concerns about clinical trial participants developing cancer, according to BiopharmaDive, the FDA is wary about the safety of cell and gene therapies — putting many of their trials on hold.
According to a February 27 note from analysts at Jefferies, “cell and gene therapy holds accounted for approximately 40% of those ordered by the [FDA in 2021], despite representing well below that proportion of trials,” reported BiopharmaDive.
Could Bluebird raise enough capital to keep it going? The company says that it “continues to evaluate additional financing options, including public or private equity financings and monetizing any priority review vouchers that may be issued upon approval of beti-cel or eli-cel.”
Bluebird is proud of its achievements and its cost reduction initiative. As Obenshain said in the press release, “…We are taking decisive action to extend our cash runway, and put bluebird in a stronger position to execute on our strategic priorities and ultimately bring potentially curative gene therapies to patients and their families.”
If you think Obenshain will succeed, Bluebird Bio stock is cheap at around $4 a share. Otherwise you could profit by joining the short sellers.