Eiger’s Lonafarnib was approved for the ultra-rare disease Progeria on Friday night.
Progeria sounds like a terrible disease that previously had no approved treatment. It is great to see that now there is at least some option available.
I’m not expecting a big move up in the stock, but we may see weakness (“sell the news” is sort of EIGR’s MO and if short term traders are disappointed they may pile on) and that could be an opportunity.
Expectations of approval were already very high. This was more of a downside risk scenario – if the approval had not happened the stock would have been whacked.
Wedbush had estimated probability of approval at 90% and did not assign any upside if the approval happened:
So it is not a big positive. But the approval does have some value to Eiger.
To be honest, I was surprised by the assessment of Wedbush and BTIG on the value of an approval (below). They assign more value to Progeria than I would have thought.
Wedbush estimates a market value of $368 million to Eiger.
BTIG assigns a $124 million NPV.
Eiger has said in the past that revenue won’t be a lot. The disease is just too rare. So I am a little skeptical of the numbers from BTIG and Wedbush. $368 million would be more than the current market cap. I don’t think the market will see it that way.
The more certain cash infusion comes from the other announcement last night. With the rare disease approval, Eiger also received something called a Pediatric Disease Priority Review Voucher (PRV).
A PRV can be redeemed for a priority review by the FDA of another product.
What makes the PRV particularly useful is that you can sell it. Eiger can auction it off to another company that it would be more valuable to.
From what I can see, these PRVs are worth around $80-$100 million.
As part of their agreement with the Progeria Research Foundation, which is the group they ran the trials with, Eiger splits the proceeds of a PRV sale with them.
So Eiger stands to net $40-$50 million from the sale of the PRV.
Eiger has cash of $60 million right now. So the PRV puts them over $100 million.
That should be enough to carry them through the other trials in progress (for HDV and PBH, as well as COVID), without having to raise capital.
The market cap of the stock is about $300 million. What I like about Eiger, what makes it the only biotech that I am willing to hold through approval events like Friday, is that there are just so many late stage shots on goal.
I will keep holding this one and add if the market gets silly about it again.
SharpSpring has really taken off these last couple weeks. I would attribute the strength to:
Everything is going up
Q3 was quite good especially the underlying metrics
Investors are starting to warm up to them (esp. the unconventional customer acquisition model they have)
With respect to (3), I noticed that there is a SumZero post on SharpSpring.
I can’t access SumZero, but the fact someone, likely a fund, is pushing them is a positive.
SharpSpring held an investor day this week. On it they described their business and their long-term model. They admitted that one of their challenges is explaining why their model works when it appears on the surface that it should not.
I still like the stock (I’m still holding), but I have to admit it remains hard for me to wrap my head around how I should think about the comps with other SaaS names. It is such a different SaaS model.
Carlson (SharpSpring’s CEO) described it pretty clearly on the call this week:
One of the — probably one of the most confusing things about our business or concerning things to an outside investor who doesn’t understand how our business works is our logo churn. On a monthly basis, we’re hovering around 3% logo churn. That’s often a problem for SaaS businesses
As I have learned more about SaaS businesses, I have come to appreciate that one of the primary tenants is that “churn is bad”.
Because SharpSpring violates this tenant with prejudice, one would expect it to weigh heavily on the stock (and until very recently, it likely did).
To put it in stark, comparative terms, consider the following ARR by cohort chart from the Slack S-1 (from January 2019):
See how there is a the nice, up-sloping curve to each of the cohorts, thereby illustrating the revenue expansion of existing customers that more than makes up for any churn.
Now look at SharpSpring:
The slope is ominously down and to the right.
But here’s the thing. That churn does not seem to matter.
SharpSpring customers have a lifetime value (LTV) of $59k. Their cost to acquire customers (CAC) is $7.5k. So their LTV/CAC, which is what really matters, is 8x.
That isn’t as good as Slack’s (which was ~12x in January 2019) but it is much better than most.
Consider the following Morgan Stanley peer group comp of LTV/CAC:
And consider this, more recent LTV/CAC peer group comp, taken from the Credit Suisse Initiation report on PagerDuty:
Now look at Hubspot, the competition. Hubspot only has an LTV/CAC of 5x, and this is a competitor that trades at about 3x the valuation of SharpSpring even after the big move we’ve seen in the stock (the following is from Morgan Stanley):
Even though SharpSpring churns through customers like a grass fire, the combination of A. having some very high value customers that stay on and B. not spending very much to acquire them, seems to outweigh that, and it leads to unit economics that are actually very good.
So good in fact, that the push is on from analysts for SharpSpring to spend more and grow faster. This was something else they addressed on the call.
If SharpSpring decides to step on the growth pedal, it will be interesting to see how it goes. The possible Achilles heel of their model (it would seem to me), is that they are running through their addressable market faster than most would, because so many are churning. So I wonder if that addressable market may not be so big?
But maybe that is not the case. The customer acquisition pipe that they use is via digital marketing agencies, who partner with SharpSpring and then acquire SharpSpring users on their behalf. According to what Carlson said in the investor day, there are 60,000+ digital marketing agencies in North America and Europe and SharpSpring currently has about 2,000. So there are still a lot of customers to churn through.
Anyway, I’m glad the market is starting to see what I thought I saw with the stock. I just wish I could see it a bit more clearly myself.
Here are the rest of my notes:
talk about net revenue retention and how the maturity of customers is important, how because they are a relatively new company, they don’t have the mature customer base, or are just getting it
“power” of their business is lost when you average the more mature cohorts and the newer ones
the new customers are holding down the ARR numbers – and if they grow faster, the weight on ARR is bigger
have penetrated 2,000 of 60,000 digital marketing agencies – around the same as Hubspot
they think longer term they can get to 80% gross margins and 20% operating margins
customer LTV is $59k while CAC is $7.5k – so 8x
older cohorts – 4+ years, are above 100% revenue retention:
move from 5-pack of licenses to start to 3-pack has reduced time to get expansion revenue
their agency customers provide tier 1 support – once they are onboarded with clients, support the agencies require to provide this is not a lot
this is the key slide I think – it shows the early attrition of the 40% of “low value” agencies and the high-value and rapidly increasing MRR of the high-value agencies:
the cohort that they signed 6 years ago is paying 70% of MRR 6.5 years later – so even with the attrition, the remaining make up for it quite a bit
just purely looking at high-value agencies – the LTV is $86k and the CAC is $9.300 so its 9.2x
in more recent years, the MRR of new customers has been rising:
they are also seeing new customers spend more quickly
far cheaper platform than competition:
with only one exception companies they compete with today are same ones they competed with 8 years ago – the one new entry is ActiveCampaign, but it is an old company that entered space more recently
in one of the questions they imply they might be willing to invest more, grow faster, accept a lower LTV/CAC to get that growth
before COVID their expectation was to hit high-40%s growth rate in 2020
you can see looking at the older cohorts that revenue retention jumps in Year 2 and then it does shrink, so there is attrition after year 2:
but after year 3 it seems to flatten out – which is basically what they were saying – revenue retention flattens at around the same level it started out at
Also worth pointing out that the 2021 number implicit in the chart is only 21% growth – that is okay but not stellar
I was listening to the Eastside third quarter call. I really like what I heard. The team seems very much on their way to turning around the ship. They are moving EBITDA to breakeven. Seem very focused on capital allocation and growth.
But there was one comment from management that really made me sit up and take notice:
I honestly don’t know if my math is wrong or I am missing something about the business. But… it seems to me that if they put 1,300 barrels towards the Burnside brand and 1,300 barrels towards this new Eastside Limited brand, and each 100 barrels generates $1 million of revenue and $500,000 of gross profit, then that is a lot of money for a company this size.
Eastside generated $4.7 million of revenue this quarter at 35% GMs. The numbers here are more than their annual revenue by some margin. It is a one time thing, but nevertheless.
Again, I don’t know if there is something about of the business here that I don’t understand or what. The market is moving the stock up enough to make me think that I might be thinking about this right, but not enough that I am sure I am thinking about it right. If that makes sense.
When I saw news of the vaccine this morning I thought of a few things. First, I thought how my RWM short hedge was going to get killed. Second, I was glad I was short some SaaS. And third, I thought how I gotta buy more banks.
Last week I described how I had gone through all my bank earnings reports. My assessment was that they were not “super exciting”. I further went on to say that it was “hard to get excited” about any of them (other than CUBI and SI – the latter of which is not really a bank in any traditional investing sense) and that I was reluctant to buy them unless I wanted to “close my eyes and wait it out”.
So… that vaccine news makes the wait more of a blink. Instead of having unknown liabilities on their balance sheet, you can look at all the same bank names, bogged down with their exposure to hospitality, restaurants, energy and even CRE and you can say, as long as their LTVs aren’t too high and their counter-parties are on the stronger side, they can probably make it past the COVID-vaccine finish line.
Of course some of the bank names moved right off the bat and I couldn’t bring myself to add. I didn’t buy any more CUBI, and I didn’t add UBSI or CADE, even though I would have liked to, because these stocks were up 15% right at the bell.
But there were others where the market was not so efficient. BSVN took a while to figure out what had happened. BCBP took even longer. MLVF and SBFG were slow movers as well. There are other, even more illiquid ones, that have not moved much at all yet today.
I still was buying them up from Friday’s close though. With BSVN and SBFG I bought them up 5-7% on the day. That maybe seems crazy on the surface. But consider BSVN for example:
BSVN was an $18-$19 bank in February. Tangible book is about $11/share. By all indications they are solid lenders in Oklahoma/Texas. Their track record looks fine (though I am no expert).
Really, the reason that BSVN has taken it on the chin, at least as far as I can see, is because they happen to lend to a bunch of hotels. Hospitality is about 21% of their loan portfolio.
These are generally big chain hotels, so Marriott, Holiday Inn, Best Western and such. The LTV on these loans is 63%. The replacement value of the collateral on a per room basis is $115,000 while the loans are pegged at $45k/room.
So BSVN was in for a tough go of it if COVID kept on for years. But you can kinda see that BSVN is likely okay if COVID is on its way out by the spring.
The news today suggests COVID does not drag on forever. So yeah, BSVN hit $10 this morning and I think its almost $12 now, but I think there is a reason for that. The reason is that if COVID is done by this time next year then these loans are going to be just fine and BSVN should be able to go back to being the same bank it was in February.
At least this is the way I’m thinking about it. You can go through the loan books of the other banks and draw similar conclusions. That restaurant exposure is likely not the albatross it was. Maybe even that energy exposure isn’t as worrisome. You have to remember, they don’t own the business, they just lend to them, so all that matters to them is they can eke it out until things normalize. And the odds of that just went up.