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Triple Waterfalls Take Time

I managed to avoid the carnage of the market this week, ending up flat in my long only account and actually up some in my margin account, where I can short and short I do.

Decision-wise, it has been a mixed bag. The worst decision I’ve made over the last few weeks has been to expand my Biotech universe to companies not trading at cash – specifically CRSP and NTLA.

My Biotech positions ex-CRSP and NTLA (and ALDX on Friday – sigh) have held up remarkably well, I suspect because most are underpinned by a whole lot of cash. Even though the XBI index goes down every day (EVERY DAY!), most of these stocks only do so reluctantly, are actually bouncing around the bottom more than anything else, and some are even going up.

But these two stocks, CRSP and NTLA, have not worked and do not act well. I am down ~10-15% on both. What to do, what to do.

The reasons I am reluctant to cut a stock like CRSP or NTLA and take the quick loss are as follows.

First, I think it is quite likely that these stocks are being beaten down primarily because it is in just about every Cathie Wood ARK fund in existence.

This is a good reason for a stock to be down but a less-good reason for it to stay down. Cathie Wood’s ARK funds are down because she picked overvalued stocks and stocks that have a business that is not performing well in this re-opening/inflationary environment. She invested in a new paradigm that is now under question. But that does not mean that every stock that ARK owns must necessarily be a basket case. Just that they all trade like one now.

The malign-ment of ARK on Twitter is reaching a fevered pitch. Sentiment against ARK seems rather extreme to me. They are being maligned by folks that, in my opinion, should be maligned themselves. CRSP and NTLA to me are, as much as anything, contrary bets that this has gone to far for now and we are due for a reversion to the mean.

Second. CRSP, to take as an example, is not all that expensive IMO. In some ways it looks quite cheap. It was expensive last year at this time, when the stock was 4x higher, no question about that. But at $50 CRSP has an market cap of $3.8 billion. They have cash of almost $2.5 billion, which means the EV is only a little under $1.4 billion.

Last year Vertex bought 10% of CRISPR’s SCD cure for $900 million + an extra $200 million to be paid in the future at approval. So…. a year ago Vertex said that 10% of one drug that CRSP now owns 40% of was worth $1.1 billion to them. Forget the rest of CRSP’s pipeline and platform.

Vertex just so happens to be trading near 52-week highs. While CRSP’s currency is depressed, Vertex’s is not.

There are folks on Twitter now saying CRSP is going to $30. Do they realize that CRSP would have a negative EV at $30? Because of the cash position, another $10 move down in CRSP from here would put the EV of roughly ~$600 million, or more than 50% less than VRTX paid for 10% of one of their drugs last year.

It is easy to say it is a new paradigm for stocks, that valuations were silly and that time is over. It is all true. It is why I have been short the momo-trade for months, when it was not nearly so fashionable. I am far from a growth-bro. But if you think CRSP is worth today’s price, then you should short VRTX, because their stock is at its highs and they are clearly run by idiots for paying what they did – and this for a drug they KNEW VERY WELL because they already owned the other 50% of it.

I don’t think that’s the case.

It is not just Vertex that among big-pharma holds highly valued currency. In fact, the same could be said for much of big-pharma. Merck is at its highs. Bristol Myers close to its highs. Eli Lilly is close to its highs. Abbvie was at its highs until they made a bad announcement last week. Even smaller big-pharma wanna-be’s like Neurocrine are not breaking down like the market as a whole.

Does that not seem like a ripe environment for takeovers?

There is some patent stuff going on between CRSP, NTLA and other gene editing companies that hasn’t been super-favorable to the two I own, but no one I’ve read seems to think this is a problem. It will get sorted out with new agreements and licenses.

Really, the only way I could see CRSP or NTLA having their value permanently impaired from this level is if news came out from one of them or some other CRISPR editing company that off-target editing has resulted in a really bad outcome for a patient.

That is a legitimate risk with these companies. But it has been a known legitimate risk for like the last 5 years. It is not new. Youse take yours chances…

So that is enough about CRSP and NTLA, which is a bit more expensive but a better pipeline and probably better opportunity to the upside.

On to some things that have gone right. What I have done right over the last few weeks has been to:

  1. Keep my shorts on
  2. Keep BIOX even when I sold most of the rest of my commodity stocks
  3. Don’t buy anything outside of these Biotech names
  4. Keep my shorts on

This market is a gong show but it kinda seems like we are getting to the crux of the issue now and 1 of 2 things is going to happen shortly. We are either going to have a crash or we are not.

When sentiment gets really bad, it seems to most often portend to a rally or, and this is kind of the black swan option, if it doesn’t rally things get much, much worse. When things get worse then bad, that’s when you have a crash.

I don’t think it ever really makes sense to “bet” on the latter because crashes very rarely happen. We had it during COVID. We had a bit of one in December 2018. We had bigger versions if you go back further.

But I’m not really convinced we are going to get one here. It would be too easy of a way out. I would say those hoping for a crash are just evidence that there is much more work to be done.

This is really more like the internet bubble of 2000-2002, which was targeted and specific and drawn-out but without a sort of big capitulation-like event that you see in a crisis-sort-of-general-bear market. The internet bear market was more of a rolling bear market, with troughs of massive negative sentiment, bear market rallies, and then another leg down. We could be on our way through the next leg down, but that is different than a crash.

I always come back to Donald Coxe and his book “The New Reality of Wall Street”. In his first chapter, The Taxonomy of the Bear, he described the different type of bear markets. It is important to distinguish because as he says, just as “it can be a matter of life and death for hikers to know which species of bear territory they are invading. Similarly, investors should learn to distinguish the kinds of bear attacks the market faces”.

He outlines 5 bears: the Teddy, the Baby, the Papa, and the Mama. The Mama is broken up into two types – the mini-Mama and the Big Mamas.

I suspect, or am at least willing to use as a working thesis, that what we are in now is a mini-Mama. The mini-Mama “only appears at the advent of Triple Waterfall crashes”. The Triple Waterfall is what Coxe’s book is about, as it was written at the time of the internet-bubble collapse.

I’ve used that term a number of times in the blog and this is where it comes from.

The Triple Waterfall is the “avenging bear who keep killing and devouring until an entire belief system has been destroyed”. That sounds a lot like what has been happening for the last year.

But most importantly I think is what Coxe notes about the nature of the Triple Waterfall: “Triple Waterfalls aren’t mere bubbles. They are financial pandemics that take not months, not years, but decades to run their course.”

To me, the important takeaway from this is that what we are experiencing now is not about some one day “crash” that flushes away excess, cures the system of its malaise, and allows us to buy TDOC, SE and PTON again with reckless abandon. If this is a Triple Waterfall, which I think it could very well be, we will not be let off so easy. This will be drawn out for a few years more (I don’t know if I agree with the decades he describes) until the last of hope of the past belief has been vanquished.

But you never know. So I’ll stay in the cautious camp, my two CRISPR bets notwithstanding.

A few tidbits from other stocks I own.

Vidler – they released their acquisition documents this week and, quite honestly, I am somewhat less inclined to believe we get a better offer now. They really did do a lot of DD and they only received one offer that was for the whole company. However, there were other interested parties, which gives a glimmer of hope. The other glimmer of hope is that the water crisis at Mead and Powell is getting more and more attention. It is too bad that the deal closes in May, I think the news cycle on the drought could reach a fevered pitch this summer as the levels in these lakes continue to decline. Oh well, I bought some PCYO, which owns water rights in Denver, as an alternative. Its not quite the idea VWTR was, but it could benefit from that news ramp.

Eiger – There was some news from Eiger of a successful trial with their drug avexitide for protein-induced hypoglycemia in patients with congenital hyperinsulinism. But the bigger news for me comes from the DEF 14A form they released, where it looks like they completed their $50 million ATM already. They managed to sell 6-7 million shares into the market, in a TERRIBLE Biotech bear market, and now the stock is surprisingly resilient as the XBI index continues to fade.

Makes you go hmmm – as does the announcement this weekend that Pfizer’s Paxlovid is resulting in delayed infection from those that take it AND the news Pfizer snuck out last week that their new trial of Paxlovid in Omicron would now remove all vaccinated patients from target group (Eiger’s trial was primarily on vaccinated patients). Kinda sounds like we need another anti-viral.

While I know COVID is over for many, I also suspect that governments around the world will want to stockpile COVID treatments, especially those targeting the most at risk, just in case we see a more dangerous variant arise, especially if that treatment is variant-agnostic (Peginterferon lambda is) and is simple (Peginterferon lambda is a single shot that can be given as much as 7 days after infection).

And with Eiger, with its modest EV of under $150 million, it wouldn’t take much stockpiling at $1,000 per dose to basically surpass the market cap on this indication alone.

All this without even mentioning Eiger’s main event, HepD.

Bioceres – Bioceres got approval of HB4 soy from China, which is a genetically modified drought tolerant soy bean. Now China will be allowed to buy soybeans grown from this HB4 seed. This is pretty important because HB4 soy is already approved in the growing regions of Brazil and Argentina (the US too) but those regions sell so much into China that they can’t grow HB4 without China approval. Now they can.

Soy revenue has been pegged at $82/ha. So that’s a cool $1.5 -$2 billion TAM to target.

I think Bioceres is overlooked because its in Argentina, has a complicated share structure, has a fair bit of debt and doesn’t really have any comps. There is no legit brokerage coverage. But the more I look at the company, the more it looks to me like a legit agri-tech firm. That is even more the case with the acquisition of Marrone-Bio.

3 Comments Post a comment
  1. ijw z #

    I don’t think retail has been shaken out yet. Too many names still at eyewatering valuations. Im avoiding anything that does not print cash atm.

    So buying these cash burning biotechs feels kind of scary. Eiger and Crispr are forecasted to burn close to 75% of their cash pile in next 3 years. So they will probably have to raise again at some point before they become profitable? How much do you think they can earn in say 4-5 years?

    May 3, 2022
    • I’m not going to bother with those sort of estimates. I don’t think it matters in the short run.

      You can go look at brokerage estimates of CRSP revenue from SCD/BT if you are interested. You can listen to that Wick interview to get his take on revenue from EUA. What really matters is that the MC and EV is historically cheap, the sector has very negative sentiment, the next data point(s) for each company could be catalysts for a move up, and there is no cash issue in the near term that will put pressure on the stock (EIGR with HDV data and, cross fingers, COVID EUA, CRSP with additional SCD data followed by early registration).

      Trying to project out what these companies might look like even a year out is pointless imo. I mean, if you had done that a year ago, trying to use cash flows and approval assumptions and making a decision to own the stock on that, where would it have gotten you? So why is it different now?

      May 3, 2022
      • makes sense to me bc small biotechs were acquisition targets even before the market meltdown. The small guys are essentially a way for big pharma to outsourced R&D and to be taken in after some de-risking.

        May 5, 2022

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