Reminiscences of a Stockblogger

On Not Writing and Prothena Corp

It is getting harder to find companies that I want to talk about. As I wrote on the weekend, I am content with the positions I have, but being enthusiastic about new ones is tougher.

Even some of the new positions I might take, I don’t really want to elaborate on. I have four positions in my portfolio right now where I can definitively say that the only reason I own them is because I think they are going up more. All four are crappy companies. Of them all, I have very little good to say. But largely because they are in the right sector at the right time (Bitcoin, SaaS, and clean energy), they are all going up and are some of my best performers. One is (ridiculously) the best performer in my portfolio this year. And the company is a mess.

I’m not going to write about these names because what would I say? I am not going to say I am excited about their prospects because their prospects are largely smoke and mirrors. I am not going to say that I like the growth runway because I don’t. In one case, a SPAC (of course), the growth run way to 2025 revenue is so ridiculous that I can’t imagine that they will even come within even half of that number. But the stock goes up.

These facts would make it depressing to write about them. Depressing because right now doing research on stocks is only peripherally related to success. While the stocks you spend hours of research on, and find to be attractive, are likely doing well, there are other stocks, one’s where even a cursory overview would find them to be garbage, that are probably doing better. That is depressing.

The reality is, the market is taking the dumbest, silliest ideas and bidding them up to even sillier heights and nothing that you can reason will change that. So you might as well own a few on speculation even if the business makes zero sense in the long run. But don’t write about them, because it will be embarrassing to look back in a year and see that you even mentioned the names.

So instead of talking about these depressing messes of success, I want to point out a stock that I found that has found very little success so far this year (until of course today – I swear that I started writing this post I had no idea that the company would release news this morning. Total coincidence. The number of times I look at a stock on the weekend and it has news within days is uncanny). But it does look attractive to me.

Prothena

First, what is going on today. Prothena announced results of their Ph1 follow-up for the molecule PRX004, which is targeting Amyloidosis. The reason the stock is up is because, while the trial was primarily looking at whether the drug was tolerated by patients, it also gave us an indication of efficacy.

Prothena said that “PRX004 showed favorable results as demonstrated by slowing of neuropathy progression for all 7 evaluable patients at 9 months, including improvement in neuropathy in 3 of the 7 patients, and improved cardiac systolic function for all 7 patients.”

The targets here are amyloidosis patients. These are patients who have heart problems. Those heart problems are caused by little deposits of mutated tissue called amyloids that are on their heart and eventually constrict it. PRX004 is expected to stop amyloids from forming (they come from the liver) and also remove the amyloids that have already formed in the heart.

These results that patients are seeing improved cardiac function and improved neuropathy suggests that the drug is doing what it is expected to do.

So its a positive result. And the stock is up a little on that. But it is a Ph1, so it is a long way from knowing anything for sure with PRX004. I would not buy the stock on this news. It will be forgotten soon I think.

At any rate, PRX004 is not the main event. The main event is two-fold. It is a very early stage Alzheimers pipeline and a later stage molecule called prazinezumab. First, the latter.

Prazinezumab is targeting Parkinson’s. This would be a huge market if successful. No therapies to slow progression. 7-10mm patients.

Prazinezumab works like a lot of drugs, binding to the bad molecule or protein before it can bind to something else:

• Targets alpha-synuclein
• Alpha-synuclein accumulates in cells in Parkinsons
• Prasinezumab molecule binds to the extra-cellular (means the one’s just floating around) alpha-synuclein instead of letting the alpha-synuclein bind to new cells

Prothena is collaborating with Roche here. It is a 30/70 split. They’ve done a Ph2a study and they showed some positive results though it did not meet the primary endpoint, which is what has held back the stock. However, the efficacy was there as they did meet secondary endpoints and, though I’m not an expert in this, it seems like the study was more geared toward compiling data on the secondary endpoints that were achieved, so they are now onto a Ph2b add on to that study.

The reason that they are doing a Ph2b instead of going to a Ph3 has to do with the symptom masking medications most Parkinson’s patients are on. In the Ph2a study, Prothena/Roche wanted to make sure they were comparing apples to placebos, so they limited enrollment to patients that were not taking any meds that would mask symptoms. Now that they have the data that shows that prazinezumab works versus a placebo, they are expanding enrollment to include this much larger (they said 4x the size) patient population.

So far the results look promising.

Prothena has interesting molecules targeting big markets and it has a lot of cash.

First is the cash on the balance sheet. The net cash position is $310 million right now. The market cap of the stock is $470 million.

Then there is a $60 million payment from Roche that will occur when the first patient is dosed with prazinezumab in the Ph2b. That is going to happen soon, so you can add that cash to the bank.

More cash could be coming in from their licensing agreement with Bristol-Myers-Squibb. For every new program that Prothena files an NDA for, BMS has the option to opt-in for $80 million.

Prothena is going to be filing an NDA in 2021 on a molecule called Tau that would qualify for this collaboration. Tau is targeting Alzheimers. We can’t say for sure whether BMS will opt in or not, but it is another potential event.

Also on the event front, there is a read-out from Biogen that is coming up on their Parkinson’s drug that could have an impact on the stock. Biogen is using a similar mechanism, targeting alpha-synuclein, but in a different way. Good results would probably boost PRTA, at least temporarily.

Biogen plays into this story in another way. Prothena has a couple of different Alzheimer candidates. The first is Tau, which I mentioned. The second is PRX012, which has similarities to another Biogen drug, aducanumab, which has had a roller-coaster ride. I’m not really sure if it is a good thing to have a molecule that investors relate to aducanumab, at least in the short run.

But Prothena was clear, even before the aducanumab/advisory committee findings (this is a very long story and just go google it if you want all the details), that their molecule was similar but different and that they expect different results. Here is how they put it in their 10-Q:

Prothena has developed anti-Aβ antibodies with greater potency that retain or improve on key attributes that are thought to underlie the observed efficacy of N-terminally directed therapeutics such as aducanumab, with the aim of offering similar or improved efficacy with sub-cutaneous dosing regimen. Prothena antibodies demonstrated a higher binding strength to amyloid than aducanumab; specifically, a 5- to 11-fold greater affinity/avidity for fibrillar Aβ than aducanumab while also neutralizing soluble, toxic (i.e., oligomeric) Aβ species. Prothena antibodies were also shown to recognize Aβ pathology to a greater extent than aducanumab, demonstrating more extensive plaque area binding at lower antibody concentrations, which are estimated to be clinically relevant exposures in the central nervous system following systemic dosing.

There is even a third, more secretive molecule targeting Alzheimer’s that is as of yet undisclosed.

With the Alzheimer angle, kind of like the Parkinson angle, this is more about just how small of a fish Prothena appears to be, even as it is playing in these very large oceans. I look at the company and the collaboration with Roche, the deal with BMS, the similar molecules to the one Biogen has and it makes me go hmmm.

Just think about it. Biogen stock moved a $100 when it looked like aducanumab might get approved. That is like $15 billion in market cap. On the other hand here we have Prothena, that has a similar molecule, that has another AD targeting molecule with an NDA that BMS may participate in, that has yet another molecule targeting AD that is still hush-hush, and the stock trades at barely $100 million net of cash. Then they also are going after Parkinsons, have just had some decent early results in amyloidosis, and have this early stage dev agreement with BMS that will pocket them $80 million every time BMS wants to participate.

All this for less than a $100 million? While my SPAC play with the stupid 2025 revenue number that has a zero (and I mean a Steve Eisman hand gesture with your thumb and index finger zero) probability of being hit, has an EV of $1 billion+ ? Like I said, hmmm.

Some General Thoughts and The Bancorp (TBBK)

One of the many lessons in Reminiscences of a Stock Operator is that when you are handed a bull market, the most important and hardest thing to do is just sit and be patient.

“It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine–that is, they made no real money out of it. Men who can both be right and sit tight are uncommon.”

This is not an easy time to add to the stocks you own. It is likely not the right time to add too many new names to the list (which is why I have not posted too much the last few weeks). But at the same time, you have to be careful about saying that this is the time to get out, if your reason is simply because the market is going up.

I imagine that we have to be in some sort of bubble, at least in so far as many tech names. The numbers of the SaaS names are truly outlandish. And for a company like Zoom, with a vaccine on the horizon, I just cannot fathom how the comps will be favorable to their results come next fall and winter.

I did not take heed of the great Livermore’s advice in this case. I pared back many of my SaaS names even before news of the vaccine and let the rest of them go on the day or two after (With SharpSpring and Intellicheck, if that is really SaaS, being the exceptions). But I was wrong. Names like Atlassian, PagerDuty, and Slack, all names I owned in the summer and early fall, have powered far higher then where I sold. I was simply not patient enough.

If I am to be honest, also at play is that my style is just not well suited to these mid-to-large cap high-priced names. It is too easy to sell Atlassian or Slack at the drop of a hat and on the first hint of fear that the multiples will crash. I am simply a micro-to-nano-cap investor, and it is in that horribly frustrating and insensible space that I am at home.

Fortunately, we really are in a bull market for these names. I tweeted a week or so ago about the moves in some of the small-green stock names – ENG, OEG, IPWR, and BEEM (none of which I owned at the time but all of which I have owned at various times). Insane moves that really make little sense for companies that are of a questionable business model.

But even the good businesses – like the one’s I like to think I own – are doing well right now. It is a bull market. While the first lesson is to be patient, the second, I think, is not to fall prey to the belief that your particular stock picking abilities are anything special. You may feel quite smart because your names are all going up, but right now, all names are going up. What’s more, the names that are going up the most are the one’s that are probably not the best selections in more normal times. So don’t get a full head from it.

The only conclusion that can be drawn in this market is if your names aren’t going up, or if they are worse – going down, then you must conclude you are doing something wrong and it is time to regroup. But otherwise, I don’t think it is helpful to draw any other conclusion, other than that axiom – it’s a bull market.

With that said I did find another bank I like. Two actually – the other being Megalith, the soon to be spin-off of Customers which I dug into this week and decided I liked quite a bit, but I will talk about that one later. I will talk about The Bancorp now. I’m going to refer to them as TBBK, because the The Bancorp sounds weird to me, a little presumptuous.

TBBK is a little like Silvergate. A “little” I say – for unlike Silvergate I do not expect the stock to more than double in two months or triple in three. TBBK is not involved in blockchain or anything like that. But TBBK, like Silvergate, has developed a business line that is largely independent of their deposit base and their net interest margin. And this business is growing because of shifts in the financial landscape that seem likely to continue. Together this factors give TBBK, like Silvergate, the opportunity to grow far beyond their book value, if all goes well.

TBBK acts as the back-end, FDIC bank holding partner for the group of companies collectively being called the “challenger bank service companies”. These are names like chime, SoFi, venmo, even PayPal though they are so large it is hard to call them a challenger.

Some of these names are growing their business extremely quickly. chime quadrupled their customer base in 2019. They doubled it again in the first few months of 2020. I am not sure where chime’s customer base is now because chime, like most of these names, is private and so you only get snippits from articles.

Challenger banks like chime seem to resonate with the millennial. According to Forbes, 2/3 of chime’s customers are under-40.

But these bank challengers are not banks. Unless they get a bank charter of their own, they need a partner to take the deposits and get direct access to the payment system.

That is where TBBK steps in. TBBK operates two businesses that act as the back-end bank to the front end challenger.

Their payment solutions business issues prepaid cards and private label debit cards with TBBK as the sponsor. They offer these cards for chime, incomm, PayPal, SoFi, HealthEquity, SMI and others.

Their payment acceptance business processes payments and transfers. Major customers are PayPal, venmo, ACI, and Intuit.

From what I can tell, the revenue TBBK derives from these businesses is directly proportional to the transactions on the challenger bank platforms. As TBBK says in their 10-K:

The majority of fees we earn result from contractual fees paid by third-party sponsors, computed on a per transaction basis, and monthly service fees.

So as the challenger bank space grows, so will the fees earned by TBBK.

One question that comes up is will chime and others just go ahead and get a bank charter of their own? I can’t be sure, but I don’t think so.

If you listen to what chime says, they are clearly trying to differentiate themselves as not being a bank. This is because they do not want a bank multiple, they want a fintech/SaaS multiple. Getting a bank charter would not help them in this regard.

What is funny to me, is that from what I can tell these bank challengers are generating revenue in much the same way as banks always did. chime, for example, seems to get nearly all their revenue from interchange fees, the fee paid when a transaction is performed. These are the same fees TBBK is getting, they probably just split them with TBBK. But chime, when it goes public, will get an outlandish multiple for that fee income, while TBBK barely trades over book (it is about 1.3x right now).

TBBK is estimating next years earnings at $1.70 per share. The stock is $13. That does not seem right to me.

Admittedly, the bank does not have a perfect history. There have been some bad loans. Until it was lifted just a month ago, TBBK was under a consent order from the FDIC for unsafe banking practices, which goes all the way back to 2012.

Nevertheless, I think the stock is more likely to go up than down, particularly given all my previously mentioned vaccine tailwinds on top of this undemanding valuation. And, its a bull market of course. I do have notes on the stock and will add them to this post in a bit.

Eiger Approval

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.

Research: SharpSpring’s Investor Day

SharpSpring has really taken off these last couple weeks. I would attribute the strength to:

1. Everything is going up
2. Q3 was quite good especially the underlying metrics
3. 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