Value Line Institutional Services


April 2017


Potential Take-Over Target

AveXis Inc. (AVXS)

By Jeremy Butler, Editorial Analyst

AveXis (AVXS) is a biotech company that specializes in treating rare genetic neurological diseases. The company’s flagship product is AVXS-101, a drug used to combat spinal muscular atrophy (SMA), the leading genetic neurological cause of infant mortality. SMA prevents patients from breathing, swallowing, and sitting upright on their own.  AVXS-101 is currently in Stage I clinical trials. There are four types of SMA. Type 1 is the most virulent form of the disease and usually affects infants. Types 2-4 affect older people. AVXS-101 is being developed to combat all four types of the disease. AveXis is based in Bannockburn, Illinois, has under 20 employees, and went public in January 2016 with 20 million shares at a selling price of $16 a share.

A Volatile Investment Vehicle
This month, we are highlighting a stock that incorporates a fair amount of risk, but also a lot of potential. Due to its short trading history, the equity doesn’t have a Value Line proprietary Performance rank. In addition, it doesn’t have any sales, and thus makes no profits. Despite this, the stock has surged from its IPO value of $16 a share, to recent levels north of $75. In our view, this leap is thanks to two factors.

First, the company’s SMA fighter, AVXS-101, has performed very well in Stage I clinical trials thus far. Only one other company, Ionis Pharmaceuticals, in conjunction with marketing partner Biogen, has developed a drug to treat SMA. That medication is called SPINRAZA, and it gained Food & Drug Administration (FDA) approval on December 23, 2016.  SMA is a leading hereditary cause of infant mortality and is estimated to affect 1 in 8,000 live births worldwide. Because Ionis and Biogen are the only companies selling a SMA drug, they are able to charge a very high price for it. Indeed, it is priced at $750,000 for the first year of treatment (which incorporates six bi-monthly doses). Annual yearly maintenance costs after the first year can be $375,000. Their SPINRAZA has some other drawbacks besides its high price tag (discussed below), and AVXS-101 is proving to be a potentially more efficacious (and cheaper) alternative.

The second reason AVXS shares have risen so much, we think, is because AveXis has become a takeover target. Thanks to the substantial potential of its flagship medicine, AVXS-101, along with the company’s patient-base information, it is rumored that at least three major drug/biotech companies are eyeing it.

Investment Thesis
AVXS-101 has thus far proven to have a better safety/efficacy profile than SPINRAZA. In clinical trials, 23% of Type 1 SMA patients treated with SPINRAZA died.  In comparison, so far, none of the Type 1 SMA patients treated with AVXS-101 in clinical trials have died. (Left untreated, it is estimated that 92% of infants with SMA die before reaching 20 months old.) While AVXS-101 is still in Stage I clinical trials, early results are encouraging.

Given the seemingly better safety and efficacy profile, the EMA (European Medicines Agency) has placed AVXS-101 on its fast track for commercial approval in Europe. The EMA’s fast track is called PRIME (Priority Medicine). On our shores, we look for the FDA to do the same in the near future, particularly in light of the Trump Administration’s desire to accelerate the approval rate of drugs deemed necessary to combat life-threatening diseases.

If AVXS-101 is granted FDA approval, it would almost certainly be priced lower than SPINRAZA in order to gain market share. Currently, insurance carriers are hesitant to pay for SPINRAZA because of its extremely high price, stating that there is insufficient data regarding SPINRAZA’s safety and efficacy to justify paying such a high price. This would give AVXS-101 a huge edge, particularly if its own safety profile remains relatively unblemished as it progresses through Stage II and III clinical trials.

AveXis has become a prime takeover target, and we wouldn’t be surprised to discover that Biogen and Ionis were interested in buying the company. AveXis is said to have a more comprehensive distribution network for disseminating SMA drugs than Biogen.

Recent Events
On March 16th, the company released its fourth-quarter results. Because AVXS doesn’t generate any revenues, there are no earnings. But costs are coming down, and the fourth-quarter bottom-line loss tallied $0.92, compared with $1.82 in 2015’s final period. Cash on the balance sheet rose to $240 million (thanks to an extra 2.6 million shares being sold), compared with $62 million at the end of 2015. The balance sheet remains debt free, and there are 22.6 million shares outstanding.

More importantly, the company reported very encouraging results from a Stage I clinical trial of AVXS-101. Although it was small, nine out of nine patients suffering from SMA Type 1 who started taking the drug when they were less than six months old not only lived to 20 months but also exhibited improved motor function. This included swallowing and breathing on their own. Without taking a SMA drug, infant patients have a 92% fatality rate over the same time span.

Since the good news regarding AVXS’ clinical trials was released, the stock price has jumped.  Even though the stock has risen markedly, we think this is just the beginning, particularly if AVXS-101 gets fast tracked by the FDA, which appears increasing likely. In addition, the company is likely to garner more suitors, which could push the stock higher. A 30% takeover premium would not be unreasonable, in our estimation.

At the time of the above article’s writing, the author didn’t have any positions in any of the companies mentioned.


Long-Term Investment

Planet Payment, Inc. (PLPM)

By Kevin Downing, Editorial Analyst

Planet Payment, Inc. (PLPM) provides international payment and multi-currency processing services to around 189,000 retail, restaurant, and hospitality locations in 22 countries worldwide. The company enables the authorization and settlement of international payment transactions by providing connections between a merchant, its bank, and a credit card association. It generates a fee every time a purchase is made across its network, and with its multi-currency processing services, the margin included in the exchange rate is shared by Planet Payment, the merchant, and the credit card association. Customer contracts are signed with credit card associations and generally have an initial term of three to five years, which provides a stable customer base. In 2016, 60% of revenue came from overseas and 40% was derived from the United States. Operations are divided into two operating segments: multi currency processing services (63% of 2016 revenue) and payment processing services (37%) for e-commerce, mail, and telephone order merchants (see below).

Planet Payment’s flagship offering, Pay in Your Currency, helps merchants sell more goods and services by allowing them to process and reconcile payment transactions in multiple currencies. For example, U.S. travelers can see a transaction amount in U.S. dollars before the sale is completed, not later on a bank statement. This “Dynamic Currency Conversion” (DCC) service is also offered at ATMs. By implementing these systems, payment processors like Visa and MasterCard are able to offer differentiated services that improve merchant loyalty, attract new merchants, and open new sales channels. Merchants can use Planet Payment’s services to attract more international customers and make the buying experience more convenient and transparent, as well as share in a financial incentive. Consumers enjoy greater clarity as to the final cost of the transaction in their native currency for point of sale purchases or cash withdrawals.

The company also sells payment services for e-commerce, mail, and telephone order merchants through its Payment Processing division. E-commerce merchants can target international customers by localizing their Web sites for different countries. Web sites price their goods and services in local currencies and have the ability to accept 300 local and alternative payment types. Shoppers get a more personalized Web experience, and more site browsers are converted into buyers.

Growth Vehicles

Higher rates of international travel typically translate into greater demand for Planet Payment’s services, and the long-term outlook here is rosy, according to airline advocacy group Airlines for America, due to low fares and airlines’ network investments and better performance metrics. High levels of employment, personal income, and household net worth should also drive demand.

Other positive industry trends include the global shift away from cash toward electronic methods of payment. This is especially true in emerging markets, such as India and China, where rising wages encourage consumers to forgo paper money in favor of cards for their added convenience and ability to be replaced if lost. India’s recent decision to remove its two highest denomination notes from circulation may drive card adoption there. To be sure, an increase in global e-commerce activity should also continue to help drive demand for the company’s Payment Processing segment.

Planet Payment does face some potential headwinds outside of its control, though. Concerns over terrorism hurt European travel demand in 2016. Further, a stronger U.S. dollar is discouraging some from traveling stateside. Finally, in early March, the European Parliament passed a resolution to require U.S. citizens traveling to the European Union (EU) to obtain visas. This was in direct response to the long-standing U.S. requirement for five of the 28 EU countries to obtain visas to enter America. This situation seems likely to be resolved before it hinders travel, but there is some risk. We don’t expect travel restrictions sought by the Trump Administration to have a severe negative impact.

Outside of favorable industry trends, the company’s main revenue growth driver is signing new contracts with credit card associations. As of December 31, 2016, the total number of active merchant locations increased approximately 60% year over year, to 189,000. In the first quarter of 2016, the company launched its first currency conversion services for ATMs in the Asia/Pacific region. Last June, PLPM partnered with Canada’s largest payment processor, Moneris, to supply Pay in Your Currency solutions there. Other recent business wins include Redeban, Colombia’s leading electronic payment processing company, and Ahli United Bank in Bahrain. A Pay in Your Currency agreement was also announced with Kenya Commercial Bank in Kenya, a significant international tourist destination. In January of 2017, the company signed an agreement with China UnionPay (the largest card payment organization in the world) to facilitate card acceptance directly with United Airlines, which ought to help that carrier gain greater access to the Chinese market. At home, the company revealed an agreement with WorldPay to launch its Dynamic Currency Conversion solution across WorldPay’s 70,000 ATMs in the United States

Recent Results and Outlook

The company’s stock has trended lower since December-period earnings were released in early March. The primary reason for the decline was lower-than-expected sales from the Payment Processing division, which caused total revenue to miss Wall Street’s consensus top-line expectation by 13%. Planet Payment has been phasing out lower-margined customers in order to improve profitability. Although revenue was impacted, this helped adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) for the fourth quarter rise 22%, and earnings per share to jump to $0.06 from $0.03 a year earlier.

A focus on more profitable core business (multi currency processing services) should continue to help lift the bottom line in 2017 despite the aforementioned potential headwinds. At present, 2017 revenue is expected to increase between 11% and 13% year over year, while earnings per share should grow between 31% and 38%.

We view much of the recent revenue shortfall as a necessary evil. The company’s efforts to transition its revenue mix and become more profitable are clearly showing up in the bottom line. Planet Payment has done well to grow its new and existing customer base over the past year, and should continue to do so in the coming quarters. Although some near-term headwinds exist, the company should ultimately benefit from the aforementioned positive long-term industry trends. A reasonable valuation adds to our positive long-term investment thesis.

At the time of the above article’s writing, the author did not have positions in any of the companies mentioned.


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