Xeris Pharmaceuticals (XERS) is a company that got on my radar about two weeks ago. Xeris is already a commercial stage biotech, and this past week saw a big rally in the stock as sales of its lead product, Gvoke, have started picking up.
Figure 1: Xeris Stock Chart (source: finviz)
Although I wish I had discovered this stock a little sooner, I discuss in this article why I believe Xeris is still a good value-pick for long term investors in the sector.
Xeris’ Non-Aqueous Formulation Technology Has Already Produced One Approved Product
All of Xeris’ developments to date relate to its proprietary technology to allow for non-aqueous solutions and suspensions of small molecules, peptides, biologics, antibodies, etc. for injection. This is important because certain therapies don’t work well in the typical aqueous, or water-containing, solutions used for injections for various reasons like needing refrigeration or reconstitution for example. The company’s XeriSol technology is best suited for small molecules and peptides while XeriJect can handle larger molecules like monoclonal antibodies and biologics.
Figure 2: Xeris’ Two Technology Platforms (source: Xeris’ August 2020 Corporate Presentation)
Xeris says that any therapy developed using this technology is ready-to-use without need for reconstitution and stable at room temperature. As will be seen below with one of Xeris’ pipeline products, this technology can be used to co-deliver products in one injection that would typically take two, and it can also deliver smaller volumes than would sometimes otherwise be practical. Importantly, these injections can take essentially whatever form is required, including both intramuscular and subcutaneous injections as well as infusions. Xeris intends to offer its suspensions commercially in vials, single-use injectors, pre-filled syringes, multi-use pens, and infusion pumps.
Xeris’ technology already carries the ultimate clinical validation as well, through the approval of the company’s lead product, Gvoke. Gvoke comes as a pre-filled syringe or as a single-use autoinjector, both intended for use as a subcutaneous injection. The drug Gvoke delivers is glucagon, which is a hormone produced by the pancreas that raises blood sugar levels.
Gvoke’s initial indication is for severe hypoglycemia in kids and adults with both type 1 and 2 diabetes. Hypoglycemia is a huge problem for diabetics who are using therapies already to lower blood sugar, and severe cases can quickly turn fatal in the wrong circumstances. Traditional glucagon therapy features a powdered form that must be reconstituted and inserted into a syringe before injecting. This is obviously not ideal in an emergency situation, hence the appeal of a ready-to-go syringe or autoinjector.
Gvoke was initially approved in September 2019, but the pre-filled syringe version didn’t launch until November 2019. The autoinjector launched even later in July 2020. Gvoke uptake was fairly slow during these first few months with just the syringe version available, netting $1.6 million in Q4 2019, $1.7 million in Q1 2020 showing some growth despite the pandemic, and now $2 million in Q2 2020.
Figure 3: Glucagon Market Growth (source: Xeris’ August 2020 Corporate Presentation)
As you can see from Figure 3 though, sales appear to have picked up since the release of the autoinjector version at the beginning of July which is likely the cause of the recent share price increase. This chart shows the traditional therapy in red and Gvoke’s main competitor, Baqsimi in blue. Baqsimi is a nasally inhalable powdered form of glucagon that got a jump-start on Gvoke by launching last August. Xeris is quick to point out the overall market growth in addition to Gvoke uptake, and I think this is an important point to note. Xeris suggests this market could potentially exceed $2 billion in the US with full uptake in coming years. I’m not sure I can imagine quite that rosy of a scenario playing out, but the Gvoke peak sales estimates I’ve seen around $250 million seem like they could be conservative with 10%+ glucagon market growth year-over-year at present.
Xeris has also already submitted an MAA in the EU for its glucagon formulation in diabetics. The company should get a decision in 2021 and be able to launch in 2021 if approved. While likely not as large as the US opportunity, this should provide Xeris with meaningful additional cash-flow.
Xeris has good synergy between already approved Gvoke and the rest of glucagon pipeline. Although there’s always some risk, there should be little reason why an approval won’t eventually be reached in these additional indications because glucagon is such a commonly used therapy and Xeris’ XeriSol technology has already been demonstrated as safe and effective in its first indication.
Xeris has actually already received positive Phase 2 results in two additional glucagon indications, post-bariatric hypoglycemia and exercise-induced hypoglycemia. The company has said there will be a meeting with the FDA on next steps for both of these programs that should happen later this year.
Xeris is also developing a singe injection pramlintide-insulin combo for mealtime blood sugar control in type 1 and 2 diabetics. This combo is already used for this purpose, but it has to be given as two separate injections because, using ordinary injection technology, these two compounds cannot be in the same liquid solution. Xeris’ XeriSol technology enables this therapy to be administered as just one injection which is a significant step up from a quality-of-life perspective. This program also has positive Phase 2 data and is awaiting an FDA meeting later this year.
Xeris has also conducted a Phase 1 study aimed at using its XeriSol technology to make a diazepam injectable therapy for both adult and pediatric epilepsy patients. Xeris received post-Phase 1 guidance from the FDA that the therapy could be moved directly to a Phase 3 registrational trial rather than following the usual course. Xeris is now looking to partner with another company to continue advancing this therapy.
Figure 5: Xeris’s Collaboration Strategy (source: Xeris’ August 2020 Corporate Presentation)
Xeris is also looking to partner with big pharma to develop injectable therapies utilizing Xeris’ technology platform, and Xeris says it already has some projects in the works with top-10 pharma companies. This model seems very similar to what is also being done by Antares Pharma (ATRS) that is another long-term holding of mine. From a technology standpoint, Xeris seems largely de-risked, meaning that while we may see substantial volatility, its hard to see failures in the pipeline sufficient to, by themselves, cause permanent loss of capital for investors.
Xeris’ Balance Sheet Is In Good Shape
Xeris’ cash on hand looks good now after a recent raise. Xeris raised $109.4 million in July, $75 million of which was in the form of convertible notes with the rest being in Xeris shares at a price of $2.72/share. Xeris’ prior cash position was $145.8 million at the end of June, so one would now expect that to be in the vicinity of $250 million post-raise.
Xeris’ net loss was $53.3 million in the first half of 2020, so the company should be in good shape for a while. Even without factoring in increased product sales, Xeris’ cash pile should last until late 2022. I think Xeris is likely to need cash at least one more time before becoming sufficiently profitable to sustain its ongoing operations out of cash flow, but hopefully that amount will be small or maybe Xeris can even figure out a way to raise the necessary cash non-dilutively.
Obviously potentially having to dilute substantially more is one of, if not the biggest risks, of investing in a company like Xeris. Despite the strength of Xeris’ technology platform, poor execution or slow sales uptake could lead to dilution large enough to cause a loss of capital for investors; thus, the balance sheet is the biggest risk in my view and should be watched closely for continued good management by Xeris.
Xeris Has Significant Insider Support
Although not the most important consideration in my mind, I do like to see insiders owning a significant amount of shares and more recent open-market buys than sales. This is both because of the shareholder-friendly incentives that insider ownership creates and because I will never know as much about a company as the insiders who are either buying or selling at any given time.
In Xeris’ case, there have been no unplanned sales since February 2019 and a significant amount of open market buys.
Figure 6: Xeris Insider Buys (source: fintel.io)
Some of these purchases were a bit lower than where the stock is now, but the ones at $4.15/share were higher than where the company has been trading lately until last Friday’s rally. This is certainly at least a slightly positive factor in support of other analysis suggesting the company is undervalued.
Xeris’ Current Valuation Leaves Lots Of Room For Upside
Xeris’ valuation is very mispriced right now in my view. Even after last Friday’s 10%+ upward move, Xeris still has a sub-$200 million market cap. If Gvoke is even moderately successful in taking market share, then Gvoke sales alone will likely exceed the current market cap at their peak. This is then putting no value on the European opportunity for Gvoke, the entire rest of the current pipeline, or the high chance of partnerships coming out of the XeriSol and XeriJect technology.
Figure 7: Xeris Revenue and Earnings Estimates (source: Seeking Alpha)
As you can see from Figure 7, analyst estimates of future revenue and earnings similarly support that the current valuation is inappropriately low. If you consider a 5 P/S and a 15 P/E about average, then this leaves a wide gap between the present expectations and the amount of underperformance that would be required for current shareholders to lose much capital over the long-haul.
Figure 8: Xeris Present Value Estimates (source: revenue and earnings estimates from Seeking Alpha and my calculations based on that data)
I went one step further and discounted these revenue and earnings estimates to see if the attractive valuation held up, and as you can see from Figure 8, this exercise resulted in a potential present value more than 4x current levels, again even after the stock rallied 10%+ last Friday.
Figure 9: Xeris Value Proposition (source: Xeris’ August 2020 Corporate Presentation)
I don’t normally pay too much attention to management’s summary slides, but I thought the one here in Figure 9 actually did a great job of summarizing what, in my view at least, makes Xeris such a good value at its current price level.
Xeris fits in perfectly with the type of companies I will be covering in my soon-to-be-launched Marketplace Service, Biotech Value Investing. With a target launch date of October 1, this service will provide in-depth coverage of my approach to finding high-quality, value-oriented companies in the biotech sector. This approach, developed through years of studying the value investing greats, is intended to use the inherent volatility of the biotech sector to my advantage by sticking with high-quality companies for the long-haul and using options to help generate a high compounded return while ensuring optimal entry and exit points.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in XERS over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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