- Many investors missed the trend when Chinese pharmaceutical companies got hot. Many of these stocks are up 3-fold or more in the last year as Chinese biotechnology companies have played catch-up to U.S. companies in the booming cell therapy market
- But manufacturing is a problem for many of these companies, and it can cost over $100K to manufacture one course of treatment before commercial-scale manufacturing in place. As a result, developers are turning to specialized contract development manufacturing organizations (CDMOs)
- CDMOs like Orgenesis (ORGS) are well-positioned to capture what could be a multi-billion dollar market based on the wide open market for new cell therapies like CART cells. Revenue is growing hand over fist, and ORGS is already partnered with high-profile public companies like CRISPR Therapeutics (CRSP). A few new deals could send the stock soaring
Chinese money is flooding the biotech sector, both in the U.S. and in the People's Republic. It's a trend that many U.S. investors may have missed as Chinese healthcare stocks have rallied higher in the last year. For instance, investors gobbled up shares in Nanjing Legend's parent company, Hong Kong–listed Genscript Biotech Corporation (1548.HK), after the smaller company presented strong new clinical trial results for a new drug based on modified human cells, called a CAR T-cell, last year. The stock is up 10-fold in the year since! Meanwhile, 3SBio Inc. (1530.HK) has doubled in that time, and Sino Biopharmaceutical Limited (1177.HK) has almost tripled! Clearly, there's a trend here.
While Chinese health care has historically lagged the U.S., and many of its citizens travel abroad for newer treatments, Chinese biotech firms may in fact be leapfrogging their U.S. counterparts in one certain subsector of the space - cell therapies, like Nanjing Legend's CART cells above. This new treatment paradigm involves using a patient's own cells, or a donor patient's cells, to combat disorders including cancer. The most remarkable new wave of cell therapies lies in these CART drugs, where white blood cells are modified to seek out and attack cancer, and many patients are being cured outright. The U.S. saw its first two approved last year.
The boom in cell therapies has created one problem: a lack of great manufacturing options. You see, modifying and expanding human cells is extremely complicated and must be done in a particularly contained environment. Many drug developers actually lack the know-how to do this at any larger scale, which is why contract development manufacturing organizations (CDMOs) have become a go-to necessity for the companies that explore new drug options. In fact, some publications have outlined why this may in fact be cheaper and more efficient in the long run.
These companies are seeing increased investment in the last few years, and one standout that's already operating in the Asian region bears attention: Orgenesis Inc. (ORGS). This company is growing their sales rapidly, on track to report a record year as they build out their capacity, and already seeing a +57% revenue increase in 2017 over 2016. Most importantly, the stock could be worth significantly more with great execution in the coming years, as this market is set to grow to $4 billion or more and even small penetration could make the stock worth $20 or more.
Cell Therapy Developers Need Help With Manufacturing
Cell therapies are therapeutics in which cellular material, often a living cell, is injected into a patient. Historically, the most common types of cell therapies have been for the replacement of existing functioning cells in a patient through blood transfusions or similar approaches. Now, some of the most promising therapies involve outfitting immune cells with specifric enhancements, as is the case with chimeric antigen receptors for CAR-T cells, which enable the cell to identify, target and destroy cancer cells. In the next decade CAR T-cells are expected to become a $25 billion industry by themselves according to Global Information, Inc, and they're one of the hottest new modalities to hit the market in years.
China has become a force in the research of cell therapies and CAR T-cells. According to a U.S. database, there were 116 drug trials registered there, compared with 96 in the U.S., and 15 in Europe. For Nanjing Legend, their big break last year came when a study of 35 multiple myeloma patients in China, who had all relapsed and were no longer responding to drugs, had a 94% rate of remission within two months of the patients being treated. It's an astonishing outcome.
But the manufacturing process for cell therapies is far more complex than traditional chemical drugs, and there are few companies with the know-how to manufacture these therapies well. Many of these drug developers are outsourcing their manufacturing, and development processes, to the very few companies who do this well. These so-called contract development manufacturing organizations (CDMOs) are filling the void and scaling up rapidly. With the potential for hundreds of new drugs in the next 10-20 years, all needing quality manufacturing processes, the opportunity for good manufacturers is huge.
Orgenesis Is Delivering On Growth And Capturing More And More High-Profile Partners
Orgenesis is one of these CDMOs, with a great track record and a group of partners that indicate just how well they conduct manufacturing for drug develoeprs. The company is already working with big names in the industry, like Servier, which has European rights to Cellectis' (CLLS) developmental drugs, and CRISPR Therapeutics AG (CRSP).
The company operates through their MaSTherCell subsidiary as a Europe-based CDMO, which offers Good Manufacturing Practices (GMP) manufacturing services so that customers, like mid-sized biotech companies, can focus on developing their product/therapy while relying on a trusted source for their production. Wall Street research firms and CAR T-cell companies have estimated that the future commercial cost to manufacture these therapies will be around $35,000 to $100,000 alone!
The company has seen consistent revenue growth over the last two years. They just reported a 42% revenue increase, to $2.6 million, in fiscal Q1 compared to the period one year ago, and gross profit of $1 million. Those results come in the wake of a 57% increase in sales in fiscal 2017, to $10.1 million, over the 2016 year. Financials are all moving in the right direction, and investors may slowly be catching on to the market opportunity here.
ORGS Could Be Worth 2X or More With Execution in 2018 and 2019
With growth like this, CDMOs and Orgenesis in particular shouldn't be overlooked. ORGS is well-positioned to benefit from the boom in cell therapies under development globally - they're operating a joint venture with the renowned CureCell Co., Ltd. to collaborate in the contract development and manufacturing of cell therapy products in Korea and the Asian region, and their Belgian facility was recently expanded to accomodate increased demand.
To illustrate the market potential, manufacturing accounts for about 15-25% of a CAR T-cell's cost. The newest drugs on the market are exorbitantly expensive, $475,000 for Kymriah and $373,000 for Yescarta. Their manufacturing, presumably, accounts for about $55,000 to as much as $100,000 at the very high end!
This estimated 15% manufacturing cost, then, applied to the expected $25 billion in sales from these and similar drugs in the coming years, means that the total addressable market may be around $4 billion for CDMOs like ORGS. This undiscovered company could very well tackle 5% or more of this market with the right execution and expansion, or $200 million in potential sales.
With this kind of expertise, there's always the chance that a larger biopharmaceutical company comes along and buys ORGS outright, bringing this manufacturing know-how internal. Gilead Sciences (GILD) and Celgene (CELG) both paid 5 to 6X their peak sales estimates from Wall Street banks to acquire the two most prominent U.S. cell therapy developers in recent years, Kite Pharmaceuticals (KITE) and Juno Therapeutics (JUNO). ORGS could go for a similar take, suggesting the shares could be worth multiples from today's prices, and 2X, or $20, may be conservative in due time.
Orgenesis is a micro-cap company, and it could be worth significantly more than where the shares trade today, or significantly less. It's a high-risk investment, and investors should understand that without proper execution, it could be worth nothing in the long run.
For Orgenesis, it's a matter of securing the manufacturing contracts for one or a handful of these cell therapy companies. As the technology reaches the commercial stage in the next 2-5 years, expect more players to be looking to outsource the complex manufacturing process for cell therapies. Orgenesis has already signed deals with some of the biggest names in the sector, and 2018 could bring more high-profile collaborations. Given the addressable market, this is a company to have on your watchlist.
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One Equity Stocks is a leading provider of research on publicly traded emerging growth companies. Our team is comprised of sophisticated financial professionals that strive to find the companies and management teams that will outperform the market and deliver investment returns to our subscribers. We are not a licensed broker-dealer and do not publish investment advice and remind readers that investing involves considerable risk. One Equity Stocks encourages all readers to carefully review the SEC filings of any issuers we cover and consult with an investment professional before making any investment decisions. One Equity Stocks is a for-profit business and is usually compensated for coverage of issuers we cover as well as other advisory work we perform. In the case of ORGS, we are reimbursed for actual costs we incur, received 80,000 shares of restricted stock, and anticipate receiving up to an additional 10,000 restricted shares per month from ORGS for Business Development, Capital Markets, and Research Services. Please contact us at [email protected] for additional information or to subscribe to our intelligence service.
