With its shares down by 49% over the last 12 months and the market losing interest in its lead pipeline program, it's hard to say that shareholders of Atea Pharmaceuticals (AVIR 5.40%) have any relief in sight. But with such a sharp decline, its shares are now so inexpensive that there could be an opportunity for investors who are comfortable with taking long odds.
So will Atea rally from the depths to a roaring comeback, or will it continue to languish? Let's answer this question by appreciating why its stock is falling in the first place.
Nothing is actually going wrong (except the market)
Atea develops antiviral medicines, specifically to combat the SARS-CoV-2 virus, as well as the hepatitis C virus. Whereas its hep-C program is in phase 2 clinical trials, its coronavirus program is in phase 3, and it succeeded in securing a fast-track designation from the Food and Drug Administration (FDA). Both of its programs feature its antiviral molecule bemnifosbuvir as the star of the show, though the hep C program is studying its efficacy in combination with another drug.
But, as you may have noticed, coronavirus therapies (and vaccines) are old news as far as the market is concerned. The market leader in anti-coronaviral medicines, Pfizer, is seeing its revenue from the segment crash, and there isn't much expectation of its decline reversing. And while it isn't possible to predict the future with certainty, right now it seems unlikely that there will be any massive new resurgence of demand stemming from high caseloads. Likewise, the market for hepatitis C antivirals is not going to boom anytime soon. So Atea Pharmaceuticals is positioned very poorly in the near-term or medium-term, even if it manages to bring a product to market.
On the other hand, the company hasn't actually hit any bumps in the road recently, and its balance sheet is quite strong. Its trailing-12-month (TTM) operating expenses were $161.7 million, whereas it had $620.5 million in cash and equivalents as of the first quarter of 2023. Its debt load is negligible. That means it has enough money in the bank to fund its operations at their current tempo for almost four years.
With such a long runway, it's quite likely that the biotech will be able to commercialize its coronavirus program, yielding some revenue. Even if regulators find a problem with its application for approval, Atea will have plenty of resources to try to fix things up. Going from $0 in recurring revenue to any sum makes for massive growth. And that's just part of the reason why this company could be a brilliant buy for those who are willing to take a big chance on it today.
Its price-to-book (P/B) ratio is presently 0.4, which suggests that the market is so pessimistic about the stock that it's being priced at a valuation that's lower than the value of its assets. With its market cap currently at $276 million, a buyer could purchase the entire business and collect an immediate profit from simply pocketing its cash holdings. Eventually, if it succeeds in commercializing one of its medicines, its unreasonably low valuation will expand, which could make shareholders a lot of money.
Don't nibble until there's a plan
The trouble with investing in Atea today is that the risk of it falling short remains incredibly high across several dimensions, starting with its total dependence on its molecule bemnifosbuvir.
Biotechs typically try to avoid putting all of their eggs (clinical programs) in one basket (candidate medicine). That way, if a clinical trial shows that a candidate medicine is unsafe, ineffective for its intended purpose, disliked by regulators, or that it's otherwise unworkable, there isn't as much of a chance of the bad results contaminating the appeal of the other programs in the pipeline. In other words, diversifying ensures that any damage to the company's stock from a clinical stumble is somewhat contained. But Atea has no such protection, as all of its clinical-stage programs are studying bemnifosbuvir. The takeaway is that any problems with bemnifosbuvir will have a sharp impact on shareholders.
Then there's the risk of the medicine failing to make enough money to recoup the costs of development. People who invest today don't really have any way to mitigate that risk by doing more diligence, as it's very much unclear how much residual demand there will be in the market for coronavirus therapies. Furthermore, if bemnifosbuvir is commercialized, it'll still need to fight Pfizer's Paxlovid for market share, and Pfizer will have a multiyear head start, not to mention vast and enduring advantages in the amount of resources devoted to marketing and distribution.
It's still possible that Atea could find a niche, and as mentioned previously, its niche doesn't need to be a large one for shareholders to be very pleased. But for now, even if your tolerance for risk is on the high side, wait for management to give at least a few remarks about how it plans to navigate the harsh competitive environment the company will face. The chance of Atea being a diamond in the rough will be a lot higher if there's a credible path for it to succeed with bemnifosbuvir.
