Aeglea BioTherapeutics, Inc. (NASDAQ: AGLE) has only been public for a few weeks, but the analysts from its underwriting syndicate have issued massive upside calls. The driving force behind Aeglea is that the biotechnology outfit is trying to develop enzyme-based therapeutics, using amino acid metabolism to treat inborn errors of metabolism and cancer.
As 24/7 Wall St. always warns about being irrationally exuberant when there are such bullish reports, it is important to keep in mind that its lead product candidate (AEB1102) is only in the Phase 1 clinical trial stage in oncology. Aeglea’s initial public offering ended up being 5.481 million shares after a partial over-allotment exercise priced at $10.00 per share in mid-April.
Its underwriters were listed as UBS, BMO Capital Markets and Wells Fargo as the joint book-running managers; and Needham & Company was the co-manager. BMO Capital Markets issued an Outperform rating and a $19 price target. UBS issued a Buy rating, with a much more conservative price $12 price target. No report had been seen by Needham as of Monday morning.
Aeglea’s post-IPO range has been $8.36 to $12.75, and its closing price on Friday was $8.76. One standout issue worth noting was that Aeglea’s original IPO price talk has been closer to a price range of $16 to $18 per share. The company’s IPO filing indicated that Aeglea intends to use the net IPO proceeds to fund the continuing development of AEB1102 and to advance its additional product candidates. The remainder was said to be for working capital and general operating expenses.
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Wells Fargo is a report that was even more bullish than BMO — with a valuation range of $22.00 to $26.00 per share. It is important to keep in mind that this is the most bullish view, but the firm’s Jim Birchenough said:
Our favorable rating and outlook is supported by a proprietary platform focused on amino acid metabolism, an exciting pipeline of optimized human enzyme therapeutics targeting both inborn errors of metabolism (IEM) and cancer cell dependence, and several potential product opportunities in each category. Overall, we view product candidates for enzyme deficiency as relatively lower risk, with predictable commercial opportunities, and product candidates targeting cancer cell metabolism as higher risk, but potentially higher reward.
The Wells Fargo valuation range of $22.00 to $26.00 is based upon the net present value of potential future cash flows tied to AEB1102. They assume $250 million in peak U.S. sales and a 25% likelihood of success in IEM and 10% likelihood of success in AML.
The risks for AEB1102 include an inability to achieve adequate arginine reduction or correlation with clinical benefit in arginanse I deficiency, an inability to identify patients with arginine dependent tumors and failure to achieve adequate tumor response.
Wells Fargo’s investment thesis is based upon Aeglea being well-positioned with a proprietary platform and having an exciting pipeline of optimized human enzyme therapeutics targeting both IEM and cancer. Wells Fargo said:
Overall, we view product candidates for enzyme deficiency as relatively lower risk, with predictable commercial opportunities, and product candidates targeting cancer metabolism as higher risk, but potentially higher reward.
Aeglea shares closed up 11.4% at $9.76 on Monday. This sounds great on the surface, and it is far better than all but a handful of stocks performed on percentage gains. Still, its trading volume was only about 113,000 shares on the day – less volume than last Monday and last Tuesday.
The biotech sector is one of those instances where there can be massive upside in the months and/or years ahead. That being said, these massive upside calls also come with a lot of risk. The potential upside for Aeglea is nothing short of a high-risk vs. high-reward scenario which should only be considered by the most aggressive investors who have no aversion to risk.
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