What's the Attraction of Bluebird Bio?

This gene therapy company may be a big opportunity - or a value trap

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Nov 27, 2020
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It's a little-known company with lots going against it, but bluebird bio, Inc (BLUE, Financial) has attracted investments from seven of the investing gurus followed by GuruFocus (and yes, the company's name is meant to be spelled without capital letters).

Based in Cambridge, Massachusetts, bluebird is a $2.87 billion biotech company specializing in gene therapy. In its Q3-2020 earnings release, it described itself this way:

"We're developing gene therapies for severe genetic diseases and cancer, with the goal that people facing potentially fatal conditions with limited treatment options can live their lives fully."

It is developing therapies for the following diseases/conditions:

  • Sickle cell disease
  • Transfusion dependent beta thalassemias (β thalassemias), a group of inherited blood disorders
  • Multiple myeloma
  • Cerebral adrenoleukodystrophy.\

The company has one approved drug, Zynteglo, which it expects to be approved for use in Europe before the end of this year. However, it is expensive, and payments will depend on how well it works.

The treatment involves a unique "manufacturing" process, which means taking cells from a patient, cryopreserving and shipping them to a special facility. At the facility, the cells are genetically reprogrammed and new cells are manufactured. Those new cells then go back to the hospital where they are infused into the patient.

If all goes well, bluebird receives a payment of 1.575 million Euros ($1.880 million) for the treatment. The payment is amortized over five years and depends on a successful treatment.

The company, which went public in 2013, has developed partnerships and agreements with other companies, including Celgene (now owned by Bristol Myers Squibb (BMS, Financial)), Lonza (LONN, Financial), Medigene (MDG1, Financial), Apceth Biopharma, TC Biopharma, Regeneron (REGN, Financial), Gritstone Oncology (GRTS, Financial) and Inhibrix (INBX, Financial).

Based on the current status of Zynteglo and its pipeline, the company sounded optimistic in its non-financial outlook. Nick Leschly, the company's president and CEO, commented the following:

"While 2020 continues to present unprecedented challenges, bluebird has continued to advance our innovative cell and gene therapy programs. Looking to 2021 and beyond, this is a catalyst-rich period for bluebird as we are on the cusp of multiple approvals in the U.S. and EU. In the near term, we look forward to collaborating with FDA to find innovative approaches to help advance these complex therapies."

What about its financial outlook? For starters, it has little debt and lots of cash:

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At the end of the third quarter, it had $1.44 billion of cash, cash equivalents and marketable securities, up $200 million from the same quarter in 2019. It credits the improvement to proceeds of a May 2020 public offering of common stock and to a one-time, upfront payment from Bristol Myers Squibb. Overall, the GuruFocus system gives it a 5 out of 10 rating for financial strength.

For profitability, it receives a lowly 2 out of 10 rating because of negative margins and return on equity. It does have positive revenue growth but does not have positive Ebitda or earnings per share growth.

Because it has negative earnings, it has no price-earnings or PEG ratios, but it does have a price-book ratio of 1.89 and a price-sales ratio of 10.36.

The company does not pay a dividend and has a negative share buyback ratio.

On valuation, the GuruFocus Value chart lists bluebird as a possible value trap. Here's a closer look at the price chart:

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Whether you see bluebird as a value trap or a value opportunity will depend on your expectations about its future. Is this an early-stage drug company with the potential to create and deliver profitable products in years to come, or is it a cash-burner with little chance of turning around its share price?

To some extent, that will be a function of the size of its niche markets and its penetration of them. It will also be a function of competition and collaboration. It reports in its 10-K for 2019 that it faces extensive competition in each of its research areas. In addition to other companies, there is also competition for types of treatments. Gene therapy, for example, is extremely expensive, so it is not likely to be any physician's or patient's first choice.

At the same time, though, collaboration with other companies helps offset the competition. It offers two examples in its 10-K:

"We have a research collaboration with Novo Nordisk A/S (NVO, Financial) to jointly develop in vivo genome editing treatments for genetic diseases, including hemophilia. We also have a research collaboration with Forty Seven, Inc. to pursue clinical proof-of-concept for an antibody-based conditioning regimen in combination with our ex vivo lentiviral gene therapy platform."

For at least some of the gurus followed by GuruFocus, bluebird is an opportunity:

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At the end of the third quarter, the following gurus held positions in the stock:

Vanguard's 5.3 million shares gave it an 8.06% ownership share in bluebird. Overall, GuruFocus reports 97.86% of its shares were owned by institutional investors.

Conclusion

We won't know for a few years whether bluebird bio will become a healthcare star delivering above-average earnings or just another expensive niche drug company that struggles to survive.

In my opinion, it seems to be an innovator in early-stage development, with one new drug about to debut and promising products in its pipeline. I base that on the premise that it is collaborating with established companies that pick their partners carefully, and from the track records of the gurus who have invested in it.

Given its low valuation, low enough that we're warned it might be a value trap, I think this stock deserves the attention of aggressive value investors. For now, though, it will be of no interest to growth or income investors, or those who do not consider biotech to be within their circle of competence.

Disclosure: I do not own shares in any of the companies named in this article.

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