Joel Greenblatt (Trades, Portfolio), the manager of Gotham Capital, has what he calls a “Magic Formula” for investing. First detailed in "The Little Book That Beats the Market," this formula is based mainly on two key ratios. The first is earnings yield, which is calculated by dividing Ebit by the firm’s enterprise value. Ebit refers to earnings before interest and taxes, while enterprise value equals market capitalization plus total debt minus cash and cash equivalents (EV= Market Cap + Total Debt – Cash and equivalents). A high earnings yield also is used as a measure of value, with higher yields reflecting lower share prices. The second key financial ratio is return on capital, which is calculated by dividing Ebit by the sum of net fixed assets and net working capital.
GuruFocus' Magic Formula Screener is based on Greenblatt's formula, and one of the stocks that ranks highly on this screener is Vir Biotechnology Inc. (VIR, Financial), which has an earnings yield of 138.89% and a return on capital of 1,072.49%.
Does the magic formula make a difference when stock picking? In his book, Greenblatt claimed the formula generated an average annual return of 30.8% per year over 17 years. While this is great, it does not indicate a 100% success rate. Still, Greenblatt makes a strong case for why these criteria are important to consider for stocks.
About Vir Biotechnology
In a recent press release, Vir Biotechnology described itself as follows:
“Vir Biotechnology is a commercial-stage immunology company focused on combining immunologic insights with cutting-edge technologies to treat and prevent serious infectious diseases. Vir has assembled four technology platforms that are designed to stimulate and enhance the immune system by exploiting critical observations of natural immune processes. Its current development pipeline consists of product candidates targeting COVID-19, hepatitis B and hepatitis D viruses, influenza A and human immunodeficiency virus.”
A Nov. 16 press release announced the company had ranked first on the 2022 Deloitte Technology Fast 500 list. It achieved the top spot because its revenue had grown by 125,138% between fiscal years 2018 and 2021. In 2021, it placed 70th on the same list, based on revenue growth of 2,383%. The competition includes companies in the technology, media, telecommunications, life sciences, fintech and energy technology industries.
CEO George Scangos, Ph.D., said, “Our number one ranking on the Deloitte Technology Fast 500 list reflects the dedication of our team and Vir’s executional success in bringing sotrovimab, a novel monoclonal antibody therapy, to millions of patients around the world in record time and in the midst of the Covid-19 pandemic."
While it is a commercial-stage company, its operations are still focused on “identifying, researching and conducting preclinical and clinical activities of our product candidates, acquiring and developing our technology platforms and product candidates, organizing and staffing our company, business planning, raising capital and establishing our intellectual property portfolio. Sotrovimab has received an EUA from the FDA and marketing authorization in the EU.”
Fundamentals
GuruFocus gives the company a financial strength rating of 8 out of 10, which is a high score, in large part because the company had no debt at the end of the third quarter of 2022. However, it had long-term capital lease obligations of $130 million, which explains the first four lines on the below table. Vir has a strong balance sheet, with $2.246 billion in cash, cash equivalents and marketable securities.
Its profitability is ranked 2 out of 10, based on the operating margin of -65.67%, the trend of the operating margin going up, the Piotroski F-Score of 7 out of ), the consistency of its profitability (upward over the past two years) and its business predictability rank (0 out of 5 stars).
Revenue growth has been astronomical over the past three years. That’s what drove its number one position on 2022 Deloitte Technology Fast 500 list. Vir has also has turned the corner to profitability:
Valuation
Valuation is a challenging issue. As we’ve seen above, revenue has skyrocketed and Vir has been profitable for years now. It went from negative earnings per share to positive in 2021. While it's still in the uncertain beginning stages, the company's price-earnings ratio is incredibly low at 3.08. Moreover, the share price has gone down due to the wider market slump.
Gurus
Vir has surprising guru confidence considering it is such a young company. Five of the investing gurus followed by GuruFocus had stakes as of the latest round of 13F and mutual fund reports for the quarter ended Sept. 30, including Baillie Gifford (Trades, Portfolio) with 3,978,657 shares and Jim Simons (Trades, Portfolio) of Renaissance Technologies with 1,512,494. Joel Greenblatt (Trades, Portfolio) had the third largest guru stake with 72,184 shares.
Institutional investors, as a whole, haven’t embraced the company to the same extent (41.78% of the shares outstanding are held by institutional investors), but their interest is growing:
Insiders have a 2.68% share, and the biggest holding is that of Dr. Vicki Sato, a director and chairman of the board. She held 1,416,919 shares as of Oct. 10, 2022, representing about half of all insider shares.
Conclusion
Vir Biotechnology is a Magic Formula stock that looks to be a quality company with an undervalued share price. Of course, its future depends not only on good management but also on its drug development platforms. The biotechnology industry is notoriously volatile as continued innovation leadership is never a give.
