Alvotech

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 2/5

A global biotech company, Alvotech focuses on biosimilar development, manufacturing and sales, specializing in complex biosimilars for autoimmune diseases, ophthalmology, and respiratory conditions.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Alvotech’s primary business strategy is to bring biosimilar versions of complex biologic drugs to the market at a lower cost than their branded counterparts. This requires an understanding of both biologics manufacturing and regulatory requirements.

Business Overview:

  • Revenue Distribution: While specific revenue breakdowns by geographic region aren’t consistently detailed in all reports, Alvotech operates on a global scale, targeting markets such as the United States, Canada, Europe, and a multitude of other international regions including Asia and South America. Their revenue drivers mainly come from product sales, milestone payments, and technology-related revenues.

  • Trends in the Industry: The pharmaceutical industry, especially the biologics sector, is characterized by high development costs, stringent regulatory approvals, and patent protection periods. As brand patents expire, the entry of biosimilars becomes more viable. Biosimilars offer a pathway to more affordable drugs, and countries are increasingly looking to such solutions, so this trend looks to be good. However, there is strong competition in the space of biosimilars and companies which are better at both pricing and innovation, do pose a threat.

  • Margins: Alvotech currently generates revenue on a small scale, with a significant increase projected to come from future product approvals and subsequent sales, especially once AVT02 and AVT04 are launched. This suggests that as the company scales, gross margins and profitability might improve. Operating margins, according to reports, have been highly negative in the past few years (with a loss of ~$200 million for 2021), but those margins would be improving over the next years. Alvotech has stated that as it commercializes the products, economies of scales would make them more profitable.

The company is currently operating at a loss and the expectation is that the losses will be greatly reduced once revenues start flowing in. But this has not been proven yet and is based purely on management projections.

  • Competitive Landscape: The biosimilar market is intensely competitive. Alvotech faces competition from major pharmaceutical companies such as Amgen, AbbVie, Biogen, and Samsung Bioepis (among others), all of which are pursuing their own biosimilar or original brand biologics. It has to compete on both technical aspects (such as innovation and IP) and financial aspects(such as ability to produce drugs at lower prices).
  • What Makes Alvotech Different? Alvotech claims a focus on biosimilars of complex biologic drugs, which require more specialized manufacturing technology and significant regulatory expertise. They have a stated goal to produce drugs that are fully interchangeable with the original brand, which they believe is something that many of the biosimilar companies can’t achieve, along with a “biosimilar-first” strategy in order to avoid any competition from branded versions. They also have a fully integrated platform which is supposed to lead to cost advantages. This helps to differentiate them from some other players who could be focusing more on less complicated biosimilars.

Alvotech aims to be the first entrant for many key drugs, and as such would have the first movers advantage which could translate into higher than average profitability. This could be a key factor in value creation.

  • Other Relevant Information: Alvotech was formed in 2013 in Iceland and is incorporated in Luxembourg. They have offices in multiple locations such as Iceland, Germany, Ireland, and the US. The company’s operational framework is designed to create a seamless global network for manufacturing and sales, which has had some logistical challenges in its early stages.

Financials (with emphasis on latest data):

  • Revenues: The revenue generation for ALVO is still in its early stages, with not many products on the market yet. As of Q3 2022, revenues were negligible ($100,000). The company is still undergoing clinical trials and awaiting approval on its main products, so the revenues are expected to pick up once these processes complete. A lot of its expenses are towards production, especially for their lead candidate AVT02 and AVT04.

For the year 2022, revenues remained relatively insignificant at ~$400,000. Most of their revenues are from development or license revenues from partnering companies, rather than sale of their own products. Revenues are expected to grow dramatically as products get approved and commercialized, mostly AVT02 and AVT04.

  • Profitability: The company is not profitable at present. For the year 2021, total losses amounted to roughly 200 million dollars, and Q1 2023 earnings call shows that the company is still operating at a loss, with total comprehensive loss of ~$136 million. But the management expects that the company would become profitable after commercialization of the drugs. The profitability of ALVO is closely tied to their success in attaining approval for their products. This is also tied to scaling the production and sales of the drugs. The company needs to show its execution expertise to garner the faith of investors.

It’s worth noting that Alvotech has continued to post huge operating losses, due to the nature of the pharmaceutical space which is very capital intensive.

  • Balance Sheet:
  • The assets include cash equivalents (around ~$270 million as of March 2023) along with some intangible assets. However, a major chunk of the assets are related to property, plant and equipment ($890 million), mostly towards manufacturing facilities and equipment. * The liabilities are made of the borrowings (around $870 million) along with some deferred tax liabilities. There are not many current liabilities.

The balance sheet shows a relatively weak financial position, with more debt and liabilities than assets.

  • Capital Expenditures: Alvotech’s capital expenditures are mainly focused on the building of production facilities and manufacturing equipment. As they are bringing their production in house, that is an important area of expenditure. Alvotech has a capex of ~$300 million in 2022. As the company starts to commercialize more products, further investment is needed to increase its global capacity.
  • Cash flow: As the company is operating at losses, it is burning through cash quickly and needs to find a way to reduce the cash burn rate and generate more revenues. The debt that the company has taken up is going to help them for now. They have said that after a few years as they commercialize their products, they would be cash flow positive.

The company has stated that it does not believe it will have enough capital to operate into 2025 unless they get an additional inflow of cash, which could mean going back to the market for additional financing.

Moat Assessment:

  • Source of Moat: The primary source of Alvotech’s moat stems from intangible assets (specifically, their expertise in complex biologics and regulatory approvals), which are not easy for competitors to replicate, and potentially cost advantages, created by their vertical integration strategy. The regulatory requirements, though not difficult, require a lot of resources, which provides some barrier to entry.
  • Strength of Moat:
    • Alvotech’s know-how in complex biosimilars and vertical integration (where it handles all stages from development to production) provides some sort of advantage. It gives them a limited pricing advantage, and may provide a barrier to entry, making it difficult for new competitors to replicate the firm’s success quickly.
    • However, since the technology is always changing, and biologics are not a “winner-takes-all” market where one company dominates everything, Alvotech is susceptible to many forms of competition. Therefore, the moat is only a narrow moat.
  • Moat Rating: 2/5

Risks to the Moat:

  • Competition: The biosimilar market is competitive, with established pharmaceutical companies and other biosimilar players vying for market share.
  • Regulatory Hurdles: Obtaining regulatory approvals is a long and costly process, any setbacks in this process will greatly affect the company’s operations.

If the company does not manage to acquire regulatory approvals in time, or if the regulatory approvals are delayed, the company would not be able to launch its drugs and thus would significantly underperform expectations.

  • Technological Disruption: New therapeutic breakthroughs or different treatments may make existing biosimilars obsolete.
  • Pricing Pressures: The market for biosimilars is price-sensitive, which could lead to the company having to reduce its prices to compete.

Alvotech’s pricing strategy and its impact on profitability is an issue which may severely reduce the long term intrinsic value of the company.

  • Manufacturing Issues: Producing biologics is complicated and subject to manufacturing risks and quality problems that may impact the reliability of Alvotech’s products. The regulatory agencies require high quality and consistent production of medicines, or else companies can get their manufacturing facilities shut down. The risk of production problems looms large over companies which are in the business of manufacturing biologics, and Alvotech is not an exception.

Business Resilience:

Alvotech has been involved in the development, production, and sale of biosimilars for several years now. Its revenues are expected to grow as approvals are given to its key products, mainly AVT02 and AVT04. It has made large scale investments in its manufacturing and distribution capabilities. The company claims they have a world-class technology and development platform and good quality controls. However, since it is still a growing company and is yet to be profitable, the resilience of the company is highly correlated to the success of its lead candidates. The company has also mentioned it may need to raise additional funds if approvals are delayed.

Understandability: 3/5 Alvotech is a specialized business and the science behind it is not easy to understand for most people. While the company has a simple business model (to manufacture and sell biosimilars), understanding of the whole biologics industry is needed for any deeper understanding of the company. There are also risks related to regulatory approvals and the competition from other companies, both of which are not easy to understand fully. Therefore, Alvotech receives a rating of 3/5 on the understandability front.

Balance Sheet Health: 2/5 Alvotech’s balance sheet shows higher liabilities compared to its assets, including a large amount of debt and financial liabilities. It has yet to attain profitability, so it is still burning through cash. Therefore, the company’s balance sheet is not too healthy, and it gets a rating of 2/5.