Apellis Pharmaceuticals, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Apellis Pharmaceuticals is a commercial-stage biopharmaceutical company focused on the discovery, development, and commercialization of novel therapeutic products for autoimmune and inflammatory diseases through the inhibition of the complement system.

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.

Apellis Pharmaceuticals is a biotechnology company developing targeted treatments for autoimmune and inflammatory diseases. Their focus is primarily on the complement system, a part of the immune system. The company is not yet profitable.

Business Overview

Apellis Pharmaceuticals, Inc. is a commercial-stage biopharmaceutical company focused on the discovery, development, and commercialization of novel therapeutic products for autoimmune and inflammatory diseases through the inhibition of the complement system. The company’s operations are based in Waltham, MA. Apellis’ lead product, EMPAVELI® (pegcetacoplan), is approved for the treatment of paroxysmal nocturnal hemoglobinuria (PNH), geographic atrophy (GA), and several other conditions.

The core of Apellis’s approach is the modulation of the complement system - an area they have heavily invested in with their research and development. This pathway plays a key role in the pathogenesis of various autoimmune and inflammatory conditions. They have received multiple FDA approvals for its lead product, EMPAVELI, specifically for conditions like PNH and GA. Their research and development efforts have led to a pipeline of other treatment candidates.

Revenue Distribution

Apellis’ revenue stream is dominated by sales of its flagship drug, EMPAVELI.

  • EMPAVELI (pegcetacoplan): This product constitutes the primary source of the company’s revenue.
  • The company has been expanding into new markets and new geographic areas with EMPAVELI.
  • Apellis has a licensing and collaboration strategy with other pharmaceutical companies, but the revenue derived from these agreements is typically not yet a key revenue driver.

Industry Trends

  • Increased Focus on Targeted Therapies: The pharmaceutical industry is shifting towards targeted therapies with high specificity and safety, in response to the limitations and side effects associated with traditional, more broadly acting treatments.
  • Innovation in Biologics and Immunomodulators: There is significant investment and research in biologics and immunomodulators, reflecting the pharmaceutical industry’s growing focus on advanced therapies with complex mechanisms of action.
  • Aging Populations and Chronic Diseases: The prevalence of age-related and chronic diseases is increasing, boosting demand for long-term treatments and management, including those for autoimmune conditions and ophthalmological disorders.

The pharmaceutical market, particularly the biologics and immunomodulators sector, is characterized by rapid changes and high competition. Companies with approved treatments are focusing on expanding into new indications and new markets to increase product adoption.

Competitive Landscape

Apellis is operating in a competitive landscape with multiple competitors who are developing and commercializing treatments for rare diseases and complement-mediated conditions. Some key competitors include:

  • Alexion Pharmaceuticals (now part of AstraZeneca): Alexion is another player in the complement system inhibitors market.
  • Other large pharmaceutical companies: Multiple large pharmaceutical companies are interested in the indications targeted by Apellis.
  • Biotech companies: In addition, several early-stage biotech companies are actively researching novel approaches for the indications targeted by Apellis.

Though they have a first-mover advantage in several areas, they may be challenged as more competitors come in the space.

What Makes Apellis Different?

Apellis’s strategic emphasis is on:

  • Complement-targeted therapies: Their deep knowledge and focus on the complement system gives them a unique platform for innovation in this area.
  • Proprietary technology: They utilize their proprietary pegcetacoplan technology.
  • Expanded indications: Their strategy includes securing regulatory approval for new applications of EMPAVELI for various conditions like PNH and GA.
  • Global Reach: They are in the process of expanding their geographical presence.
  • Long Term Approach: Apellis is investing in the long term health of the company rather than short term profit.

Financials In-Depth

Apellis’ financial reports show a company in a phase of heavy investment in R&D and significant sales growth, but not yet profitable.

  • Revenue Trends: The company’s revenue is increasing driven by commercialization of EMPAVELI. Quarterly revenue has been increasing, reflecting both a wider adoption of the product and its expansion into new markets. Year-over-year revenue increases are noteworthy. But, as a growth company, their expenses tend to be high, so the net profit is still negative.
  • Operating Expenses: The operating expenses are also high, mainly from R&D and selling, general, and administrative activities, and are growing. The company has not yet achieved profitability. The company should look to focus on their existing assets and look to lower their operating costs in the near term. As noted in the 2022 annual report, the company’s operating expenses are around $491 million, and it was stated that approximately $300 million, the company was going to try to decrease. Management plans to keep operating costs stable, but are still expanding.
  • Cash Runway: Apellis appears to have a decent cash runway at present, but with the company being loss-making at the current rate, this is something to watch out for. The company has raised substantial capital through several means over the last few years.
  • Profitability: The company’s losses have been significant, but there is some signs of improving margins and the high costs associated with early product launches.

It is important to consider the company’s history, its investments in clinical and pre-clinical programs, and its efforts to scale up its sales and marketing infrastructure. The company also has a history of collaborations.

Moat Assessment: 2 / 5

While Apellis has some elements of a moat, it’s not yet robust. It earns a 2 out of 5.

  • Intangible Assets: The company benefits from its FDA approvals, especially for rare conditions, but this moat is likely to erode over time as competition increases, and may need to continue to innovate to maintain its competitive advantage. As the company’s products expand in new territories, their patents are likely to see litigation from other companies. However, the company has spent a lot of time and resources innovating in the space.
  • Switching Costs: PNH and GA are chronic conditions with limited treatment options currently. Given that and the strong safety profile of their products, there is a possibility for high switching costs, but these can’t be considered very high currently.
  • Network Effect: This is irrelevant here.
  • Cost Advantage: No evidence of cost advantages stemming from production or distribution.

Legitimate Risks and Resilience

Risks:

  • Regulatory Risk: The pharmaceutical industry is subject to strict regulation, which can cause delays and additional costs. Delays in clinical trials, regulatory approvals, or the like. It may cause changes or limits to the commercialization of their lead drug, EMPAVELI.
  • Competition Risk: Other companies may have similar or superior drugs in their pipeline, which may significantly hinder Apellis’s growth.
  • Financial Risk: The company is not profitable and requires substantial financing to sustain its R&D efforts.
  • Clinical Risk: The risk of unfavorable results from clinical trials is a huge hurdle, which can lead to the abandonment of drug development programs.
  • Adoption Risk: Physicians and patients may adopt EMPAVELI slower than anticipated which would hurt growth rate.

Resilience:

  • FDA Approval: Having received FDA approval is itself a kind of moat.
  • Novel Approach: Their approach to the complement pathway is novel and has significant potential.
  • Management: Management has been involved for several years now, and should be able to continue to innovate to generate further growth in the company.
  • Pipeline: The company has a pipeline of more products and drugs in different clinical phases, so even if one does not do well, others are lined up.
  • Expansion into new markets and conditions: The company’s ability to expand into new markets and indications could continue to allow it to find new sources of growth and profitability.

Understandability Rating: 3 / 5

While Apellis operates in a complex industry, their business structure is fairly straightforward, so it earns a 3/5 for understandability.

  • Industry Complexity: The biotechnology and pharmaceutical sectors are inherently complex due to the scientific and clinical aspects of drug development.
  • Product Focus: The core product, EMPAVELI, is fairly simple to understand in terms of its function. However, the science behind the drug may be complex for some investors.
  • Financial Transparency: Some financial reports are hard to read and understand.
  • Future Projections: Projections are hard to make for growth and adoption of products which are still on early stage growth.

Balance Sheet Health: 3 / 5

Apellis’s balance sheet is healthy, but there are certain factors that may be concerning, which results in a rating of 3 out of 5.

  • Cash: The company has cash reserves on hand, but it needs to continue its current business without needing any other forms of funding.
  • Debt: The company has manageable amounts of debt and seems to be able to support it.
  • Profitability: The current main risk is that the company is still not making any profit, and they are spending a large amount of their capital into growth and expansions.
  • Capital structure: The equity to debt ratio is not very good, indicating that they may need to look for alternative sources of capital.

Recent Concerns/Controversies/Problems

  • In February of 2023, the FDA extended the review period for the New Drug Application (NDA) for intravitreal (IVT) pegcetacoplan for geographic atrophy (GA), an eye disease which has greatly affected their stock price, while also delaying timelines. The extension of the review was a major concern for investors, as a timely approval is important to the financial growth of the company, which had already been under pressure.
  • In November 2023, Apellis had a phase 3 study fail. After this failure, the stock dropped almost 50%. Further clinical trials will be needed for the other diseases they hope to cure through their drug.

These issues were addressed in recent quarterly reports where they mentioned that the company is continuing to move forward with their goals and look for other methods to ensure that they can create value for their shareholders.

Conclusion

Apellis has some promise based on its novel approach, but as of now, it is very risky and not a conservative investment option. However, the company does have some moats that could sustain profitability, but the company may need to improve and focus on profitability to achieve long-term shareholder value. There is some hope and optimism for the company, but there are also multiple risks. For those who are looking to invest, should first assess if this investment fits with their requirements and risk tolerance.