Ascendis Pharma A/S

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Ascendis Pharma A/S is a biopharmaceutical company focused on developing treatments for unmet medical needs through its innovative TransCon technologies.

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.

Ascendis Pharma A/S, headquartered in Denmark, is a biopharmaceutical company focused on developing and commercializing therapeutics that address unmet medical needs.

Business Overview

Ascendis Pharma is primarily involved in the development and commercialization of therapeutics using its proprietary TransCon technologies.

Revenue Distribution: The company’s revenue is primarily derived from its commercial stage products, with a focus on endocrinology and related treatments for rare diseases. In its most recent quarter, the company had sales of Skytrofa with 16.2 million EUR and TransCon CNP 1.2 million EUR. The main market is North America for now, but they are expanding globally.

The majority of revenue in the last couple of quarters has come from their first FDA approved product Skytrofa and its growth in revenue has been quite impressive since release.
Industry Trends: The biopharmaceutical industry is characterized by heavy research and development spending, lengthy regulatory approval processes, and high potential for returns on successful treatments. There is a significant demand for novel therapies in rare disease areas and the industry has recently seen a trend of smaller companies developing and commercializing treatments themselves, instead of selling the drug or their rights to a bigger player.

The growth of the company is driven by the demand for niche treatments for rare diseases. This also means that if the company has multiple successful treatment for other rare diseases, it will have more revenue stability and growth than those companies with a single main drug.
Competitive Landscape: The company faces competition from other biopharmaceutical firms in the same area, and the competition is always shifting given the long drug development processes and patent expiration issues.

While many pharmaceutical companies aim to create new, effective, safe, and useful drugs for common diseases, there is significant competition for these treatments, and companies must invest heavily in R&D. This can also involve a lot of competition from generic drugs once their patents expire.
What Makes Ascendis Pharma Different: Ascendis Pharma utilizes its proprietary TransCon technology, which allows for the creation of drugs that are optimized for extended release and improved efficacy. This platform technology sets it apart from many other pharmaceutical companies. Moreover, it seems the company is creating a pipeline with many niche products aimed at small patient pools that have very limited treatment options. Also, the company aims to have full commercial control instead of selling the drug or its rights to a bigger player.

The company has been focusing on its proprietary TransCon technology and also aiming at full commercialization which gives it full control and profits.
Other points to note : * The company has been creating a global operation structure. * They have a deep clinical pipeline and are currently running multiple phase 3 trials for different drugs. * They have a lot of collaborations and partnerships for their various products. * They have a high growth strategy.

Financials

Revenue: The company’s revenue is currently growing rapidly due to the commercial launch of its first product, Skytrofa. The full financial impact of the company’s current revenue will be seen from Q1 2023 as this is when it reached commercialization. The latest Q1 2023 report has given great indications of the company’s long term outlook. Revenue for 2022 was 24.9M euros.

The revenue growth of Skytrofa has been quite high since its launch.
Margins: The company is still operating at a loss as is common with biotech companies. This is set to change as revenue keeps on improving and they become more profitable.

The company’s net loss in 2022 was 488.6 million euros.
R&D Expenses: R&D expenses are substantial for all biotech firms. However, if the company is able to get more of its drugs to the market, the cost will be easier to bear and will have a larger impact on revenues and profitability.

The main challenge of biotech companies like Ascendis is that, if one or more products fail, then the R&D expense would have been incurred with no major benefit.
Cash Position: Ascendis Pharma has a substantial amount of cash, cash equivalents, and marketable securities which is a good sign given the cash requirements for a drug developing firm. As of December 31, 2022, its cash position was at 886.4 million euros.

The company has good liquidity, which means they can easily fund future research without needing to go to the debt market.
Debt: Ascendis has an extensive amount of long-term debt. However, if they are able to consistently turn out successful drugs and sell them, they will have more cashflow to fund debt repayment.

As of December 31, 2022, the company had 547.5 million euros in long-term debt.

Moat Analysis

A moat rating of 2/5: The company is creating a unique and specialized product portfolio that can help generate value for a long time, but the risk is still very large, hence, we rate the moat at a 2.

Intangible Assets: Ascendis Pharma leverages patents related to its TransCon technology. However, patents eventually expire, and the company must continuously innovate to maintain a moat. The company has a growing pipeline and is working on several candidates which is positive. A good brand is required, and a brand is not easily made or attained overnight, therefore, a brand does not give them as much moat as some other companies like Coca-Cola.
- The core technology is quite interesting and they have been using it to create several treatments.

The patent applications are in place to protect their core technologies and products.
1. Switching Costs: The company’s products are specialized, but once a treatment option is found, there is not a lot to make a patient switch to other companies. Therefore, there will be very low switching costs for most patients. It’s hard to argue that the patients have a high switching cost.
2. Network Effects: The company does not have any network-based competitive advantages. The only network effect they can benefit from is to create a relationship between its researchers, and doctors. However, this does not confer much competitive strength.
3. Cost Advantages: The company has no sustainable cost advantages. However, they focus on controlling their cost structure and having a reasonable budget.
Risks
- Regulatory Risk: The biopharmaceutical industry is highly regulated. Changes to regulations could impede the company’s ability to obtain approvals. The company is exposed to many regulatory bodies all over the world, and it’s possible to have some adverse regulatory changes.

Also the company’s products are subject to very intense FDA scrutiny and if any issue arises at the regulatory level, the company could face significant problems.

In recent reports it is mentioned that the company is being scrutinized by FDA as well as similar regulatory bodies in other countries.
Clinical Trial Risk: The company’s therapies are heavily reliant on the success of clinical trials. If a trial doesn’t generate positive results, then the product will most likely have no value, and hence the company’s worth may be greatly diminished.

A potential issue for the company will be their phase 3 data on multiple products, if the data is not positive, then their value may dramatically fall.
Competition: The company competes with many other bio-pharmaceutical companies, some of them having massive budgets and experience. This can prove to be a tough competitor especially for new and niche treatments.
Intellectual Property: The company heavily relies on its patents and proprietary technology. They could face legal challenges regarding these and they might have to face more competition if their patent protection is eroded.
Manufacturing and Production Risks: The company does not have full control of the manufacturing and other aspects of products’ production, as they have certain agreements with third parties for their products. This has some risks, and they also might need to build their own manufacturing facilities in the long run to maintain quality control and also to achieve lower costs.
Commercialization Risk: The company still has a lot to achieve in its global commercialization strategy. Success in this aspect is not guaranteed. If the company fails to properly commercialize, or has unforeseen challenges, the stock may fall significantly, especially since the bulk of its value is in future cashflows.

Management is trying to take full control of sales and commercialization, instead of selling the drug rights off to a bigger pharmaceutical company.

Business Resilience

Specialization in Rare Disease Treatments: By specializing in niche therapeutic areas, Ascendis reduces the risk of generic competition, which is a large advantage compared to a lot of other pharmaceutical companies, where their patents are copied by others.
Proprietary Technology: The TransCon platform gives Ascendis an advantage when compared to generic drugs, and makes it more difficult for competitors to copy their products.
Substantial Liquidity: The company has enough funds to operate and withstand any hiccups in operations and clinical trials.

Understandability

The business model is relatively easy to understand, but valuation of the company is more difficult due to the long-term nature and uncertainty involved. Given this we rate understandability at 3/5.

The company’s business is to develop, and bring to market new pharmaceutical products. That is relatively easy to understand. However, it can be hard to analyze and understand the various research and testing processes, the regulatory approval system, clinical trials, and other factors specific to the pharmaceutical industry. Moreover, the company’s valuation is highly dependent on their pipeline and the success of multiple future drugs, which cannot be guaranteed.

Balance Sheet Health

The company is in good financial condition, with substantial cash at hand and minimal long term liabilities. Hence a rating of 4 out of 5 is justified.

The company has a good level of cash and has also been aggressively using debt. While a lot of debt is something to be wary of, biotech firms typically have a good cash level. The company’s assets have also been growing consistently in recent years. Also they have been investing in new facilities for expansions of production.

Latest Concerns and Management’s Response

The management has been taking an approach of slow and measured growth, and has been focusing on the long-term success of the company, instead of focusing on the immediate revenues and profitability.

FDA Scrutiny: In the latest 10Q filing, the company stated that it is expecting that it’s facilities are going to be scrutinized by the FDA and other regulators. They are expecting that this scrutiny is going to be done in a normal way and that there shouldn’t be any major issues.
Commercialization: The company is slowly rolling out its products. In many emerging markets, the company is still in preparation and not selling its products yet.
Competition: The company faces competition, and they have been trying to be as competitive as possible and generate as much returns as they can for their shareholders.

Conclusion

Ascendis Pharma is a biopharmaceutical company with a focus on innovative TransCon technologies and rare diseases. Its potential is high, but so is the risk. It is important to understand how they are going to commercialize and also if the multiple drug candidates in the pipeline achieve a positive outcome in clinical trials. Overall, this company requires a lot of research and thorough analysis.