IDEAYA Biosciences, Inc.

Moat: 1.5/5

Understandability: 3/5

Balance Sheet Health: 3/5

IDEAYA Biosciences, Inc. is a precision medicine oncology company focused on the discovery and development of targeted therapeutics for patient populations selected using molecular diagnostics, primarily engaged in research and development in the fields of oncology, immuno-oncology, and synthetic lethality.

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.

IDEAYA Biosciences (IDYA) is a clinical-stage precision medicine company focused on discovering and developing targeted therapeutics for cancer treatment. They utilize a “synthetic lethality” approach, which aims to exploit genetic weaknesses in cancer cells. Their focus is on small molecules that have the potential to be first-in-class or best-in-class treatments.

Business Overview

  • Revenue Distribution: As a clinical-stage company, IDEAYA’s revenue is primarily through collaborative agreements. Revenue streams include upfront payments, milestone payments and royalties, but these revenue streams are very limited currently due to the stage of the company. A major part of their current revenue comes from a partnership with GSK.
  • Industry Trends: The oncology therapeutics market is experiencing rapid growth, particularly within the areas of targeted therapies and immuno-oncology. There’s a growing trend towards more personalized medicine, based on an understanding of the molecular characteristics of individual tumors. A growing trend is also the increasing need of efficient and fast acting drug production, to meet the demand quickly.
  • Margins and Profitability: As a research and development-focused company, IDEAYA currently is not profitable, since a major chunk of its costs are for research and development. Their gross margins (from collaboration revenue) are high, but net profits are very low. The company is not expected to be profitable for some time as it invests heavily in its pipeline of products and clinical trials. They have shown growth and a strong track record of being able to secure funding and investments.
  • Competitive Landscape: The oncology market is intensely competitive, with numerous companies, including large pharmaceutical firms and emerging biotech firms, developing their own targeted therapies. Therefore, the company is in a crowded marketplace with a high level of research and development costs. IDEAYA needs to compete with companies that are often much larger and better funded. As a result, a strong scientific team and a strong history of collaborations with bigger players is important.
  • What Makes IDYA Different: IDYA differentiates itself by focusing on synthetic lethality, targeting cancer-specific genetic vulnerabilities with the goal of developing precision medicines that are more effective and have fewer side effects. This approach, in theory, has the potential to be the foundation of highly-targeted therapies with low side effects, that may be crucial in the cancer therapeutic market. They are using a variety of technologies to identify those targets and create novel therapeutics against them.

Financials In-Depth

  • Recent Revenue: For the three months ended June 30, 2024, they had Collaboration revenue of 12,015,000, a decrease of 58.4% year over year (from 29,824,000 in 2023). Their revenue is primarily tied to collaborative agreements with GSK, for now.
  • Operating Expenses: They had operating expenses of 46,721,000, in the three months ended June 30, 2024, and that was a decrease of 14.5 % year over year (from 54,633,000 in 2023). Their operating expenses consists of research and development expenses, and general administrative expenses. Research and development expenses are the bulk of their costs, with a total of $31.1 million for the three months, compared to $41.7 million the year prior. General and administrative expenses came in at $15.6 million compared to $12.9 million a year earlier. They also have a loss from operations at $46.7 million.
  • Net Loss: IDEAYA’s net loss for the three months ended June 30, 2024, is a loss of $52.9 million (compared to $39.5 million last year). It is primarily due to its high R&D costs, coupled with a large decrease in collaboration revenue.
  • Cash Position: As of September 30, 2024, they have cash, cash equivalents, and marketable securities totaling $506 million, which is more than enough to cover operating expenses in the near future.
  • Equity: IDEAYA’s shareholder equity amounts to $365 million as of September 30, 2024, a substantial decrease from $658 million in December 31, 2022. The company has been using stock sales and offerings to generate cash, and therefore shareholders’ equity has been reduced.

Important Insight About Cash: While IDEAYA has a solid cash balance, they burn through a huge chunk of cash each quarter-as seen from its financial statements, primarily due to its very large R&D expenses. This makes the company dependent on funding and collaborations in the future.

Moat Rating: 1.5 / 5

  • Justification: IDEAYA’s moat is weak to nonexistent. While they possess intellectual property through patents and proprietary technology, these are largely unproven until clinical data is shown. In addition, they face intense competition in the biotech industry. Their only source of competitive advantage, or economic moat, is their research and development, but at the moment that is unproven. They rely heavily on financial backing from bigger companies to fuel their research and development activities. There are no network effects or switching costs for the type of products they are creating.

A few factors are important to consider:

  • Their intellectual property is at a very early stage, so the company’s competitive advantage is tied to unproven technology and patents, that may be subject to legal challenges in the future.
  • They are in the very competitive pharmaceutical and biotech industry, where companies are highly vulnerable to disruptive technology.

New Insight: Their technology is highly complex, and they have to go through extensive clinical trials before their technology can translate into a revenue stream.

Understandability Rating: 3 / 5

  • Justification: Although the company’s technology may be complex, the general business model of drug development is easy to understand. But understanding their specific approach of synthetic lethality does require more technical knowledge. The financial statements can be somewhat intricate due to the way R&D is handled (it is an expense, not an investment), coupled with a variety of income sources. As a result, the understandability of this business has some areas of simplicity, some are more complex.

Balance Sheet Health Rating: 3 / 5

  • Justification: Although they have a decent cash position, they have no revenue stream, and they are dependent on financial backing from bigger pharmaceutical companies to stay afloat. The company also uses share offerings as a source of income, which reduces shareholder equity, potentially making this an unsuitable investment for shareholders. As a result, their financial health, while stable now, has potential issues in the future.

Legitimate Risks that Could Harm the Moat and the Business Resilience

  • Clinical Trial Failure: Since they are a clinical-stage company, success depends entirely on their drugs clearing clinical trials. A failure in one or more of their key drug candidates would severely impact its value, and also severely harm their moat.
  • Competition: A competing drug with a better efficacy or lower price may be a threat to their success, and the crowded pharmaceutical industry implies the presence of such competitors is always on the horizon. Also, since IDEAYA relies on the drug market in specific cancer niches, they are vulnerable to a competitor taking their market share.
  • Regulatory Setbacks: They are always at risk for FDA delays or rejection or FDA modifications, which could impact the timeline for approvals and market entry, and therefore their cash flow from drug sales.
  • Reliance on Collaborations: Their collaborations with larger pharmaceutical firms like GSK are a critical source of income and funding. If there is a shift in priorities or funding from their collaborators, it may slow the pace of development and bring the sustainability of the company into question.
  • Funding: Since the company depends on funding from other sources, they are vulnerable to a tightening of the credit markets. If these markets dry up, and the company is not able to secure additional funding, its future is highly uncertain.
  • Intellectual Property Challenges: Although the company relies on its IP to have a moat, those patents are at an early stage and have not been proven to be effective. They are also vulnerable to other companies challenging those patents.

Business Resilience

  • Financial Resilience: With a significant cash balance, they have some flexibility to withstand operational setbacks, at least for some time. The company’s focus on cutting costs will also help them mitigate such setbacks, and continue to fund their most important projects.
  • Technological Resilience: While the company is reliant on the success of its technology pipeline, the company is consistently working with newer methods of drug research and is trying to explore more options for finding cancer fighting therapeutics. That said, new technologies make previous approaches redundant.
  • Market Resilience: The company’s business and market is relatively recession resistant, as people will always require healthcare solutions. This stability also provides some protection against the whims of market changes.

Controversies / Problems:

  • Recent Financial Concerns: The most pressing issue appears to be the drop in collaboration revenue, and the uncertainty around the stability of their funding moving forward. Recent comments by executives highlighted the need to lower the level of spending, which may be a cause for concern for the investor.

This company’s economic moat is fragile and highly dependent on future clinical success and financial partnerships.