Ultragenyx Pharmaceutical Inc.

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 3/5

Ultragenyx is a biopharmaceutical company dedicated to developing and commercializing novel products for the treatment of serious rare and ultra-rare genetic diseases.

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.

Ultragenyx (RARE) operates in the niche market of rare and ultra-rare diseases. The company focuses on identifying, developing, and commercializing novel products within this field. The targeted nature of the market means relatively small patient population and a high regulatory bar, but it also means high pricing power for the company’s approved products.

Business Overview

  • Revenue Streams: Ultragenyx’s revenue primarily stems from product sales of its approved therapies such as Crysvita and Dojolvi. They also earn revenue from collaboration and licensing agreements with other pharmaceutical companies and royalties from the sale of future royalties. The company’s sources of income are all well laid out and broken down in its consolidated income statement.
  • Industry Trends: The biotechnology and pharmaceutical industry is constantly evolving, characterized by significant technological advancements, rising R&D costs, and increasingly complex regulatory environments. For companies in the rare disease space, the pressure to keep costs in check is especially high.
  • Margins: Gross profit margins are significant, a positive for RARE. However, operating margins are still negative, as high R&D expenditures are weighing down the operating profitability. For the three months ended September 30, 2024 the gross profit was $109.5 million but there was a loss from operations of $116.8 million. For the nine months ended September 30, 2024 gross profit was $293.1 million and loss from operations was $474.9 million. The high R&D costs are a key factor affecting margins, which makes them especially volatile. RARE has a high level of research spending, which will continue to push their revenues up but will negatively affect margins.
  • Competitive Landscape: The pharmaceutical industry is intensely competitive. Competitors for RARE include major pharmaceutical companies as well as other biotech firms and research institutions developing similar therapeutic products and modalities and other potential treatment methods.
    • In the market for the treatment of TIO with Crysvita, they cite “competing products, such as Fosavance and other available bisphosphonates.”
    • For the treatment of XLH, they also list other bisphosphonates but include “non-pharmaceutical approaches” such as “physical and occupational therapy.”
    • In other approved products, such as Dojolvi and Mepsevii, there are “biosimilar and generic products”, as well as other similar medicines that could compete with their products.
    • In addition, since the company has so many collaboration partners, they compete with those partners as they develop products that potentially overlap with the company’s products.
  • What Makes RARE Different?: Ultragenyx stands out due to its intense focus on rare and ultra-rare diseases, where it has gained specialized knowledge and research capabilities. The company also prioritizes a differentiated approach to drug development, with a focus on biologics, small molecules, gene therapy, and nucleic acid therapies for treating genetic diseases. The ability to make the targeted therapies and to secure approvals for them, particularly for rare diseases that lack adequate treatments, gives them a strong competitive advantage. But this advantage can be eroded by competitors who develop similar therapies.
  • Recent Concerns and Problems: RARE has been experiencing a high level of volatility and price swings. While it has had some significant positive news in the development of its drug pipeline, it has also been facing challenges in increasing sales in its approved products. This suggests an imbalance between the pipeline and its revenue and the company may have trouble in capitalizing on the value of its drugs in the market. In a recent earnings call, the CEO mentioned that the company expects an acceleration in the commercial launch of its product, Dojolvi. The company has also cited pricing as a headwind. Additionally, the company expects increased collaboration revenue to help support the company’s performance. They are also working to increase clinical trials participation and are actively trying to make their product lines more diverse. Finally, RARE has mentioned issues related to raw material supply for its manufacturing processes, which may further hinder growth in the future.
  • Other Important Points: RARE has a unique focus on rare and ultra-rare diseases, a factor that will heavily impact its performance and create a natural barrier against some competitors. The business is inherently complex as the pipeline contains drugs for complex diseases that are very rare. Therefore, the target patient market is small, which may hinder revenues even with high prices.

Financial Analysis

  • Balance Sheet: Ultragenyx’s balance sheet shows a large proportion of assets in cash, cash equivalents and marketable debt securities. There is also a fair amount in property and equipment, including their new manufacturing facility. Intangible assets and goodwill are a significant part of the asset mix too. Liabilities primarily consist of payables, long-term debt, lease liabilities and royalties. Stockholder’s equity, however, is negative due to accumulated deficits. This is not uncommon in young biotech firms who invest significantly in R&D to grow for the future. But it does negatively affect their ability to borrow further.
  • Cash flow: RARE’s has been burning cash as seen by the statements of cash flow. For example, in 2023 the company has used $474.8 million in operating activities. Investing activities and financing activities are both generating income, however, it is not enough to compensate the losses in operations. However, the company expects to slow its burn in the next few years. In the last report, management mentioned they had $690 million in cash and marketable debt securities. As such, their runway is safe for the coming 12 months.
  • Profitability: While the company has positive gross margins and is making great progress in the development of its products, the high R&D spending prevents the company from being profitable, or improving margins in the short term.
  • Revenue Analysis: The revenues are growing at a good rate. However, there are some variations in the revenues between quarters. In general, they are increasing the revenue from existing products, and from new product development.

Moat Rating: 2/5

  • Justification:
    • While Ultragenyx operates in a niche market (rare and ultra-rare diseases), which gives them pricing power, the presence of other therapeutic alternatives or competing pharmaceutical options from major pharmaceuticals presents a significant challenge.
  • Although RARE has patents on some of their drug candidates, patent protection is not always a durable source of competitive advantage. Competitors can make their own drugs and use their own technologies without any violations. Even for very complex patented drug, other companies can make a similar one with only slightly different formulations and bypass patent protection. Therefore the company does not have a durable moat from patents. * The high level of specialization, experience, and know-how in gene therapies and ultra-rare disease management does give them some advantage, but a big chunk of their moat is based on the strength of the patent portfolio and the approval/ regulatory framework for its products. As a result, the strength of the moat is highly dependent on other factors as well and therefore does not create a wide and lasting moat.
  • Overall Rating Justification: RARE’s moat, while meaningful, is more akin to a narrow moat with the potential to get wider over the next few years. Due to its dependency on approvals and patent protections, as well as potential new drug candidates coming into the market, it can be categorized as a narrow moat at best, giving it a moat rating of 2.

Risks to Moat and Business Resilience

  • Regulatory Hurdles: The pharmaceutical industry is heavily regulated. Delays, changes, or rejections in regulatory approvals from governmental agencies, such as the FDA, EMA, or other regulatory bodies, could severely hinder the company’s product development and revenue streams. New regulations could also decrease profitability or make it difficult to keep current products in the market, eroding the moat.
  • Clinical Trial Failures: Success in clinical trials can not be guaranteed. Failures or delays in trial progressions could lead to significant delays or complete termination of drug programs. Companies may also need to incur huge costs for failed or delayed programs.
  • Intellectual Property Risks: RARE depends heavily on its patents and licenses to protect the proprietary elements of their drugs. However, patents can be challenged, circumvented or may expire. Legal maneuvering may also reduce patent lifespans, leaving other companies an opportunity to make generic versions, causing erosion of revenue and profitability.
  • Competition: Many drug manufacturers are always looking for new opportunities and may find it economically feasible to enter the niche area of RARE. Companies like this would eat away at RARE’s ability to increase prices and may lower revenue substantially.
  • Manufacturing Complexities: The company has several agreements with contract manufacturing companies to make its drugs. The ability of those manufacturers to keep costs low and follow regulations and safety protocols is paramount. Issues with supply chain, manufacturing, and related infrastructure could affect profitability and delay sales of the product.
  • Financial Risk: It is clear that RARE is burning through cash and not profitable and has a high level of R&D expenditure. Any changes in revenue or expenses, any changes in market interest rates, or any other financial risks that have not been factored in, could severely hinder its performance.
  • Reliance on Collaboration Agreements: Much of RARE’s future revenue is dependent on agreements with collaborators that may have different objectives and may be dissolved, and new agreements are needed. There is a risk of depending on partners for revenue.
  • Price Fluctuations and Market Volatility: A biotech company like RARE is especially susceptible to large price movements, even if the underlying business is doing well. If sentiment turns negative, such a company is very likely to face massive drawdowns, which can harm the company’s ability to generate value and retain investors.
  • Dependency on the Supply of Raw Materials and Specialized Manufacturing Processes: Any disruption to the supply of raw materials, or difficulties in specialized manufacturing steps, can limit production and result in lower revenue.

Understandability: 4 / 5

  • Justification:
    • RARE’s business model, which involves identifying a target patient population, research and clinical development of drug candidates, and obtaining necessary approvals, is a complex and lengthy process. Understanding the market dynamics and regulatory environment is not straightforward.
    • While their revenue streams and pipeline of approved drugs are understandable, the nuances of intellectual property law, drug pricing and market exclusivity, require specialized knowledge.
    • Understanding the technical and regulatory nuances related to rare and ultra-rare diseases is challenging for non-specialist investors and makes the company’s business model more complex. Therefore, the company earns an understandability rating of 4.

Balance Sheet Health: 3 / 5

  • Justification:

    • While RARE is generating adequate revenues, it is not profitable as expenses related to Research and Development are quite high. This is common with such a high-growth company. RARE has $690 million in cash and cash equivalents to offset these losses and expenses, and are planning to achieve profitability in the near future. Therefore, their cash balance is still sufficient to support day-to-day operations.

    • However, the company’s reliance on debt financing with its negative equity means that the company is not financially strong and does not have a stable base of operations for long-term value creation. The company’s long-term debt is about $500 million. If that is the only debt the company is currently holding, it has sufficient cash to offset that liability.

  • Overall Rating Justification: The company has sufficient assets to continue its operations for now, but it lacks long-term profitability and a positive equity. Furthermore, the company has a decent level of debt. These factors translate to a balance sheet rating of 3.