Avidity Biosciences, Inc.

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 4/5

Avidity Biosciences is a biopharmaceutical company focused on developing RNA therapeutics, using its proprietary Antibody Oligonucleotide Conjugate (AOC) platform to target diseases with a high unmet need.

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.

Avidity Biosciences is in a unique position, pioneering the use of RNA therapeutics with its AOC platform. While the idea of using RNA to treat diseases is not new, their specific approach—linking antibodies to oligonucleotides—is what sets them apart and creates a potential barrier for competitors.

Business Overview

  • Revenue Streams: Currently, Avidity’s revenue primarily stems from research collaborations and license agreements. These collaborations involve upfront payments, milestone payments, and royalties based on future sales of their products. The company’s financial statements, as shown in its 10Q filings, clearly states that revenue is largely dependent on the progress of these agreements rather than actual commercial sales of their products, making it an important factor to consider in any valuation.
  • Industry Trends: The biopharmaceutical industry is undergoing rapid advancements, especially in the field of RNA therapeutics. This includes both increased regulatory scrutiny and more sophisticated techniques for drug design and delivery. The competitive landscape is getting more and more crowded, with both established pharmaceutical companies and smaller biotechs are rushing to develop new drugs based on RNA.
  • Margins: As a clinical-stage biopharmaceutical firm, Avidity currently does not have any products for sale. Their financial statements do indicate a high level of ongoing research and development expenses, including clinical trial costs, contract manufacturing and consulting fees, personnel expenses, etc. That, combined with all the general and administrative expenses, means net operating profit margin is currently negative. However, once products get FDA approval and are commercialized, we can anticipate the revenue model to have very high margins.
  • Competitive Landscape: The biopharmaceutical landscape is intensely competitive, with major pharmaceutical firms and numerous smaller biotech companies all vying for market share. This is especially true in the area of novel treatments. Many companies are focused on different targets within RNA, making the competitive landscape quite crowded, especially for common targets. Given the significant investments in R&D and clinical trials, only a handful of companies with differentiated platforms tend to achieve success. For example, Arrowhead Pharmaceuticals has developed a technology that promotes binding to the liver, Alnylam Pharmaceuticals is focused on RNAi technology and Dicerna Pharmaceuticals has a focus on GalNAc targeting. Avidity’s AOC platform sets them apart by combining the specificity of antibodies with the therapeutic action of oligonucleotides to selectively target cells and diseases.
  • What Makes Avidity Different: Avidity’s approach combines the specificity of antibodies with RNA therapeutics in a way that allows them to target muscle cells, which provides an opportunity in diseases that are hard to treat. Most of its competitors focus on the liver or on other areas.

Notably, the flexibility of the AOC platform appears to be the main competitive advantage that has driven Avidity’s results.

  • Financials In-Depth:

    • Revenues: As a clinical-stage company, Avidity currently has limited sources of revenue. Revenue is mainly generated through upfront payments from collaborations (which are recognized over time as services are rendered), and any research and development expense reimbursements from their existing strategic collaboration agreements. As of Q3 2024, total revenue was just around $6 million (almost all through collaboration). But at the same time, the company has many active collaboration agreements with various global players like Eli Lilly and Bristol-Meyers Squibb, among others. Therefore, revenues will likely be a huge upside for Avidity in the future.
    • Cost Structure: Avidity’s operating expenses, specifically in R&D, have increased over time as their clinical trials have moved to the next phases. For instance, R&D spending for the first 9 months of 2023 was $138.5 million, up by approximately 20% compared to the same period in 2022 ($115.4 million). It indicates that they will continue to spend more money on testing. Avidity also has a high-spending profile in personnel and infrastructure, a necessary step in the long and uncertain road to drug development. Administrative costs have generally remained quite steady from year to year.
    • Profitability: As a developing biotech company, it is natural for Avidity to be heavily unprofitable at the current stage.
      • The company is trying to be efficient by hiring the key talents while outsourcing other services. This enables them to keep the operating costs low. However, that will not eliminate operating loss as they are still a few years away from product approval and commercialization.
      • The company has a very flexible balance sheet with no long-term debt, which provides the company a lot of leeway.
  • Liquidity: Avidity has a very strong cash position. Its cash balance is $624 million. This gives them a lot of time to test and develop various drugs. The company’s cash balance decreased from $762 million as of December 31, 2021, to $623 million as of December 31, 2022, and then rose to $626 million as of September 30, 2023 and has again dropped to $572 million at the end of Septemeber 30, 2024 due to increased spending in R&D and other operating expenses. That means they are actively burning cash, which is a very common practice in biotech companies.
  • Cash Burn: For the 9 months ending in September 30, 2024, the total cash burned is approximately $130 million. This is something to be wary of when analyzing companies that are not currently making a profit.
  • Recent Concerns: During the latest earnings call, the company mentioned that they are working on an improved method of manufacturing for their product candidate, AOC-1001. This is going to be important because previously the manufacturing process was really slow. They have already produced sufficient material for Phase 3. Another key update is related to a Phase 2 trial that the company has completed. Results from the trial are going to be reported in an upcoming conference.
    • There is a significant risk related to clinical trials. The outcome can not be predicted, and many trials do not show positive results, even after substantial investment. For example, the company recently announced that it has terminated the phase 1/2 trial of one of the product candidates due to a lack of benefit based on the ongoing review of the data by a data monitoring committee. This was bad news for the stock.
    • Avidity is also reliant on third-party manufacturers for their product candidates, and any disruption in the supply chain will severely affect their business.

Moat Rating: 2/5 Avidity has a “narrow” moat, and it is entirely based on its novel AOC platform. It seems like they have a good product and may make substantial money if they get approval for any of their candidates. But, there are many concerns with the platform, such as patent expiry, production problems, reliance on third-party manufacturers, and any unknown clinical trial risks. Hence, a low moat rating is given at this point.

Legitimate Risks Affecting the Moat and Business Resilience:

  • Clinical Trial Failures: As a clinical-stage biotech company, Avidity faces a significant risk of drug candidates failing in clinical trials. This is a very real risk, and could dramatically reduce the company’s value. This can happen even after several trials, resulting in a complete loss on investment.
  • Intellectual Property Challenges: While Avidity holds several patents, there is always a chance of someone challenging those patents. If challenged successfully, their competitive advantage is going to severely diminish. In the drug space, it is not unheard of that a big pharma company has tried to steal the IP from a small biotech firm.
  • Manufacturing Problems: It seems like the production cost of AOCs is still very high and is a major factor limiting the development. The company needs to improve its manufacturing processes before it can scale production of its drugs.
  • Regulatory Hurdles: The regulatory pathway for new drugs is long and arduous, especially in the biologics space. In case the FDA comes down hard on RNA therapeutics, then all the investments might go down the drain. Regulatory delays and rejections can significantly delay or derail the company’s path to profitability.
  • Commercialization Risks: Even after gaining regulatory approval, there is no guarantee that a drug will see success in the market. Companies need to establish a suitable sales channel, create consumer awareness, and compete with existing and new market rivals. Moreover, Avidity has very little experience in this sector.
  • Competition: There are numerous other companies (both larger pharma and small biotechs) working on similar RNA therapies, so they might be facing competition in the future. Also, in this space, there are many companies with better funding, which can be a major competitive threat to Avidity.
  • Funding Issues: Biotech companies have a difficult time staying afloat in the long run and usually need constant additional funding to survive. So far, Avidity has been able to maintain its cash balance by taking in additional investments via stock sales. If future fundraising goes downhill, then they may run into cash shortages, which may severely affect R&D.

While all of these risks are there, the management seems aware of most of them. They are actively trying to improve production costs, while also planning ahead in terms of clinical trials. They seem like competent people who know what they are doing.

Understandability Rating: 4 / 5 Avidity’s business is of a complex scientific nature due to its novel AOC technology and its focus on a relatively new class of medicines. However, after digging into the financials and information, it can be well understood. The company’s model relies heavily on the success of its drug pipeline, meaning understanding the disease, the clinical trial process and success rates in that field is very important. The management team seems pretty competent and clear about their goals, which enhances understanding the business model.

Balance Sheet Health Rating: 4 / 5 Avidity’s balance sheet is overall quite healthy. The cash pile ($572 Million) provides a strong buffer. There are no debt obligations, meaning they won’t need to worry about debt repayment. And it indicates that they can focus on R&D and other operating expenses. However, at the same time, they are aggressively burning cash, which is very common for the biotech sector. But still, this is something that has to be kept in mind.