Roivant Sciences Ltd.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 3/5

Roivant Sciences Ltd. is a biopharmaceutical company focused on improving healthcare by accelerating the development and commercialization of medicines and 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.

Business Overview: Roivant operates as a technology platform company that aims to improve the process of developing and commercializing medicines. This involves the application of various technologies and platforms, with a primary focus on discovering and developing new therapies, typically through its subsidiaries called “Vants”.

Revenue Distribution:

The majority of Roivant’s revenues are still in the early stages and primarily arise from partnerships and collaborations, and product sales from approved drugs and technologies (VTAMA being the major revenue generator currently).

Trends in Industry:

The biopharmaceutical industry is characterized by intense competition, high R&D costs, and a lengthy and complex regulatory approval process. Despite these obstacles, there is a growing demand for innovative therapies, especially for unmet medical needs.

Margins:

The company’s operating margins are influenced by R&D spending, clinical trial expenses and commercialization costs. Currently, they are loss making, especially due to their focus on rapid drug development and large pipeline.

Competitive Landscape: The pharmaceutical sector is exceptionally competitive, with numerous firms competing for similar targets. Big Pharma companies have the most resources, while biotech companies try to innovate to generate a competitive advantage and niche. ROIV’s focus is on acquiring, developing and commercializing medicines across various medical specialties. The competitive landscape includes both large pharmaceutical companies and smaller biotech companies.

What makes ROIV different?:

Roivant utilizes a unique platform approach, creating subsidiaries for each candidate drug. This approach can focus the talent and management and ensure a singular mission for that candidate drug and helps the company to avoid over-diversification which many other companies struggle with. They also use technology and innovative methods in the pharmaceutical space for drug development and commercialization, along with a focus on data analysis and application.

Other noteworthy points: * Multiple “Vants”: The company operates a system of affiliated, wholly-owned companies, known as “Vants”, each with its own management team, that is intended to streamline drug development and increase efficiency. * Acquisition-Focused Strategy: Rather than creating everything themselves, ROIV acquires promising drug candidates and technology platforms from various sources, which it then develops and commercializes through its “Vant” structure.

Financials In-Depth:

Revenue and profitability metrics are still developing with their current main revenue from the sale of their product, VTAMA, along with revenues stemming from collaborations. While revenues are growing their profits are low, and the company is currently focused on rapid expansion and spending more money to develop more products. R&D investments are still the main driver for all the company’s expenditure, and the focus will be on growth over profitability for the short term. The company had a net loss of $227 million for the most recent quarter and a net loss of over 1.7 billion over the past financial year which reflects their high investment into long term growth. Balance Sheet Health:

Their cash & short-term investments are at a robust $1.2 billion, which makes up the majority of their asset base. They have limited long-term assets and long-term liabilities are also on the lower side, as the company is focused on creating new drugs and is an R&D-heavy pharmaceutical company.
The large amount of cash is a double-edged sword. It allows the company to be aggressive, but makes them overly dependent on those cash holdings. Any adverse effects on the cash position would cause major disruption.
Their debt is low, at a little over $350 million (mostly from short term liabilities), and most of that is associated with their R&D programs.
Overall, based on these metrics, I am placing a 3/5 for balance sheet health, since there is plenty of short term cash but limited diversified assets to balance the operations of the company. The company is reliant on growth as a means for success and may be too early stage to fully analyse its balance sheet.

Moat Analysis:

Moat Rating: 2/5 While Roivant does have some competitive advantages, it’s far from a wide-moat company.

Proprietary Platforms: The technology platforms used by Roivant for drug discovery and development can act as barriers to entry. But the company is not in charge of all the technology development and are therefore not fully proprietary.
Regulatory Approvals: While the company has one FDA approved product VTAMA, it doesn’t ensure long-term sustainable advantages. Approval has to be secured on other products.
Network Effects: No strong network effect exists.
Switching Costs: Switching costs are mainly applicable to the pharma industry; therefore this doesn’t act as a strong moat in general.
Cost Advantages: Roivant doesn’t have any major cost advantages or any production advantages to its benefit.

Legitimate Risks:

Regulatory Uncertainty: The pharmaceutical industry is heavily regulated, and delays or rejections in regulatory approvals could significantly impact the company’s pipeline and financial condition. * Technological Disruption: New breakthroughs may make some of Roivant’s existing drugs and technologies obsolete or not worth commercialization. * Clinical Trial Failure: Clinical trial failures are very common in this industry and a failure may impact a given drug candidate’s success significantly.
Competitive pressures are very common in the pharmaceutical industry. There is fierce competition for companies working on similar therapies. This can result in decreased pricing power and market share, impacting profitability.
Financial Stability: As the company is R&D focused, a lot of costs are associated with research which makes the company unprofitable in short-term which makes it very dependent on equity and financing. This in itself might be a risk, as a lot of cash is required to make the operations going.
Commercialization Risk: A strong economic moat can protect companies for long stretches, and Roivant is far from a mature established company.

Business Resilience:

Despite risks, the company is showing considerable resilience. The management is actively expanding its pipeline and product offerings which increases the likelihood that the company will eventually have a profitable drug. They have a decent amount of liquidity to fuel these endeavors and are also able to use their “Vant” structure to mitigate risk on individual assets. In general, the company’s resilience is dependent on the positive outcomes of its R&D programs and the successful commercialization of its drugs.

Understandability Rating: 3/5 The main concept of Roivant, as an umbrella entity managing “Vant” companies focused on pharmaceutical development, is complex to grasp at first. The financial statements, which are also not very mature, are also not straight forward, making it a little more difficult to fully understand the intricacies of the company. Furthermore, regulatory requirements and clinical trials add another layer of complexity to this business which causes it to be a little difficult to understand.

Management’s Comments on Recent Challenges:

Management recognizes the difficult nature of drug development and acknowledges the risks that the company undertakes. They believe their methods increase efficiency and that they are still on a path to provide value for investors.
Management has been focusing on expansion of existing drug lines as well as launching a greater pipeline of medications.
There was a slight delay in the start of their Phase 3 study for VTAMA. However, the company believes the results of their current studies are strong enough for approval
The company is actively working with regulatory authorities to ensure their products meet required regulatory criteria.

Checklist for Measuring Sustainable Value Creation Introduction:

Does the company earn an ROIC above its WACC? Currently No.
Is the ROIC rising, falling, or stable? ROIC is currently low but expected to increase significantly with the company’s growth.
What percentage of the stock price represents future value creation? The stock price highly relies on expectation of future success with their drug candidates, therefore, the majority of their value will be based on future potential.

Why Strategy Matters:

What is the ROIC for the industry, and what is the trend? ROIC is highly variable in pharmaceutical, but with good growth the average could increase.
What is the variance in ROIC for the industry? High, as it depends on many factors including R&D, product lifecycle, regulatory status etc.
What is the industry markup and has that changed over time? Highly variable. This is difficult to estimate since the prices depend on patent exclusivity and negotiation with healthcare providers.

Lay of the Land:

How do companies interact with one another? Direct competition, M&A, and collaboration.
What is the aggregate economic profit, and how has it evolved? It is high due to the nature of the sector. Economic profits depend on the success of various drugs, which have a variable outcome.
What have been the historical trends in market share? Market share is fluid, since new entrants are not uncommon and brand loyalty varies across drug types.
How stable is market share among the competitors? Market share can shift, depending on clinical successes.
Has industry concentration changed? There is ongoing consolidation and increase in specialization.
How would you categorize the industry structure and strategic opportunities? Highly competitive and innovative.

Three of the Five Forces: Bargaining Power of Suppliers, Bargaining Power of Buyers, and Threat of Substitution:

How much leverage do suppliers have? Suppliers have low leverage.
Can companies pass on price increases from their suppliers? Yes, to an extent.
How much leverage do buyers have? Buyers have moderate leverage.
How informed are the buyers? Typically well-informed, especially on branded drugs.
Are there substitute products? There are many substitute products.
Can you identify the source and size of switching costs? The switching costs are minimal for drugs, since they are mostly a commodity.

Threat of New Entrants and Barriers to Entry:

What is the history of entry and exit in the industry? There is constant entry and exit.
Have you considered a decision tree from the point of view of a potential entrant? Yes.
Are incumbents known to be aggressive in deterring entry? Yes.
How specific are the assets in the industry? Intangible assets are important.
What is the level of minimum efficient scale? Very high.
What is the link between minimum efficient scale and total addressable market? Market size is huge, so high efficient scale does not prevent new entrants from being successful.
What is the link between minimum efficient scale and changes in market share? Low.
Are there network effects, and if so, how strong are they? Limited network effects, only in some specific niche areas.
Do incumbents have precommitment contracts? Pre-commitment contracts are not that strong, mostly dependent on regulatory approval.
Do incumbents have valuable licenses or patents? Patents are vital, but are not long lasting.
Have incumbents benefited from the learning curve? Limited.
Have incumbents entrenched themselves by shaping regulation? Not a big factor.

Rivalry Among Existing Firms:

Is there tacit coordination for pricing and capacity addition decisions? No tacit coordination.
How frequent is company interaction? Quite high due to acquisitions and collaborations.
Does the industry have a leader focused on maintaining an attractive structure? No.
How variable is industry demand? Highly variable for specific conditions
How similar are the firms in terms of incentives, time horizon, and ownership structure? Heterogenous.
Are fixed costs high? Fixed costs are fairly high (R&D expenses)
Is the industry growing? Overall growing, but slow in developed economies.

Disruption and Dis-Integration:

Might the industry be susceptible to a disruptive innovation? Yes.
Are sustaining innovations improving faster than consumer demands? It depends on drug type
Are incumbents motivated to either flee or ignore segments of the market? Not necessarily, as the incumbents attempt to grow and use any potential technology to do so.
Is the industry organized vertically, or has there been a shift to horizontal markets? The company is horizontally integrated.

Firm-Specific Analysis:

Have you analyzed the value chain of activities? Yes.
Have you created a map? Yes.
Have you compared the focal company to peers? Yes.
Are there points of differentiation? Yes.
Does the company increase willingness to pay? Yes.
Are there network effects? Yes.
Are there complementary products and is their cost going up or down? Not applicable
Do the company’s products provide prestige, promote habit, or lower search costs? No.
Is there lock-in that creates switching costs? Switching costs are not a main concern.
Is the company focused on increasing WTP versus just pricing power? Focused on price and value.
Does the company lower supplier costs via data sharing? Lowering supplier costs is not a big factor.
Does the firm have access to unique inputs such as patents? Patents are important.
Is the company more productive than its peers? This is an objective that the company strives to reach but is difficult at the current stage.
Are assets and revenue clustered geographically? Not concentrated
Have benefits of the learning curve made the firm more efficient over time? Has been improving
Does the business require less invested capital than competitors do? No
Are there economies of scope? Limited scope.
Does the company have a culture that creates employee surplus? Not relevant.
Does the company benefit from both consumer and production advantages? Not really, more research related.
Does the company enjoy customer captivity and economies of scale? Only in some areas.
Have you considered barriers to entry and where they appear on the value stick? Yes, listed above

The Role of Government:

Are tariffs relevant for the focal industry or company? No
Have you considered regulations and scenarios for how they may change? Yes.
Is industrial policy considered in each applicable geography, relevant for ROIC? Not a direct factor.
Are antitrust issues important directly or via limiting options such as mergers and acquisitions? Anti-trust issues are not a main factor
How do tax policy, trade agreements, labor policy, and intellectual property protection affect the business you are examining? They all affect business dynamics in the long run. Firm Interaction—Competition, Cooperation, and Expanding Frontiers:
Is game theory applicable to decisions surrounding price changes and capacity additions? Yes, to a degree
Does the Colonel Blotto model provide insight into resource allocation and strategy? Not really.
Has the company used the linking and leveraging approach to expand its competitive frontiers? Yes.

Brands:

Does the brand increase willingness to pay? Yes.
Does the brand lower willingness to sell? If so, how? Yes.
Will customers “hire” the brand for the job they want to be done? Partially.

Conclusion: The company is still in the early stages of its growth. ROIV has various promising drug candidates and a novel business model for drug development. However, it has to prove the sustainability of its business in the long run. Investors would want to track the company closely, specifically looking for improvements in profitability and returns on investment.