Scholar Rock Holding Corporation

Moat: 1/5

Understandability: 4/5

Balance Sheet Health: 4/5

Scholar Rock Holding Corporation is a clinical-stage biopharmaceutical company focused on discovering and developing innovative medicines for the treatment of severe diseases in which protein growth factors play a fundamental role, particularly in the area of spinal muscular atrophy (SMA) and oncology.

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

  • Focus: Scholar Rock’s core strategy revolves around targeting disease mechanisms where selective modulation of protein growth factors can have a therapeutic impact. They are developing a novel approach to treating specific diseases using antibodies.
  • Pipeline: Their primary focus is on apitegromab, an antibody that is designed to be a selective inhibitor of myostatin and latent-TGFβ1 activation. Their pipeline has many drug candidates that are being tested in clinics or are in early phases, including preclinical work. Most of the drugs are in the rare disease space and oncology.

Revenue Distribution

  • Non-Revenue Generating: Scholar Rock is a clinical-stage company, therefore, it is currently not generating revenue from any commercial products. All of the company’s funding so far has come from various equity and debt financings and from collaboration agreements with other companies.
  • Future Revenue Sources: Future revenue would come from the success of their drug candidates in clinical trials, and ultimately via sales or partnerships with other companies.

Industry Trends

  • Biopharmaceutical Innovation: There is a strong emphasis on innovative technologies and new approaches to disease treatment, particularly in the areas of genetic and immunological therapies. Companies using human antibodies are of focus, but are facing competition in getting the right price as well as the increasing rate of new companies, therapies and drug candidates.
  • Orphan Drug Designations: Many companies are focusing on the development of therapeutics for rare diseases as these drugs may have more expedited development and approval processes, while also receiving incentives from the government.
  • Technological Advancements in Drug Development: Advanced computational and biological techniques are speeding up research and drug development and enhancing the probability of success.

Financial Analysis

  • Profitability and Margins: Being a clinical-stage company, Scholar Rock is not profitable, and most of its capital has been allocated towards its operational and R&D expenses, including high expenditures for clinical testing.
  • Capital Structure: Primarily funded through common stock offerings, the company still has a significant amount of convertible stock and warrants outstanding. As a result, the company will have to rely heavily on outside funding sources and more debt or equity financing to keep the business running.
  • Debt: The company has some debt from term loans and financial leasing obligations. However, these are pretty small.
  • Cash Position: The cash position seems quite healthy with $140+ million at the end of the last reporting quarter. However, it will remain important for the company to manage their cash effectively and plan ahead carefully to avoid financial distress.

Recent Earnings Call Information (Q3 2023)

  • Operational progress: The company provided an update on the topline data from the TOPAZ Phase 2 trial with Apitegromab and stated that they are continuing to engage in discussions with regulatory authorities on a registration path for this treatment.
  • Financial Health: They noted that their cash balance of roughly $144 million would be sufficient to run operations into the second half of 2024 and with a burn rate of roughly $42-45 million/quarter, so they do have sufficient funds.
  • Cash Runway: Given their financials, they state that their cash runway is sufficient to last for at least another 12 months.
  • Upcoming Catalysts: In the fourth quarter, the company planned on a few important events including presenting data on their new drug candidate, and reporting topline data from their latest clinical trials.

Recent Controversies and Risks

  • Limited Pipeline: The company’s core value is centered around apitegromab. If their main program fails, or competitors bring out similar products before they do, the company is highly vulnerable, especially since the pipeline is not as diversified as most of its competitors.
  • Trial Delays: Many companies, especially in the bio-pharmaceutical sector, are subject to clinical trial delays, which can mean substantial additional cost and delayed profits for the firm.
  • Funding Risk: The company is still several years away from commercialization, so their main source of funding is external capital, which is contingent upon their performance and on the state of capital markets. If this becomes unavailable, the business might not be able to continue operations.
  • Regulatory Approval Uncertainty: The regulatory processes for new drugs are uncertain and involve certain risks, the primary risk being that the drugs may not get regulatory approval.

Moat Assessment

  • Moat Rating: 1/5.
  • Justification: Scholar Rock’s moat is currently extremely weak. The company currently does not possess an established base of revenues, profits, customer loyalty, intellectual property advantages, or anything that is normally defined as an economic moat. Their business model is heavily reliant on R&D success, and they are also involved in a highly competitive sector with numerous other companies all trying to get FDA approval, so, without something substantially different about them from the rest, they lack a sustainable competitive advantage, and thus have a poor moat rating.

Understandability Rating

  • Understandability Rating: 4/5.
  • Justification: While the science behind the therapies they are developing is complex, understanding the company’s business model is relatively straightforward. They are trying to develop and bring to market drugs for rare diseases and oncology, which, although are highly competitive, is not hard to understand as a business.

Balance Sheet Health

  • Balance Sheet Health Rating: 4/5
  • Justification: At this moment in time, the company’s financial health is comparatively well-balanced, given their access to a decent amount of cash, but there are certain risks. Their debt is well-managed and they have shown progress in the clinical trials and pipelines, but as an early-stage company, they are very prone to financial distress. They also face risks from the overall macro-economic conditions, and their reliance on outside financing also does not help. If they do fail, they might be unable to complete ongoing clinical trials or to expand operations.