SpringWorks Therapeutics

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

SpringWorks Therapeutics is a commercial-stage biopharmaceutical company focused on developing and commercializing life-changing medicines for patients with rare cancers and other 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.

SpringWorks Therapeutics (SWTX) is a commercial-stage biopharmaceutical company focused on developing and commercializing medicines for rare diseases and cancer, an area with high unmet medical needs, and is therefore quite specialized. This specialization can be an advantage as well as a disadvantage depending on how the company’s pipeline and ability to execute develops.

Business Overview

SpringWorks Therapeutics is an emerging commercial-stage biopharmaceutical company. Their main focus is on treatments for rare diseases and cancers, specifically desmoid tumors, neurofibromatosis type 1 and 2, and other oncology and rare disease. The company operates under a few segments which are primarily developing and commercializing treatments targeting certain genetic and cellular pathways of cancer.

Their flagship product, OJEMDA (nirogacestat), received FDA approval in the United States for treating adult patients with desmoid tumors. They intend to also establish a global, commercial organization for distributing this product and future ones.

Revenue Distribution:

SpringWorks Therapeutics’ revenue comes from sales of its commercial product, licensing agreements with pharmaceutical partners for collaboration on research, development, and commercialization, and potential milestone payments for achievements. The company is transitioning into a commercial-stage company, having received approval for its first commercial product.

A key driver for future revenue growth is the successful launch and adoption of its approved treatments, particularly OJEMDA, in target markets and expansion of its label indications in existing markets.

Industry Trends: The biopharmaceutical industry is constantly changing, and this area is quite challenging, specifically those focusing on rare diseases. The industry is characterized by high R&D costs, long development cycles, complex regulatory requirements, and the potential for large returns (and losses) for successful products. A key trend is an increased focus on targeted and personalized therapies, particularly in oncology, driven by advancements in genomics and molecular biology. There is also a growing emphasis on orphan drugs that address unmet needs in rare diseases.

The rise of private equity investments to fund drug development and companies seeking to partner with bigger pharma is notable here.

Competitive Landscape:

SpringWorks faces competition from larger pharmaceutical companies, including biotechs, that operate in their chosen markets as well as smaller niche companies.

Their primary competition for drug development is driven on speed for approvals and better clinical data. And in the commercialization stage, is also driven by brand recognition, reach, salesforce, and manufacturing ability. The key drivers of competition are the ability to rapidly advance new drugs through clinical trials, gain regulatory approval, and effectively market products. Other competitors with similar drugs and focus are mainly big pharmaceutical companies.

What Makes SpringWorks Different:

SpringWorks differentiates itself through a focused approach on rare diseases and cancer, its strategic partnerships with other companies, and its deep scientific expertise in drug development and patient selection (for better clinical trials).

Specifically the company’s focus on a single target (Gamma Secretase) and its ability to manage clinical trials and execution is one of the main points. Additionally the company’s collaborations to develop new drugs, as well as finding opportunities in the market is what makes it different. Furthermore, the company’s business model is unique, which combines elements of being a biopharma company with a drug discovery and development engine. They also have multiple partnerships to help them distribute the drug globally and help on the clinical trial pipeline.

Financials

SpringWorks Therapeutics has a market capitalization of $1.82 billion. This has fluctuated wildly recently and has been seen as high as $3.4B but has also gone as low as $1.0B. In the short term, the company may be considered volatile.

The price volatility also is because they have a limited approved products, but many in their pipeline. Revenues: As of the September 2023 quarter, SpringWorks generated $17.8 million in product revenue and $15.4 in collaboration revenue and grants, while having a total operating revenue of $33.2 million. This is a major increase when we look at the 2022 yearly figures of $0.7 million in product revenue.

This is driven by the launch and sale of their flagship product. The trend for revenues is upwards as they scale their infrastructure and sales, with more products coming in the future.

  • Cost of Product Revenue: $3.6M in Q3 2023. This was very high for the year 2022. Expect this to increase along with sales.
  • Research and Development expenses: The company has been spending heavily on R&D, $88M in Q3 of 2023.
  • Selling, General and Administrative Expenses: $31.9M in Q3 2023.

Profitability: The company is not currently profitable, with net losses of $97M in Q3 2023, however, that trend is improving over time as seen by the decreased loss vs 2022 figures. This reflects the high costs of R&D and commercial launch activities.

As sales increase and R&D expenses become more structured, you could reasonably expect them to achieve profitability in the coming years.

Balance Sheet Health: The company’s balance sheet is considered relatively healthy:

  • SpringWorks had approximately $641 million in cash and cash equivalents and marketable securities.
  • Their total assets were $777.3 million.
  • Their liabilities were $408.3 million.
  • They also are in a net cash position with cash and marketable securities far exceeding debt, an additional point is that they have strong liquidity reserves.

All of this means that it is financially stable at the moment. They are unlikely to incur any debt issues within the next couple of years and have ample cash for trials. However, continued losses do represent that they need to gain a footing on profitability sooner rather than later.

Understandability

The business model is moderately complex, therefore earning the company a 3/5 for understandability. To understand SWTX you will need to have a good understanding of their financial statements, their specific drug trials, the development pipeline, and industry, in general. The core business is not hard to understand though, but you need to go over multiple layers to get a solid picture.

The business involves drug development and commercialization, which can be complex, since you are dealing with patents, regulatory hurdles, clinical trials, and so on.

Moat Analysis

SpringWorks Therapeutics has a moat rating of 2 out of 5. Here’s why:

  • Economic Moat: Limited. SpringWorks is operating in an industry where having a drug that fits into an unmet need grants them a level of moat due to patents. This is the most important aspect for the company, giving it pricing power. But, the durability of this economic advantage, particularly in an evolving sector with high R&D, is uncertain. Although they have regulatory and licensing protections on their specific drugs, they may still face challenges from competitors, who can come up with substitute/similar drugs.
  • Intangible Assets: Moderate: The company’s patents on its drug candidates can provide some limited protection against competition, however, this advantage is limited by the fact that patents expire. The brand recognition for new drugs is also still in the early stages.
  • Switching Costs: Low: There aren’t considerable switching costs for this industry.
  • Network Effects: None: SpringWorks’ business doesn’t benefit from network effects.
  • Cost Advantages: Low. While companies that have scale economies can generate advantages, SpringWorks does not have that advantage. However, their strategic partnerships and focus on specific markets and drug development could represent an advantage.

Risks to the Moat and Business Resilience

  1. Clinical Trial Failures: Failure of clinical trials or the lack of strong clinical data for their products, could lead to severe setbacks to the company and their value.
  2. Regulatory Risks: Changes in regulatory approval process or timelines. These present uncertainty about their ability to get their products to market on time.
  3. Competition: The entrance of new or established players and the development of more effective therapies, would create massive competition.
  4. Sales Execution: If the launch of their products is unsuccessful then their performance would be extremely impacted, thus threatening the long term sustainability and value of the company.
  5. Financing & Cash position: If they do not gain profitability fast enough, or if R&D proves more expensive than expected they may have a funding problem as their cash is currently a big asset.
  6. Patent Expiry: Patents on their drugs can expire, which would bring in more competition. They need to keep innovating to expand their portfolio of products.
  7. Macroeconomics: Any future economic crisis or changes, interest rate hikes, inflation, or reduced funding in the pharmaceutical sector, could negatively impact the performance of the company.

Key Takeaways

SpringWorks Therapeutics is a company with good potential in the long-term, as they have focused in a profitable industry and are growing at a good rate. However, they need to demonstrate their ability to scale, keep their trials on track, commercialize their products, and manage operational expenses better in the coming years. Investors need to monitor any competition and the company’s ability to maintain growth in their chosen markets, and should also pay attention to the underlying financial health of the company as profitability is not yet achieved.

The company has also had previous negative experiences with drugs. And these things mean, the business is very risky, hence why a low moat rating. This means that it is not for risk averse people.

Recent management commentary indicates a cautious approach towards R&D expenses, as well as a commitment to creating value by strategic acquisitions in the market. The current market price appears on the higher side considering they are in a non profitable stage, hence there is more risk in the stock.