|16,737 million yen|
|PDF version of this page|
This writing is a brief note of the investment insights into the company’s shares. Kidswell Bio Corporation is characterised by its focus on regenerative medicine using CSC (Cardiac Stem Cells) and SHED (Stem cells from Human Exfoliated Deciduous teeth) on top of new biologics development, its pioneering position as a biosimilar producer vis-a-vis other Japanese bioscience companies by consistently earning more than 1 billion yen in sales, and the fact that the company is an equity accounted affiliate of Noritsu Koki (TYO7744). The company’s vision is to help children, and with regenerative medicine, it aims to treat intractable pediatric diseases. For details of the business and the management’s business plan, please refer to public materials. The company handout for the latest result presentation and the Five-year Medium-term Business Plan announced in February 2021 are recommended. These are disclosed on the company’s website.
Kidswell Bio’s stock price has been sluggish for many years, but it appears to be finally passing through an interesting turning point. TSR beat TOPIX over the last six months thanks to the sharp stock price rise from the beginning of June 2021, and achieved good results. Over the last three months, the stock ranks 6th place out of 32 biotechnology stocks. By now investors can see a roadmap for medium- to long-term business outlook. Stock price appears to have begun to reflect investor expectations sensibly. Share price positive news flow is expected for some time and fairly rich news flow is expected towards FY2025 (FY03/2026). These should mainly center on the drug pipeline progress and the possibility of partnering. Until now, consistent deficits, huge extraordinary losses and significant dilution of per share value weighed on the share price, against the backdrop of the unclear outlook of new drug development. The impression is that BPS has been neglected so much, which must have been a great pain to shareholders. These share price drags should be resolved once the company returns to profitability. Stock price may be stepping into a stage where shareholder loyalty is rewarded.
Total Shareholder Return
|1M||3M||6M||YTD||1Y||3Y||5Y||10Y||20Y||IPO (Nov 2012)|
Thoughts on medium- to long-term stock price
Investors who patiently hold bioscience stocks, aiming at surprisingly high investment returns, should be interested in epoch-making new drug development and far less in biosimilars. As per the company, in a year or two, sales of biosimilar will grow steadily whilst R&D costs and fixed costs will stabilise. Importantly, this will result in a healthy financial cycle to support new drug development. Hence biosimilar and new drug development are organically linked. The management has confidence in delivering operating profit in the FY 2022 (FY03/ 2023). This is mainly thanks to the end of the significant investment in the biosimilar development of over the 15 years, as the spending for the manufacturing process of the fourth biosimilar to be marketed will be over. With cash flow generated by the company covering both R&D expenses and fixed costs, the company should see factors that have held back the stock price go away.
As investors gain more confidence in the possibility of the company generating operating income of 1 billion yen FY2025, there may be a reaction of the shares. In order for investors to be confident, they must confirm the steady earnings contribution of biosimilar, the stabilisation of the fixed costs and R&D expenses, and the possibility of new drug partnering. The company plans to launch three new regenerative biopharmaceuticals by SHED until FY2030. It is a very ambitious goal, and there has yet to be more info to judge this potential. This needs to be discussed between investors and the management. As mentioned in our investment view on Chiome (4583), expectations for the results of pharmaceutical R&D do not match amongst the developing companies, out-licensing companies, and investors, and the results do not necessarily come out in line with the expectations of investors. In addition, investment activities of the two biggest shareholders, who hold bulky amount of Kidswell Bio’s shares, are difficult to predict, and should be regarded as a risk.
As per the premium attached to the shares
There may have been some unknown supply and demand factor behind the recent rise in stock price. However, considering only the business fundamentals to have a think on what investor expectations were discounted in the stock price, we come up with the followings. 1) the view that the company’s forecast for achieving a surplus FY2022 is realistic. 2) It is uncertain that operating income will reach 1 billion yen toward the FY2025, but there is a possibility that new revenue streams such as new drug milestones will be added, and 3) The ongoing Phase3 clinical trials of JMR-001 is proceeding well, and there may be news about partnering in the near future.
While the outlook for the drug development has been made clearer, investors may not be optimistic enough as to whether the management will take care of the interests of minority shareholders to a satisfactory extent. The management posted an extraordinary loss of nearly 6 billion yen in the FY2019, while allowing an average annual share dilution of 20% over the past five years. As a result, BPS has diminished significantly. BPS was 182 yen in FY2016 but is now a little over 50 yen. It must have been a great pain to many loyal investors, who held the shares over many years.
|Market Cap (Y-mn)||4,995||5,889||8,653||13,347||25,881||17,221||14,487||14,930|
|No of Shr||9,536,420||9,576,420||11,541,768||19,135,846||19,135,846||20,342,446||27,646,894||29,622,755|
Investment activities of the big shareholders are also risky. Noritsu Koki owns 31.97% of Kids Bio’s outstanding shares, and its book value is estimated to be around 500 yen per share. Noritsu Koki has discontinued its drug discovery business and is regarded as a major potential seller. Heights Capital of the US has been undertaking the third-party new share / rights financing by Kidswell Bio. As a result, as of June 30, 2021, Heights owns 9.0% of Kidswell Bio, including a potential stake equivalent to 8.7% of all shares. These two companies hold bulky shares in an aim to earn investment returns. There are no signs that they are interested in the management of Kidswell, but their investment activities are difficult to predict.
Below is a brief list of stock price relevant expectations and concerns.
A look at fair value of the shares
It is extremely difficult to calculate a convincing fair value for any biotechnology stock. On the other hand, it is an interesting exercise to consider various measurements. DCF model is one of the powerful valuations, which is based on the detailed forecasts of the main pharmaceuticals in the drug pipelines. Here is just a simple and rather unsophisticated approach. Hopefully, we should be able to present a more sophisticated calculation at some point in the future.
Of the 33 biotechnology stocks, 28 trade at a market capitalization of 100 billion yen or less, with an average market capitalization of 33 billion yen and a PBR of 8.6 times. At a glance, there is some correlation between market capitalization and PBR. In this particular industry, investors tend to be optimistic with high market capitalization and they allow high PBR to these stocks. This is the exact opposite of the automobile sector. It may be because biotechnology is thought to be in the development stage of its industrial life cycle whereas automobiles are thought to have matured. Considering that a share price is formed by BPS and PBR that multiplies it, the dynamics seems to be that investors attach more premiums to the stocks of companies which deliver solid momentum for BPS growth. It should perhaps be endorsed by the observation that once successful, biotechnology businesses are able to remain profitable over the long-term on high return on capital.
Currently the stock price of Kidswell Bio is around 600 yen. Assuming the share price rises to 1200 yen and if the shares should trade on a PBR of 8.6x, which is the sub-sector average, the implied BPS will be 140 yen. Current BPS is around 50 yen, so this is about three times higher. If this incremental change of BPS is translated into a post-tax profit, it will be worth 2.7 billion yen. How many years will it take for Kidswell Bio to earn that much in total? Conversely, if the current shares are valued at a sub-sector average PBR of 8.6 x, the fair price will be 430 yen. It indicates the stock price is priced 40% above the sub-sector.
Originally Kidswell Bio, which was formerly called Gene Techno Science before the renaming in July 2021, was a Noritsu Koki’s subsidiary under their healthcare division. Noritsu Koki lost interest in the drug discovery business and moved Kidswell Bio to a business group to discontinue, but still incorporates Kidswell Bio in its consolidated accounts as an equity-method affiliate. Noritsu Koki does not lay a hand on the management of Kidswell Bio. There appears to be no personnel who can advise on bioscience business. The management of Kidswell Bio reports business results to Noritsu Koki on a regular basis. They are now a shareholder who solely aims for investment returns.
Heights Capital Management, Inc’s stake equals to a 9.0% of Kidswell Bio’s outstanding number of shares even after the selling of a 1% stake in May 2021, if the rights and CBs are considered. To date, they have mainly undertaken a third-party allotment of Kidswell Bio’s new shares and the rights via CVI Investments, Inc., which is under their wing. Heights Capital Management, Inc. is part of the Susquehanna International Group headquartered in the US. Susquehanna is a private company and is a group of investors investing in various financial markets in the US, Europe, Asia and elsewhere in the world. Their equity investment portfolio suggests to us that they are more of a long-term investor. They seem to employ Mr. Willam Chen, a renowned poker player, as head of the quantitative arbitrage team.
Kidswell Bio’s management regularly meets with Heights investment manager to explain their business. Kidswell Bio sees Heights as an investor who nurtures investees while building good relationships with them. According to Kidswell Bio, Heights runs a policy of not putting pressure on management of the investee and not investing more than 10% of all the shares. In fact there were some sales of shares, which appears to be in line with that principle. However, Heights owns huge stakes of over 10% in some other Japanese companies such as OKWAVE (3808) and 3D Matrix (7777), and their investment principles are not clear.
Regarding IR activities
Kidswell Bio’s IR activities are fairly active. They sit at 30 to 40 individual investor meetings a year. Recently, the contacts with foreign investors are on the rise. Going forward, the likelihood of a profitable FY2022 and FY2025 may well increase, while the drug pipeline develops. if the management continues to actively share information with investors and promotes constructive discussions with them, perhaps, it will be positive for the share price.