AC Immune SA (NASDAQ:ACIU) is a company I’ve been following for a while, and one that I believe the market is over-hyped about. My concerns are mainly around the sustainability of its future growth, the opportunity cost of investing in the stock accounting for the returns I could have gotten in other peers, and its cash-to-debt management. It’s crucial to understand if a company has a strong future based on its current operations and financial status.
Firstly, a quick intro on the company – AC Immune SA, a clinical stage biopharmaceutical company, discovers, designs, and develops therapeutic and diagnostic products for prevention, diagnosis, and treatment of neurodegenerative diseases associated with protein misfolding. Started in 2003, it operates in Switzerland and is recently valued at US$574.70M.
With falling revenues (year-on-year growth rate of -12.75%) I decided to dig a bit deeper into whether this was a one-off occurrence. A consensus of 3 US biotechnology analysts covering the stock illustrates the trend may continue into the foreseeable future. According to their forecast, ACIU’s revenue level is expected to reduce by -99.20% by 2021. In addition to this, ACIU is currently loss-making, delivering a recent bottom-line of -CHF26.41M. With a declining top-line, moving towards positive earnings becomes harder, which is a concerning issue.
Investors tend to get swept up by a company’s growth prospects and promises, but a key element to always look at is its financial health in order to minimize the downside risk of investing. A big red-siren warning for ACIU is that its cash generated from its business is less than its outgoing cash expenses. This means that, although debt is relatively minimal (0.34% of equity), it cannot be serviced at all with cash from operations, which makes me uneasy. However, the company has been able to generate enough earnings to cover annual interest payments. Cash management is still not optimal and should be improved, but its interest coverage somwehat alleviates my doubts around the sustainability of the business going forward. ACIU has high near term liquidity, with short term assets (cash and other liquid assets) amply covering upcoming one-year liabilities, as well as long-term commitments. One reason I do like ACIU as a business is its low level of fixed assets on its balance sheet (1.78% of total assets). When I think about the worst-case scenario in order to assess the downside, such as a downturn or bankruptcy, physical assets and inventory will be hard to liquidate and redistribute back to investors. ACIU has virtually no fixed assets, which minimizes its downside risk.
ACIU is now trading at US$10.52 per share. At 57.36 million shares, that’s a US$574.70M market cap, which is in-line with its peers based on its industry and adjusted for its asset level. Currently, it’s trading at a fair value, with a PB ratio of 5.01x vs. the industry average of 4.4x.
ACIU is a fast-fail research for me. Good companies should have good financials to match, which isn’t the case here. Given investors have limited time to analyze a universe of stocks, ACIU doesn’t make the cut for a deeper dive. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I’ve taken my data from.