Is Adverum Biotechnologies Inc (NASDAQ:ADVM) Cheap For A Reason?

Adverum Biotechnologies Inc (NASDAQ:ADVM) is a company I’ve been following for a while, and one that I believe the market is over-hyped about. The biggest risks I see are 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.

First, a short introduction to the company is in order. Adverum Biotechnologies, Inc., a clinical-stage gene therapy company, engages in developing gene therapy product candidates that target serious rare and ocular diseases. Started in 2006, it operates in United States and is recently valued at US$401.02M.

The first thing that struck me was the pessimistic outlook for ADVM. A consensus of 3 US biotechnology analysts covering the stock indicates that its revenue level is expected to decline by -13.47% by 2021. In addition to this, ADVM is currently loss-making, delivering a recent bottom-line of -US$56.15M. With a declining top-line, moving towards positive earnings becomes harder, which is a concerning issue.

NasdaqGM:ADVM Future Profit Apr 20th 18
NasdaqGM:ADVM Future Profit Apr 20th 18

Minimizing the downside is arguably more important than maximizing the upside. Generally the first check to meet is financial health – a strong indicator of an investment’s risk. A major red flag for ADVM is that its cash generated from its business is less than its outgoing cash expenses. This means that, although debt is relatively minimal (0.085% of equity), it cannot be serviced at all with cash from operations, which makes me apprehensive. However, management has been able to reduce debt over the past five years, and it generates enough earnings to cover annual interest payments. There’s room for improvement on the cash management side of things, but its overall debt level and interest coverage somwehat alleviates my doubts around the sustainability of the business going forward. ADVM 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 ADVM as a business is its low level of fixed assets on its balance sheet (1.50% 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. ADVM has virtually no fixed assets, which minimizes its downside risk.

ADVM currently trades at US$6.45 per share. With 62.17 million shares, that’s a US$401.02M market cap, which is too low compared to its peers based on its industry and adjusted for its asset level. Currently, it’s undervalued by 156.23%, with a PB ratio of 1.72x vs. the industry average of 4.4x.

A good company is reflected in its financials, and for ADVM, the financials don’t look good. This is a fast-fail analysis, which means I won’t be spending too much time on the company, given that there is a universe of better investments to further research. 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.