market risk – Fountainheadinvesting

Galapagos (GLPG) $27 pivots to CAR-T therapy, divesting Jyseleca; faces clinical, market risks amidst investor skepticism. Divestiture of its Jyseleca business reflects a significant shift in its business strategy. There are dissenting opinions on whether this was a good move.

Revenue up 9% YOY; operating losses reduced; strong cash reserve at $4.2B;

Negative enterprise value and underperforming stock; high short interest and bearish investor sentiment.
A lot of uncertainties in CAR-T strategy, competitive landscape, and market skepticism. The CAR-T therapy landscape is intensely competitive, and the success of Galapagos’ key candidates, GLPG5101 and GLPG5201, is imperative.
- Pipeline and R&D Success Rate: Concentrating on CAR-T therapies, particularly GLPG5101 and GLPG5201, presents significant risks. Nevertheless, the EUPLAGIA-1 study’s preliminary data reveals encouraging results. In the study, 75% of CLL patients (12 out of 16) who received GLPG5101 achieved Complete Response with no report of serious adverse effects. In contrast, the GLPG5201 treatment group faced more severe outcomes, with 2 out of 14 patients encountering fatal (Grade 5) events, and a few others experiencing life-threatening or disabling (Grade 4) complications.

This is from a biotech analyst, he’s bearish but a couple of other biotech specialists were bullish in 2023, but haven’t published any updates.

Wall Street has a hold rating.

Alibaba (BABA) $74, JD.com (JD) $24

At $74, Alibaba does seem like it’s at a rock bottom valuation with 7-8% earnings growth priced at only 8.5x earnings and sales growth of 7% priced at only 1.3x sales. Similarly, at $24, JD is even cheaper at 8x earnings for a 12% grower and 0.3x sales for a 4-5% grower, which is also below its historical average.

But, I suspect given the China risks in the future, low multiples are par for the course. For many, China’s authoritarian impulses such as Jack Ma’s treatment, clampdowns on businesses, on Hong Kong, during the pandemic to name a few, plus supply chain problems, are a strict no-no for further investments. Ironically, a real Chinese wall for investors.

Perhaps low multiples are the new normal for China, so not sure what yardstick or benchmarks to use – or what is the level of discount needed for country/political risk? The deflationary spiral, and decrease in demand is real and not transitory, with no easy fixes – extorting businesses and investors to invest or banks to lend never has good endings, and I’m not saying that with just a philosophical bias. I also cannot see government policies easing, either.

That said, both these businesses are doing all right and will continue to recover over time – I can’t figure out whether investors will re-enter or will give Chinese companies a better valuation. I don’t have any Chinese stocks, so can’t opine – that country/political risk call you’ll have to take.