The SportsFolio Journal - November 7, 2021

The Three Musketeers of COVID

These are the original three musketeers: Athos, Porthos, Aramis from the Alexandre Dumas classic. But no, this post is not about them.

Instead, we will be dedicating this post to three companies that have what we believe to be some promising technologies in the COVID space: Aditxt, Todos, Adamis. We call them the Three Musketeers of COVID. 

If you have been following us, you will notice that this post is a little bit different. Over here, we write mostly about investment vs. speculation, crypto, NFTs, etc. from a conceptual perspective. This is not an investment newsletter and we have never covered individual stocks. 

That said, we realize that talking about what investing is, while hopefully helpful, has its limitations. How does it work in practice? What does research look like? How do we assess whether or not there is a sufficient margin of safety? To close some of these gaps, we decided to switch gears a bit this week and let you in on how we are making some personal portfolio decisions. Please note that this post is more about the thought process and less about crunching numbers to come up with a valuation. This is an extremely important aspect of investing and we suggest you do this for yourself.**

Let’s dive in. 

First things first. What is investing? Benjamin Graham defined it as “an operation which, upon thorough analysis promises safety of principal and an adequate return.” Ours is really a variation of his but highlights the concept of a financial asset. A financial asset must produce cash flows, a realization that is key when navigating the 21st century of finance. With that, here is our definition: “Investing is taking research-based positions in financial assets with a sufficient margin of safety.” 

Investment decisions are often led by what is called an investment thesis, which is a broad-based view of how the world works or is expected to work in the future. It is important to get this right, so formulating a solid investment thesis requires a fair amount of thinking. When it comes to the Three Musketeers of COVID, here is ours: 

Investment Thesis. Led by the United States, the world will increasingly adopt a hybrid approach when it comes to dealing with COVID. Vaccines are here to stay, but antiviral pills will increasingly play a bigger role as a supplementary mechanism. Easy to administer and store, they may also be particularly appealing to anti-vaxxers.

Often, it is said investing is a long-term concept, but why is that? There are multiple reasons, but one has directly to do with the investment thesis itself. An investment thesis is often about a government shift, regulatory shift, or consumer shift and is not something that happens overnight. 

Being wrong on your investment thesis is already a possibility. What is worse, perhaps, is being right, but not having the patience to see it through. Remember what Warren Buffett said:

The stock market is a wonderfully efficient mechanism for transferring wealth from the impatient to the patient.

It is hard to argue with a man who has produced 20% annual returns for his shareholders over a 55-year period! During the same period, the S&P returned 10.2%. Not bad, but that’s about half as what Berkshire delivered. Also, Berkshire did pretty well in Q3 and is nearly at an all-time high. 

Cash Flows. Remember, investing is all about financial assets, thus it’s all about cash flows. How those cash flows end up in the investor’s pocket has always been a topic of debate. It is true that as a stockholder, you own a piece of business. But unless the stock pays dividends, you are at the mercy of price appreciation, which depends on your ability to sell to somebody else. So there has always been a beauty contest element to the stock market. 

There is a big difference between crypto, where your only way out is to sell your coin to somebody else (and his only way out is to sell it to somebody else, and that goes on ad infinitum). With stocks, the price appreciation itself is rooted in ultimate cash flows. Investing doesn’t require cash flows to be immediate (though that’s certainly nice), it just requires that there are cash flows at some point, which can then be valued using an appropriate discount rate. Microsoft is a classic example, after not paying dividends for years, it started to pay dividends in 2003, which have increased ever since. 

None of the Three Musketeers pay dividends and given where they are in their lifecycle, we don’t think that will happen anytime soon. There will be cash flows, however,  if they can get their products to market and that might result in price appreciation. So what are these companies hoping to sell?

Products. The Three Musketeers are working on antiviral pills for COVID.  

Aditxt. Aditxt doesn’t have its own pill just yet. Instead, it is trying to buy a company that does have one. On August 25, Aditxt signed a letter of intent for exclusive rights to negotiate the acquisition of a biopharmaceutical company commercializing and distributing antiviral oral therapy for COVID-19, which included a term that required Aditxt to extend a bridge loan of $6.5 million to the company. Aditxt subsequently raised the money and satisfied that condition. The market started playing guessing games and some actually suggested the target company would be Todos (it wasn’t). On October 5, 2021, the identity of the target was finally revealed: It was AiPharma, which holds the rights to the antiviral Tablet Avigan/Reeqonus/Qifenda (favipiravir), excluding Japan where Fujifilm has the local rights. The press release is a must-read for anyone who is considering investing in the company. This is particularly important because there are multiple companies involved that are in a complex web of relationships. As part of this announcement, the bridge loan amount was also increased to $15 million. 

Todos. Todos’s pill is called Tollovir. According to the company, Tollovir is using a proprietary blend of botanical extracts with an active chemical ingredient that limits the replication of coronaviruses. Observational results, which were positive, came out on September 30, 2021. The focus here is on hospitalized patients. 

Todos’s CEO, Gerald Commissiong, has been on the speaking circuit lately, so if you are interested in further due diligence, here are a few suggestions: 

Adamis. The product is called Tempol. According to the company website, Adamis has a worldwide license to use Tempol for the treatment of respiratory diseases including asthma, respiratory syncytial virus, influenza and COVID-19. The website further notes that Adamis has initiated patient dosing in a Phase 2/3 clinical trial for Tempol (Study Site), its oral antiviral product candidate. Tempol is also covered on the National Institutes of Health (NIH) website. There is some further NIH coverage here

Competitive Landscape. There is no question that Pfizer and Merck beat the Three Musketeers to the market. Merck and Ridgeback’s molnupiravir data came out first, on October 1, 2021 which was faster than originally expected due to the positive outcomes:

At the recommendation of an independent Data Monitoring Committee and in consultation with the U.S. Food and Drug Administration (FDA), recruitment into the study is being stopped early due to these positive results.

The results were generally not considered to be a slam dunk, but given there is a dire need for COVID treatments, it didn’t take long for the first regulatory approval to be granted - Lagevrio (brand name for molnupiravir) was approved in the UK just a month later. Thus, the time to market was quite accelerated. 

Pfizer reported out on its own data, which looked better than Merck’s, just a couple of days ago. Similar to Merck, enrollment was ceased earlier than expected. 

At the recommendation of an independent Data Monitoring Committee and in consultation with the U.S. Food and Drug Administration (FDA), Pfizer will cease further enrollment into the study due to the overwhelming efficacy demonstrated in these results and plans to submit the data as part of its ongoing rolling submission to the U.S. FDA for Emergency Use Authorization (EUA) as soon as possible.

Pfizer’s CEO, Albert Bourla, called it a great day for humanity and stated that they plan to submit to the FDA by Thanksgiving, which could potentially make the pill available to the masses right around the new year. (click to play video)

For anyone who is trying to decide whether or not to invest in the Three Musketeers, the threshold question is this: are the Merck and/or Pfizer developments good news? It depends. If you think that big pharma will effectively corner the market, use its marketing muscle to push out their treatments even if they may not be the best treatments, then that’s bad news. If part of the investment thesis is that there is more demand than supply, then Pfizer and Merck’s success may actually be a good thing. They are getting the word out and validating the concept for all antiviral pills. In that scenario, a rising tide may end up lifting all ships. Todos certainly seems to think that way and they explicitly reference Pfizer in their investor presentation (PDF). We are closer to this line of thinking, but investors can agree to disagree. What is important here is that investors think about this issue and formulate a view consistent with their investment thesis before making any decisions. 

The other consideration is whether or not the Three Musketeers can carve out a niche. Even if demand exceeds supply, if the product is just a me-too, it’s really hard to gain market share against established players. In that regard, we believe that the Three Musketeers can potentially claim that they have something to offer: 

  1. Hospitalized vs. Non-hospitalized. Todos is a small company with limited resources. It is going after late-stage COVID patients, addressing a certain segment of the market. It believes that if Tollovir works at this stage, it might also work in earlier stages. 

  2. Anti-inflammatory. Both Tollovir and Tempol claim to have anti-inflammatory properties, which might be a differentiator for them.  

  3. Combined Treatment. An article came out in a medical journal published by the Lancet (Note: Lancet is a respected journal in the field) with this title: The combined treatment of Molnupiravir and Favipiravir results in a potentiation of antiviral efficacy in a SARS-CoV-2 hamster infection model. Remember, favipiravir is the active pharmaceutical ingredient for Avigan. We think one possible scenario for Aditxt here is that molnu + favi ends up being considered to be better than molnu alone, in which case Aditxt may end up being a partner (or an acquisition target) for Merck. 

Valuation. How much is a COVID antiviral pill worth? This is an absolutely critical part of the exercise. Remember, investing is all about establishing a view on the value of the company and then comparing that to the price. 

Staying true to the promise we made early in this post, we will leave it to you to do your own valuation. Aswath Damodaran has some great templates available to use for this exercise. However rudimentary it may be, we suggest that you do it. 

We’d like to make note of one thing though: many people are referencing the publicly-observed changes in the market cap of Merck and Pfizer when their data came out. On October 1, the day the data came out, Merck’s stock price closed at $81.40, more than 8% above its previous day's price, which was $75.11. Merck has approximately 2.5 billion shares outstanding according to TD Ameritrade, meaning that the increase in their market cap that day was more than $15 billion. Throughout most of October, Merck traded in a rather narrow band but closed over $90 when the UK approval news came out on November 4, 2021. The next day, Pfizer released their data, shooting from $43.85 to $48.61, adding roughly $25 billion to their market cap. Merck investors didn’t like it and the stock tumbled by about 10%, translating to a roughly $22 billion decline in its market cap. Basically, the market seems to have largely thought Pfizer won the battle and there is not much room for Merck.   

If you are long in any of the Three Musketeers, it certainly feels good to fantasize that a similar size increase could happen to your portfolio. We don’t think that’s realistic, however. For starters, the total addressable market (TAM) may not even be the same. As mentioned above, Todosis is going after late-stage, while both Merck and Pfizer will likely target the early-stage. Having all available pills on the market is good for society, but it’s not an apples-to-apples comparison. 

Neither are the stewards the same. For large companies, arguably the biggest risk is the regulatory process. Once approval is received though, they do already have established marketing channels and relationships. The execution risk, while not non-zero, is certainly lower. The Three Musketeers combined market capitalization is less than $300 million as of this writing. Even in the case of approval, there are significant execution risks. Like any other small company, they can run out of money. We think it’s a pipe dream to expect that these companies will add billions of dollars of market cap even with positive news.

Margin of Safety. What if things go wrong? Is our principal protected? If we are truly investing, we have to ask these questions. 

Pharma/biotech investing is often risky. The R&D lifecycle is long and uncertain. Having “multiple shots on goal” is something you see analysts talk about quite a bit, and it really is a margin of safety concept. Being a one-trick pony might work if you can do that trick really, really well. But if you are in pharma and the ability to do that trick depends on factors you cannot fully control, things can go south pretty quickly. 

What we like about the Three Musketeers is that all three have other businesses/product lines. 

Aditx. The company has an immunity measurement tool, called Aditxt Score. Aditxt has just announced a partnership with CLX Health. It has earlier announced similar agreements with SphereDX, Great Lakes, and Meridian HSN

Todos. Todos has previously closed the acquisition of Provista Diagnostics. The Provista Lab is capable of administering various tests of which the COVID PCR is one.  They have been ramping up the volume with the potential to do more.

Todos is also selling a couple of dietary supplements, Tollovid and Tollovid Daily, that it is selling on Amazon, though obviously, they are not making any therapeutic claims for Tollovid. We have not yet seen Tollovid sales numbers (per the previous link, it was expected to be not significant for Q3, but perhaps more significant for Q4) so we hesitate to ascribe any value to it at this point. 

Adamis. Adamis has two products approved by the FDA. The first one is SYMJEPI, an injection indicated for the emergency treatment of allergic reactions.  The second one is ZIMHI, a high-dose (5mg) naloxone injection for the treatment of opioid overdose. ZIMHI was recently approved by the FDA. 

Catalysts. If you are making true investment decisions, and your horizon is long-term, you should not be too worried about catalysts. If this is a rather short-term trade for you, well, that does make it more speculative, but to each his own. In that case, it becomes more important to be aware of what’s next. 

The first piece of news will likely come from Aditxt. When Aditxt put out its press release on October 5, they said topline results are expected in 60 days. The same day, AiPharma put out a press release of its own and it said 45 days. Taking their word for it, it looks like we will hear something within the next two weeks. 

Todos is not too far behind. The company has repeatedly noted that results are expected in Q4, so less than two months. 

It looks like Adamis’s results will be out sometime in 2022.

Final Verdict. The margin of safety is less than we’d like, so we are not going to put the Three Musketeers too far to the right on the speculation/investment spectrum. It is not non-existent though, as we don’t think these companies are one-trick ponies. We feel we can still count on some revenues (though obviously less) if these pills don’t pan out. So we believe there is certainly a speculative element to these investments, though we’d like to think that if we are speculating, we are speculating intelligently. Aditxt seems slightly riskier compared to the other two, and there is a chance to lose a meaningful amount of capital if the pill doesn’t deliver in the trials, or it does but something derails the acquisition. 

We think it is also somewhat unlikely that none of these companies will deliver. Two wrongs don’t make a right and two speculative moves don’t make an investment. But if we are correct that these companies sit close to the border where speculation turns into investing, allocating a small portion of their portfolio to the Three Musketeers might give investors a reasonable return with some optionality of upside. 

Best of luck, everyone. We’ll come back and revisit this post in the future. 

** Disclaimer: This article provides opinions and information, but does not contain recommendations or personal investment advice to any specific person for any particular purpose. Before making any significant investment decision, please educate yourself about the risks and consider speaking to a reputable professional investment advisor who has a legal fiduciary duty to you. We are not getting compensated for this article. The author of this article has long positions in Aditx (ADTX) and Todos (TOMDF) and is considering initiating a long position in Adamis (ADMP) within the next 72-96 hours.