Genfit May Become Very Interesting By The End Of 2019

With one product candidate at phase 3 of development, Genfit (OTCPK:GNFTF) should interest institutional investors quite a bit. The results are expected by the end of 2019, which the market should remember well. Keep in mind that beneficial results could make the share price increase quite a bit. Having mentioned this, the company may need more financing to finish other product candidates still at phase 2 of development. Investors should remember that further sale of equity to finance these trials could lead to share price depreciation in the near future.

Source: Prospectus

Source: Prospectus

Business

Founded in 1999, Genfit is a clinical biopharmaceutical company focused on the development of drug candidates targeting the treatment of metabolic and liver-related diseases. The activities of company are presented with the following terms on its website:

Source: Company’s Website

Biotech investors should appreciate the company’s pipeline. The research executed by Genfit is at an advanced stage of development. Genfit exhibits one candidate at phase 3 of development, three products at phase 2 of development, and one product candidate at pre-clinical stage. The image below provides further details on this matter:

Source: Company Presentation

The company’s leading candidate is elafibranor, which represents a potential treatment for nonalcoholic steatohepatitis, or NASH. With regards to potential stock catalysts, elafibranor seems interesting. As reported in the previous image, by the end of 2019, Genfit is expected to release Phase 3 interim results. If the new information is beneficial, the stock price of Genfit could spike up. Investors should remember this date.

The image and the lines below provide further details about the upcoming stock catalysts and when the product candidate may be commercialized in the United States and the EU:

Source: Company Presentation

“We expect to report the results of our interim cohort analysis by the end of 2019, which, if positive, could support accelerated approval from the FDA and conditional approval from the EMA as early as 2020.” – Source: Prospectus

The market opportunity is also very significant, which investors should appreciate quite a bit. The market opportunity for the treatment of NASH could reach $20 billion by 2025. With that, it is also very relevant that this disease affects million of patients in the world, and there are currently no approved therapies for this disease. Refer the image below:

Source: Company Presentation

Phase 3: Elafibranor

Elafibranor is a dual agonist of the nuclear receptors PPARa and PPARd. As mentioned in the prospectus, in the phase 2b clinical trial, elafibranor seemed to obtain resolution of NASH without worsening the fibrosis. The lines below provide further details on the results obtained with 120 mg.

Source: Prospectus

The company has not obtained any issue while assessing tolerability and safety. Investors should consult the information contained in the prospectus about this matter. However, the prospectus seems to provide enough details:

“In all five Phase 2a clinical trials, we observed a favorable tolerability profile and did not demonstrate any safety concerns of elafibranor.” – Source: Prospectus

The company expects to enroll a total of 2,000 patients. The image below provides further details on the phase 3 trial:

Source: Company Presentation

Balance Sheet

Genfit reports a decent amount of cash, €207 million, with total amount of assets worth €229 million. The amount of properties and intangible assets is very small, equal to €7.7 million and €0.7 million respectively. After the cash in hand, the largest assets are receivables worth €8.7 million. The image below provides the list of assets:

Source: Prospectus

While the amount of liquidity is substantial, investors should understand very well that the amount of financial debt is large. It is not ideal. Genfit reports non-current convertible notes of €159 million and current convertible notes of €1.31 million. In addition, Genfit reports non-current loans of €7.2 million and current loans of €1.8 million. Investors should not appreciate these securities as they could be converted in shares, which could lead to share price depreciation. In addition, if the company needs to pay these debts in the future, the remaining amount of cash may not be that significant.

The image below provides both the equity structure and the list of liabilities. Please note that the company did not seem to sell convertible securities such as preferred stock or warrants.

Source: Prospectus

What should matter to investors is when Genfit needs to pay these debts. According to the prospectus, it is a bit worrying that Genfit should have to pay €160 million in three to five years. It represents 77% of the total amount of cash. If Genfit burns out its cash to pay research and development expenses, it may not have €160 million in three to five years. If Genfit needs to raise further capital to pay its debt, the value of the stock price may decline quite a bit. The image below provides further details on this matter:

Source: Prospectus

Regarding the interest rate being paid for the debt, it should not worry investors. As noted in the lines below, convertible debt holders receive annual rates of 3.5%:

“We had net outstanding debt of €160.5 million as of December 31, 2018 in the form of convertible loans, which loans accrue interest at a fixed rate of 3.5% and for which the gross amount is €180,000. We also had outstanding at December 31, 2018 a total of €3.2 million in conditional advances from BPI France, €1.9 million of obligations under finance leases and €4.0 million of loans from commercial banks.” – Source: Prospectus

Income Statement And Cash Flow

Like other pharmaceutical companies, the total amount of revenues is very low, and the net losses are large. The revenue in the year ended December 31, 2018, was equal to €7.4 million, 9.3% more than that in 2017. The net losses were equal to €79.5 million in 2018, 42% more than those in 2017. The image below provides further details on this matter:

Source: Prospectus

The cash flow statement reveals that the company burns more than €50 million every year. It means that in four years, Genfit should burn all the cash owned in 2019, before the IPO. Investors should keep in mind this fact and remember that without cash and intangible assets and with no FDA-accepted product, the share price should decline. The image below provides the cash flow statement:

Source: Prospectus

French Law

Since Genfit was incorporated in France, the jurisdiction that will be applied is that of France. Genfit noted this fact very clearly in the prospectus. There are some differences as compared to the securities law in the United States. For instance, the Board of Directors cares not only about shareholders but also about debt holders, employees, and other stakeholders. This fact may affect the amount of money that shareholders may make on this name. See the image below:

Source: Prospectus

Use Of Proceeds

Investors should appreciate the use of proceeds as Genfit does not expect to use the money to pay debt or acquire shares from existing shareholders. Most of the proceeds will be used for finishing the Phase 3 of elafibranor. The lines below provide further details on this matter:

Source: Prospectus

Institutional Investors

The list of shareholders before the IPO is not beneficial as the amount of institutional investors is not large. Significant shareholders are only Biotech Avenir and the directors of Genfit. It means that the company was not that successful in selling stakes right before the IPO. This feature should not help draw the attention of institutional investors. The image below provides further details on this matter:

Source: Prospectus

Conclusion

Genfit should become quite interesting in the last part of 2019, when the company expects to release information about its phase 3 trial. If the data to be released is beneficial, the share price should increase quite a bit. Perhaps waiting nine months or more is the smartest investment strategy here.

Having said this, investors may have to be careful after 2019. Taking into account the cash in hand, the cash burn rate and the use of proceeds, the company does not seem to have money to finish the phase 3 for the other product candidates. Investors should understand that further sale of equity to finance this treatment may lead to share price depreciation.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.