ADC Therapeutics SA (NYSE:ADCT) Shares Could Be Significantly Undervalued

Published on September 24, 2024 | Ticker: ADCT

ADC Therapeutics SA (NYSE:ADCT) is a leading, commercial-stage global pioneer in the field of antibody drug conjugates (ADCs). The company has reported its financial results for the first quarter of 2024, showcasing its continued progress and potential for future growth.

In the first quarter of 2024, ADC Therapeutics generated net sales of $17.8 million for its flagship product, ZYNLONTA, a 7% increase over the previous quarter. This sequential growth was driven by continued demand in both the community and academic settings, despite an intensified competitive landscape. The company's total revenue for the full year 2023 was $69.6 million.

On the bottom line, ADC Therapeutics reported a net loss of $46.6 million, or $0.56 per share, for the first quarter of 2024. For the full year 2023, the company reported a net loss of $240.1 million. While the company continues to invest in its pipeline and commercial efforts, it has maintained a disciplined approach to capital allocation, as evidenced by a 16% year-over-year reduction in non-GAAP operating expenses in the first quarter of 2024.

ADC Therapeutics' cash position remains strong, with $234.3 million in cash and cash equivalents as of March 31, 2024. The company has recently announced the pricing of a $105 million registered direct offering, which is expected to extend its cash runway into mid-2026 and provide enhanced financial flexibility to execute its strategy.

Business Overview

ADC Therapeutics is a leading, commercial-stage global pioneer in the field of ADCs. The company's goal is to transform the lives of those impacted by cancer through its robust ADC portfolio across two pillars of growth: hematology and solid tumors.

In the hematology space, the company's flagship product, ZYNLONTA, is a CD19-directed ADC that received accelerated approval from the U.S. Food and Drug Administration (FDA) and conditional approval from the European Commission for the treatment of relapsed or refractory diffuse large B-cell lymphoma (DLBCL) after two or more lines of systemic therapy. The company is seeking to expand ZYNLONTA into international markets, earlier lines of DLBCL, and other indolent lymphomas, including follicular lymphoma (FL) and marginal zone lymphoma (MZL), as a single agent and in combination.

In the solid tumor space, ADC Therapeutics' clinical-stage pipeline consists of ADCT-601, targeting AXL, as a single agent and/or in combination in sarcoma, pancreatic, and non-small cell lung cancer (NSCLC). The company's pre-clinical stage pipeline includes a portfolio of next-generation investigational ADCs targeting Claudin-6, NaPi2b, PSMA, and ASCT2.

Recent Developments

ADC Therapeutics has made significant progress in advancing its pipeline and research initiatives during the first quarter of 2024.

In the hematology space, the company announced positive data from the LOTIS-7 study, a Phase 1b trial evaluating ZYNLONTA in combination with bispecific antibodies. The dose escalation portion of the study successfully cleared all three dose levels, with no dose-limiting toxicities, no or low-grade cytokine release syndrome (CRS), and no immune effector cell-associated neurotoxicity syndrome (ICANS) observed. The company is now enrolling patients in the dose expansion portion of the study, evaluating ZYNLONTA in combination with glofitamab in second-line-plus DLBCL.

Additionally, the company presented encouraging initial data from an investigator-initiated Phase 2 trial of ZYNLONTA in relapsed/refractory marginal zone lymphoma (MZL). Out of the first 15 evaluable patients, 13 achieved a complete response and one achieved a partial response, with all patients maintaining their responses at the time of data cutoff. The company plans to potentially pursue a regulatory pathway and compendia strategy for ZYNLONTA in MZL as soon as sufficient data are available.

In the solid tumor space, ADC Therapeutics provided a comprehensive update on its novel exatecan-based ADC platform and its four lead ADC candidates targeting NaPi2b, Claudin-6, PSMA, and ASCT2. The company's preclinical data suggest that these ADCs have a high therapeutic index, reflecting the proprietary design of the ADCs. The NaPi2b and Claudin-6 ADCs are currently in IND-enabling studies, while the PSMA and ASCT2 ADCs are in the drug candidate selection stage, which the company expects to complete this year.

Financial Overview

For the full year 2023, ADC Therapeutics reported total revenue of $69.6 million, primarily driven by net sales of ZYNLONTA. The company's net loss for the year was $240.1 million, or $2.92 per share. This loss was primarily due to the company's continued investment in research and development, as well as its commercial efforts to support the launch and expansion of ZYNLONTA.

In terms of cash flow, ADC Therapeutics reported annual operating cash flow of -$118.7 million and annual free cash flow of -$121.9 million for the full year 2023. The company's strong cash position, with $234.3 million in cash and cash equivalents as of March 31, 2024, combined with the recent $105 million financing, is expected to provide the necessary resources to execute its strategic priorities.

Key Financial Ratios

ADC Therapeutics' financial ratios demonstrate its focus on efficient capital allocation and liquidity management:

Current Ratio: 4.61 (as of March 31, 2024)

Quick Ratio: 4.35 (as of March 31, 2024)
Debt-to-Equity Ratio: -0.59 (as of March 31, 2024)

These ratios indicate that the company has a strong balance sheet and ample liquidity to fund its ongoing operations and pipeline development.

Liquidity

ADC Therapeutics maintains a strong liquidity position, with $234.3 million in cash and cash equivalents as of March 31, 2024. The company's recent $105 million registered direct offering is expected to extend its cash runway into mid-2026, providing enhanced financial flexibility to execute its strategy. This robust liquidity position enables the company to continue investing in its pipeline development and commercial efforts while maintaining a disciplined approach to capital allocation.

Risks and Challenges

While ADC Therapeutics has made significant progress, the company faces several risks that investors should consider:

Continued competition from bispecific antibodies in the DLBCL market, which could impact the growth of ZYNLONTA

Potential delays or setbacks in the development of the company's pipeline candidates
Reliance on third-party manufacturers and suppliers for the production of its products and product candidates
Uncertainty around the regulatory approval and commercial success of its pipeline candidates

Outlook

Despite these risks, ADC Therapeutics remains well-positioned for future growth. The company's focus on expanding the use of ZYNLONTA in earlier lines of DLBCL and indolent lymphomas, as well as its promising solid tumor pipeline, provide multiple avenues for value creation. Additionally, the company's disciplined approach to capital allocation and strong liquidity position suggest that it is well-equipped to execute its strategic priorities.

Conclusion

ADC Therapeutics is a leading, commercial-stage global pioneer in the field of ADCs, with a robust pipeline and a strong focus on hematology and solid tumors. The company's first-quarter 2024 results demonstrate its continued progress, with sequential growth in ZYNLONTA sales and a disciplined approach to capital allocation.

The company's pipeline advancements, including positive data from the LOTIS-7 study and the investigator-initiated trial in MZL, as well as its comprehensive update on its solid tumor research platform, highlight the potential for future value creation. While the company faces certain risks, its strong financial position and strategic priorities suggest that ADC Therapeutics is well-positioned to drive long-term growth and deliver value for its shareholders.

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