In the often-volatile world of biotech stocks, shares of small-cap Blueprint Medicines (BPMC -2.31%) have proven surprisingly steady over the past 12 months. But the stock could be gearing up for a bull run. That's thanks to an expanded set of prescription guidelines approved recently for the company's biggest-earning drug, Ayvakit.
But Blueprint is still burning far more money than it brings in, and that is unlikely to change in the near term. So should you think about buying this stock, or are its warts too much to bear? Let's take a look.
Why this stock is heating up
Ayvakit treats indolent systemic mastocytosis (ISM), a rare and often debilitating blood disorder that causes organ damage as well as fatigue, not to mention a slew of other symptoms which are often unpredictable both in terms of their severity and their duration.
It was originally approved by the Food and Drug Administration (FDA) for advanced or severe ISM in mid-2021. At the time, a report by Research and Markets estimated that its addressable market size would reach $1 billion by 2028. Roughly 1 in 10,000 people globally are affected by mastocytosis although that figure includes types of mastocytosis other than ISM which may or may not be ultimately treatable with the drug.
On May 22, regulators granted the company's petition for an expanded indication. Now, all adults with ISM are eligible for treatment, which represents a major expansion of Avaykit's addressable market, and more such expansions may be on the way in the long-term.
The market seems to have a positive opinion on Blueprint's prospects as the company's shares are up by 35% in the past three months. And since the drug is the only medicine that's approved specifically to treat the root causes of ISM rather than the symptoms, Blueprint should continue to have free reign in the market. Furthermore, as Medicare covers the drug, its price tag of more than $35,000 per course of treatment isn't borne by most patients.
In the first quarter of 2023, before the expanded indication was granted, Avaykit was responsible for $39.1 million of the biotech's total sales of $63.3 million, with the remainder coming from collaboration revenue. Management originally predicted that the drug would bring in as much as $145 million this year, but that figure doesn't count the favorable impact of being able to sell it to more people. So it's very likely that the company will outperform its prior estimates.
The risks of falling short are real
As favorable as Blueprint's positioning with its ISM therapy is, it isn't exactly a low-risk investment, even for a biotech stock.
The company has around $822 million in cash and equivalents, and $240 million in debt. But in the trailing 12-month period, it burned $511 million of its cash as its sales of Avaykit weren't enough to make it profitable. Nor has it been profitable in the last five years, with the exception of one quarter in 2020 when it reported a very small profit.
Even if we assume that sales of Avaykit in 2023 will be $300 million thanks to the expanded indication, which is far more than anyone has predicted, and also assume that those sales will be made at zero additional cost, which they won't be, Blueprint will still likely be unprofitable and burning hundreds of millions of dollars per year.
Fundamentally, the problem is that its research and development (R&D) expenditures are wildly high; in 2022, it spent $477 million on R&D. Over the latest four quarters, during which it had a medicine on the market with multiple indications, R&D expenses averaged a startling 256% of revenue.
Those high costs look especially large considering that the company only has one program in late-stage clinical trials, four early stage clinical programs, and one program that's awaiting submission to regulators. In other words, buying Blueprint stock today requires believing that it'll be able to wring some stellar returns out of its research, and likely within the next few years, before all of its cash is spent.
What's the right move?
Despite this bearish perspective, it's important to recognize that Blueprint isn't on the verge of running out of money as it could just trim or pause some of its less-promising pipeline programs. Likewise, it could probably take out more debt comfortably, or even issue new shares to raise capital, allowing its outsized R&D operations to continue seeking out future growth opportunities.
This isn't a stock that I'd invest in myself due to the lack of profitability despite having a medicine on the market, which for me is a red flag because it could indicate that there's not enough demand. But if your tolerance for risk is sufficient to buy shares of early stage biotech companies that haven't launched a product yet, this stock could be up your alley as its set of execution and financial risks are not as vast as those faced by less mature businesses in the industry.
