IBIO – don’t buy the vaccine dream

Portfolio manager summary

  • IBIO is a Texas-based company whose stock was up ~500% year to date through 12/7 on investor optimism about its COVID-19 vaccine efforts
  • We believe that IBIO is vaccine vaporware, with a history of having inserted itself into the discourse of several diseases-du-jour over the last decade including H1N1, Ebola, and now COVID
  • IBIO has never actually commercialized any of its vaccine or therapeutics efforts, having eliminated pipeline disclosure in FY17
  • In fact, IBIO settled a shareholder suit alleging that it lied about its Ebola claims, and we believe IBIO’s COVID effort is just a replay of the 2014 Ebola episode
  • Despite this, the Roberts (Kay and Erwin), have reaped compensation in excess of 100% of IBIO’s revenues since 2008
  • We uncovered associations between Robert Kay and CELH’s Carl Desantis, himself a controversial businessman, and a Georgian businessman caught up in post-Soviet intrigue along with Hillary Clinton’s brother
  • Robert Erwin, on the other hand, was CEO and Chairman of LSBC, a plant-based biotech that went bankrupt in 2006
  • Between the company’s track record and management history, we believe this is a clear “fool me once, shame on you; fool me twice, shame on me” situation that investors shouldn’t get caught in. We believe that IBIO’s business is worth no more than the cash on its balance sheet adjusted for the next twelve months of cash burn, or just $0.43 per share, down 71% from the 12/7 close

All hat and no cattle

If you ever hear the saying “all hat and no cattle”, the message is simple: wearing a cowboy hat doesn’t make you a cowboy. All talk, no substance – rarely has a metaphor fit our view of a company the way it fits IBIO.

iBio is a Texas-based company that purports to develop vaccines and other therapies using its plant-based system known as FastPharming. As a fresh example of what investors are dealing with, on December 2nd, it announced a Statement of Work with Belgium-based ATB Therapeutics, which sent IBIO’s stock up ~10%, adding about $30MM to the company’s market cap.

What investors miss here is that ATB Therapeutics did just EUR 55,209 in gross profits in 2019 and had just EUR 2.2MM in assets on its balance sheet:

Source: ATB financials

Investors are overly optimistic about this announcement, especially given the size of the partner – we do not believe this will be a material revenue generator for IBIO moving forward. After researching IBIO, we view this as typical of the company’s modus operandi, and think it is yet another red flag in a series of many.

For context, it is our view that this announcement was solely used to bolster investor optimism about IBIO, which was up ~500% year to date through 12/7 on its purported COVID efforts, which we believe will amount to nothing.

In light of Moderna and Pfizer’s stunning recent announcements that their COVID vaccine candidates prevented over 90% of infections, we thought it would be important to give investors a look into purported COVID player IBIO’s business model, history, and management.

Before kicking off this report, here is a little perspective – a perspective that should give the reader an idea of the level of investment required to be competitive in the COVID vaccine race. Pfizer spent $2B to get its vaccine to this stage, and it had $1.5B in cash on its balance sheet at the end of September. Pfizer has approximately 88,200 employees.

In the last twelve months, Moderna has spent $729MM on R&D and had $1.5B in cash on its balance sheet at the end of September.

IBIO, on other hand, had $77MM in cash at the end of September and 51 employees at the end of June.

We believe IBIO lacks the track record, leadership, or resources to be successful. In our report below, we will outline IBIO’s repeated failure to bring vaccines and other therapeutics to market over its history as a public company. At one point, IBIO even made comments that implied its involvement in Ebola drug development! We also will present our concerns about key personnel and why we believe they cannot be trusted.

Based on all this information we believe IBIO shares to be worth no more than $0.43, its cash value per share (pro forma for today’s offering adjusted for cash burn), or 71% below current levels.

Understanding the bull case

IBIO’s meteoric 2020 performance is largely the result of the company’s purported efforts toward a COVID vaccine developed through its FastPharming System. Investor speculation in vaccine plays this year has been so frothy that at one point in July, IBIO’s stock was up 2483% from the beginning of the year. And while the stock has since come in, it is still up over 400% on the year as investors assign value to its technology and the possibility that IBIO may be able to successfully bring to market a COVID vaccine.This InvestorPlace article argues that while IBIO may be behind its peers in developing a COVID vaccine, its technology has real potential. Comments on Reddit outline a similar view on IBIO and its technology:

Source: Reddit

Source: Reddit

It is our belief that these investors are unfortunately unaware of IBIO’s history of unkept promises and the management history of the company. We outline those topics in this note.

IBIO’s Ebola (EboLIE?) Drug

COVID would not be the first time IBIO gave itself a part in the search for a solution to a concerning disease. In 2014, the world was horrified by a small, but concerning the spread of Ebola from Africa to other locations, including the US.

With no approved drugs on the market at the time, the FDA allowed two experimental drugs to be used in the US. One of these compounds was ZMapp, a cocktail developed by San Diego-based Mapp Pharmaceuticals and manufactured by Kentucky Bioprocessing using “genetically modified tobacco plants”. In August 2014, Mapp ran out of its supply of the drug, and the federal government sought help from other facilities, one of which was the Texas A&M Center for Innovation in Advanced Development and Manufacturing. (source: US District Court of Delaware, case 1:14-cv-01343, document 1).

The Texas A&M facility was affiliated with Caliber Biotherapeutics LLC. Caliber, in 2013, entered into a licensing agreement with IBIO to “use their combined capabilities to develop their own product portfolios, starting with a monoclonal antibody for an oncology indication.” 

A shareholder suit refers to an October 11, 2014 quote from founder and then CEO Robert Kay (who just stepped down from the CEO role in March 2020 but remains co-chairman of the board) from the Washington Post (this, despite IBIO only partnering with Caliber for oncology):

Source: US District Court of Delaware, case 1:14-cv-01343, document 1

Just five days later, IBIO explicitly inserted itself into the Ebola discussion with a press release that implied it had a role in responding to Ebola:

Source: Press release

These communications resulted in an approximately 530% increase in IBIO’s stock price from the beginning of October 2014 to the middle of that month. Shortly thereafter, two Seeking Alpha articles, one on October 20 and the other on October 23, concluded that IBIO never actually explicitly confirmed it was producing an Ebola drug and that the government-funded lab was not exploring any changes to Mapp’s compound. These reports sent the stock down approximately 55% through month-end. Shareholders later sued IBIO, claiming that “iBio repeatedly lied about the role it played in producing an experimental Ebola drug

This is a classic “Fool me once, shame on you; fool me twice, shame on me” situation. IBIO settled for $1.9MM, and, unsurprisingly, investors never saw IBIO come to market with an Ebola drug. We believe IBIO is pulling the same trick this time around, albeit more discreetly. We have the view that if a company settles a lawsuit that alleges it lied to its shareholders, that should be a large enough red flag to make it a bad investment.

However, for the investors that still think IBIO can pull off a COVID-19 vaccine, we believe the company’s repeated pattern of failing to commercialize its efforts speaks for itself.

IBIO: promises unfulfilled

IBIO’s roots are in a 2004 acquisition of a plant-based technology platform from Fraunhofer USA Center for Molecular Biotechnology (FhCMB), a non-profit translational research institution. IBIO’s model was to use the platform to create and advance its product candidates and license the platform to other parties. Indeed, in the 2008 10-K, we see that IBIO is “prioritizing the following product candidates for our in-house research and development portfolio”:

Source: 2008 10-K

In the 2009 filing, we learn that IBIO and FhCMB, in January 2009, agreed to “defer further preparation for clinical trials of a seasonal flu vaccine candidate and instead to focus on clinical trials of a pandemic flu vaccine candidate”, namely H1N1. (We are struck by IBIO’s ability to insert itself in the discourse for H1N1, Ebola, and now, COVID-19.)

In the same filing, we learn that FhCMB is an important source of funds for IBIO – in 2009, FhCMB received $8.7MM from the Bill & Melinda Gates Foundation to fund clinical trials of “the pandemic flu candidate based on [IBIO’s] platform.” Further, IBIO noted that “[t]he U.S. Department of Defense (“DoD”) has also provided $10.3 million in funding to FhCMB for preclinical and clinical studies for anthrax and plague vaccine projects, and this funding is similarly beneficial to us because we have retained the commercial rights to any technology improvements resulting from those projects”.

Needless to say, it sounds like FhCMB was probably an important source of capital and revenue. The company derived close to ~$1M in sales as a subcontractor to FhCMB. The company also put its focus on H1N1 stating that “Our near-term objective is to complete preclinical evaluation and transition select vaccine candidates into Phase I Human Trials”.

In the 2010 10-K, we learn that in addition to H1N1, IBIO was developing vaccine candidates targeting the H5N1 virus and therapeutics for Human Papilloma Virus (HPV), as well as owning the commercial rights to an oral anthrax vaccine. Once again, the company stated the importance of H1N1 saying “We currently are prioritizing H1N1 influenza vaccine candidates for our in-house research and development portfolio”. All of this was being done at IBIO’s “approximately 500 square feet of office space at our headquarters located in Newark, Delaware, which is leased on a month-to-month basis from FhCMB.”

In the 2011 10-K, we find out that IBIO started Phase I trials for both the H1N1 and H5N1 vaccines in late 2010, and the company had yet again expanded its efforts to develop vaccines for malaria and trypanosomiasis and therapeutic proteins for Fabry disease, hereditary angioedema, and treatment of disorders caused by a deficiency in alpha-1 antitrypsin. This seems like a gargantuan undertaking for a company with just seven employees at the time.

In the 2012 10-K, we learn that IBIO completed its H1N1 and H5N1 Phase 1 trial, and in the 2013 10-K, the company started disclosing all its research programs as seen below.

Source: 2013 10-K

But then, things seem to slow down considerably over the next few years. The chart below shows the status of these clinical programs over the next few years:

Source: 10-Ks

In the 2014 10-K, there is no progress AT ALL on the 2013 pipeline, and we just see the addition of one therapeutic protein known as IBIO-CFB03. In FY15, we see that just three products have moved forward – malaria, hookworm, and anthrax vaccines moved into Phase 1. We also learn that IBIO filed a legal complaint against its partner, Fraunhofer, for material contract breaches. In FY16, we see “feasibility demonstrated” (whatever that means) for several products.

Also in FY16, IBIO launched a new business, IBIO CMO (now IBIO CDMO), a contract manufacturing organization to 1) develop and manufacture third party products, 2) develop and product IBIO’s products for the treatment of fibrotic disease (what happened to the vaccines?!) and 3) commercial technology and transfer services. Was the litigation with Fraunhofer going so poorly that IBIO had to pivot its business?

Sure enough, in the 2017 10-K, the product candidate pipeline is GONE. There is no mention of the progress of the pipeline, and IBIO mentions the following risk:

Neither we nor our collaborators have completed any other clinical trials for any vaccine or therapeutic protein product candidate produced using iBio technology. As a result, we have not yet demonstrated our ability to successfully complete any Phase 2 or pivotal clinical trials, obtain regulatory approvals, manufacture a commercial scale product, or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization.”

To recap – between 2008 and 2016, IBIO claimed to have a pipeline of promising vaccines and therapeutics, including implying a role in addressing Ebola, and quite literally NONE OF IT MATERIALIZED into a marketable product.

Of the $8.4MM in revenues booked between FY08 and FY17, $6.3MM came from providing, through Fraunhofer, technology services to a Brazilian company, with the remainder coming from nutraceutical sales in 2008 and 2009. This revenue stream went to zero in FY18. 

Since then, IBIO has done little else, in our view, generating revenues of just $2MM in FY19 and $1.6MM in FY20.

What IBIO has done, however, is spend almost 7x on G&A as it generated in revenues since 2008 – two of the main recipients of this largesse were the Roberts (Kay and Erwin), who have been in leadership positions at IBIO through the saga we outlined above. We believe the Roberts’ track record is a cause for concern and an indication that the company’s promises lack credibility.

Robert Barons? We believe that IBIO’s leadership is a cause for concern

Over the last 12 years of what we view as a bunch of talk with very little results, the company has had two constants – the Roberts – Robert Kay and Robert Erwin, two individuals whose aggregate cash and stock compensation between FY08 and FY20 comprised 101% of the $12.5MM in revenues that IBIO generated during the same period. We believe that this is grossly excessive given the track record we outlined above.

Robert Kay was IBIO’s CEO from its 2008 spin-off until earlier this year when he stepped into the role of Co-Chairman and member of the board. As CEO, he oversaw the series of failed commercializations we outlined above but made over $7.5MM in the process.

Kay’s background includes some colorful experiences and characters. Before becoming CEO of IBIO in 2008, when it was spun out of Integrated BioPharma (INBP), Robert Kay was on the board of INBP from 2003 until the 2008 spin-off. INBP appeared to be a family affair, with Gerald Kay (Robert’s brother) as CEO at the time (now Chairman). Today, according to Bloomberg, Riva Kay Sheppard and Christina Kay share the Co-CEO seats at INBP. During Robert Kay’s time on INBP’s board until the IBIO spin-off announcement, INBP’s stock fell from a peak of $12.85 to approximately $2.72, a 79% collapse.

But this is not as interesting as who the Kay brothers have surrounded themselves with – Carl Desantis. Carl, who still sits on the INBP board and was partners with the Kay brothers in a vehicle known as Trade Investment Services, LLC (TIS), was also the founder of Rexall Sundown, which was fined $12MM by the FTC about claims it made in the marketing of a dietary supplement, Cellasene. 

In 2000:

Source: Broward New Times

Carl is also the largest shareholder of CELH, which Grizzly Reports covered in an October 2020 research piece. CELH itself makes bold claims, saying it is the “first and only negative calorie drink the world.”

But that’s not all – enter Vasili Partarkalishvili – Vasili and the Kay brothers, along with Carl Desantis (through TIS mentioned above), were owners of a company called Paxis Pharma, which INBP bought in 2003.

Somehow, inexplicably, Hillary Clinton’s brother Tony Rodham is part of this story:

Source: TIME

We should note here that the Gene Prescott mentioned here was Robert Kay’s partner in a real estate business.

Back to Vasili – in the early 90s he opened Liberty Bank, which, in 1994, the US Comptroller of the Currency warned was not authorized to operate in the US. Vasili and his partners got sued by two men claiming that “Liberty, IBN and several other enterprises amounted to a Ponzi scheme in which they lost hundreds of thousands of dollars”:

Source: TIME

Those partners included Robert Kay:

Source: TIME

We believe it is safe to say, given Robert Kay’s background with dubious characters and the Ebola lawsuit which involved management making false claims, that anything he is involved with is deserving of additional scrutiny if not complete avoidance.

Now, onto the other Robert, Robert Erwin. Erwin has been IBIO’s president since 2008, earning over $4.9MM through FY20. Like Robert Kay, Erwin has a track record we wouldn’t want to see in a public company. According to Erwin’s bio on the IBIO website, he “led Large Scale Biology Corporation from its founding in 1988 through 2003, including a successful initial public offering in 2000, and continued as non-executive Chairman until 2006.

Like IBIO, Large Scale Biology Corporation (LSBC) was attempting to use plants as biological factories. What Erwin’s bio doesn’t tell you is that LSBC “never really managed to get its products off the ground” LSBC filed for Chapter 11 protection in 2006, and its 3Q05 10-Q shows it had an accumulated deficit of over $200MM.

Erwin has also found a way to enrich himself as the minority shareholder of Novici Biotech, which, since 2012, performs various scientific services for IBIO:

“In January 2012, the Company entered into an agreement with Novici Biotech, LLC (“Novici”) in which iBio’s President is a minority stockholder. Novici performs laboratory feasibility analyses of gene expression, protein purification and preparation of research samples. In addition, the Company and Novici collaborate on the development of new technologies and product candidates for exclusive worldwide commercial use by the Company.” (Source: IBIO 10-K)

In FY19 and FY20, IBIO’s expenses related to Novici were $954k and $97k, respectively, accounting for 47% and 6% of IBIO revenue during those periods. Not a bad gig if you can get it.

To recap, IBIO’s founder/former CEO/chairman, whose compensation exceeded 60% of IBIO’s revenues from FY08 to FY20:

  • Served on the board of what appears to be a family-run company while its stock price fell 79%
  • Partnered with Carl Desantis, who is alleged to have made unsubstantiated claims about the businesses HE ran
  • Alleged to have partnered with a Georgian “wheeler-dealer” to launch a bank that was not authorized to operate in the United States

IBIO’s president, whose compensation was approximately 40% of IBIO’s revenue from FY08 to FY20, was CEO and Chairman of a biotech that went bankrupt during his tenure and extracts value from IBIO through his position as a minority shareholder that provides services to IBIO.

Given these backgrounds and IBIO’s track record, we believe there is little value for investors in the stock.

We believe IBIO is likely to disappoint investors

The Mariner instant replay shows that:

  • IBIO’s ATB Therapeutics deal is with a company with just EUR 2MM in assets
  • We believe that IBIO will be unable to compete in the vaccine space given the massive amount of dollars and time required to be successful
  • IBIO’s track record shows that the company has attempted to insert itself in vaccine discussions related to other diseases-du-jour, but none of these efforts amounted to anything but stock price movement. In the fact, the company settled a lawsuit alleging it lied about its Ebola program to shareholders
  • Despite never commercializing a vaccine or therapeutic, Robert Kay and Robert Erwin, IBIO’s founder/former CEO (now Co-Chair of the board) and president, respectively, received compensation exceeding all of IBIO’s revenues from FY08 to FY20
  • We believe both Roberts present significant credibility and execution risk to the business

Our view is that the year to date move in IBIO is unrelated to business fundamentals and that the track record of IBIO’s platform and management suggests the business is in no better condition than it was in before its initial 633% move in February. IBIO has not shown investors any meaningful progress for its COVID-19 program, and we believe this program amounts to little more than vaccine vaporware.

Given this, we view IBIO as a stunning example of “all hat no cattle” and do not believe the business is worth more than the cash on the balance sheet.

After today’s offering, this amounts to 53c per share – which, adjusted for approximately $20MM of estimated cash burn over the next year, results in a price target of $0.43 per share or down approximately 71% from the 12/7 close.