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Amylyx (AMLX) occupies a unique position for a small cap biotech. It has a recently approved therapy for ALS and a strong launch and yet the stock has pulled back since the earnings report (March 13^th). While the market has been difficult for biotechs in general, does the retrenchment represent an opportunity or a better reflection of the long-term potential of Amylyx?

Stock reaction to earning reports often come from an interaction between the reported numbers but how it relates to expectations. Heading into the earnings report, the sell-side consensus was for $3 million in sales and the buy-side consensus was around $10 million. Amylyx reported $22 million in sales, which was clearly above expectations. It was also above the whisper numbers of $14 million to $15 million, although I would always be careful about whisper numbers as they are by definition silent and difficult to gauge.

It seems, however, by all indications that the quarter was a success and a success in comparison to expectations. This should be a positive for the stock, but it has gone from around $38 on the release of the earnings on March 13^th to as low as the mid-$26 level. There seems to be a disconnect. Is there a reason that the earnings were not as positive as they first appeared?

In terms of inventory build, there was $7 million in the quarter, which represents about two weeks of demand.  That seems pretty reasonable and so it does not seem like the earnings were inflated by inventory.  In addition, even with that inventory level it would not take a lot more growth for Amylyx to become cash flow positive in the second quarter of their launch.  I would not use that as a base case expectation and would think the third quarter of this year or slightly later would be more possible but even that would be quite an accomplishment.

That still leaves a very fair question because if the earnings were as good as described, why did the stock sell off since the report?  Could it be that investors see this quarter as more a bolus of patients waiting for treatment and growth will slow?  There is likely truth to that, but any bolus should not dramatically slow growth.

Could investors be worried about the long term of potential results of the larger phase III trial? The PHOENIX phase III trial started in November 2021 with the last patient enrolled in February 2023, which implies top-line data in mid-2024.  While the phase II trial produced a statistically significant benefit on the ALSFRS-R at 24 weeks, there is always risk when moving from phase II to phase III.

While I certainly acknowledge and respect the clinical risk, it did not change at the earnings call and so I find it hard to believe that caused the selling.  Everyone who follows Amylyyx most likely has already decided the probability of success in the PHOENIX trial before the earnings and nothing reported in the call changed those beliefs.

Is it as simple as the market has been weak and a falling tide lowers all boats?  Perhaps but there has been a seller in Amylyx.  After the close of markets on April 3^rd, Morningside Ventures (a venture capital firm that owned about 11%+ of Amylyx shares) sold around 700,000 shares starting in late February.  While they still own around 10.5% of shares, it seems plausible that the selling pressure has come from these shares hitting the open market.

Is it bad that such a large investors is selling?  While one always needs to be a little cautious when a large insider sells, this is a firm that invested in the Series B and C rounds and as a venture capital firm it makes sense to pare down at these valuations.  To be clear, I have no idea why they sold, how much they plan on selling or when they will be done.  The question one has to ask is twofold.  Is the selling pressure plausibly related to these sales?  If yes, then is the selling related to portfolio management of Morningside or because of a fundamental issue with Amylyx?

If you believe that there is no fundamental issue related to the sales, then the valuation pressure it has caused represents a long-term opportunity. This does not mean that there are no risks as there remains clinical risks coming in 2024 and while the commercial launch has been quite strong, it is still early and only one real quarter of data.

To circle back to the original question that motivated this article, why the selling pressure?  I think it is less related to the fundamentals of the business and more to those shares hitting the market at a time when the broader sector was also weak.  It also seems more likely that Morningside has been locking in a significant profit rather than a fundamental revaluation of Amylyx long term prospects.

This thesis rests on a set of assumptions that I want to reiterate.  First, the earnings and launch are strong (and likely stronger than expectations). Second, nothing has changed to alter the clinical risks of the phase III trial. This does not mean it will be clearly successful, but stocks react to changes in views and the earnings report should not have changed views.  Third, selling in Amylyx is at least partly driven by the sales of Morningside.  Fourth, the Morningside sales are more likely related to portfolio/profit taking than a new fundamental analysis of Amylyx. 

It is the combination of those assumptions that created, in my view, a positive long term risk/reward of Amylyx at the current levels. Changes in those assumptions would alter the risk/reward analysis but I think those are a key set of questions/assumptions for an evaluation of the recent sell-off of Amylyx and what it means going forward.