In an RM article last week on Nano One Materials, I coined the phrase: the antidote to stagflation is innovation. On the heels of last Friday's shockingly weak non-farm payrolls report, this week we saw Wednesday's CPI reading - a monthly gain of 0.8% versus the consensus estimate for 0.2% - come in well above expectations. This is stagflation. Get used to it. The current level of yield on the 10-year Treasury note of 1.68% in no way comprehends the true impact of inflation. We are heading to 2% with a bullet. Be ready.
Many are using the threat of rising interest rates as an excuse to sell Nasdaq favorites and small-caps, with the general reason being that higher growth companies are more exposed to higher discount rates caused by higher interest rates. The problem here is that we enter a baby/bathwater situation. I have been yelling from the rooftops for months about the overvaluation of the U.S. stock market, especially the Nasdaq - with Tesla (TSLA) being a prime example - but not all tech companies are created equal.
The risk is that we start to ignore real innovation, and companies that need capital are starved of it. That risk is mitigated by the fact that capital-raising has been so darn easy over the past few years. So, companies with strong balance sheets no longer need to raise equity, and if this market weakness continues, it will lead to attractive long-term entry points.
One such situation exists with Arcturus Therapeutics (ARCT) . I have written about ARCT in my RM column several times. Management noted in their earnings call this week that progress continues on ARCT's COVID vaccine candidate, ARCT-021. ARCT CFO Andy Sassine noted on the call that ARCT had a cash balance of $467 million as of March 31st. Clearly Arcturus is more than sufficiently capitalized for both the increased expenses driven by a Phase 3 trial of ARCT-021 and the costs of a roll-out, should regulatory approval be granted for ARCT-021.
Yesterday I had the opportunity to speak privately with ARCT CEO Joe Payne, and Neda Safarzadeh, Sr. Director, Head of Investor Relations/Public Relations/Marketing. I believe primary research is key to understanding emerging industries. On the call Mr. Payne reiterated to me that the Arcturus true value-add is in its proprietary self-transcribing and replicating RNA (STARR) technology and even further in Arcturus proprietary delivery system for that mRNA, LUNAR.
That's the lightbulb moment in the midst of a pandemic. Arcturus' IP is incredibly valuable, and may in fact be invaluable. I am not an expert on biotech, but I have educated myself on the prospects for messenger RNA. COVID-19, as horrible as it has been, has been mRNA's coming-out party, as vaccines from Moderna (MRNA) and Pfizer (PFE) /BioNTech (BNTX) have proven to be safe and efficacious. As Mr. Payne noted to me yesterday, mRNA works by BUILDING proteins and adding to genetic materials that your body might be lacking or unable to produce itself.
I believe that COVID vaccines, including ARCT's formulation, ARCT-021, are just the tip of the iceberg for this emerging technology. The market has noticed, with the group of mRNA companies including Moderna, BioNTech, CureVac (CVAC) and Translate Bio (TBIO) producing torrid runs in 2020 - ARCT shares rose 280% last year - but all now seeing sharp selloffs into the stagflation trade.
The macro will always drive the micro. That can be frustrating as an investor, and I use options contracts to cushion potential losses (contact me via RM for details) but there are no secrets in the stock market, just as there are no secrets in the world of biotech. ARCT lists partnerships with Takeda (TAK) , Johnson & Johnson (JNJ) and Ultragenyx (RARE) in its most recent presentation. That is the ultimate downside protection for ARCT, and any company with truly innovative IP. That IP is valuable to other companies in the sector. mRNA may very well change the way humans treat diseases, but M&A will keep any of those companies from getting "too cheap." Innovation always wins.