Enjoy this free share recommendation on ABZENA extracted from the latest edition of the premium Trendwatch newsletter…
IT WOULD be churlish, if not actually unethical, to give pharmaceutical companies a wide berth for brutal financial reasons. But the fact remains that, in our experience you need deep pockets and lots of luck to combine with the warmth of your human response to make sure that your savings do not evaporate.
But here’s a business profile that’s a bit different.
Over 70% of the revenue of the world’s top ten selling medicines is derived from biopharmaceuticals, including the world’s largest selling drug, HUMIRA. Biopharmaceuticals are treatments derived from life forms, including proteins, antibodies and DNA/RNA, such as gene therapy. Worldwide revenue from biopharmaceutical products was $169 billion in 2012 and this figure is forecast to exceed $220 billion this year.
Abzena’s mission is to enable R&D companies to develop better biopharmaceutical products with one or more of the following attributes: better efficacy, fewer side effects, more predictable quality and/or improved patient compliance.
The company is a revenue-generating life sciences company with a range of complementary services and technologies (covering biopharmaceutical immunogenicity assessment, antibody and protein engineering, manufacturing cell line development and bioconjugation). The company can command high-margin fee-for-service income from a broad customer base, which includes the majority of the top 20 biopharmaceutical companies.
The market that Abzena serves is growing, driven by an increase in outsourcing of R&D by major biopharmaceutical companies, as well as by biotechnology companies looking to access expertise and skills externally. The US market for applied research and pre-clinical drug development, the areas in which Abzena operates, is estimated at $9.6- $11.5 billion. The majority of its revenues are derived from providing services and access to its technologies by US customers.
At the time of its flotation in November 2014, it had more than 30 licence and option agreements in place, from which it’s entitled to milestone payments and/or future potential royalties from the development and commercialisation of products created with its technologies. And it had five customers’ products undergoing clinical development for a wide range of diseases, including cancer, auto-immune and inflammatory diseases.
The company raised £20m on its debut; and in November 2015, it raised £20m more, which it spent on acquisitions. And in April this year another successful sally raised another £23.9m. What for? And how has the business progressed since flotation? What does it do now?
Chemistry Research Services:
This business comprises custom synthesis, ADC linkers, payloads, bioanalytical fields and bioconjugation using ThioBridge and other technologies (don’t ask!) Underlying revenue growth in chemistry was 48%, delivering revenue of £7.0m (Proforma 2016: £4.7m), representing 39% of the its service revenues.
The growth of this business was achieved through expanded long-term customer-funded chemistry programmes, multiple bespoke custom synthesis projects and extensive evaluation and process development programmes for the Group’s proprietary technologies. Growth was achieved by both UK and US chemistry groups (based in Cambridge and Bristol PA respectively) as the chemistry division benefited from its first full year together since the acquisition of TCRS completed in December 2015.
Following an extensive technology evaluation programme with a US biopharmaceutical company, Abzena signed a major licensing deal with this partner in January 2017. Under the deal, Abzena has the potential to receive over $300 million in licence fees and milestone payments. There would also be further royalties on sales of any approved products incorporating Abzena’s ThioBridge technology. As well as the financial benefits to Abzena, this collaboration is further validation of its proprietary technology and expertise.
This division comprises the cell line development group in Cambridge as well as the facilities in San Diego. Revenues have grown at an underlying rate of 74% for the past year, generating revenues of £5.3m (FY16: £2.1m), representing 30% of the Group’s service revenues.
The Group’s biomanufacturing offering represents an integration of manufacturing cell line development, process development and manufacturing. During the year, there were seven manufacturing programmes underway, all with repeat customers, which was more than twice the number undertaken during the previous year.
‘ABZENA Inside’ portfolio:
ABZENA Inside is the pharmaceutical equivalent of Intel Inside, the trademark of the microprocessor manufacturing giant. The name refers to a portfolio of products (currently 12) in clinical development that use Abzena’s proprietary technology. This has been a consistent growth area for Abzena since its IPO.
Technology licence agreements within the ABZENA Inside port- folio provide the Group with the potential to earn up to $0.5 billion in technology access licence fees, milestone payments and/or royalties on its partners’ development of products incorporating the Group’s proprietary technologies.
Abzena also has the opportunity to earn further service revenues from its ABZENA Inside partners as they continue the development of these products.
Abzena also has an intellectual property (IP) portfolio: During the year it was granted 24 patents, covering aspects of its services and technologies. These patents help maintain Abzena’s competitive position and provide valuable licensable technologies to feed the ABZENA Inside portfolio.
The Group experienced capacity constraints in the past year, which has limited its growth. However, the post-period fundraise of £23.9m (mentioned above) in April 2017 is key to increasing capacity across the Group’s three sites. The investment plan is targeting 40% CAGR revenue growth over a period of three years and significant improvement in gross margin, along with driving operational leverage to accelerate the transition to profitability.
Here are the figures on record:
|Year||2013||2014||2015||2016||2017||2018 (Forecast)||2019 (Forecast)|
|Pre-tax profit £m||(0.16)||(3.90)||(4.72)||(9.70)||(9.12)||(8.50)||(3.60)|
The figures in the table provide an explanation as to the fact that of the three visits to the market covered above, the first took place at 80p, the second at 60p and the third at 33p.
In terms of operational matters it’s clear that the company is pretty mainstream internationally, and well respected. It isn’t the easiest of companies to understand; but subject to our limited layperson’s ability to comprehend what it does, we like this company and its technology ‒ and especially its growth potential. It may not be profitable now, and indeed we don’t know when it will achieve profitability.
But we’re sure that many investors will be licking their lips at the prospect of the company harvesting the fruits of its labours in the form of future milestone and royalty payments.
BUY (41.50p; yield: nil; market capitalisation: £88.6 million; initial stop-loss: 33p; EPIC: ABZA; sector: Pharma and Biotech; classification: AIM; website: www.abzena.com; tel: 01223 903498).
We hope you enjoyed this this free share recommendation extracted from the latest edition of the premium Trendwatch newsletter…