Abzena — Starting to get back on track

Abzena — Starting to get back on track

In its interim results for the year-ending March 2018, Abzena started to move out from under the shadow of September’s disappointing trading update. Investors should be relieved that Abzena continues to demonstrate a growing service business even against the backdrop of an investment programme aimed at increasing capacity. Group revenues were up 7.6% year-on-year for the first half, while the Abzena Inside portfolio continues to expand and products within it advance.

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Abzena

Starting to get back on track

Interim results

Pharma & biotech

21 December 2017

Price

32.75p

Market cap

£70m

US$1.34/£

Net cash (£m) at 30 November 2017

14.9

Shares in issue

213.8m

Free float

39%

Code

ABZA

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

1.6

(3.7)

(1.5)

Rel (local)

(0.3)

(7.0)

(9.1)

52-week high/low

56.0p

28.2p

Business description

Abzena is a UK group that offers a range of services and technologies for biopharmaceutical development including immunogenicity tests, protein engineering, bioconjugation, polymer/synthetic chemistry, biomanufacturing and ADC chemistry.

Next events

Phase III results and further licences from Abzena inside products

2018

Full-year results

Q218

Analysts

Andy Smith

+44 (0)20 3077 5700

Alice Nettleton

+44 (0)20 3077 5700

Abzena is a research client of Edison Investment Research Limited

In its interim results for the year-ending March 2018, Abzena started to move out from under the shadow of September’s disappointing trading update. Investors should be relieved that Abzena continues to demonstrate a growing service business even against the backdrop of an investment programme aimed at increasing capacity. Group revenues were up 7.6% year-on-year for the first half, while the Abzena Inside portfolio continues to expand and products within it advance.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/16

9.9

(7.4)

(5.86)

0.0

N/A

N/A

03/17

18.7

(8.3)

(5.82)

0.0

N/A

N/A

03/18e

21.6

(13.1)

(5.91)

0.0

N/A

N/A

03/19e

31.0

(9.7)

(4.35)

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Babies not thrown out with the bathwater

Abzena demonstrated revenue growth in two out of its three service lines in the first half of FY18, despite the lower performance across all three service lines that was announced in its September trading update. Only the revenues from its Biology research services lagged the comparable period a year ago and this was partly the result of industry-wide introspection on the standardisation of immunogenicity assays, and partly by being capacity-constrained in protein engineering.

Eyes on the capacity prize

Service revenue growth during a period of higher investment on both sides of the Atlantic demonstrates that management have not taken their eyes away from the bigger prize of a service business that is refractory to a delay in any one contract. The more tactical objectives of increasing protein engineering capacity in the UK and consolidation and expansion of manufacturing at Abzena’s San Diego site are not just aimed at larger capacity. These should bring higher margins as, for example, automated bioreactors have quicker turnaround cycles and require fewer staff to run.

Valuation: £90m or 42.1p per share not demanding

We have made changes to our valuation, which reduce it to £90m from £110m. These changes reflect cash at the end of November (£14.9m or 7p per share) and the average cash burn rate over the first eight months of FY18. In addition, we have reduced our FY18, FY19 and FY20 sales forecasts by c £1.0m, c £1.0m and c £3.0m, respectively, to better reflect the sales growth rates mentioned in the company’s September’s trading update. We suspect that investors may take a wait-and-see stance after September’s trading update, although after a period where revenue growth has been rebased, we may now be past the worst. After Abzena’s full-year results we will be looking to incorporate the more accurate estimates of its increased capacity and margins in later years.

Half-year results review

After the disappointment of the trading update earlier in September, where revenues at all three of Abzena’s service offerings were below expectations, some reassurance of 7.6% revenue growth (£9.6m) at group level in the six months to 30 September 2017 should be welcomed by investors. Two out of three of Abzena’s service lines demonstrated meaningful growth, if lower than was previously expected, compared to H117. While Biology research services was the laggard with a revenue decline to £2.3m in the first half, at least the capacity constraint issue is addressable by the existing investment programme. The adjusted EBITDA loss of £7.0m and reported loss of £8.0m were both about twice that reported in the previous half-year’s numbers, representing increased operational expenditure in the face of close to flat sales.

At the time of the fund-raising in April, management aspired to that stock issuance being the last before break-even. We believe this is still achievable and our model continues to forecast adjusted EBITDA break-even in c FY20. Depending on the interplay between capital expenditure phasing and revenue growth on Abzena’s cash balance, the investigation of a secured debt facility in order to maintain healthy headroom without further shareholder dilution looks eminently sensible. For the moment, we have not included a debt facility in our model.

Keep an eye on Biology research services

The issues at Biology research services that resulted in a decline in sales in the half-year to September were (a) demand exceeding capacity and (b) industry introspection on immunogenicity assays. Increasing demand is a good thing as long as customers are not lost while extra capacity is built. In framing the sector’s debate on immunogenicity assays, Abzena’s thought leadership and engagement with key opinion leaders and customers continue so that Abzena’s enhanced assay capabilities become recognised as the standard.

Abzena sees a significant proportion of its service business deriving from repeat customers, with seven of its top 10 customers returning for a more integrated service. This was demonstrated in the recent announcement of the largest manufacturing contract awarded to date (~$5m). This ADC manufacturing contract award was by a longstanding customer of the Chemistry business. An integrated service offering is important for the maximisation of cross-selling opportunities. One of the challenges of this interconnection was seen earlier in the year when a delay to a project at the manufacturing process development stage had a knock-on effect on the planned GMP manufacturing campaign. Although the antibody will be manufactured by Abzena for the client now the issue has been fixed, freed-up manufacturing capacity and cost can be difficult to absorb at short notice.

Emerging from the shadow and awaiting midday

While much comfort was given on the profile of Abzena as a growing biopharmaceutical services business, it will probably take another earnings announcement before investor confidence returns. Between then and now, further licence agreements for Abzena Inside products should be expected. New contracts like that recently signed on ADC manufacturing with a US biotech company have already occurred, so business development appears to be humming along. In the medium term, two of Abzena’s Inside products will report Phase III results next year. Gilead Sciences’ andecaliximab is in Phase III for gastric cancer and management appeared excited by Bioverativ’s BIVV009 in cold agglutinin disease. One of the reasons for this could be that haematological clinical trials can have much shorter treatment durations than oncology studies and results for the first BIVV009 Phase III study might be available during the first half of 2019.

The only way is investment

The only way out of the revenue volatility caused by delays that occur in the earlier stages of a project (as described above) is to have more capacity available. This means that a delay to one programme (even if Abzena eventually recognises the full value of the integrated contract) has much less of an effect on the group. Currently, the top 10 customers account for 58% of revenues and this can probably be expected to reduce over time as multiple and larger contracts are awarded. Abzena’s investment program has the additional objective of increasing margins since the new automated bioreactors have shorter downtimes and need less committed labour.

Valuation: £90m (42.1p/share) on services/royalty mix

We have reduced our fair value to £90m (from £110m) or 42.1p per share (vs 52p) by using the cash number at the end of November, a revised exchange rate, average burn rate (calculated on the average monthly change in cash in Abzena’s year to date) and number of shares in issue. In addition, we have looked at the sales growth rate implied by September’s trading update and applied it across the services businesses and licensing revenues through to FY20. As a result, our FY18, FY19 and FY20 revenue estimates were reduced by c £1m, c £1m and c £3m respectively. We may have underestimated R&D tax credits in later years on our valuation since none were received in H118, but will update this in our model after the full-year results. The three-phase DCF for the services businesses and risk-adjusted royalties from existing and future licensed products have all been adjusted. For future royalty revenues, we estimate peak sales, launch dates, probabilities of success and small royalties (up to 1%) for the programmes in clinical development. We have estimated better deal economics from the ADC candidates and as a result we model a 2.5% royalty. Further newsflow from the progression toward royalties from its Abzena Inside products, further service contract deals and/or ThioBridge deals may provide additional upside to our current estimates. After Abzena’s full-year results we will be looking to incorporate the more accurate estimates of its increased capacity and margins in the later years.

Building better biologics

Abzena provides biological research services aimed at creating more effective and safer biological products. The group initially evolved through the combination of three key businesses: PolyTherics, Antitope and Warwick Effect Polymers prior to its IPO. After its listing, during 2015 the group acquired PacificGMP (contract, development and manufacturing) and TCRS (specialist contract chemistry and bioconjugation). This enables Abzena to offer a comprehensive and integrated biologics offering.

The significant service aspect to Abzena’s business model provides investors with a lower-risk exposure to the biotech sector than a pure-play product development company where most of the risk resides in the success or failure of one molecule. The Abzena Inside portfolio also provides investors with a diversified product royalty exposure. While the pharmaceutical services sector is growing and fragmented, with the trend towards pharmaceutical companies outsourcing this type of work, a public standalone integrated biopharmaceutical services business is uncommon.

Abzena listed on AIM in July 2014 (raising £20m) and in 2015, from a secondary placement, raised £20m net of expenses from the sale of 35m new shares at 60p. The group is primarily based on the Babraham Research Campus in Cambridge (UK) and, following two acquisitions in 2015, now has operations in San Diego (PacificGMP) and Philadelphia (TCRS). The company employs c 220 staff.


Exhibit 1: Financial summary

£000s

2016

2017

2018e

2019e

Year end 31 March

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

 

 

 

Revenue

 

 

9,854

18,654

21,566

31,023

of which: Biology

5,299

5,719

4,525

5,875

Manufacturing

2,096

5,316

8,958

15,253

Chemistry

2,174

6,961

7,733

9,152

Total Service revenues

9,569

17,996

21,216

30,280

Licenses/milestones/royalties

285

658

350

743

Cost of Sales

(5,319)

(10,547)

(12,730)

(16,654)

Gross Profit

4,535

8,107

8,836

14,369

R&D expenses

(4,216)

(3,849)

(3,984)

(4,183)

SG&A expenses

(9,047)

(14,611)

(18,994)

(20,894)

EBITDA

 

 

(6,817)

(7,450)

(10,792)

(6,377)

Operating Profit (before amort. and except.)

 

(7,618)

(8,607)

(13,075)

(9,701)

Intangible Amortisation

(588)

(723)

(666)

(607)

Depreciation

(801)

(1,157)

(2,284)

(3,324)

Exceptionals

(2,542)

0

0

0

Other

(155)

(412)

(400)

(400)

Operating Profit

(10,903)

(9,742)

(14,142)

(10,708)

Other

0

0

0

0

Net Interest

244

277

9

31

Profit Before Tax (norm)

 

 

(7,374)

(8,330)

(13,066)

(9,670)

Profit Before Tax (reported)

 

 

(10,659)

(9,465)

(14,133)

(10,677)

Tax

961

347

431

384

Profit After Tax (norm)

(6,413)

(7,983)

(12,635)

(9,286)

Profit After Tax (reported)

(9,698)

(9,118)

(13,702)

(10,293)

Average Number of Shares Outstanding (m)

109.4

137.2

213.6

213.6

EPS - normalised (p)

 

 

(5.86)

(5.82)

(5.91)

(4.35)

EPS - reported (p)

 

 

(8.86)

(6.65)

(6.41)

(4.82)

Dividend per share (p)

0.0

0.0

0.0

0.0

BALANCE SHEET

Fixed Assets

 

 

27,347

33,494

41,052

40,630

Intangible Assets

23,177

25,882

25,224

24,625

Tangible Assets

4,170

7,612

15,828

16,004

Other

0

0

0

0

Current Assets

 

 

22,108

11,267

15,233

4,630

Stocks

1,379

1,876

1,876

1,876

Debtors

5,436

4,982

4,982

4,982

Cash

13,724

4,135

8,375

(2,228)

Other

1,569

274

0

0

Current Liabilities

 

 

(5,850)

(6,319)

(6,319)

(6,319)

Creditors

(5,488)

(6,032)

(6,032)

(6,032)

Short term borrowings

0

0

0

0

Short term leases

0

(169)

(169)

(169)

Other

(362)

(118)

(118)

(118)

Long Term Liabilities

 

 

(2,549)

(2,508)

(2,455)

(2,402)

Long term borrowings

0

0

0

0

Long term leases

0

(494)

(441)

(388)

Other long term liabilities

(2,549)

(2,014)

(2,014)

(2,014)

Net Assets

 

 

41,056

35,934

47,511

36,539

CASH FLOW

Operating Cash Flow

 

 

(11,330)

(8,100)

(11,013)

(6,620)

Net Interest

244

277

115

137

Tax

371

1,665

705

384

Capex

(2,047)

(3,320)

(10,508)

(3,508)

Acquisitions/disposals

(9,357)

0

0

0

Financing

20,013

(89)

23,800

0

Dividends

0

0

0

0

Other

31

(22)

62

84

Net Cash Flow

(2,075)

(9,589)

3,161

(9,524)

Opening net debt/(cash)

 

 

(15,799)

(13,724)

(4,135)

(7,296)

HP finance leases initiated

0

0

0

0

Other

0

0

(0)

0

Closing net debt/(cash)

 

 

(13,724)

(4,135)

(7,296)

2,228

Source: Abzena accounts, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Abzena and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
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Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Abzena and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Research: Healthcare

Selvita — Phase I/II with SEL24 to continue

On 16 December 2017, Selvita announced that the FDA had lifted the clinical hold on the Phase I/II clinical trial with the company’s lead drug candidate SEL24 (dual PIM/FLT3 kinase inhibitor) for refractory/relapsed acute myeloid leukaemia (r/r AML). The asset is now out-licensed to Menarini Group, therefore the two companies worked together with the FDA to resolve the issues. The trial can now be restarted with some modifications to the design. While only few details have been disclosed, Selvita mentioned that the dose-finding scheme will be revised to the usual “3+3” design and the trial will resume.

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