Abzena
Written by
Abzena |
Integrated service offering demonstrating value |
Interim results |
Pharma & biotech |
2 December 2016 |
Share price performance
Business description
Next events
Analyst
Abzena is a research client of Edison Investment Research Limited |
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Abzena announced strong H117 results with overall underlying revenue growth of 46%. This growth resulted from an increase in new customers and expansion of the services provided to existing customers, which starts to demonstrate the value in its integrated service offering. Despite this we have reduced our valuation to £112m, primarily as a result of the discontinuation of simtuzumab (Abzena inside product). However, we note the potential for upside as the company continues to grow its integrated service business and as other Abzena inside products progress.
Year |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
03/15 |
5.7 |
(4.7) |
(5.89) |
0.0 |
N/A |
N/A |
03/16 |
9.9 |
(7.5) |
(6.00) |
0.0 |
N/A |
N/A |
03/17e |
19.1 |
(8.2) |
(5.20) |
0.0 |
N/A |
N/A |
03/18e |
25.0 |
(5.7) |
(3.57) |
0.0 |
N/A |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Services business update
H117 revenue increased by 156% to £9.0m (H116 £3.5m), which represents 46% growth on an underlying basis. This was broadly in line with our expectations and provides comfort in our FY17 forecasts. Abzena offers a continuum of services from antibody discovery to GMP manufacture for Phase I and II clinical trials and is building on this by investing in further capacity and growing its customer base, including cross-selling across the expanded group. Importantly, the company has an increasingly strong presence in the US, a significant market in the biopharmaceutical industry, as it now has a significant operating footprint and the majority of its business is from US companies.
Future potential upside – Abzena inside
Recent Abzena inside newsflow has been mixed, with the discontinuation of simtuzumab and GS-5745 in ulcerative colitis and Crohn’s disease. While this is disappointing, it is important to note that GS-5745 was not discontinued in those indications due to safety concerns and it continues in a number of other indications, most notably in gastric cancer (Phase III), for which interim analysis is expected in Q317. Other aspects of the pipeline have, however, demonstrated progress, with Opsona Therapeutics and True North Therapeutics announcing promising preliminary data and orphan drug designation in its target indications.
Valuation: Reduced to £112m, but upside potential
We have reduced our valuation to £112m (from £140m) or 82p per share (vs 102p, principally due to the removal of simtuzumab (rNPV £32m) following its recent discontinuation by Gilead. We have also rolled the model forward, included a slight increase to SG&A costs in H217, updated the $/£ rate used for the Abzena inside portfolio and used H117 reported cash of £9.4m. We believe Abzena is well positioned to grow its integrated service offering and offer a potential valuation uplift as its Abzena inside products move through the clinic and onto the market.
Valuation update
Our fair value is adjusted to £112m (from £140m) or 82p per share (vs 102p). This is principally due to the removal of simtuzumab from the Abzena inside portfolio valuation (rNPV £32m) following its discontinuation in October 2016. We have also slightly increased the forecast SG&A spend for FY17 (to £13.1m vs £11.8m) to reflect a higher run rate than expected in H1 of £6.4m, due to the expanded operations and an adverse impact of foreign exchange movements. This increase has a small impact on PBT and EPS forecasts, increasing the loss to £8.2m (vs £6.8m) and 5.2p (4.3p) in 2017 and £5.7m (£4.2m) and 3.6p (2.6p) in 2018, respectively. Finally, we have updated the $/£ rate used (1.24 vs 1.31) for the Abzena inside portfolio, rolled the model forward and used H117 reported cash of £9.4m. We currently forecast cash reach into FY18, but expect a financing requirement in that year.
The company now has 11 Abzena inside products in progress. We note that five of these are being developed by four leading biopharmaceutical companies: Gilead, Roche and two undisclosed. This is a strong endorsement of Abzena’s Composite Human Antibodies technology platform and expertise in the field.
Exhibit 1: Abzena valuation model and key assumptions
rNPV (£m) |
rNPV per share (p) |
Key assumptions |
|
Services business |
48.4 |
35.3 |
Three-phase DCF: 2016-20 (6-10% growth), 2021-25 (2-5% growth), 2% TV on 2025 FCF (steady state); 10% WACC; 12-15% effective tax rate; 60% COGS; 60% of group admin expense. |
Licensed biological product royalties |
54.2 |
39.6 |
Risk-adjusted royalties (1-5%) on partners’ product sales; 12.5% WACC; 12% effective tax rate; 50% of group R&D expense (risk-adjusted); no milestones included. |
Portfolio subtotal |
103 |
75 |
|
Cash (H117) |
9.4 |
6.9 |
|
Equity valuation |
112.0 |
82 |
136.9m shares outstanding (basic). |
Source: Edison Investment Research
The integrated business model of services and technology is beginning to demonstrate its value and potential. H117 has shown good growth at the underlying level (46% underlying revenue expansion), with the company indicating that its customer base has expanded and taken advantage of the increased offering. An example of this was Faron Pharmaceuticals with its product Clevegen, which was the first to have been humanised by Abzena’s technology and which Abzena will also manufacture for clinical development.
We expect a number of inflection points as the company continues to grow and progress toward royalties from Abzena inside products. Potential newsflow that would provide uplift to the valuation includes the progression of Gilead’s GS-5745 (in particular, the interim data from its Phase III gastric cancer study in Q317), Roche’s RG6125 (formerly known as SDP051), which is Phase IIa ready, and further development announcements from the remainder of its pipeline, eg Opsona Therapeutics, which has announced promising preliminary data for its Phase I/II study of OPN-305.
Exhibit 2: Financial summary
£'000s |
2014 |
2015 |
2016 |
2017e |
2018e |
||
Year end 31 March |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|
|
|||||
Revenue |
|
|
5,261 |
5,667 |
9,854 |
19,076 |
25,008 |
of which: Biology |
3,128 |
4,158 |
5,299 |
6,423 |
8,237 |
||
Manufacturing |
419 |
594 |
2,096 |
5,658 |
9,006 |
||
Chemistry |
165 |
657 |
2,174 |
6,395 |
7,015 |
||
Total Service revenues |
3,712 |
5,409 |
9,569 |
18,476 |
24,258 |
||
Licenses/milestones/royalties |
1,549 |
258 |
285 |
600 |
750 |
||
Cost of Sales |
(1,697) |
(2,532) |
(5,319) |
(11,233) |
(13,342) |
||
Gross Profit |
3,564 |
3,135 |
4,535 |
7,842 |
11,666 |
||
R&D expenses |
(2,601) |
(2,989) |
(4,216) |
(3,794) |
(3,984) |
||
SG&A expenses |
(4,787) |
(5,634) |
(9,047) |
(13,118) |
(14,102) |
||
EBITDA |
|
|
(3,116) |
(4,510) |
(6,972) |
(6,780) |
(4,312) |
Operating Profit (before GW and except) |
|
(3,394) |
(4,795) |
(7,773) |
(8,240) |
(5,654) |
|
Intangible Amortisation |
(304) |
(504) |
(588) |
(731) |
(666) |
||
Depreciation |
(278) |
(285) |
(801) |
(1,460) |
(1,342) |
||
Exceptionals |
(426) |
0 |
(2,542) |
0 |
0 |
||
Operating Profit |
(4,124) |
(5,299) |
(10,903) |
(8,970) |
(6,320) |
||
Other |
0 |
0 |
0 |
0 |
0 |
||
Net Interest |
27 |
79 |
244 |
50 |
1 |
||
Profit Before Tax (norm) |
|
|
(3,367) |
(4,716) |
(7,529) |
(8,190) |
(5,652) |
Profit Before Tax (FRS 3) |
|
|
(4,097) |
(5,220) |
(10,659) |
(8,920) |
(6,319) |
Tax |
548 |
498 |
961 |
1,070 |
758 |
||
Profit After Tax (norm) |
(2,819) |
(4,218) |
(6,568) |
(7,119) |
(4,894) |
||
Profit After Tax (FRS 3) |
(3,549) |
(4,722) |
(9,698) |
(7,850) |
(5,560) |
||
Average Number of Shares Outstanding (m) |
1.4 |
71.6 |
109.4 |
137.0 |
137.0 |
||
EPS - normalised (p) |
|
|
N/A |
(5.89) |
(6.00) |
(5.20) |
(3.57) |
EPS - FRS 3 (p) |
|
|
N/A |
(6.59) |
(8.86) |
(5.73) |
(4.06) |
Dividend per share (p) |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
10,139 |
10,432 |
27,347 |
29,171 |
29,678 |
Intangible Assets |
9,446 |
8,942 |
23,177 |
22,461 |
21,809 |
||
Tangible Assets |
693 |
1,490 |
4,170 |
6,711 |
7,868 |
||
Other |
0 |
0 |
0 |
0 |
0 |
||
Current Assets |
|
|
5,856 |
20,924 |
22,108 |
11,984 |
6,078 |
Stocks |
295 |
817 |
1,379 |
1,379 |
1,379 |
||
Debtors |
2,263 |
3,161 |
5,436 |
5,436 |
5,436 |
||
Cash |
2,757 |
15,799 |
13,724 |
4,098 |
(1,495) |
||
Other |
541 |
1,147 |
1,569 |
1,070 |
758 |
||
Current Liabilities |
|
|
(1,278) |
(2,354) |
(5,850) |
(5,850) |
(5,850) |
Creditors |
(1,160) |
(2,354) |
(5,488) |
(5,488) |
(5,488) |
||
Short term borrowings |
0 |
0 |
0 |
0 |
0 |
||
Short term leases |
0 |
0 |
0 |
0 |
0 |
||
Other |
(118) |
0 |
(362) |
(362) |
(362) |
||
Long Term Liabilities |
|
|
(1,183) |
(1,153) |
(2,549) |
(2,549) |
(2,549) |
Long term borrowings |
0 |
0 |
0 |
0 |
0 |
||
Long term leases |
0 |
0 |
0 |
0 |
0 |
||
Other long term liabilities |
(1,183) |
(1,153) |
(2,549) |
(2,549) |
(2,549) |
||
Net Assets |
|
|
13,534 |
27,849 |
41,056 |
32,756 |
27,357 |
CASH FLOW |
|||||||
Operating Cash Flow |
|
|
(4,328) |
(4,859) |
(10,870) |
(6,661) |
(4,190) |
Net Interest |
0 |
0 |
0 |
0 |
0 |
||
Tax |
251 |
(133) |
371 |
961 |
1,070 |
||
Capex |
(264) |
(1,082) |
(2,047) |
(4,014) |
(2,515) |
||
Acquisitions/disposals |
(6,133) |
0 |
(9,357) |
0 |
0 |
||
Financing |
10,670 |
19,037 |
20,013 |
0 |
0 |
||
Dividends |
0 |
0 |
0 |
0 |
0 |
||
Other |
(6) |
79 |
(185) |
89 |
40 |
||
Net Cash Flow |
190 |
13,042 |
(2,075) |
(9,626) |
(5,593) |
||
Opening net debt/(cash) |
|
|
(2,754) |
(2,757) |
(15,799) |
(13,724) |
(4,098) |
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
||
Other |
(187) |
0 |
0 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
(2,757) |
(15,799) |
(13,724) |
(4,098) |
1,495 |
Source: Abzena and Edison Investment Research
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