Abzena — Update 7 February 2017

Abzena — Update 7 February 2017

Abzena

Analyst avatar placeholder

Written by

Abzena

Significant licence deal with US biotech

ThioBridge deal

Pharma & biotech

7 February 2017

Price

40.50p

Market cap

£56m

$1.24/£

Net cash (£m) at 30 September 2016

9.4

Shares in issue

137.8m

Free float

39%

Code

ABZA

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

12.5

17.4

(18.2)

Rel (local)

12.9

9.6

(32.5)

52-week high/low

56.0p

32.5p

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

Further Abzena inside products into the clinic

2017

Roche update SDP051

2017

Phase III GS-5745 futility analysis in Gastric Cancer

H217

Analyst

Linda Pomeroy

+44 (0)20 3077 5738

Abzena is a research client of Edison Investment Research Limited

Abzena has recently achieved a significant licensing deal for its proprietary site-specific ThioBridge antibody drug conjugate (ADC) linker technology with a San Diego-based biopharmaceutical company. The agreement covers the use of ThioBridge in up to 10 ADCs across a wide range of indications and a service agreement. This provides important validation of Abzena’s proprietary ADC technology and hybrid business model. Our rNPV valuation increases to £117m following inclusion of the 10 ADCs now being developed through this deal.

Year
end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

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)

(5.16)

0.0

N/A

N/A

03/18e

25.0

(5.7)

(3.55)

0.0

N/A

N/A

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

ThioBridge licensing deal

Abzena announced a significant licensing deal with a San Diego-based biopharmaceutical company for its novel site-specific ThioBridge technology, which links antibodies/proteins to cytotoxic agents, and a master services agreement to use its chemistry services. The licensing deal includes the use of ThioBridge in up to 10 ADCs across a wide range of indications. According to the company, the value of the agreement has the potential to reach more than $300m in development/ commercial milestones if the partner successfully develops the ADC products. Alongside this, Abzena would also receive royalties on sales of any approved products that incorporate the ThioBridge technology.

Continued validation of business model

This is the second ADC deal announced with a significant biopharmaceutical company and importantly this deal includes the addition of the use of Abzena’s chemistry services division, which we believe underpins our current forecasts. This provides validation of Abzena’s offering and leveraging a broader service, whilst maintaining potential upside as products progress through the clinic (Abzena inside).

Valuation: Raised to £117m or 85p per share

We have increased our valuation to £117m (from £112m) or 85p per share (vs 82p). This is principally due to the inclusion of the 10 potential ADC products resulting from the recent (January 2017) ThioBridge agreement. We expect Abzena to gain greater deal economics from its ADC products due to the greater technological and IP input resulting from ThioBridge and therefore include a higher royalty rate (2.5%) than its antibodies developed using its Composite Human Antibody technologies (1%). We believe Abzena is well positioned to grow its integrated service offering and, as its Abzena inside products move through the clinic and onto the market, we expect upside to our current estimates.

Investment summary

Company description: Building better biologicals

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. More recently, it has also acquired PacificGMP (contract, development and manufacturing) and TCRS (specialist contract chemistry and bioconjugation). This enables Abzena to offer a more comprehensive and integrated offering. 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, has operations in San Diego (PacificGMP) and Philadelphia (TCRS). The company employs c 200 staff.

Valuation: £117m (85p/share) on services/royalty mix

Our fair value is adjusted to £117m (from £112m) or 85p per share (vs 82p), based on a three-phase DCF of the services business (£48m) and risk-adjusted royalties from existing and future licensed products (£60m). We include H117 cash of £9.4m. 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 (there are currently 11 of these programmes in our model). We also include 13 preclinical ADC projects (vs three previously) following the recent San Diego biopharmaceutical company deal announced in January 2017. We expect better deal economics from the ADC candidates and as a result we estimate a 2.5% royalty. Further newsflow from the progression toward royalties from its Abzena inside products, further service contract deals and/or ThioBridge deals will provide upside to our current estimates.

Financials: Integrated service offering demonstrating value

We have not altered our forecasts, maintaining revenue at £19.1m for FY17 and £25.0m in FY18 and PBT loss of £8.2m and £5.7m in FY17 and FY18 respectively. While the recent ThioBridge deal has not had an impact on our near-term forecasts, the inclusion of the use of Abzena’s chemistry services in the deal provides comfort that the forecasts will be met. H117 reported cash was £9.4m, which we currently forecast will reach into FY18. We expect a financing requirement in that year and for illustrative purposes include £10m debt in FY18. We also expect capex to increase (FY17 £4m vs FY16 £2m), as the company invests in expanding its GMP manufacturing capacity in San Diego and chemistry services in Bristol (US).

Sensitivities: Low-risk business model

With stable and growing revenues from its services business and a licensed portfolio of drugs that does not require investment to develop, Abzena operates a relatively low-risk business model. However, the biological services industry is highly competitive and will require Abzena to continually invest in enhancing its technologies and offering to the sector, which may require development and/or purchasing further assets. Having acquired two manufacturing businesses at the end of 2015 to expand its offering, it is integrating and embedding the broader offering, which is not without risk. While potential future royalty revenues on sales of products developed using Abzena’s technologies appear to offer pure upside, the development of these candidates is not within Abzena’s control. Advancing these candidates into late-stage clinical studies will require significant investment and/or a larger partner, so success of part of the pipeline will depend on the ability of Abzena’s licensees to secure the finance and/or partner. This does not include Gilead, Roche, two undisclosed major pharmas and private companies Opsona and Vascular Pharmaceuticals (large pharma investment).

ThioBridge: The growing heart of the matter

Antibody drug conjugates (ADCs) are an emerging class of cancer therapeutics, harnessing the tumour-targeting properties of antibodies with highly potent cytotoxic drugs. The ADC binds to the target antigen on the tumour cell surface and enters the cell, whereupon the payload is released by cleavage of the linker (by acid conditions or enzymes) or when the antibody is degraded in the cell if a non-cleavable linker is used. The released drug then kills the cell (and sometimes adjacent tumour cells) according to the mechanism of action. The payloads now being used in ADCs (tubulin polymerisation inhibitors or DNA-damaging agents) are so potent that they would cause too much damage to healthy cells if used as a standalone chemotherapeutic agent. With both antibodies and cytotoxic drugs often used independently to treat cancer, attaching a toxic payload to a tumour cell selective antibody appears an elegant and highly effective solution.

At the heart of the technology is the linker used to attach the payload to the antibody, which is where Abzena’s ThioBridge may offer a number of advantages over the competition. Also, when coupled with Abzena’s immunogenicity tools, antibody engineering and manufacturing cell line development, the company has an increasingly strong ADC offering.

A connecting link

The linkers developed by ImmunoGen and Seattle are reactive towards either the amino side chains of lysine residues (in Kadcyla), or to the thiol side chains in cysteine residues, created from reducing inter-chain disulfide bonds (Adcetris). However, both approaches have limitations. Conjugation to lysines, of which there can be more than 80 on a given antibody, cannot be precisely controlled, which leads to a heterogeneous mixture of ADCs with different drug-to-antibody ratios (DAR). Having a consistent DAR of four is suggested by various academic reviews as ideal for an ADC. Too low and naked antibodies compete with ADCs to bind the target, too high and the ADC becomes less stable with a greater chance that the payload is released before reaching the tumour, +causing tolerability issues. Attachment via cysteine residues is an alternative to conjugation to lysines, as there are far fewer cysteine residues in an antibody. An intact IgG1 antibody has four inter-chain disulfide bonds that can be reduced to release eight free cysteine thiols, which can then serve as sites for conjugation. This therefore produces a mixture of ADCs with a still variable DAR ranging from 0-8, while the disulfide bond remains broken after conjugation, which affects the integrity of the antibody, potentially impairing its ability to bind to its tumour cell target.

Another method developed to overcome a heterogeneous mixture of ADCs with variable DARs is to use antibodies with engineered cysteine residues, ensuring site-specific conjugation of the payload. This produces a more homogeneous ADC with a DAR of two, although the stability of the linker (maleimide) is still sub-optimal. A further re-engineering approach is to incorporate non-natural amino acids into the antibody as sites for conjugation, which also improves homogeneity while offering flexibility in the number of sites and therefore DAR ranges. However, re-engineering antibodies is complex and therefore may be costly, could introduce stability issues and the final product could be more immunogenic and may therefore attract greater scrutiny from the regulators. Some of the issues with current ADC technologies are summarised and presented in Exhibit 1.

Using native disulfides guarantees 4:1 homogeneity

Abzena’s ThioBridge has the potential to address or avoid these issues of instability, heterogeneity and tolerability by targeting native disulfide bonds in an antibody. Using chemistry similar to Abzena’s TheraPEG technology used in the attachment of polyethylene glycol to therapeutic proteins (PEGylation), the disulfide bond is reduced and then effectively re-bridged with a reagent including the cytotoxic drug (Exhibit 2). This leaves the antibody structurally intact and does not require any engineering. Also, with four accessible, naturally occurring inter-chain disulfides per antibody, a ThioBridge ADC should have a high percentage of DAR 4.

Exhibit 1: Issues with current ADC technologies

Exhibit 2: ThioBridge conjugation

Source: Abzena. NNNA = non-natural amino acid

Source: Abzena

Exhibit 1: Issues with current ADC technologies

Source: Abzena. NNNA = non-natural amino acid

Exhibit 2: ThioBridge conjugation

Source: Abzena

Abzena has conducted a number of assessments using its ThioBridge linker instead of, or compared to, the linker technologies used in Kadcyla and Adcetris. Exhibit 3 demonstrates how ThioBridge improves homogeneity with 80-90% DAR 4 vs Adcetris. Similarly, in in vivo cancer models (conducted by Abzena) ThioBridge ADCs have been shown (Exhibit 4) to be more efficacious than Adcetris (Seattle Genetics) and Kadcyla (Immunogen). See below for details of the competitor ADC products.

Exhibit 3: ThioBridge can improve homogeneity

Exhibit 4: ThioBridge vs existing ADCs (in vivo)

Source: Abzena

Source: Abzena

Exhibit 3: ThioBridge can improve homogeneity

Source: Abzena

Exhibit 4: ThioBridge vs existing ADCs (in vivo)

Source: Abzena

In Exhibit 5 we review the competitive landscape for companies developing ADC technologies. We suggest that the overall profile of ThioBridge (coupled with Abzena’s complementary immunogenicity/antibody engineering/cell line manufacturing) offers a compelling case for partners to seek out Abzena for the development of a new generation of ADC products.

Exhibit 5: ADC linker technologies

Company

Linker

Payload release mechanism

DAR average

Mixture

Candidate status

Seattle Genetics

Dipeptide: valine-citrulline

Cleavable (cathepsin B)

4:1

Heterogenous

Marketed: Adcetris

Maleimidocaproyl (mc) moiety

Non-cleavable (Ab degradation in lysosome)

Unknown

Heterogenous

Phase II: ABT-414

ImmunoGen

SMCC (thioether linker)

Non-cleavable (Ab degradation in lysosome)

3.5:1

Heterogenous

Marketed: Kadcyla

Immunomedics

Carbonate (CLA2A)

Cleavable (pH-sensitive)

7.6:1

Heterogenous

Phase II: IMMU-130, IMMU-132

Abzena

ThioBridge (site-specific conjugation via disulfide bridging)

Cleavable or non-cleavable options

4:1

Homogenous

Preclinical

Ambrx

Not specified (Ab involves engineering with non-native amino acids)

Cleavable

2:1

Homogenous

Preclinical

Antikor

OptiLink (lysine residue-based)

Cleavable

10-12:1

Heterogenous

Preclinical

Igenica

SNAP bifunctional linkers (site-specific conjugation via disulfide bridging)

Cleavable or non-cleavable options

4:1

Homogenous

Preclinical

Meditope Biosciences

Meditope (Fab region binding)

Cleavable

2:1

Homogenous

Preclinical

Mersana Therapeutics

Customisable linker chemistries (Fleximer payload platform)

Cleavable or non-cleavable options

20-30:1

Heterogenous

Preclinical

Sutro Biopharma

Not specified (Ab involves engineering with non-native amino acids)

Cleavable

Multiple

Homogenous

Preclinical

ThioLogics

Thiomaleamate–PABC

Cleavable

Unknown

Homogenous

Preclinical

Source: Edison Investment Research

Abzena ThioBridge deals to date

Abzena has now successfully concluded two significant partnering ThioBridge deals. Furthermore, according to the company, other companies are evaluating or have options to utilise the technology. In our opinion, Abzena is well placed to benefit from this developing field in the future.

Halozyme ADC deal

In January 2016, Abzena signed a significant licensing deal with Halozyme Therapeutics, a listed US biotech company that is developing and commercialising oncology therapies, including biological agents. The deal established rights to the ThioBridge technology for three targets. It included an initial licence fee and the potential to receive up to $150m ($50m per ADC product assumed) in development/commercial milestones if Halozyme successfully develops each of three ADC products. To date, the research collaboration with Halozyme has screened multiple ADC candidates and one has been selected for further development. We anticipate that the first ADC product will enter the clinic in FY19.

Halozyme is developing tumour microenvironment therapeutics, specifically an anti-EGFR (epidermal growth factor receptor) therapeutic, for which it is using ThioBridge. Current anti-EGFR therapies have two limitations associated with them: 1) a dose-limiting skin rash, which in some patients can be severe enough that they are unable to receive the drug; and 2) downstream activating mutations such as KRAS, BRAF or EGFR itself. Halozyme’s ADC is designed to mitigate these limitations.

EGFR mediates signalling in tumour cells and promotes cell growth. Halozyme has developed an antibody, which it believes can bind to the EGFR receptor in the tumour microenvironment with high affinity (low affinity to receptors within the skin, thereby potentially reducing the skin reaction limitation) and inhibit the signalling pathway thereby preventing proliferation, angiogenesis etc. However, in some cases there is a mutation in the signalling pathway (eg KRAS), which makes the cell resistant to mAb therapy. The hypothesis is that an ADC can overcome this mutation resistance and selectively kill the tumour cell, ie it is internalised and bypasses the mutation. Exhibit 6 outlines the proposed mechanism.

Exhibit 6: Process ADCs may treat EGFR+ mutation-resistant Tumors

Exhibit 7: ThioBridge next generation ADC technology

Source: Halozyme presentation

Source: Halozyme presentation

Exhibit 6: Process ADCs may treat EGFR+ mutation-resistant Tumors

Source: Halozyme presentation

Exhibit 7: ThioBridge next generation ADC technology

Source: Halozyme presentation

Halozyme has been clear about its choice of using Abzena’s ADC ThioBridge as, in its view, it offers the ‘next-generation’ ADC technology (see Exhibit 7) with highly specific four drugs per mAb and a more stable chemistry. Exhibits 8 and 9 delineate data that underpin this view, demonstrating Halozyme’s drug conjugate HTI-1511 (Anti-EGFR mAb conjugated with ThioBridge-MMAE [monomethyl auristatin E]) as highly homogenous and with improved stability over time respectively.

Exhibit 8: Anti-EGFR mAb conjugated with ThioBridge-MMAE homogeneity data

Exhibit 9: Improved ADC stability

Source: Halozyme presentation

Source: Halozyme presentation

Exhibit 8: Anti-EGFR mAb conjugated with ThioBridge-MMAE homogeneity data

Source: Halozyme presentation

Exhibit 9: Improved ADC stability

Source: Halozyme presentation

Halozyme has presented promising data in terms of tumour regressions in KRAS- and BRAF-mutated tumour models and in patient-derived tumour models in mice. For an overview click here.

San Diego-based biopharmaceutical company deal

Abzena’s most recent significant ThioBridge deal was announced in January 2017. It indicated that it had signed a significant licensing agreement with a San Diego-based biopharmaceutical company for its novel site-specific ThioBridge technology and a master services agreement to use its chemistry services. The licensing deal includes the use of ThioBridge in up to 10 ADCs across a wide range of indications. According to the company, the value of the agreement has the potential to reach more than $300m in development/commercial milestones if the partner successfully develops the ADC products. Alongside this, Abzena would also receive royalties on sales of any approved products that incorporate the ThioBridge technology.

This deal is significant not just because we expect Abzena to gain greater deal economics from its ADC products due to the greater technological and IP input resulting from ThioBridge (vs Abzena’s licensed portfolio of antibodies developed using its Composite Human Antibody technologies, which offers the prospect of small royalties (~1%) on sales), but also due to the inclusion of a master services agreement. The agreement means that Abzena will undertake the chemistry work for the San Diego biopharmaceutical company generating revenue for its services business. This provides strong validation of Abzena’s hybrid business model, an integrated service and technology offering (See Exhibit 10), which enables:

1.

offering a continuum of services from antibody discovery to GMP manufacture for Phase I and II clinical trials; and

2.

retaining upside from its expanding clinical pipeline (in which Abzena’s technology has been utilised, which is developed and fully funded by global partners (termed Abzena inside products). For a full overview of the other Abzena inside products, see our previous Abzena notes.

Exhibit 10: Integrated services and technology

Source: Abzena

ADC drug development

The development of ADCs has proved challenging, but this is typical of novel drug development, as demonstrated by the long and arduous route to successful development of antibodies, which now accounts for five of the top 10 biggest selling drugs globally. Despite the challenges, there are, according to Beacon ADC, c 59 active clinical trials currently focused on ADCs that have antibodies linked to a cytotoxic payload. While there remain only two marketed ADCs, the clinical pipeline is growing with the number of ADC trials initiating growing substantially (see Exhibit 11) and there are now four ADCs in Phase III (see Exhibit 12).

Exhibit 11: Number of ADCs initiating clinical testing per year

Source: World ADC seminars, Beacon ADC

The first ADC to reach the market was Mylotarg (gemtzumab ozogamicin) in 2000, for the treatment of acute myeloid leukaemia (AML), but the product was withdrawn in 2010 following safety concerns and lack of efficacy. However, two more recent ADC product launches have been far more successful: Seattle Genetics’ Adcetris (brentuximab vedotin) approved in 2011 to treat Hodgkin’s lymphoma and anaplastic large cell lymphoma ($450m sales in FY15) and Roche’s Kadcyla (trastuzumab emtansine) approved in 2013 for HER2+ve breast cancer ($843m sales in FY16). Kadcyla was developed using ImmunoGen’s ADC technology. Seattle Genetics and ImmunoGen remain the dominant players in the field, in terms of these approved products and the mid- to late-stage pipeline of ADC candidates (Exhibit 12). For an overview of the difference between Immunogen’s and Seattle Genetics’ ADC technology, please see above.

Exhibit 12: ADC portfolio – marketed and late-stage pipeline (at least Phase II*)

Product

Company

ADC licensor

Antibody target

Payload

Status

Indication

Adcetris (brentuximab vedotin)*

Seattle Genetics

 

CD30

Auristatin (MMAE)

Marketed

2011: FDA accelerated approval for Hodgkin's lymphoma and anaplastic large cell lymphoma; $450m sales in FY15; Multiple Phase III studies ongoing for CTCL, PTCL and NHL.

Kadcyla (trastuzumab emtansine, T-DM1)**

Roche

ImmunoGen

HER2

Maytansine (DM1)

Marketed

Feb 2013: FDA approval for HER2+ve metastatic breast cancer; $843m sales in FY16; Phase II/III studies ongoing for gastric cancer + NSCLC.

Sacituzumab govitecan (IMMU-132)

Immunomedics

 

TROP2

SN-38 (irinotecan metabolite)

Phase III

Triple-negative breast cancer (TNBC); SCLC; pancreatic cancer; colorectal cancer

Mirvetuximab soravtansine (IMGN853)

Immunogen

 

FRα

DM4

Phase III

Women with platinum-resistant FR-alpha positive advanced EOC, primary peritoneal cancer and/or fallopian tube cancer.

Vadastuximab talirine (SGN-CD33A)

Seattle Genetics

 

CD33

Pyrrolobenzo-diazepine (PBD) dimer

Phase III

Acute Myeloid Leukaemia

Inotuzumab ozogamicin

Pfizer

UCB Pharma

CD22

Calicheamicin

Phase III

Relapsed or refractory CD22-positive acute lymphoblastic leukemia

Polatuzumab vedotin (RG7596)

Roche

Seattle Genetics

CD79b

Auristatin (MMAE)

Phase II

NHL; diffuse large B-cell lymphoma

SAR3419

Sanofi

ImmunoGen

CD19

Maytansine (DM4)

Phase II

NHL (DLBCL); B-cell ALL

ABT-414

AbbVie

Seattle Genetics

EGFR

Auristatin (MMAF)

Phase II

Glioblastoma multiforme; squamous cell tumours

Glembatumumab vedotin (CDX-011)

Celldex Therapeutics

Seattle Genetics

GPNMB

Auristatin (MMAE)

Phase II

Breast cancer; advanced melanoma

PSMA ADC

Progenics Pharmaceuticals

Seattle Genetics

PSMA

Auristatin (MMAE)

Phase II

Prostate cancer (metastatic castration-resistant, CRPC)

Labetuzumab-SN-38 (IMMU-130)

Immunomedics

 

CEACAM5

SN-38 (irinotecan metabolite)

Phase II

Metastatic colorectal cancer

Sacituzumab govitecan (IMMU-132)

Immunomedics

 

TROP-2

SN-38 (irinotecan metabolite)

Phase II

Triple-negative breast cancer (TNBC); SCLC; pancreatic cancer; colorectal cancer

Source: Edison Investment Research, BioCentury, clinicaltrials.gov. Note: *Not an exhaustive list of Phase II trials. **Regarded as first-generation ADC products, with stability and heterogeneity issues that may limit their effectiveness and increase unwanted side effects.

Services business: Strong underpinning

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. Exhibit 13 provides an overview of the services and technologies Abzena can offer.

Abzena had a solid start to FY17, with H117 revenue increasing by 156% to £9.0m (H116 £3.5m), which represents 46% growth on an underlying basis. While the recent ThioBridge deal has not made an impact on our near-term forecast services business revenue, the inclusion of the use of Abzena’s chemistry services in the deal underpins our forecasts and provides comfort that they will be met. For a more detailed overview of Abzena’s services and technologies, see our outlook note published on 21 June 2016.

Exhibit 13: Abzena’s services and technologies

Source: Abzena

Sensitivities

With stable and growing revenues from its services business and a licensed portfolio of drugs that does not require R&D spend, Abzena operates a relatively low-risk business model. However, the biological services industry is highly competitive and will require Abzena to continually invest in enhancing its technologies and offering to the sector. This may include the need to acquire new assets/companies, which adds an element of execution risk, but with shrewd selection of targets this should only help strengthen Abzena’s position and therefore the investment case. Abzena acquired two manufacturing businesses at the end of 2015 to expand its offering, which it is integrating and embedding into the broader offering. Although the potential future revenue streams from royalties on sales of products developed using Abzena’s technologies appear to offer pure upside, the development of these candidates is not within Abzena’s control. With the exception of Gilead, Roche, two undisclosed major pharmas and private companies Opsona and Vascular Pharmaceuticals (a large pharma investment), a number of candidates are being developed by relatively small private companies that may struggle to secure the finance required to develop their products in a timely and effective manner. Advancing these candidates into late-stage clinical studies will require significant investment and/or a larger partner, so success will depend on the ability of Abzena’s smaller licensees to secure the finance/partner.

Valuation

We have adjusted our fair value to £117m (from £112m) or 85p per share (vs 82p) to include the recent ThioBridge licensing agreement with a San Diego-based biopharmaceutical company, a review of the ADC deal metrics and updated the number of shares. Exhibit 14 outlines our updated valuation (no change to the services business valuation) metrics and key assumptions.

Exhibit 14: Abzena valuation model and key assumptions

rNPV (£m)

rNPV per share (p)

Key assumptions

Services business

48.1

34.9

Three-phase DCF: 2017-20 (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

59.4

43.4

Risked-adjusted royalties (1-5%) on partner's product sales; 12.5% WACC; 12% effective tax rate; 50% of group R&D expense (risk-adjusted); no milestones included.

Portfolio subtotal

107

78

Cash (H117)

9.4

6.8

H117 (30 Sept 2016).

Overall valuation

117

85

137.8m shares outstanding (basic).

Source: Edison Investment Research

We have updated our model to include the recent licensing deal, which includes the use of ThioBridge in up to 10 ADCs across a wide range of indications. According to the company, the value of the agreement has the potential to reach more than $300m in development/commercial milestones if the partner successfully develops the ADC products. Alongside this, Abzena would also receive royalties on sales of any approved products that incorporate the ThioBridge technology. As with the previous deal announced by Abzena with regard to ThioBridge (with Halozyme in 2016), we expect Abzena to gain greater deal economics from its ADC products due to the greater technological and IP input resulting from ThioBridge. We have included 10 ADC products in our model, with two products reaching the clinic every year starting in FY18. We also include peak sales of $500m (potentially a conservative assumption in the absence of further information and based on the lower end of peak sales assumptions for other Abzena inside products) and $30m in development/licence fees. We have also reviewed the Halozyme ThioBridge metrics in the model, updated the peak sales to $500m (vs $1bn) and moved timing to the clinic to FY19 to be conservative and in line with the recent deal. Finally, we have updated the number of shares to 137.8m following the announcement that Abzena was adding to its ordinary shares following the completion of the initial vesting period of restricted stock units to employees on the acquisition of the Chemical Research Solution in 2015.

We value the licensed product portfolio at £59m, which includes Abzena’s licensed portfolio of antibodies developed using its Composite Human Antibody technologies. Please note that we now only include those that are in clinical development. Exhibit 14 outlines our assumptions.

Exhibit 15: Valuation assumptions by product

Product – partner

Status

Peak sales ($m)

Probability of success

Launch date

Estimated royalty rate

1

GS-5745 - Gilead Sciences

Phase III

2,500

50%

2019

1%

2

OPN-305 - Opsona Therapeutics

Phase II

750

35%

2020

1%

3

VPI-2690B - Vascular Pharmaceuticals

Phase II

1,000

35%

2021

1%

4

NKT120 - NKT Therapeutics

Phase Ib

250

25%

2021

1%

5

RG6125 Roche (formerly known as SDP051)**

Phase II

1,000

25%

2023

1%

6

TBI 304H - Therapure Innovations

Phase I

1,000

15%

2021

1%

7

US major pharma partner

Phase I

1,000

15%

2022

1%

8

US Pharma

Phase I

750

15%

2022

1%

9

US Biotech

Phase I

750

15%

2022

1%

10

US Biotech

Phase I

750

15%

2023

1%

11

Private US Biotech

Phase I

750

15%

2023

1%

12

Halozyme ADC Product 1

Preclinical

500

5%

2026

3%

13

Halozyme ADC Product 2

Preclinical

500

5%

2027

3%

14

Halozyme ADC Product 3

Preclinical

500

5%

2028

3%

15

US Biotech ADC Product 1 and 2

Preclinical

1,000*

5%

2025

3%

16

US Biotech ADC Product 3 and 4

Preclinical

1,000*

5%

2026

3%

17

US Biotech ADC Product 5 and 6

Preclinical

1,000*

5%

2027

3%

18

US Biotech ADC Product 7 and 8

Preclinical

1,000*

5%

2028

3%

19

US Biotech ADC Product 9 and 10

Preclinical

1,000*

5%

2029

3%

Source: Edison Investment Research. Note: *For both products. **Roche bought Adheron Therapeutics.

The recent ThioBridge agreement further validates Abzena’s technology and hybrid business model as the deal includes licence/development fees and royalties, as well as making use of its chemistry services. For a more detailed discussion of the hybrid business model see our outlook note published on 21 June 2016.

In our opinion, the outlook is positive for Abzena. There appears to be a growing interest and investment in ADCs and, as outlined above, ThioBridge offers a number of benefits over some of the current competitors. This could lead to an expanded use of its ThioBridge technology. In addition, we note that four of the Abzena inside products are being developed by four leading biopharmaceutical companies: Gilead, Roche and two undisclosed. This is a strong endorsement of Abzena’s Composite Human Antibody technologies platform and expertise in the field. This could lead to a number of inflection points as the company continues to grow and progress towards royalties from its Abzena inside products. Potential newsflow that would provide uplift to the valuation includes progression of Gilead Sciences GS-5745 in various indications (futility analysis expected for its Phase III study in Gastric cancer inQ317) and Roche’s RG6125 (formerly known as SDP051), which is Phase IIa ready.

Financials

We have not altered our key forecasts, maintaining revenue at £19.1m for FY17 and £25.0m in FY18 and PBT loss of £8.2m and £5.7m in FY17 and FY18 respectively. While the recent ThioBridge deal has not made an impact on our forecasts, the inclusion of the use of Abzena’s chemistry services in the deal provides comfort that they will be met. H117 reported cash was £9.4m, which we currently forecast will reach into FY18. We expect a financing requirement in that year. For illustrative purposes, we have included a loan financing of £10m in FY18 and updated the number of shares (137.8m) following the announcement of the completion of the initial vesting period of restricted stock units to employees on the acquisition of the Chemical Research Solution in 2015. We also expect capex to increase (FY17 £4m vs FY16 £2m), as the company invests in expanding its GMP manufacturing capacity in San Diego and chemistry services in Bristol (US).

Exhibit 16: 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

6,422.5

8,237

Manufacturing

419

594

2,096

5,658.0

9,006

Chemistry

165

657

2,174

6,395.2

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

137.8

137.8

EPS - normalised (p)

 

 

N/A

(5.89)

(6.00)

(5.16)

(3.55)

EPS - FRS 3 (p)

 

 

N/A

(6.59)

(8.86)

(5.69)

(4.03)

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

16,078

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

8,505

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)

(12,549)

Long term borrowings

0

0

0

0

(10,000)

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 accounts, Edison Investment Research

Contact details

Revenue by geography FY16

Babraham Research Campus
Babraham
Cambridge CB22 3AT
UK
+44 (0)1223 903 498
www.abzena.com

Contact details

Babraham Research Campus
Babraham
Cambridge CB22 3AT
UK
+44 (0)1223 903 498
www.abzena.com

Revenue by geography FY16

Management team

Chief Executive Officer: John Burt

Chief Financial Officer: Julian Smith

Joined PolyTherics in November 2010, initially as chief business officer then becoming CEO in May 2011. Following the acquisition of Antitope and creation of Abzena, John is CEO of the group. Co-founder and CEO of Thiakis (2004-08, when Thiakis was acquired by Wyeth). Previous roles include finance, technology licensing and business and corporate development responsibilities at Vanguard Medica, GlaxoSmithKline and Imperial Innovations.

Joined PolyTherics as CFO in September 2013, now CFO for the group. Julian was chief financial and operations officer at Imperial Innovations (2006-13). Prior to Imperial Innovations, he was CFO of RadioScape and group financial controller of Mobile Systems International.

President, Abzena US: John Manzello

Chief Business Officer: Sven Lee

Joined Abzena in October 2016 after serving as president of San Diego’s Promosome, where he joined the company as president & CEO in April 2007. John expanded the business development, IP portfolio and strategic alliances for the company’s suite of synthetic biology technologies. Before joining Promosome, he held business and commercial development roles at Althea Technologies, Cohesive Technologies, Genzyme Transgenics (GTC) and GTC’s CRO/CMO subsidiary Primedica.

Before joining Abzena, Sven was director of global sales and business development for the cell therapy technologies business unit of Terumo BCT. Before Terumo, he was VP of global business development at Catalent Biologics, responsible for the team's preclinical through Phase I/II GMP manufacturing business. He also launched the SMART Tag antibody drug conjugation platform. Before Catalent, Sven spent five years as director of business development with Crucell (Johnson & Johnson) and 10 years with Biogen.

Senior VP Scientific Operations: Campbell Bunce, PhD

Senior VP Technical Operations: Jim Mills, PhD

Campbell has over 19 years ‘experience working in the biotech and diagnostics sectors, occupying senior management positions with Piramed Pharma (director, development programmes), Immune Targeting Systems (R&D director) and Oxford Immunotec (GM, immunology products). He has extensive experience in developing novel biologics and vaccines for cancer, inflammatory and infectious diseases, leading them through development and regulatory processes.

Jim joined Abzena’s executive team in March 2015 as VP of technical operations. He was previously CEO of Cantab Biopharmaceuticals, having originally joined the company in 1997 as part of the process development group. Jim has a background in protein production and GMP manufacturing, having obtained his PhD in microbial physiology and biochemistry from the University of Leicester.

Management team

Chief Executive Officer: John Burt

Joined PolyTherics in November 2010, initially as chief business officer then becoming CEO in May 2011. Following the acquisition of Antitope and creation of Abzena, John is CEO of the group. Co-founder and CEO of Thiakis (2004-08, when Thiakis was acquired by Wyeth). Previous roles include finance, technology licensing and business and corporate development responsibilities at Vanguard Medica, GlaxoSmithKline and Imperial Innovations.

Chief Financial Officer: Julian Smith

Joined PolyTherics as CFO in September 2013, now CFO for the group. Julian was chief financial and operations officer at Imperial Innovations (2006-13). Prior to Imperial Innovations, he was CFO of RadioScape and group financial controller of Mobile Systems International.

President, Abzena US: John Manzello

Joined Abzena in October 2016 after serving as president of San Diego’s Promosome, where he joined the company as president & CEO in April 2007. John expanded the business development, IP portfolio and strategic alliances for the company’s suite of synthetic biology technologies. Before joining Promosome, he held business and commercial development roles at Althea Technologies, Cohesive Technologies, Genzyme Transgenics (GTC) and GTC’s CRO/CMO subsidiary Primedica.

Chief Business Officer: Sven Lee

Before joining Abzena, Sven was director of global sales and business development for the cell therapy technologies business unit of Terumo BCT. Before Terumo, he was VP of global business development at Catalent Biologics, responsible for the team's preclinical through Phase I/II GMP manufacturing business. He also launched the SMART Tag antibody drug conjugation platform. Before Catalent, Sven spent five years as director of business development with Crucell (Johnson & Johnson) and 10 years with Biogen.

Principal shareholders

(%)

Invesco Asset Management

26.2

Woodford Investment Management LLP

22.9

Touchstone Innovations

19.7

Ballie Gifford & Co

3.3

Companies named in this report

Seattle Genetics (SGEN), ImmunoGen (IMGN), Immunomedics (IMMU), Celldex Therapeutics (CLDX), Roche (ROG), Gilead Sciences (GILD), Opsona Therapeutics, Vascular Pharmaceuticals, NKT Therapeutics, Adheron Therapeutics, Therapix Biosciences, Annexon Biosciences, Therapure Innovations

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt and Sydney. 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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, 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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt and Sydney. 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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. 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 Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. 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.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, 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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Research: Industrials

Epwin Group — Update 7 February 2017

Epwin Group

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