Abzena — Update 21 June 2016

Abzena — Update 21 June 2016

Abzena

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Abzena

Solid results and outlook strong

FY16 results

Pharma & biotech

21 June 2016

Price

45.00p

Market cap

£61m

Net cash at 31 March 2016 (£m)

13.7

Shares in issue

136.2m

Free float

39%

Code

ABZA

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(4.3)

(10.0)

(47.7)

Rel (local)

(4.9)

(10.2)

(43.8)

52-week high/low

86.50p

46.50p

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 (PacificGMP) and ADC chemistry (TCRS).

Next events

Further Abzena inside products into the clinic

2016

Roche update SDP051

2016

Initiation of Phase II studies GS-5745 (COPD, RA and CF)

H216

Analyst

Dr Linda Pomeroy

+44 (0)20 3077 5738

Abzena is a research client of Edison Investment Research Limited

FY16 results were strong, with 28% like-for-like total revenue growth reported (74% growth including the £2.7m contribution from its acquisitions late 2015). It has been a pivotal year for Abzena as it has expanded its business to provide a broad range of services from antibody discovery through to GMP manufacturing for Phase I/II trials. Alongside this, its clinical Abzena inside pipeline continues to grow, with 11 products now in the clinic and progressing toward commercialisation, most notably GS-5745 in gastric cancer. We have increased our valuation to £133m (from £130m) but expect upside to this as the portfolio progresses and further licensing deals are announced.

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

(6.8)

(4.35)

0.0

N/A

N/A

03/18e

25.0

(4.2)

(2.65)

0.0

N/A

N/A

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

A broader service-offering a positive

Following two recent acquisitions (PacificGMP and TCRS) and a marketing alliance with FairJourney Biologics, Abzena offers a continuum of services from antibody discovery to GMP manufacture for Phase I and II clinical trials. Integration of PacificGMP and TCRS is almost complete and as such we believe that Abzena is well positioned to capture a larger share of the outsourced biopharmaceuticals market. It enables clients to remain with Abzena rather than identify another party for additional services, eg GMP production, and also provides cross-selling opportunities across the expanded group. PacificGMP and TCRS acquisitions have also created a US wide operating presence, providing proximity to customers.

Abzena inside – the risk-free upside

Over the past 12 months the number of Abzena inside clinical products has risen from eight to 11 and the company expects this run rate to continue. The 11 products are at different stages of clinical development ranging from Phase I to Phase III. The most advanced is Gilead’s GS-5745 for the gastric cancer (Phase III). This is an important aspect of the Abzena investment case as it offers potential upside with few of the risks usually inherent with clinical pipeline prospects.

Valuation: Increased to £133m, upside potential

Our fair value has increased to £133m (from £130m) or 98p per share (vs 96p). We have included £56m for the services business, based on our new forecasts (including a 12-month contribution from the acquisitions) and risk-adjusted royalties from licensed products of £64m, (adding an 11th clinical Abzena inside product and including the Halozyme ADC deal). Abzena is well poised to grow its integrated service offering and also offer a potential valuation uplift as its Abzena inside products move through the clinic and to the market.

Investment summary

Company description: Enabling better biopharmaceuticals

Abzena is a provider of 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 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 recent acquisitions, is also based in San Diego (PacificGMP) and Philadelphia (TCRS). The company employs 180 staff.

Valuation: Raised to £133m (vs £130m) or 98p per share

Our fair value is adjusted to £133m (from £130m) or 98p per share (vs 96p), based on a three-phase DCF of the services business (£56m) and risk-adjusted royalties from existing and future licensed products (£64m). We include FY16 cash of £13.7m. 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 eleven of these programmes included in our valuation model. We also include three preclinical ADC projects, earning up to an estimated 2.5% royalty and up to a total of $50m of developmental milestones per product.

We do not include a terminal value or any estimates for potential milestones that Abzena could receive on successful development of the Abzena inside products (apart from for the three announced ADC candidates), providing upside to our current estimates.

Financials: Strong growth expected

FY16 service revenues of £9.6m included six months of the PacificGMP acquisition and around three months of the TCRS acquisition (£2.7m). We have increased our service revenue forecasts for FY17 (£18.5m) and FY18 (£24.3m) to include a 12-month contribution from the acquisitions and to reflect the expected growth resulting from cross-selling, expanded presence in the US and the broader service offering. 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) over the next 12 months.

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 recently acquired two manufacturing businesses to expand its offering there is now the need to integrate and embed 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).

Integrated service & technology offering – FY16 update

Abzena operates in the large ($162bn in 2014) biopharmaceuticals market, forecast to grow at a CAGR 9.4% from 2014 to 2020, with six out of the global top 10 drugs by revenue a biopharmaceutical product. The outsourced early development and contract manufacturing services market is $5bn and growing. Abzena combines biology, chemistry and manufacturing to enable better biopharmaceuticals. It generates revenues from the provision of services and licences to its technologies, particularly protein/antibody engineering and bioconjugation and, as a result of two recent acquisitions, it now has a manufacturing capability to GMP standard for Phase I and II clinical trials. The investment story is built on two aspects, its:

integrated service and technology offering, which has created a profitable services business. In particular, Abzena can offer a continuum of services from antibody discovery to GMP manufacture for Phase I and II clinical trials; and

expanding clinical pipeline of antibodies, being developed and fully funded by global partners, which were derived using Abzena’s protein engineering technology, termed Abzena inside products.

Exhibit 1: Integrated services and technology

Source: Abzena company presentation

Service revenues: Solid and growing

Services accounts for 97% of group revenues today (£9.6m reported in FY16). We expect growth of approximately 40% in FY17 (c 90% including PacificGMP and TCRS contribution) and a combined c 30% growth in FY18. This is primarily due to the increase in the cross-group utilisation of the broader service and technology offering, underpinned by already in place FY2017 contract bookings of over £9m. Approximately 52% of the services revenue in FY16 was derived from repeat customers, yet the customer base is relatively broad with the top 10 customers accounting for ~43% of total revenues. Geographically, these revenues in FY16 were broadly split between North America (67%) and Europe (21% not including UK, 6% in the UK). In Exhibit 2 we summarise Abzena’s service and technology platforms and respective revenue streams.

Exhibit 2: Abzena’s service and technology offerings

Technology offering

Products

Revenue structure

Details

Immunogenicity assessment

EpiScreen / iTope & TCED

Service only

Accurate, sensitive and rapid ex vivo and in silico (computer) testing for the risk of anti-drug antibodies (ADAs) to therapeutic antibodies/proteins; and identification of immunogenic sequences that cause immune response (which can then be 'fixed' by Abzena's Composite Human Antibody or Composite Protein technologies).

Cell line development**

Composite CHO

Service only

Development of stable and highly expressing mammalian cell lines, suitable for commercial production (for clinical trials) of proteins and antibodies by the licensee (or CMO). Suitable for Abzena engineered products or biosimilars.

Contract manufacturing biopharmaceutical products (PacificGMP)

Contract, development and manufacturing

Service only

San Diego based CDMO (Contract, development and manufacturing organisation) focused on developing/GMP manufacturing biopharmaceutical products (e.g. monoclonal antibodies) for use in Phase I and II clinical trials.

Specialist contract chemistry and bioconjugation (TCRS)

Produce and analyse antibody drug conjugates

Service only

Specialist contract chemistry and bioconjugation company based near Philadelphia, US with expertise in producing and analysing antibody drug conjugates (ADCs).

Protein engineering**

Composite Human Antibodies / Composite Proteins

Service & License

Creation of fully humanised antibodies and deimmunised proteins to reduce the risk of immune responses (immunogenic sequences removed / critical sequences retained). Fully-integrated offering with cell line development and bioconjugation as appropriate.

Bioconjuation - PK optimisation

TheraPEG / HiPEG/ CyPEG/ PolyPEG

Service & License

Optimisation of the pharmacokinetics (PK) and pharmacodynamics (PD) of therapeutic peptides and proteins, using site-specific conjugation (PEGylation) technologies, involving linkers or polymers (e.g. low viscosity polymer PolyPEG enables administration of conjugated proteins at high concentrations). Extends half-life (i.e reduces rate of elimination from body) to reduce the frequency of dosing.

Bioconjugation - ADCs

ThioBridge

Service & License

Site-specific conjugation of chemotherapy drugs to antibodies and antibody fragments, creating more stable and homogeneous antibody drug conjugates (ADCs) using the ThioBridge linker. Range of cytotoxic payloads available.

Source: Abzena presentation, Edison Investment Research. * Longer-term licensing potential PK: Pharmacokinetics, ADC: Antibody Drug Conjugates, PD: Pharmacodynamics, ** Can lead onto GMP manufacturing services

The company indicates that it adds value to the services it offers due to the quality of the skill set of its employees, which enables them to be involved in understanding the research question, designing the study and interpreting the results.

Once the services detailed above have engineered and developed human antibodies from cell lines or Thiobridge linker technologies for antibody-drug-conjugates, they require scale-up from small laboratory quantities to larger ‘good manufacturing practice’ (GMP) levels of product. Abzena’s two recent acquisitions, PacificGMP and TCRS provide the GMP manufacturing route for antibodies and (after further investment of c $4m from Abzena) GMP manufacturing for linkers and payloads and other conjugation technologies respectively. We expect this investment in FY17.

Exhibit 3: How PacificGMP and TCRS fit with Abzena’s antibody technologies

Source: Abzena


This has been an important step for Abzena for the following reasons:

Previously clients would have had to identify another party for GMP production.

Provides the opportunity for significant cross-selling for antibody/ADC engineering across PacificGMP’s and TCRS’s customer bases

Creates a US-wide operating presence, which gives proximity to a number of customers.

Could drive a significant increase in the conversion to licensing (Abzena ‘inside’ see below) as it increases its client base and is able to work with it for a greater part of the development process, which could enable it to capture a larger part of the biopharmaceutical value chain.

A further drive to expand its range of offerings is its marketing alliance with antibody discovery services company, FairJourney Biologics. The alliance enables Abzena to offer antibody discovery services to its partners and FairJourney Biologics to offer immunogenicity assessment and analytical services to its clients. This allows Abzena to offer a continuum of services from antibody discovery to GMP manufacture for Phase I and II clinical trials. Exhibit 4 below provides an overview of the services and technologies offered across the drug development process.

Exhibit 4: Services and technologies across the drug development process

Source: Company presentation

Licensing: Strong pipeline – the risk-free upside

Longer term, it is the successful clinical development and subsequent commercialisation of products that have been created using Abzena’s technologies that offer significant revenue potential (secured from small royalties on the sales of its customers’ products created using Abzena’s technologies). This potentially provides risk-free upside as Abzena benefits if the product successfully reaches the market (a small royalty figure); however, it assumes none of the R&D or partnering risk and is not restricted by indication as its ‘inside’ is applied across a broad range of indications. Products that have a future licensing agreement are termed Abzena inside and are based on two core inside platforms: Composite Human Antibody (CHA) and Thiobridge (antibody-drug-conjugates).

Composite Human Antibody: Humanised, safer antibodies

Immune responses to therapeutic protein products can be an issue for both patient safety and product efficacy. As a result, immunogenicity is an important factor for late-stage development failure, which can be expensive. Multiple techniques exist for the humanisation of antibodies (modifying antibodies produced from animal cell lines to increase their similarity to antibodies produced in humans), although these do not always lead to complete removal of the T-cell epitopes. Abzena’s Composite Human Antibody technology significantly reduces the potential immunogenicity of a therapeutic antibody while maintaining its affinity, specificity and (and as a result) desired activity. Further details of the Abzena CHA technology can be found in our initiation here.

To date, 11 antibody candidates (up from five at the time of Abzena’s IPO in July 2014), developed using Abzena’s humanising technology (Composite Human Antibody), have been disclosed as in active clinical development with customers currently conducting Phase I, II and III studies. Most notable are Gilead Sciences’ simtuzumab (undergoing Phase II studies for NASH and PSC) and GS-5745 (currently undergoing Phase I to III studies for gastric cancer, ulcerative colitis, Crohn’s disease, pancreatic cancer, COPD, cystic fibrosis and rheumatoid arthritis), all significant opportunities given the unmet medical need in these indications. Recent positive news flow has been good Phase I efficacy data for Gilead’s GS-5745 in gastric cancer, ulcerative colitis and pancreatic cancer, and True North Therapeutics Complement component C1 in Cold agglutinin disease. For a presented abstract of each please click on the link under the indication in the table below, where the 11 clinical antibody candidates disclosed by Abzena are summarised.

Exhibit 5: Abzena inside – composite human antibodies in clinical development

Product

Antibody target

Company

Potential indications

Status

Notes

GS-5745

MMP-9

Gilead Sciences

Gastric cancer*

Phase III

430 pt Phase III initiated in November 2015, based on highly encouraging Phase I data, estimated to complete H218, interim data expected H117.

Ulcerative colitis (UC)*

Phase II/III

1600 pt Phase II/III study initiated in December 2015 in moderate-to-severe active UC, based on encouraging data from 74-pt Phase Ib trial in mod-to-severe UC; initial results estimated mid-2018.

Crohn's disease (CD)

Phase II

175-pt Phase II study initiated (Apr 2015) in moderate-to-severe CD; 8-week treatment period; primary endpoint = % clinical response + endoscopic response at week 8; data end 2016.

Pancreatic cancer*

Phase Ib

Trial ongoing.

COPD

Phase I complete

Initiate Phase II study Q416.

Cystic Fibrosis

Phase I complete

Q316 initiate 150 pt Phase IIb dose ranging study, estimated to complete Dec 2018.

Rheumatoid arthritis

Phase I complete

Initiate Phase II study Q316.

Simtuzumab (GS-6624)

LOXL2

Gilead Sciences

Non-alcoholic steatohepatitis (NASH)

Phase IIb

2x Phase II studies initiated in 2012 (liver fibrosis with and without liver cirrhosis respectively), with IV (n=225) and SC (n=222) formulations; enrolment complete; treatment for up to 240 weeks; primary endpoint = event free survival (EFS). Expected to complete Q416.

Third study – combination of Simtuzumab and ASK-1 inhibitor. Expected to read out in 2016.

Primary sclerosing cholangitis (PSC)

Phase IIb

225-pt study initiated in 2013, with SC formulation; enrolment complete; 96-week treatment; primary endpoint = collagen reduction in liver biopsy. Expected to complete H216.

OPN-305

TLR2

Opsona Therapeutics

Prevention of delayed renal graft function (DGF)

Phase II

278-pt study initiated in 2012; primary endpoint = incidence of DGF/need for dialysis within first seven days following renal transplantation. Data mid-2017.

Myelodysplastic syndrome (MDS)

Phase I/II

Phase I/II study initiated in Jan 2015, in second-line lower (low-to-intermediate-1) risk MDS patients. Data mid-2016.

VPI-2690B

αVβ3 receptor

Vascular Pharmaceuticals

Diabetic nephropathy

Phase II

Mar 2015: $9m series A extension; J&J have option to acquire on Phase II completion. 300-pt study initiated in 2014 for diabetic nephropathy in type I and II diabetic patients; 48-wk treatment period; primary endpoint = change from baseline in albuminuria. data H218.

NKTT120

iNKT cells

NKT Therapeutics

Sickle cell disease

Phase Ib

21-pt Phase I dosing/safety study ongoing; encouraging data from first 18 patients at ASH 2014; awaiting final data.

RG6125 (SDP 051)

Cadherin 11

Roche (Adheron Therapeutics)

Rheumatoid arthritis, fibrotic conditions (NASH), cancer

Phase II-ready

Jan 2014: Phase I complete; safe and well-tolerated up to 10 mg/kg per day. Pre-clinical studies demonstrate activity across cancer, rheumatoid arthritis and fibrotic conditions including NASH. Expected to start Phase II study 2016.

TBI 304H

CD163

Therapure Innovations

Chemotherapy-induced anaemia

Phase I

Mar 2015: FDA approval for a Phase I study as a single-centre, open-label, dose-escalation trial to evaluate the safety, tolerability and pharmacokinetics of TBI 304H following administration to subjects experiencing chemotherapy-induced anaemia.

TNT009

Complement component C1

True North Therapeutics

Cold agglutinin disease& other antibody-driven diseases*

Phase I

June 2015: Prospective, double-blind, randomized, placebo-controlled First-In-Human study with three sub-parts: Part A, a single ascending dose study (SAD) in normal human volunteers (NHVs), Part B, a multiple ascending dose study (MAD) in NHVs, and Part C, a multiple dose (MD) study in patients with a complement-mediated disorder. Interim analysis complete*.

Undisclosed

N/A

US major pharma

Neurodegenerative conditions

Phase I

Undisclosed

N/A

US major pharma

Neurodegenerative conditions

Phase I

Undisclosed

N/A

US biotech

Cancer

Phase I

Source: Edison Investment Research, Abzena, clinicaltrials.gov. Note: *Recent presented abstracts.

Beyond this disclosed clinical-stage pipeline, we note that Abzena has announced a number of collaborations with biotech companies and research organisations over its licensable antibody/protein humanisation and bioconjugation (ADC/PK optimisation) technologies. Also, these are just the ones where the partner has agreed to Abzena’s disclosure, as some companies would prefer such licences to remain confidential for competitive reasons. Abzena has stated publicly that it has 40 licence and licence option agreements, including some that cover multiple potential products (eg de-immunised toxins for cancer and ADC products).

ThioBridge: The 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. ThioBridge enables this without materially disrupting the structure and function of the antibody and may offer a number of advantages over the competition including better stability, homogeneity (consistent drug to antibody ratio) and tolerability. Exhibit 6 outlines the issues with current ADC technologies and the ThioBridge conjugation. Also, when coupled with Abzena’s immunogenicity tools, antibody engineering and manufacturing cell line development, the company has an increasingly strong ADC offering. Further details of the ThioBridge technology and its competitors can be found in our initiation report.

Exhibit 6: Issues with current ADC technologies

Exhibit 7: ThioBridge conjugation

Source: Abzena. NNNA = non-natural amino acid

Source: Abzena

Exhibit 6: Issues with current ADC technologies

Source: Abzena. NNNA = non-natural amino acid

Exhibit 7: ThioBridge conjugation

Source: Abzena

In January 2016, Abzena signed a significant licensing deal with Halozyme, a publicly listed US biotech company that is developing and commercialising oncology therapies, including biological agents. The deal 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; so far the research collaboration with this partner has screened multiple ADC candidates and one has been selected for further development. We anticipate the first ADC product will enter the clinic in 2017.

Abzena’s licensed portfolio of antibodies developed using its Composite Human Antibodies technology (outlined above) offers the prospect of small royalties (~1%) on sales, given the greater technological and IP input with ThioBridge we expect that Abzena secures greater economics from deals over its ADC products (potentially royalties up to 5%). The deal, outlined above, with $50m milestones per ADC supports this assumption.

Sensitivities

With stable and growing revenues from its services business and a licensed portfolio of drugs that does not require R&D spend 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. 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 recently acquired two manufacturing businesses to expand where there is now the need to integrate and embed 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 (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

Our fair value is adjusted to £133m (from £130m) or 98p per share (vs 96p). We have included the updated financial forecasts (see financials section) and FY16 reported cash of £13.7m. Within the rNPV for product royalties, we also now include the 11th Abzena inside product with an undisclosed US biotech. We note that five 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 technology platform and expertise in the field. Exhibit 8 and 9 outline the valuation metrics and key assumptions and valuation assumptions by product.

Exhibit 8: Abzena valuation model and key assumptions

rNPV (£m)

rNPV per share (p)

Key assumptions

Services business

55.6

40.9

3-phase DCF: 2016-2020 (6-10% growth), 2021-2025 (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

63.8

46.9

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, apart from for the 3 ADC products

Portfolio sub-total

119

88

Cash (FY16)

13.7

10.1

FY16e (31 March 2016)

Overall valuation

133

98

136.2m shares outstanding (basic)

Source: Edison Investment Research

Exhibit 9: Valuation assumptions by product

Product – Partner

Status

Peak sales ($m)

Probability of success

Launch date

GS5745 - Gilead Sciences

Phase III

2,500

50%

2019

Simtuzumab - Gilead Sciences

Phase II

3,000

35%

2019

OPN-305 - Opsona Therapeutics

Phase II

750

35%

2020

VPI-2690B - Vascular Pharmaceuticals

Phase II

1,000

35%

2021

NKT120 - NKT Therapeutics

Phase Ib

250

25%

2021

SDP 051 – Roche*

Phase II

1,000

25%

2023

TBI 304H - Therapure Innovations

Phase I

1,000

15%

2021

US major pharma partner

Phase I

1,000

15%

2022

US Pharma

Phase I

750

15%

2022

True North Therapeutics**

Phase I

750

15%

2019

US Biotech

Phase I

750

15%

2023

ANX005 - Annexon Biosciences

Pre-clinical

750

5%

2023

US Biotech ADC Product 1***

Pre-clinical

1,000

5%

2024

US Biotech ADC Product 2***

Pre-clinical

1,000

5%

2025

US Biotech ADC Product 3***

Pre-clinical

1,000

5%

2026

Source: Edison Investment Research. *Bought Adheron Therapeutics, ** Spun out of iPierian, which was subsequently acquired by Bristol Myers-Squibb, ***Includes potential developmental milestones

Abzena has demonstrated rapid creation of value as shown in Exhibit 10, an overview of the changes to our valuation model since we initiated coverage in March 2015. This, we believe, supports the overall investment case (growing and advancing partnered pipeline) alongside a growing service business.

Exhibit 10: Breakdown of fair value progression since March 2015

Source: Edison Investment Research

It has been an important year for Abzena with the two acquisitions bolstering its service offering and the integrated business model of services and technology licences beginning to demonstrate its worth. 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 progression of Gilead Sciences simtuzumab Phase II studies for NASH and PSC, GS-5745 Phase I to III studies including the initiation of Phase II studies in COPD, cystic fibrosis and rheumatoid arthritis, expected this year and Roche’s RG6125 (formerly known as SDP 051), which is Phase IIa ready.

Financials

Abzena’s reported group accounts reflect the inclusion of six months of the PacificGMP acquisition and around three months of the TCRS acquisition. As a result, reported total revenue growth for the group was 74%, with 28% like-for-like growth. We forecast an increase in service revenue, FY17 £18.5m and FY18 £24.3m as a full 12 months benefit from the acquisitions are included and growth resulting from cross-selling and the ability to offer a continuum of services. We expect a small reduction in the gross margin following the acquisition and therefore forecast 41% in FY17, increasing to 47% in FY18. The company intends to invest slightly less in R&D in FY17 and therefore we have reduced it slightly to c £3.8m in FY17, although this is broadly offset by an increase in SG&A costs relating to a full year impact of the acquisitions and the overall increase in administrative costs from the enlarged group. We also forecast an increase in capex (to c £4m) as the company executes its investment plan into the expansion of its GMP manufacturing facility in San Diego and its facilities in Bristol (US).

We note our valuation and financial models do not currently include the potential dilution effect from the exercise of warrants, or the issue of new shares under the performance-based incentive scheme, related to the PacificGMP and TCRS acquisitions. For the PacificGMP acquisition the warrants cover 564,762 Abzena shares (0.58% of current issued share capital), which are valued at approximately £0.5m and valid for three years with an exercise price of 80p. Under the performance-based incentive scheme, PacificGMP's executives and key managers are eligible to receive up to 5,129,939 Abzena ordinary shares (5.3% of current issued share capital), dependant on the business's performance over the next two years.

Exhibit 11: 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: Immunology

2,196

2,940

3,978

5,569

6,015

Protein engineering

932

1,218

1,321

1,849

1,960

Bioconjugation

165

657

1,376

1,926

2,023

Cell line development

419

594

525

735

772

Biomanufacturing (PacificGMP)

1,571

3,928

5,891

TCRS

798

4,469

7,597

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)

(11,234)

(13,342)

Gross Profit

3,564

3,135

4,535

7,843

11,666

R&D expenses

(2,601)

(2,989)

(4,216)

(3,794)

(3,984)

SG&A expenses

(4,787)

(5,634)

(9,047)

(11,761)

(12,643)

EBITDA

 

 

(3,116)

(4,510)

(6,972)

(5,423)

(2,853)

Operating Profit (before GW and except)

 

(3,394)

(4,795)

(7,773)

(6,882)

(4,195)

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)

(7,613)

(4,861)

Other

0

0

0

0

0

Net Interest

27

79

244

50

8

Profit Before Tax (norm)

 

 

(3,367)

(4,716)

(7,529)

(6,833)

(4,187)

Profit Before Tax (FRS 3)

 

 

(4,097)

(5,220)

(10,659)

(7,563)

(4,853)

Tax

548

498

961

908

582

Profit After Tax (norm)

(2,819)

(4,218)

(6,568)

(5,925)

(3,605)

Profit After Tax (FRS 3)

(3,549)

(4,722)

(9,698)

(6,656)

(4,271)

Average Number of Shares Outstanding (m)

1.4

71.6

109.4

136.2

136.2

EPS - normalised (p)

 

 

N/A

(5.89)

(6.00)

(4.35)

(2.65)

EPS - FRS 3 (p)

 

 

N/A

(6.59)

(8.86)

(4.89)

(3.14)

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

13,178

8,562

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

5,456

1,165

Other

541

1,147

1,569

908

582

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

33,951

29,841

CASH FLOW

Operating Cash Flow

 

 

(4,328)

(4,859)

(10,870)

(5,304)

(2,731)

Net Interest

0

0

0

0

0

Tax

251

(133)

371

961

908

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

47

Net Cash Flow

190

13,042

(2,075)

(8,268)

(4,291)

Opening net debt/(cash)

 

 

(2,754)

(2,757)

(15,799)

(13,724)

(5,456)

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)

(5,456)

(1,165)

Source: Abzena and Edison Investment Research

Contact details

Revenue by geography

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

Management team

Chief Executive Officer: John Burt, DPhil

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). Before Imperial Innovations, Julian was CFO of RadioScape and group financial controller of Mobile Systems International.

Chief Scientific Officer: Matthew Baker, PhD

Senior VP Corporate Development: Sally Waterman, PhD

Co-founder of Antitope in 2004, and CSO of the group since the merger with PolyTherics in July 2013. Before Antitope Matthew was VP for biologics discovery at Biovation (subsidiary of Merck KGaA). Matthew has a background in B- and T-cell immunology and completed post-doc roles in Cambridge (UK), after obtaining a PhD in cellular immunology at the University of Birmingham (UK).

Joined PolyTherics in October 2009 as Chief Operating Officer and became Senior VP of corporate development in December 2013. Sally’s previous roles include director of R&D at Protherics, VP of R&D at KS Biomedix, VP of nonclinical development at Vernalis and director of scientific operations at Pharmakopius.

Chief Technology Officer (Biomanufacturing): Leigh N. Pierce

Senior VP & Global Head of Chemistry: Nareshkumar Jain, PhD

Ms. Pierce co-founded PacificGMP in 2005 establishing the company as the only contract manufacturing organization that specializes in the development and manufacturing of biologics utilizing single-use technology in both upstream and downstream processes. Ms. Pierce has over 20 years’ experience in the biotechnology industry. Prior to PacificGMP she was President of Pierce BioDevelopment, a consulting firm that assisted pharmaceutical companies with preclinical development and clinical manufacturing of biologics.

Dr. Jain has more than ten years of medicinal chemistry experience at Johnson and Johnson where he worked on advancing new drug molecules from early lead to lead optimization and clinical trials. He has co-authored more than 60 publications, patents, and chapters in medicinal/synthetic chemistry books.

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 (General Manager, 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 including pre-clinical evaluation and translation in the clinic.

Jim joined Abzena’s executive team in March 2015 as VP 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, DPhil

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). Before Imperial Innovations, Julian was CFO of RadioScape and group financial controller of Mobile Systems International.

Chief Scientific Officer: Matthew Baker, PhD

Co-founder of Antitope in 2004, and CSO of the group since the merger with PolyTherics in July 2013. Before Antitope Matthew was VP for biologics discovery at Biovation (subsidiary of Merck KGaA). Matthew has a background in B- and T-cell immunology and completed post-doc roles in Cambridge (UK), after obtaining a PhD in cellular immunology at the University of Birmingham (UK).

Senior VP Corporate Development: Sally Waterman, PhD

Joined PolyTherics in October 2009 as Chief Operating Officer and became Senior VP of corporate development in December 2013. Sally’s previous roles include director of R&D at Protherics, VP of R&D at KS Biomedix, VP of nonclinical development at Vernalis and director of scientific operations at Pharmakopius.

Principal shareholders

(%)

Invesco Asset Management Limited

26.4

Woodford Investment Management LLP

2.0

Imperial Innovations

19.8

Ballie Gifford & Co

3.3

Companies named in this report

Gilead Sciences (GILD); Opsona Therapeutics; Vascular Pharmaceuticals; Roche (ROG); NKT Therapeutics; Adheron Therapeutics; Therapix Biosciences; Annexon Biosciences; Therapure Innovations; True North Therapeutics

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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

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Findel — Update 21 June 2016

Findel

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