SSB: ABGX: Reports Q4 and FY03 Financials; Pipeline
Update
HOLD (2) Speculative (S)
Mkt Cap: $1,303 mil.
February 24, 2004 SUMMARY
Elise Wang
Soham Pandya
Robert Rapaport
* After the market close, excluding charges, Abgenix
reported a net loss of $45 MM or $0.51 per share versus
our estimate of a net loss of $40.8 MM or $0.46 per share
for Q403. Higher expenses were the driver for the greater loss.
* Revising our forecasts for FY04 to a loss of $163 MM or
$1.84 per share from a loss of $125 MM or $1.42 due to
higher R&D expenses. In our view, quarterly earnings results are not the primary driver for the shares, as the
key focus remains the clinical progress of ABX-EGF.
* Abgenix and partner, Amgen, recently announced the
initiation of a pivotal trial for ABX-EGF as a third-line
monotherapy in colorectal cancer patients. Detailed
results from the Phase II study in colorectal cancer is
expected to be presented at this year's ASCO meeting.
Abgenix announced based on results from a Phase II trial
that it is no longer advancing ABX-EGF monotherapy in the
prostate cancer setting. We reiterate our Hold rating on
ABGX.
FUNDAMENTALS
Revenue (12/03A) $16.9 mil.
Long-Term Debt to Capital(a) NA
Price (2/24/04) $14.83
Rating (Cur/Prev) 2S/2S
52-Week Range $16.58-$4.58
Target Price (Cur/Prev) $17.00/$17.00
Shares Outstanding(a) 87.9 mil.
Expected Share Price Return 14.6%
Expected Total Return 14.6%
OPINION
Today, after the market close, Abgenix reported results for the fourth
quarter and fiscal 2003. The net loss for the quarter, excluding a $7.9
million impairment of investments charge, totaled $45.1 million or $0.51 per
share, and was higher than our estimate of a net loss of $40.8 million or
$0.46 per share as the company incurred higher than forecasted R&D and SG&A
expenses. In the aggregate, R&D and manufacturing expenses totaled $41
million and included $9.3 million related to the start-up of antibody
production facilities. These expenses were higher than our forecast of $35
million. In terms of other expense items, SG&A spending of $9.0 million was
also higher than our estimate of $6.8 million. Contract revenues (licensing
fees and milestone payments) were $6.4 million, higher than our estimate of
$2.0 million. For fiscal 2003, the company reported a net loss of $188
million or $2.14 per share, compared to our forecast of a net loss of $184
million or $2.10 per share, as we have included a charge of $28 million or
$0.32 per share related to the cancellation of a manufacturing agreement with
Lonza Biologics recorded in the second quarter into our forecasts. The
company ended fiscal 2003 with approximately $347.8 million in cash and cash
equivalents on its balance sheet. Thus, the company achieved its goal for
fiscal 2003 of ending the year with a cash balance of about three times the
net cash used in operating activities for the year.
Adjusting our financial model. For fiscal 2004 the company indicated that it
anticipates an increase in research and development expense, with the $60
million credit facility from Amgen for development expense towards ABX-EGF to
be utilized over the coming two years. Further, for fiscal 2004 net cash
used in operating activities are projected to be in the range of $110-$125
million with capital spending approximately $20-25 million. We are revising
our EPS estimates for fiscal 2004 to incorporate recent financial trends and
the company's guidance. Specifically, we have significantly increased our R&D
expense estimate to $160 million from $122 million as we have included
approximately $38 million in expenses related to manufacturing activities for
the company's antibody production facilities. The company is anticipating the
signing of one manufacturing deal to utilize excess capacity in 2004 and
recording revenue in fiscal 2005 from this agreement. In addition, we have
increased SG&A expense forecasts to $34 million from a previous forecast of
$29 million. In terms of revenue, we forecast $35.6 million to be recorded
as contract revenue. Consequently, our fiscal 2004 net loss is adjusted to
$163 million or $1.84 per share from a net loss of $124.8 million or $1.42
per share. For fiscal 2005 our loss forecast is slightly adjusted to a loss
of $1.15 per share from a previous forecast of a loss of $1.11 per share.
Progress on ABX-EGF Remains the Focus. In our view, given the company's
stage of development, quarterly earnings results are not the primary driver
for the shares. Continued progress of the company's late-stage clinical
pipeline remains the key focus. In this regard, development of ABX-EGF, a
fully human monoclonal antibody targeted to the EGF receptor for cancer, will
be critical for significant appreciation of the stock. The company in
conjunction with partner, Amgen, recently announced the initiation of a
pivotal trial for ABX-EGF as a third-line monotherapy in colorectal cancer
patients. We provide more details on this study below. A Phase III trial
has also been initiated outside the U.S. to support regulatory approval in
European region. During the conference call, the company indicated that
based on the results from a Phase II trial in prostate cancer, no further
studies with ABX-EGF as monotherapy in this indication are planned. We are
not anticipating any new data to be released at the Amgen R&D investor
meeting on March 23rd meeting although an update on the clinical strategy in
general terms is likely to be discussed. Detailed results from the Phase II
study conducted in 150 colorectal cancer patients is expected to be presented
at this year's ASCO meeting in June.
Importantly, in our view, the recent FDA approval of another EGFr inhibitor,
ImClone/ Bristol-Myers Squibb's Erbitux (a chimeric monoclonal antibody),
bodes well for the regulatory pathway for ABX-EGF. However, the approval and
accessibility of Erbitux in the marketplace might make it more challenging to
complete enrollment in the pivotal trial for ABX-EGF. We note that ImClone
and partner, Bristol-Myers Squibb submitted a supplemental BLA for licensure
(CMC) of the BB36 manufacturing facility to expand the current capacity.
Based on current guidelines, the FDA has four months to respond to this
submission. In addition, we expect final FDA approval of Avastin for
metastatic colorectal cancer in the near term, which may also impact
enrollment of the pivotal study for ABX-EGF.
In terms of other pipeline projects, the company announced in February that
it has initiated a Phase I clinical trial of ABX-PTH, a fully human
monoclonal antibody targeted to the parathyroid hormone. This antibody is
being investigated for the treatment of secondary hyperparathyroidism (HPT),
a chronic disorder that is observed in patients with chronic kidney disease.
We note that ABX-PTH would be an injectable protein and would compete with
Amgen/NPS Pharmaceuticals' Cinacalcet, an orally available compound, which is
expected to receive FDA approval by the end of the first quarter for
secondary HPT.
Clinical data from a Phase I dose ranging study with another Abgenix fully
human antibody, ABX-MA1, in late-stage melanoma patients is likely by the end
of this year. Additionally, in late January, Abgenix also announced that it
received a milestone payment from partner, Pfizer, for the advancement of
another fully human monoclonal antibody into the clinic (IND filing).
ABX-EGF UPDATE
ABX-EGF is a fully human monoclonal antibody that binds to the epidermal
growth factor receptor (EGFR), which is over-expressed in a variety of tumor
types. Amgen obtained rights to this compound from Abgenix due to the
Immunex acquisition. ABX-EGF is currently in Phase II clinical trials for
renal cell carcinoma, non-small cell lung cancer (NSCLC), colorectal cancer
and prostate cancer and a pivotal study for colorectal cancer. Overall,
there are five trials of ABX-EGF in four indications underway.
On October 14, 2003, Amgen announced a refinement of the collaboration with
Abgenix. Under the revised agreement, Amgen will now take the lead with
respect to decision making for clinical development and commercialization of
the compound. Additionally, Abgenix will have responsibility for the
manufacture of both clinical and early commercial supplies of the antibody.
In consideration, Abgenix will have access to a $60 million credit line from
Amgen that may be utilized by Abgenix to fund it share of the costs after it
has contributed $20 million towards development costs in 2004. These funds
plus interest may be repaid out of Abgenix's share of profits from future
product sales although Abgenix is not obligated to repay any of the loan if
the product is not marketed. Most importantly, the companies will continue
to share the costs of the program and worldwide operating profits on an equal
basis.
On January 20, 2004, Abgenix announced that a pivotal Phase III trial of ABX-
EGF as a monotherapy in advanced colorectal cancer patients will be initiated
by partner, Amgen. The company indicated that the study design was reviewed
and approved by the FDA under a Special Protocol Assessment (SPA) with the
plan to submit an application under accelerated approval guidelines. As a
reminder, an SPA provides clear regulatory guidelines of approval if a study
as followed under its submitted design achieves the targeted endpoints. We
believe the study is designed to be conducted in patients who have become
refractory to oxaliplatin (Sanofi Synthelabo's Eloxatin) as a third line
therapy. Oxaliplatin was recently approved as a first line treatment for
metastatic colorectal cancer in combination with Fluorouracil (5-FU) and
Leucovorin (LV). While the exact details of the pivotal study for ABX-EGF
have not been provided, we believe that the trial is targeted to enroll a
couple of hundred patients with potential endpoints of response rate,
duration of response and tumor progression. Other endpoints may include
survival. We estimate that the study is likely to complete enrollment this
year with a potential for submission next year leading to a possible approval
in late 2005 or early 2006. Amgen is planning a second pivotal study in
Europe. The study design is likely to be different than the U.S. study given
different treatment paradigms in Europe relative to the U.S.
Clinical data from the completed Phase II study in colorectal cancer from all
150 patients is expected to be presented at the 2004 ASCO meeting. We are
not anticipating any new data to be released at the Amgen R&D meeting
although an update on the clinical strategy in general terms is likely to be
discussed.
Overall, there are five trials of ABX-EGF in four indications, which are
underway. Aside from the studies in colorectal cancer, the other trials are
as follows:
Renal cell cancer --- Abgenix presented updated results of its Phase II trial
of ABX-EGF in kidney cancer at the AACR/EORTC meeting in Frankfurt in
November 2002. Although there was suggestion of anti-tumor activity based on
some tumor responses and possibly stable disease, there was no correlation
between median time-to-progression and increasing doses of ABX-EGF treatment
(1.0, 1.5, 2.0 and 2.5mg/kg). We note that the number of patients
(approximately 20) in each dose cohort was relatively small and there was no
control group; therefore, it is difficult to draw any definitive conclusions.
Abgenix is initiating the second part of this trial, which will enroll more
than 100 patients with less advanced disease. Data from this study are
likely to released towards the end of this year.
Non-small cell lung cancer--- A Phase II trial of ABX-EGF in about 200
patients with non-small cell lung cancer in combination with standard
chemotherapy, compared to standard chemotherapy alone, was initiated in
July2001 and enrollment is ongoing. The primary endpoint is time to
progression.
Prostate cancer--- A Phase II clinical trial evaluating the effect of ABX-EGF
in patients with hormone resistant prostate cancer without metastasis has
been completed. The endpoint of the trial was a 50% drop in PSA. The company
indicated that based on the results from this trial, no further studies with
ABX-EGF monotherapy in this indication are planned.
COMPANY DESCRIPTION
Abgenix is a biotechnology company that develops and intends to commercialize
fully human monoclonal antibodies for the treatment of a variety of
conditions, including cancer, inflammatory, transplant-related diseases,
among many others. It relies on its proprietary transgenic mouse technology
- the XenoMouse -- to generate fully human antibodies, which represent the
most advanced stage of antibody technology. Abgenix is utilizing its
technology to build a diversified portfolio of proprietary and partnered
antibodies: four proprietary and two partnered antibodies (with Pfizer and
Amgen) are already in clinical development.
INVESTMENT THESIS
We rate the shares of Abgenix (ABGX) Hold/ Speculative Risk (2S) with a
target price of $17 per share. Continued progress of the company's late-
stage clinical pipeline remains a key focus. In this regard, positive news
on the development of ABX-EGF, a fully human monoclonal antibody targeted to
the EGF receptor for cancer, will be critical for significant appreciation of
the stock. We also believe positive newsflow with other EGFr inhibitors,
such as ImClone/Bristol-Myers Squibb's Erbitux (a chimeric monoclonal
antibody, which received FDA approval on February 12), Genentech/OSI
Pharmaceuticals' Tarceva (Phase III) and AstraZeneca's Iressa (on market),
may generate investor interest in Abgenix. The company in conjunction with
partner, Amgen, is conducting a number of clinical studies of ABX-EGF in four
cancer indications: colorectal cancer (Phase II studies as a monotherapy and
in combination with chemotherapy), a Phase II study in renal cell carcinoma,
a Phase II study in non-small cell lung cancer, and a Phase II study in
prostate cancer. We expect an update on the development program for ABX-EGF
will be provided by partner, Amgen, during Amgen's R&D investor meeting on
March 23rd. Clinical data from various studies for ABX-EGF may be provided
during this meeting with a detailed presentation potentially at ASCO in June.
Detailed fiscal 2004 financial guidance will be provided during the year-end
conference call.
VALUATION
In order to value Abgenix shares, we used a discounted earnings analysis
based on the first full year of profitability (i.e., when a number of the
more advanced products in the pipeline are commercially released), which we
estimate to be 2007. Our target price of $17 per share is based on applying
a PE multiple of 30-35x and a discount rate of 30%-40% to our 2007 earnings
of $1.35. We believe these parameters are appropriate for companies such as
Abgenix, which has products in mid-stages of development.
A second approach that we have utilized to augment our discounted earnings
approach is a relative valuation analysis. With this methodology we conducted
a market capitalization analysis on other comparable biotech companies with
antibody platforms (e.g., Protein Design Laboratories (PDLI), Medarex (MEDX),
Cambridge Antibody Technology (CATG) and ImClone (IMCL)). The average market
capitalization of this comparative group of antibody companies is
approximately $1.4-$1.5 billion, generally in line with Abgenix's market
capitalization. We note that certain of the companies, notably Medarex, are
at an earlier developmental stage in terms of their clinical pipeline,
compared to Abgenix. We believe Abgenix should trade at least at a similar
market capitalization to the average for the comparative group of antibody
companies.
RISKS
We believe a Speculative Risk rating is warranted for Abgenix given the
company's dependence on ABX-EGF and the high volatility of its shares. Risks
to Abgenix achieving our valuation target include the following: Like all
biotechnology companies developing proprietary products, Abgenix is subject
to clinical development setbacks, which could delay or hamper profitability.
Currently there is an acute shortage of manufacturing capacity in the
monoclonal antibody area and many companies, including Abgenix, are building
new commercial-scale facilities to address this issue. Furthermore, any
patent issues in the EGFr antagonist field will likely have a negative effect
on the shares of Abgenix.
I, Elise Wang, hereby certify that all of the |
