SSB ABGX: Uneventful Quarterly Results; Upcoming
ABX-EGF Presentations at ASCO
HOLD (2) Speculative (S)
Mkt Cap: $1,630 mil.
April 27, 2004
* After the market close, Abgenix reported a net loss of
$41.6 MM or $0.47 per share versus our estimate of a net
loss of $37 MM or $0.42 per share for Q104. Lower than
forecasted contract revenues were the driver for the
greater loss.
* 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's partner, Amgen, for ABX-EGF has initiated 2
pivotal studies for ABX-EGF as a third-line monotherapy
in colorectal cancer in the U.S. and Europe.
Importantly, detailed data from a Phase II study in 150
colorectal cancer patients will be presented at ASCO in
June that may provide a preliminary view of the product's
potential as a 3rd line therapy in CRC.
* We maintain our Hold rating but given the potential for
positive newsflow related to the EGFr class (i.e.,
DNA/OSIP's Tarceva, IMCL/BMY's Erbitux) and data at ASCO,
we are increasing our target price to $22 from $17.
FUNDAMENTALS
P/E (12/04E) NA
P/E (12/05E) NA
TEV/EBITDA (12/04E) NA
TEV/EBITDA (12/05E) NA
Book Value/Share (12/04E) NA
Price/Book Value NA
Revenue (12/04E) $17.3 mil.
Proj. Long-Term EPS Growth NA
ROE (12/04E) NA
Long-Term Debt to Capital(a) NA
Price (4/27/04) $18.55
Rating (Cur/Prev) 2S/2S
52-Week Range $16.58-$8.85
Target Price (Cur/Prev) $22.00/$17.00
Shares Outstanding(a) 87.9 mil.
Expected Share Price Return 18.6%
Div(E) (Cur/Prev) $0.00/$0.00
Expected Dividend Yield 0.0%
Expected Total Return 18.6%
OPINION
Today, after the market close, Abgenix reported results for the first quarter
of 2004. The net loss for the quarter, totaled $41.6 million or $0.47 per
share, and was higher than our estimate of a net loss of $37 million or $0.42
per share as lower than forecasted contract revenues were recorded. Overall,
R&D and SG&A expenses were lower than forecasted for the quarter. Contract
revenues (licensing fees and milestone payments) were $2.9 million, and lower
than our estimate of $10.0 million. In the aggregate, R&D and manufacturing
expenses totaled $35.8 million and included $7.3 million related to the
start-up of antibody production facilities. These expenses were lower than
our forecast of $39 million. In terms of other expense items, G&A spending of
$6.9 million was also lower than our estimate of $8.0 million. The company
ended the quarter with a cash balance of $307 million and indicated that the
net cash used in operating activities during Q1 was $38.2 million, with
capital expenditure spending totaling $3 million.
The company reitereated prior financial guidance for fiscal 2004, which
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 starting later this year and over the next two years.
Furthermore, net cash used in operating activities are projected to be in the
range of $110-$125 million with capital spending approximately $20-25 million
for fiscal 2004.
Fine-tuning our financial model. We are revising our EPS estimates for
fiscal 2004 to incorporate recent financial trends. Specifically, we are
lowering our contract revenue forecast to $17.3 million from a prior forecast
of $35.6 million. Our R&D expense forecast is adjusted to $157 million from
$160 million. In addition, we have lowered our SG&A expense forecast to $32
million from a previous forecast of $34 million. Consequently, our net loss
is adjusted to $177 million or $2.01 per share from a net loss of $163
million or $1.84 per share for fiscal 2004. For fiscal 2005 our loss
forecast remains unchanged at a net loss of $1.15 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, positive news on the
development of ABX-EGF (panitumumab), 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 (on market),
Genentech/OSI Pharmaceuticals' Tarceva (positive Phase III results announced)
and AstraZeneca's Iressa (on market), may generate investor interest in
Abgenix.
Amgen, Abgenix's partner for ABX-EGF, is conducting a pivotal study of ABX-
EGF as a third-line therapy in advanced colorectal cancer patients under an
SPA (Special Protocol Assessment) 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. A Phase III trial has also been
initiated outside the U.S. to support regulatory approval in European region.
In addition, other studies are ongoing with ABX-EGF including a Phase II
study in combination with chemotherapy in colorectal cancer, a Phase II study
in renal cell carcinoma, and a Phase II study in non-small cell lung cancer.
The company indicated that at the upcoming American Society for Clinical
Oncology (ASCO) meeting in early June (June 5-8), there will be two data
presentations pertaining to ABX-EGF. Updated detailed results from the
ongoing Phase II study with the antibody as monotherapy in 150 colorectal
cancer patients will be discussed on Sunday, June 6th. As a reminder, last
year this study was expanded to 150 patients from 100 patients to capture
colorectal cancer patients who had become refractory to an oxaliplatin-based
regimen. We expect data from this study will provide a preliminary view of
the potential for ABX-EGF as a third-line monotherapy treatment for
colorectal cancer. Another presentation will be interim safety data from a
trial evaluating the antibody in combination with paclitaxel and carboplatin
as front line therapy in non-small cell lung cancer patients, which will be
presented on Saturday, June 5th.
Raising Target Price to $22 from $17. As mentioned, we continue to believe
Abgenix's stock will respond to positive newsflow related to other EGFr
inhibitors, such as ImClone/Bristol-Myers Squibb's Erbitux (on market),
Genentech/OSI Pharmaceuticals' Tarceva (positive Phase III results announced)
and AstraZeneca's Iressa (on market). Recently, Genentech and partners, OSI
Pharmaceuticals and Roche, announced positive results from a Phase III study
of Tarceva. Specifically, the results demonstrated a survival benefit in
patients receiving Tarceva as 2nd/3rd line therapy for non-small cell lung
cancer (NSCLC). Given the design of the study, we believe this implies at
least a 33% improvement in survival benefit with Tarceva versus best
supportive care. Secondary endpoints of improving time to symptomatic
deterioration, progression-free survival and response rate were also
statistically significant. This outcome was an upside surprise. The
detailed data will be presented at the ASCO meeting, scheduled for June 5-8.
In response to this news, Abgenix's stock was up approximately 20%. In
addition, we expect upcoming data releases on ABX-EGF at ASCO, as mentioned
previously, may generate further investor interest in Abgenix. As indicated,
there will be two presentations on ABX-EGF at ASCO. Importantly, the
complete data from a Phase II study that enrolled 150 patients with
colorectal cancer will be presented. We believe these data will provide a
preliminary view of the potential of ABX-EGF as a third-line monotherapy in
advanced colorectal cancer patients. Consequently, we are raising our target
price to $22 from $17 with the potential for near term positive newsflow
related to ABX-EGF and other EGFr inhibitors to drive appreciation. Our
target price of $22 is based on applying a PE multiple of 30-35x and a
discount rate of 30%-35% (previously, 30%-40%) to our 2007 earnings of $1.35.
With ABX-EGF advancing into pivotal Phase III clinical studies, we believe a
more appropriate discount rate is 30%-35%. In general, we believe these
parameters are appropriate for companies such as Abgenix, which has products
in mid-stages of development.
Additional Pipeline Products. In terms of other internal pipeline projects,
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 as treatment is ongoing given the completion of enrollment. In
February, a Phase I clinical trial of ABX-PTH, a fully human monoclonal
antibody targeted to the parathyroid hormone, was initiated. This antibody is
being investigated for the treatment of secondary hyperparathyroidism (HPT),
a chronic disorder that is observed in patients with chronic kidney disease.
Abgenix also highlighted AMG 162 (antibody to RANK Ligand), which was
presented at partner's Amgen R&D day. This drug candidate is a fully human
monoclonal antibody generated with Abgenix's technology platform that is
being advanced for osteoporosis and metastatic bone disease. AMG 162 binds
to the RANK Ligand and is currently in a Phase II study for osteoporosis and
in a Phase II study for metastatic bone disease. Results from the Phase I
study were presented at last year's annual meeting of the American Society
for Bone and Mineral Research (ASBMR) in Minneapolis, Minnesota. The study
enrolled 52 postmenopausal women who received a single subcutaneous injection
of either the antibody or placebo. Overall a dose dependent decrease in bone
turnover compared to baseline values, which was rapid and sustained out to
nine months, was noted with the antibody. One subcutaneous injection of 3
mg/kg of AMG 152 demonstrated a 80% reduction in markers of bone turnover
within a period of five days. The drug was well tolerated and no related
serious adverse events were noted. Based on these data, the compound
demonstrated potent anti-resorptive activity. At Amgen's R&D day, initial
interim results from a Phase II trial in post-menopausal women comparing two
dose levels of the antibody given as a single subcutaneous injection to
Merck's drug Fosamax as well as a placebo control were released. Six-month
data presented show that the drug appears to be as effective as Merck's
Fosamax but with a highly convenient dosing regimen of an every 6-month
injection. Efficacy was assessed at examining levels of urinary NTx, a
marker for bone turnover, as well as with more clinical endpoint of increases
in bone mineral density (BDM) at the lumbar spine as well as total hip.
Specifically, a 5% increase in BMD from baseline was noted at the six-month
time point with the high dose tested, which was similar to the response noted
with Fosamax in this study. We await more detailed efficacy results from
larger trials with this initially promising agent. Amgen indicated that it
plans to initiate a Phase III clinical program in osteoporosis this year with
the antibody. The osteoporosis market is sizable representing approximately
10 million patients in the U.S. In addition, there are about 350,000 U.S.
patients diagnosed with bone metastasis each year. We believe this
compound could represent a billion dollar market opportunity.
Pfizer collaboration: Abgenix received an undisclosed milestone payment for
the advancement of Xenomouse-derived antibody products by partner, Pfizer,
into clinical development. There are currently two programs that have been
advanced into clinical studies, which include targets to CTLA4 and the IGF-1
receptor.
ABX-EGF (PANITUMUMAB) BACKGROUNDER
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), and colorectal
cancer. Overall, there are five trials of ABX-EGF in three 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. Last year, Oxaliplatin was 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 has also initiated 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.
Overall, there are five trials of ABX-EGF in three indications 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 (paclitaxel and carboplatin), compared to standard chemotherapy
alone, was initiated in July2001 and has been completed. The primary endpoint
is time to progression. Interim safety results from the initial combination
phase will be presented at ASCO in June.
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 $22 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 detailed clinical data from the completed Phase
II study of ABX-EGF as a monotherapy in 150 colorectal cancer patients to be
presented at ASCO in early June.
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 $22 per share is based on applying
a PE multiple of 30-35x and a discount rate of 30%-35% (previously 30%-40%)
to our 2007 earnings of $1.35. With ABX-EGF advancing into pivotal Phase III
clinical studies, we believe a more appropriate discount rate is 30%-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 $2.2-$2.5 billion, with a wide range noted. Abgenix's current
market capitalization is at discount to this average of peer companies. We
note that certain of the companies, notably Medarex, are at an earlier
developmental stage in terms of their clinical pipeline, compared to Abgenix,
while ImClone's EGF targeted antibody, Erbitux, was recently launched. 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 views .... |
