SSB: Abgenix (ABGX, Hold, Speculative)
Reporting date: Tuesday, July 27th, after market close; Conference call
scheduled at 4:30PM EST
For Abgenix (ABGX), we are maintaining our Hold rating and are reducing
our target price to $14.00 from $22.00 due to a lack of near-term newsflow
to generate investor interest. The stock has sold off, down 33%, since
the major medical meeting, ASCO, in early June. We believe the stock has
underperformed recently due to the lack of sufficient data to support a
differential profile for ABX-EGF (panitumumab) from ImClone/Bristol-Myers
Squibb's Erbitux, which is currently on the market. In our opinion, we
believe the stock is appropriate for long-term investors with a high risk
tolerance. We continue to believe that the market for novel cancer
therapies is sizable enough to support multiple EGFR inhibitors. With a
robust launch for Erbitux ongoing and promising data for Erbitux in head
and neck cancer as well as preliminary promising data in first-line
colorectal cancer and in lung cancer, we believe ABX-EGF has the
opportunity to demonstrate similar results. We remind investors that ABX-
EGF is currently in two pivotal Phase III studies in advanced colorectal
cancer patients that are being conducted by partner, Amgen. As a
reminder, the U.S. clinical study is under a Special Protocol Assessment
(SPA) and therefore, if successful, would be filed with the FDA under a
priority review process. We believe these studies have been on track for
patient enrollment and expect Abgenix to announce the completion of
enrollment later this year or early next year with a targeted filing in
2005. Data from these studies as well as from Phase II studies of ABX-EGF
in lung cancer are not expected until next year. In the meantime, we
believe Abgenix will announce clinical progress from a Phase I study of
ABX-PTH for secondary hyperparathyroidism later this year at medical
forums and a Phase I study of ABX-MA1 also later this year.
We expect Abgenix to report Q2 2004 EPS of a loss of $0.50, compared with the
consensus estimate of a loss of $0.48. Our revenue estimate for the second
quarter is $4 million reflective primarily of contract revenues. 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 (NDA filing
expected to be completed this summer), and AstraZeneca's Iressa (on market)
may generate investor interest in Abgenix.
At this year's American Society for Clinical Oncology (ASCO) meeting, Abgenix
provided updates on two ongoing Phase II studies pertaining to ABX-EGF. The
company presented detailed data from a Phase II study with the antibody as
monotherapy in 150 advanced colorectal cancer patients. The results
reaffirmed a previously observed response rate of approximately 10% in
patients, representing primarily partial responses, and were generally in-
line with our expectations and similar to results observed with Erbitux.
Abgenix also presented interim safety data from an open-label Phase II trial
evaluating the antibody in combination with paclitaxel and carboplatin as a
front-line therapy in non-small cell lung cancer patients. These results
highlighted the preliminary promise of ABX-EGF in this indication with
approximately 26% (5/19) achieving a response rate (1 CR, 4 PR) at varying
doses. Enrollment of 175 patients in the second part of this trial---which
will compare ABX-EGF at a 2.5 mg/kg/week dose with paclitaxel and carboplatin
to those two agents without the antibody---has been completed with results
expected later this year.
Abgenix's ABX-EGF in conjunction with partner, Amgen, has moved into advanced
stages of clinical development. Specifically, pivotal Phase III studies of
ABX-EGF as a third-line therapy in advanced colorectal cancer patients are
ongoing in the U.S. and Europe. Amgen is conducting the U.S. pivotal study
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 achieves the
targeted endpoints outlined in its submitted design. In addition, other
ongoing studies with ABX-EGF include a Phase II study in renal cell carcinoma
and lung cancer.
We are maintaining our Hold rating on ABGX and are reducing our target price
to $14.00 from $22.00 due to a lack of near-term newsflow to generate
investor interest. Our target price of $14 per share is based on applying a
PE multiple of 25-30x and a discount rate of 35%-40% (previously 30%-35%) to
our 2007 earnings of $1.35. The stock has sold off, down 33% since the major
medical meeting, ASCO, in early June. We believe the stock has
underperformed recently due to the lack of sufficient data to support a
differential profile for ABX-EGF (panitumumab) from ImClone/Bristol-Myers
Squibb's Erbitux, which is currently on the market.
We expect newsflow to remain relatively sparse for the remainder of this
year. We expect Abgenix to announce the completion of enrollment for the
pivotal studies of ABX-EGF later this year or early next year with a targeted
filing in 2005. Data from these studies as well as from Phase II studies of
ABX-EGF in lung cancer are not expected until next year. In the meantime, we
believe Abgenix will announce clinical progress from a Phase I study of ABX-
PTH for secondary hyperparathyroidism later this year at medical forums and a
Phase I study of ABX-MA1 also later this year. In our opinion, we believe
the stock is appropriate for long-term investors with a high-risk tolerance.
We continue to believe the market for EGFR inhibitors in cancer is sizable
enough to support multiple players. With a robust launch for Erbitux ongoing
and promising data for Erbitux in head and neck cancer as well as preliminary
promising data in first-line colorectal cancer and in lung cancer, we believe
ABX-EGF has the opportunity to demonstrate similar results.
ABGENIX Q2 2004E 2004E
Total Revenues $4 million $17.3 million
G&A Expense $7.3 million $32.3 million
R&D Expense $39.2 million $157 million
Net Loss $43.8 million $178 million
EPS ($0.50) ($2.01)
Source: SB estimates.
Valuation
We are reducing our target price to $14.00 from $22.00 due to a lack of near-
term newsflow to generate investor interest. Our target price of $14 per
share is based on applying a PE multiple of 25-30x and a discount rate of
35%-40% (previously 30%-35%) to our 2007 earnings of $1.35. The stock has
sold off, down 33% since the major medical meeting called ASCO in early June.
We believe the stock has underperformed recently due to the lack of
sufficient data to support a differential profile for ABX-EGF (panitumumab)
from ImClone/Bristol-Myers Squibb's Erbitux, which is currently on the
market.
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 range of
market capitalizations for this comparative group of antibody companies is
approximately $400 million to $6.4 billion, with the average for the group at
nearly $2.0 billion. 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
a discount market capitalization to the average for the comparative group of
antibody companies due to lack of near-term catalysts.
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. |
