SSB: ABGX: Waiting for Panitumumab-Ph III Data & BLA Expected By Year-end
HOLD (2)
Speculative (S)
Mkt Cap: $610 mil.
April 26, 2005 SUMMARY
* Today, ABGX reported a Q105 net loss of ($42.6MM) or ($0.48)/share vs. our est of ($40.5MM) or ($0.45) due to lower contract rev & higher R&D exps.
* In our view, quarterly results are not the primary driver for the shares as the focus remains on panitumumab's clinical progress. ABGX reported AMGN's initiation of a Ph III 1st-line CRC study using panit. with Avastin. ABGX expects data releases for panit. in 1st-line CRC, NSCLC, and RCC in H205.
* Abgenix continues to plan for a panitumumab BLA filing for adv CRC by year-end and indicated it would release top-line data prior to a submission.
* Based on recent results, our EPS est is fine-tuned to ($1.98) from ($1.99) for FY05. Our '06 and '07 EPS ests are revised to ($1.27) and ($0.69), respectively. We now expect ABGX to achieve profitability in '09 vs. '08 & thus our target price is adjusted to $9 from $11 based on '09 EPS of $0.89. In our opinion, ABGX is appropriate for long-term investors with a speculative-risk tolerance.
FUNDAMENTALS
P/E (12/05E) NA
P/E (12/06E) NA
TEV/EBITDA (12/05E) NA
TEV/EBITDA (12/06E) NA
Book Value/Share (12/05E) $3.83
Price/Book Value 1.8x
Revenue (12/05E) $16.2 mil.
Proj. Long-Term EPS Growth NA
ROE (12/05E) (62.5%)
Long-Term Debt to Capital(a) 59.3%
(a) Data as of most recent quarter
SHARE DATA . RECOMMENDATION
Price (4/26/05) $6.95
Rating (Cur/Prev) 2S/2S
52-Week Range $18.55-$6.54
Target Price (Cur/Prev) $9.00/$11.00
Shares Outstanding(a) 87.9 mil.
Expected Share Price Return 29.5%
Div(E) (Cur/Prev) $0.00/$0.00
Expected Dividend Yield 0.0%
Expected Total Return 29.5%
OPINION
Today, after market close, Abgenix reported financial results for the first
quarter of 2005. The net loss for the quarter totaled $42.6 million, or $0.48
per share, and was higher than our estimate of a net loss of $40.5 million, or
$0.45 per share, as well as the consensus estimate of a loss of $0.47 per
share. The primary reason for the higher-than-expected net loss stemmed from
lower contract revenues and higher R&D expenses related to development work for
panitumumab (ABX-EGF) and ABX-PTH.
Contract revenues, which included licensing fees and milestone payments but no
contract manufacturing revenues, were $2.7 million (down 7% year-over-year) and
below our estimate of $4.0 million. As a reminder, Abgenix's 2005 guidance
does not reflect revenue from contract manufacturing, although the company
indicated its plans to pursue opportunities in this area to use idle capacity.
Contract revenues for the quarter reflected a milestone payment from partner
Amgen related to the advancement of a second fully human monoclonal antibody
(MAb) into the clinic. Abgenix indicated that there are now 10 fully human
monoclonal antibodies derived from its XenoMouse platform technology in the
clinic, six under collaborations. Importantly, Abgenix also recently announced
that Genentech has extended its license to Abgenix's XenoMouse technology for
an additional three years. Genentech had signed a technology license agreement
with Abgenix in 1999 to license the XenoMouse technology for Genentech's
product development activities. The three-year license extension entitles
Abgenix to possible future milestones and fees pending successful clinical
development milestones for Genentech. Abgenix may also receive royalties on
any products, which reach commercialization. As part of the deal, Genentech
also purchased less than one percent of Abgenix common stock under a private
placement, which is expected to be registered at a future date. We believe
this latest technology license extension by Genentech endorses the value of
Abgenix's XenoMouse technology.
Overall, operating expenses of $44.9 million were slightly higher than our
estimate of $43.1 million primarily due to higher R&D expenses. In particular,
R&D and manufacturing start-up expenses totaled $37.8 million and included $2.0
million related to manufacturing start-up expenses of the antibody production
facility. Our total R&D expense forecast was $35.1 million. G&A spending of
$5.7 million was lower than our estimate of $6.5 million and reflects the
company's ongoing expense control initiatives.
The company ended the quarter with a cash balance of $401 million, which
reflects the $300 million raised from the convertible debt offering in December
2004. The company indicated that the net cash used in operating activities
during Q1 2005 was $15.2 million with capital expenditure spending totaling
$1.3 million. During the quarter, Abgenix did draw down an additional $14.7
million on its $60 million credit line from development partner, Amgen. The
company indicated that the outstanding principal amount of the credit line is
$39.8 million (excluding any interest). The interest rate on this credit line
is 12%.
Strategic Review. Since arriving at Abgenix in September 2004 as the new CEO,
Bill Ringo has been conducting a strategic review of the company's operations,
a practice typical for a newly appointed CEO from outside the company. Today,
Mr. Ringo indicated that the company is completing its internal review and
beginning the rollout of a plan focusing in three areas: building the pipeline;
managing cash; and improving productivity. He expects to share more details
about this plan in the coming months. One of the key decisions of this ongoing
strategic review includes whether Abgenix should pursue the co-promotion option
it has with Amgen for panitumumab. The company expects to reach a decision by
the end of 2005, if not sooner.
Importantly, Mr. Ringo reiterated the company's commitment to fulfilling its
obligation of manufacturing the monoclonal antibody, panitumumab, for the joint
venture with Amgen. As a reminder, under the current agreement with Abgenix,
Amgen is leading the clinical development program and commercialization efforts
for the compound. Abgenix will have responsibility for the manufacture of both
clinical and early commercial supplies of the antibody. Today, Mr. Ringo
indicated that the Abgenix facility is currently producing conformance lots
needed for the BLA submission. The companies will continue to share the costs
of the program and worldwide operating profits on an equal basis. Abgenix
indicated it was comfortable with its ability to support its share of the 50/50
cost-sharing arrangement even as panitumumab begins to enter other clinical
development initiatives with Amgen to study the drug candidate in earlier
settings of CRC as well as other indications.
Progress on Panitumumab (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. Instead, continued progress of the company's late-stage
clinical pipeline remains the key focus. In this regard, Abgenix's panitumumab
(ABX-EGF), a fully human monoclonal antibody targeted to the EGF receptor for
cancer, has moved into advanced stages of clinical development in conjunction
with partner Amgen. Specifically, pivotal Phase III studies of panitumumab as
a third-line therapy in advanced colorectal cancer patients are ongoing in the
U.S. and Europe. On March 18th, the companies announced the completion of
patient enrollment in the European study. 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. 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. While the exact
details of the pivotal study for panitumumab 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.
During its January analyst meeting to report year-end results, Amgen indicated
that it met with the FDA in December 2004 and received a favorable opinion as
to the registration plans for panitumumab. Specifically, as clarified by
Abgenix, the FDA is willing to accept data from one pivotal study, such as the
European study, for a complete BLA filing. Abgenix and its partner would then
subsequently file data from other studies, although Abgenix indicated that this
would be supplemental data and would not be required for a regulatory decision.
Thus, we expect Abgenix and its partner Amgen to initiate a regulatory filing
with the FDA late this year with the European data as the partners announced
enrollment completion in the European study on March 18th, 2005. Abgenix
indicated that top-line results from this study are likely to be released in
advance of this filing. The Phase European III trial is a randomized,
controlled clinical trial that enrolled approximately 463 patients in Europe,
Australia and Canada to evaluate the effectiveness of best supportive care plus
panitumumab as a stand-alone therapy administered every other week versus best
supportive care in patients with spreading colorectal cancer who have failed
standard chemotherapy. The partners may then supplement the filing with the
U.S. study results when available. As a reminder, enrollment in the U.S. Phase
III study slowed with the approval of ImClone/Bristol-Myers Squibb's Erbitux, a
competing monoclonal antibody in advanced colorectal cancer, as well as with
the approval of Genentech's Avastin, but has been proceeding.
As mentioned, Abgenix indicated that top-line results from the European Phase
III study will be released prior to the filing late this year with the detailed
data presented at a medical meeting, which we believe may be the American
Society of Oncology (ASCO) meeting in 2006. In our opinion, positive top-line
results and a regulatory submission would be key catalysts for the stock. We
note that our physician panel on solid tumors convened at the Smith Barney
Healthcare Conference in March 2005 suggested the possibility that panitumumab
could replace Erbitux as the EGFR monoclonal antibody of choice if it
demonstrates equivalent efficacy to ImClone/Bristol-Myers Squibb's Erbitux.
This is primarily due to the lower infusion reactions (better safety profile)
and potentially greater administration flexibility with panitumumab as compared
to Erbitux.
Upcoming Panitumumab Data Releases. Besides the pivotal Phase III studies in
third-line colorectal cancer (CRC), Abgenix is pursuing studies of panitumumab
in renal cell carcinoma, front-line non-small cell lung cancer (NSCLC), and
front-line CRC as part of its strategy to expand the drug's possible
opportunities. Phase II results in these three additional indications are
expected to be released in H2 2005 with details presented at appropriate
medical meetings yet to be announced. Incremental data of panitumumab from a
Phase II study of the monotherapy regimen in colorectal cancer and a Phase I
dose and schedule study in solid tumors are expected to be presented at the
upcoming American Society of Clinical Oncology (ASCO) meeting scheduled for May
13-17.
As a reminder, Abgenix presented updated pharmacokinetic and preliminary
efficacy and safety data from a single-arm study of panitumumab with an
irinotecan-based chemotherapy regimen, including both the Saltz and FOLFIRI
regimens, at the 29th European Society for Medical Oncology (ESMO) Congress in
Vienna, Austria last fall. Panitumumab in combination with chemotherapy is
being utilized as a front-line treatment in metastatic colorectal cancer.
Preliminary interim data from an open-label Phase II study assessing the
combination of panitumumab and the Saltz chemotherapy regimen as a front-line
therapy in colorectal cancer was presented at a medical meeting. Data was
presented on the first 19 patients and suggest preliminary evidence of anti-
tumor activity as a front-line treatment. The results indicated a 47% response
rate with a median PFS of 8.2 months and median overall survival of 16.4
months. In our opinion, these results appear to be similar to initial efficacy
data of Erbitux + FOLFIRI. Data for Avastin + Saltz in this setting was a
median overall survival of 20.3 months (+4.7 month benefit). While
encouraging, the results to date represent a relatively small number of
patients in an uncontrolled and open-label study. Data from the second part of
the study, which enrolled 24 patients treated with panitumumab with FOLFIRI,
are expected in the second half of 2005. The company is encouraged with the
results to date but highlighted that the data represents a relatively small
number of patients.
Abgenix is studying front-line NSCLC in a two-part Phase II. Interim results
from part one showed panitumumab was well tolerated with chemotherapy. Five of
19 patients showed response (1 complete, 4 partial). The median time to
progression was six months and median survival was 17 months. Part two of the
study is a randomized, controlled comparison of panitumumab with paclitaxel and
carboplatin versus paclitaxel and carboplatin alone. Patients in the non-
control arm will receive 2.5 mg/kg of panitumumab weekly. The study is fully
accrued with 175 patients and will examine time to tumor progression (primary
endpoint), response rate, and survival.
Patient enrollment in the second part of the ongoing study of panitumumab as a
monotherapy in renal cell carcinoma has been completed. The first part of the
renal cell carcinoma study was published in the August 2004 issue of the
Journal of Clinical Oncology and highlighted the modest effect panitumumab as a
monotherapy had on advanced renal cell carcinoma patients.
Initiation of the PACCE study -- Panitumumab + Avastin. Abgenix's partner
Amgen previously indicated that preclinical studies of the combination of
panitumumab and AMG 706, a multi-targeted kinase inhibitor, have demonstrated
more potent activity than each compound alone and has already begun clinical
studies with this combination therapy. In its earnings conference call in
April, Amgen indicated that the company initiated a combination study with
panitumumab and Genentech's Avastin for the treatment of first-line colorectal
cancer. Today, Abgenix and Amgen announced that enrollment has already begun
in this study, which is called the PACCE or Panitumumab Advanced Colorectal
Cancer Evaluation study. This trial is a randomized, multi-center, open-label
study that is targeted to enroll approximately 1,000 patients to evaluate the
potential benefits of adding panitumumab administered every other week to
Avastin and either oxaliplatin or irinotecan-based chemotherapy for the first-
line treatment of metastatic colorectal cancer. The endpoints for this study
include progression free survival, response rate, and survival time.
Reiterates Fiscal 2005 Guidance. The company expects revenues to continue in
the same range as fiscal 2003 and fiscal 2004, noting these revenues will
predominantly come from milestone payments and fees from partners. This
guidance does not reflect revenue from contract manufacturing. Net cash used
in operating activities in fiscal 2005 is projected to be in the range of $105-
$120 million inclusive of capital spending (compared to $135-$150 million in
fiscal 2004). Abgenix plan is to keep enough cash on hand to cover at least
two or more years of operating expenses. The company is targeting to become
cash flow positive in the 2008-2009 timeframe although the achievement of this
objective will be dependent upon the successful market launch of panitumumab.
Expense control remains a top priority for the company. The company is
planning on reducing the operating cash burn rate in fiscal 2005 as compared to
fiscal 2004 with cost containment primarily in the G&A area representing a
primary means of achieving this objective. Abgenix expects operating expenses
in the range of $185-$200 million reflecting continued R&D expenditures to
support the development of panitumumab and pipeline products with reductions in
G&A spending.
Fine-tuning our Financial Model. Given the company's recent financial results,
we have fine-tuned our financial model for fiscal 2005. Specifically, we have
revised our total revenue estimate to $16.2 million from $17.5 million. We
have increased our operating expenses to $189 million from $187 million with
our R&D expense estimate revised to $158 million from $155 million and our G&A
expense estimate to $25.3 million from $26.2 million. Consequently, our net
loss and EPS estimates are adjusted to a loss of $177 million or ($1.98) per
share from $178 million or ($1.99) per share for fiscal 2005.
We have also revised our financial model for later years with our net loss
estimates adjusted to a loss of $121 million or ($1.27) per share from $114
million or ($1.19) per share for fiscal 2006 and to a loss of $66.8 million or
($0.69) per share from a loss of $29.6 million or ($0.31) per share in fiscal
2007. This reflects increased operating expenses associated with expanded
development efforts for panitumumab and other pipeline products as well as
increased SG&A expenses assuming Abgenix pursues its co-promotion option for
panitumumab. As a result, we are now assuming the company will become
profitable in fiscal 2009 instead of in fiscal 2008. Thus, our EPS estimate is
revised to a loss of $3.4 million or ($0.03) per share from a profit $95.7
million or $0.93 per share for fiscal 2008 and we are introducing our fiscal
2009 estimate of net income of $91.3 million or $0.89 per share driven by the
market launch of panitumumab.
Revising Target Price to $9 from $11. In order to value the company, we have
utilized a discounted earnings analysis and applied a discount rate and PE
multiple that we believe is representative of a high growth biotechnology
company with a Phase III program, to a projected EPS estimate for the company.
Our restructured financial model suggests the company will now achieve
profitability in fiscal 2009 versus fiscal 2008. Thus, our target price is
revised to $9 from $11 per share. Our target price of $9 per share is based on
applying a P/E multiple of 30-35x (unchanged from our prior assumption), which
we believe is comparable to the range for small-cap therapeutic companies with
significant growth prospects, and a discount rate of 35%-40% to our 2009
earnings of $0.89.
PIPELINE UPDATE
ABX-PTH (or ABX10241). In February 2004, 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 (SHPT), a chronic disorder that is observed in patients
with chronic kidney disease. The company believes this compound has a
differential profile compared to other products, such as Amgen's Sensipar, as
the antibody directly targets the parathyroid hormone. Abgenix plans to
initiate a Phase I multi-dose, multi-center study for SHPT in dialysis patients
later this year. Depending on the outcome of this study, the company plans to
initiate a Phase II study in 2006.
Preliminary clinical data was presented at last year's American Society for
Bone and Mineral Research (ASBMR) conference in early October in Seattle,
Washington. Specifically, data was presented from three abstracts covered
preclinical and Phase I studies of ABX-PTH for SHPT. Preliminary results from
an ongoing Phase I study for the treatment of SHPT showed that treatment with
ABX10241 reduced serum ionized calcium and parathyroid hormone levels (PTH)
over a 24-hour period compared to placebo. In addition, the data indicate that
high doses of ABX10241 may appear to suppress PTH to within the desired normal
uremic range for up to 7 days after a single dose. Based on the safety
analysis of the 30 mg dose, higher dose levels are being evaluated.
More specifically, this randomized, double-blind, single dose, dose-escalating
study enrolled hemodialysis patients to randomly receive an IV of either the
antibody or placebo after hemodialysis. Planned dose cohorts include 30, 100,
200, and 300 mg of ABX10241. The starting dose of 30 mg was less than the no-
effect level in preclinical studies. Within each cohort, subjects were
randomized 3:1 to ABX10241 or placebo. The preliminary results from this study
show that treatment with ABX10241 was able to, over a 24-hour period, reduce
serum ionized calcium and parathyroid hormone levels (PTH) compared to placebo
in these patients. In particular, 24 hours post-dose, the mean reduction in
plasma unbound PTH was 45% in the ABX10241 treated group compared with a 12%
reduction following placebo treatment. In addition, the data indicates that
high doses of ABX10241 may appear to suppress PTH to within the desired normal
uremic range for up to 7 days after a single dose. In summary, single 30 and
100 mg doses of ABX10241 administered by IV bolus appear to be safe and well-
tolerated. In addition, treatment to date with ABX10241 resulted in a dose
dependent suppression of unbound iPTH, dose dependent reduction in serum
calcium, and a reduction in calcium x phosphorus product. No human anti-human
antibodies were detected in any subject at any time point.
Table 1: Adverse Events
Subjects Placebo ABX10241 ABX10241
(n=5) 30 mg (n=4) 100 mg (n=8)
One or more AE 2 (40%) 4 (100%) 6 (75%)
Drug-related AE 0 (0%) 0 (0%) 0 (0%)
Severe or maximal AE 1 (20%) 1 (25%) 1 (13%)
Serious AE 1 (20%) 2 (50%) 2 (25%)
Drug-related serious AE 0 (0%) 0 (0%) 0 (0%)
Source: ASBMR 2004 poster
At the 2004 ASBMR meeting, Abgenix also presented data in a poster on one
patient with inoperable parathyroid cancer, which highlighted the potential of
ABX10241 in the treatment of hyperparathyroidism secondary to parathyroid
cancer. As a follow-up to ASBMR, Abgenix also presented two abstracts at the
American Society of Nephrology (ASN) meeting in St. Louis last year.
ABX-MA1. 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 19 late-stage melanoma patients was submitted to AstraZeneca for review as
the Phase I is complete. AstraZeneca had an option on this program and has
decided not to pursue development of this compound. Thus, Abgenix also does
not plan to continue development of ABX-MA1.
AMG 162. AMG 162 is a fully human monoclonal antibody to RANK Ligand generated
with Abgenix's technology platform under an agreement with Amgen. Last year,
Amgen advanced this compound in a large pivotal Phase III program. AMG 162
binds to the RANK Ligand and is being studied for the treatment of osteoporosis
and hormone treatment-induced bone loss in cancer patients.
Detailed 12-month data from a Phase II study of AMG 162 were presented at the
2004 ASBMR annual meeting in October in Seattle, Washington. These data
indicated that AMG 162 demonstrated a rapid and sustained antiresorptive
response. In terms of BMD effects, AMG 162 increased BMD at all anatomic
sites (lumbar site, total hip, distal radius and total body) compared to
placebo. Compared to Fosamax, AMG 162 at doses of 60 mg every 6 months and 30
mg every 3 months achieved greater increases in total hip and distal radius.
Furthermore, AMG 162 at a dose of 30 mg every 3 months achieved a greater
increase in lumbar spine BMD than Fosamax. Dose-dependent increases in BMD
ranged from 4%-6% in the lumbar spine for all the AMG 162-treated groups as
compared to approximately 5% in the Fosamax group after 12 months of treatment
and 2%-4% in total hip in all the AMG 162-treated groups as compared to 2% in
the Fosamax group after 12 months of treatment. These increases were noted as
early as one month after dosing with AMG 162. Increases in BMD measurements
suggest the potential for reduced risk of fractures. Fracture prevention is
the primary goal in the treatment of patients with osteoporosis.
In regards to bone turnover markers, decreases in CTx (and confirmed in urinary
NTx measurement) were statistically significantly greater than Fosamax (p =
0.0001) through month 2 and in the three highest dose groups for AMG 162
through month 4. The study demonstrated that serum CTx was suppressed much
faster with AMG 162 than Fosamax within 3 days of treatment. In particular,
after 3 days of treatment, patients that received AMG 162 experienced a
decrease in serum CTx of approximately 75%-80% relative to baseline compared to
a decrease of approximately 20% relative to baseline in patients receiving
Fosamax.
In regards to safety, AMG 162 was well-tolerated with no differences among AMG
162, placebo or Fosamax in terms of adverse events, serious adverse events, or
withdrawals due to adverse events. Furthermore, there was no evidence of a
dose relationship of AMG 162 and adverse events and no evidence of a negative
effect of AMG 162 on the immune system. In addition, AMG 162 appeared to have
an improved safety profile compared to Fosamax. Dyspepsia or indigestion was
the most common adverse event and occurred most frequently in the Fosamax group
(20%) compared to patients in the placebo (4%) or AMG 162 group (5%). One
patient treated with 14 mg of AMG 162 had a transient and asymptomatic decrease
in serum calcium. In addition, transient non-neutralizing antibodies to AMG
162 were detected in two subjects.
AMG 162 Mean Percent Change From Baseline at 12 Months (*)
Parameter Placebo AMG 162 AMG 162 AMG 162 AMG 162 Fosamax
(14 mg) (60 mg) (100 mg) (210 mg)
Lumbar Spine -1% +3% +4.2% +5.5% +4.8% +5%
Total Hip 0% +1.8% +3.5% +2% +2.1% +1.9%
Distal 1/3 Radius -2% +1% +1.2% +1% +1.5% -0.5%
Total Body 0% +0.8% +2.3% +1.9% +2% +1.5%
(without head)
Serum CTX 0% -20% -60% -75% -75% -75%
Bone-spec ALK 0% -50% -60% -70% -60% -60%
Phos.
* represents estimates of changes from baseline from graphs.
Source: ASBMR meeting -- presentation by M. McClung.
In conclusion, AMG 162 increased BMD at trabecular and cortical bone sites in
postmenopausal women with low bone mass. Compared to Fosamax, BMD efficacy
with AMG 162 was greater at sites of predominantly cortical bone. This
suggests that AMG 162 may have the potential to provide an improved impact on
the risk of nonvertebral fractures (e.g., hip). Based on bone turnover marker
changes, AMG 162 demonstrated potent antiresorptive properties. In general,
the effects achieved with AMG 162 were rapid, reversible (as noted with lower
doses) and persistent. There did not appear to be any cumulative effects or
attenuation of effect with a second dose of AMG 162 based on changes in bone
turnover markers. In addition, AMG 162 was generally safe and well-tolerated.
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. As a reminder, Abgenix will
receive single-digit royalties on product sales for AMG 162.
Pfizer Collaboration. There are currently two programs that have been advanced
into clinical studies, which include targets to CTLA4 and the IGF-1 receptor.
Preliminary promising Phase I data of Pfizer's anti-CTLA4 monoclonal antibody
in melanoma was also presented at last year's ASCO meeting.
AstraZeneca Collaboration. In terms of earlier stage programs with
AstraZeneca, Abgenix has selected 17 targets for further development to date
out of the goal 36 targets in the three-year collaboration.
Abbott Collaboration. Abgenix previously indicated that Abbott exercised a
commercial license from one of its targets under their collaboration.
CuraGen Collaboration. Abgenix reported that CuraGen plans to move CR002,
which is in development for treatment of kidney inflammation, into a Phase I
study before the end of this year. In addition, CuraGen foresees advancing
CR011, another XenoMouse antigen, into the clinic by 2006. Abgenix will
receive milestones from both of these candidates as they move into clinical
development and is entitled to royalties on both products presuming they reach
the market.
Pre-Clinical Development Programs. Abgenix indicated that it now has 15
oncology and inflammation projects ongoing and expects potential INDs
(Investigational New Drug applications) to initiate human clinical studies to
be filed in the next 18-24 months for two inflammation candidates.
INVESTMENT THESIS
We rate the shares of Abgenix (ABGX) Hold/ Speculative Risk (2S) with a target
price of $9 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 panitumumab (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, is conducting a number
of clinical studies of panitumumab in three cancer indications: colorectal
cancer, renal cell carcinoma, and non-small cell lung cancer. The pivotal
Phase III program for panitumumab is focused on the development of panitumumab
as a monotherapy in refractory colorectal cancer patients. Enrollment in the
U.S. study has been slower than planned due to the availability of Erbitux and
Avastin on the market while enrollment in the European study is complete. The
company and its partner, Amgen, continue to expect a BLA filing by year-end.
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.
VALUATION
In order to value the company, we have utilized a discounted earnings analysis
and applied a discount rate and PE multiple that we believe is representative
of a high growth biotechnology company with a Phase III program, to a projected
EPS estimate for the company. Our restructured financial model suggests the
company will now achieve profitability in fiscal 2009 versus fiscal 2008.
Thus, our target price is revised to $9 from $11 per share. Our target price
of $9 per share is based on applying a P/E multiple of 30-35x (unchanged from
our prior assumption), which we believe is comparable to the range for small-
cap therapeutic companies with significant growth prospects, and a discount
rate of 35%-40% to our 2009 earnings of $0.89.
We have also assessed Abgenix's valuation using a discounted cash flow (DCF)
analysis. Our DCF analysis assumes a time horizon of 10 years, with 2014
serving as our year for assessing a terminal value. Our estimate for a
weighted average cost of capital (WACC) is 11%. Our cost of equity assumes a
beta of 1.30, a market risk premium of 5.0%, and a risk free rate of
approximately 4.50%. We have also applied a terminal growth rate of 6.0%.
Using this approach, we arrive at a target price of approximately $9 per share.
RISKS
We believe a Speculative Risk rating is warranted for Abgenix given the
company's dependence on panitumumab (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, the author of this report, hereby certify that all of the views
expressed in this |
