ssb increase price target:
Abgenix (ABGX)
ABGX: Increasing Price Target 2 S (In-line, Speculative)
Mkt Cap: $703.4 mil.
March 27, 2003 SUMMARY
* We're increasing our price target for Abgenix from $7 to
BIOTECHNOLOGY $10.
Ilana Fogelman * We believe the stock price should continue to increase
in the next two months in anticipation of positive
results for ABX-EGF in colorectal cancer to be presented
Elise Wang at the ASCO meeting in late May.
* Potentially positive upcoming news from competitors'
EGFR inhibitors in development could also contribute to
the stock's upward momentum. We're expecting Imclone,
Bristol and Merck KGaA to make a general announcement
about the direction of the Erbitux program in the near
future - possibly tomorrow - based on the results of the
Merck KGaA 007 trial. And FDA's decision on the Iressa
application in non-small cell lung cancer should be known
by May 5th , potentially validating the EGFR class of
agents.
* We have an In-Line rating on Abgenix and we rate
biotech a Marketweight sector.
FUNDAMENTALS
P/E (12/03E) NA
P/E (12/04E) NA
TEV/EBITDA (12/03E) NA
TEV/EBITDA (12/04E) NA
Book Value/Share (12/03E) NA
Price/Book Value NA
Dividend/Yield (12/03E) NA/NA
Revenue (12/03E) NA mil.
Proj. Long-Term EPS Growth NA
ROE (12/03E) NA
Long-Term Debt to Capital(a) NA
(a) Data as of most recent quarter
SHARE DATA RECOMMENDATION
Price (3/26/03) $8.03 Current Rating 2S
52-Week Range $18.98-$4.58 Prior Rating 2S
Shares Outstanding(a) 87.6 mil. Current Target Price $10.00
Convertible No Previous Target Price $7.00
EARNINGS PER SHARE
FY ends 1Q 2Q 3Q 4Q Full Year
12/02A Actual ($0.25)A ($0.49)A ($0.39)A ($0.44)A ($1.54)A
12/03E Current NA NA NA NA ($1.38)E
Previous NA NA NA NA ($1.38)E
12/04E Current NA NA NA NA ($1.39)E
Previous NA NA NA NA ($1.39)E
12/05E Current NA NA NA NA NA
Previous NA NA NA NA NA
First Call Consensus EPS: 12/03E ($1.49); 12/04E ($1.57); 12/05E ($1.70)
OPINION
* In February, Abgenix and Amgen announced that after an interim analysis of
the first 40 patients who received ABX-EGF in their colorectal cancer
monotherapy trial, the companies intended to continue enrollment into the
study.
* We viewed this news favorably as an indication that the ongoing trial was
not negative, and that ABX-EGF must be showing evidence of anti-tumor
activity. However, we caution that the strength of the evidence is still
not known, and there is no guarantee that the data are going to be good
enough. Anti-tumor activity may range from a mere stabilization of the
disease (which per se is not sufficient to support approval of a drug) all
the way through objective responses (which is often used in support of
accelerated approval of cancer drugs).
* We believe that potentially positive upcoming news from competitors' EGFR
inhibitors in development -- Erbitux and Iressa - could also contribute to
the stock's upward momentum. Merck KGaA, Imclone (Not Rated ) and Bristol
are expected to make an announcement about the direction of the Erbitux
program in the near future based on the outcome of Merck KGaA's 007 trial
of Erbitux in colorectal cancer. We do not expect to see the results of
this trial until the ASCO meeting in May, but Merck KGaA may confirm, as
early as tomorrow during their annual general meeting, whether they will
file for Erbitux approval in Europe in the next few months. We also expect
Imclone to announce their plan to meet with FDA to discuss the suitability
of the Merck KGaA trial alone to support a filing for Erbitux in the U.S.
If FDA considers the study suitable, an application for Erbitux could be
filed with the FDA in early H2 2003. In our opinion, in the near term, any
positive development for Erbitux will also reflect positively on Abgenix,
given the similarities between the products (both are antibodies targeting
the EGF receptor, although Abgenix' is fully human). In our view, another
near-term catalyst for the stock will likely be FDA's decision on
AstraZeneca's Iressa, which should be known by May 5th (its extended PDUFA
date). Despite recent reports of pulmonary toxicities and deaths associated
with Iressa in Japan, we still believe that FDA is more likely than not to
grant approval for Iressa in relapsed/refractory non-small cell lung
cancer. Such news would validate the EGF receptor inhibitor class, and we
believe Abgenix' stock could also appreciate on the news.
* As a result of the various catalysts discussed above, we believe that
Abgenix' stock price should continue to increase in the next two months in
anticipation of the ASCO meeting in late May. Therefore, we're increasing
our price target for the stock from $7 to $10.
* We have an In-Line rating on Abgenix and we rate biotech a Marketweight
sector.
ABX-EGF
ABX-EGF is a fully human antibody that belongs to a new class of anti-cancer
agents, the EGF receptor inhibitors. It is being developed in collaboration
with Immunex/Amgen in a 50-50 cost and profit sharing agreement. We expect
the results of the phase II trial of ABX-EGF in colorectal cancer at the next
ASCO meeting, which will start on May 31st in Chicago. Overall, five trials
of ABX-EGF in four indications are underway. They are as follows:
Colorectal cancer--- Two trials of ABX-EGF are ongoing in colorectal cancer.
The first trial is designed to assess the safety and efficacy of the product
as monotherapy in 100 patients with metastatic colorectal cancer who have
previously failed chemotherapy. The trial is a multi-center open-label phase
II study evaluating tumor response rates in patients receiving 2.5 mg/kg of
ABX-EGF intravenously on a weekly basis over an 8-week treatment cycle, for
up to 6 cycles. An interim analysis of the first 40 patients was recently
completed and supported the continuation of the trial. Preliminary data from
this trial will be presented at the ASCO meeting. The second colorectal trial
is designed to assess the safety and efficacy of ABX-EGF in combination with
standard chemotherapy, as first-line treatment in patients with metastatic
colorectal cancer. This multi-center, open-label phase II study will enroll
up to 84 patients. Patients will receive weekly intravenous infusions of 2.5
mg/kg of ABX-EGF in combination with standard doses of irinotecan,
leucovorin, and 5-fluorouracil (Saltz regimen) over a 6-week treatment cycle,
for up to eight cycles. We expect data from this trial to be available in
2003.
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. 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.
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 initiated. The endpoint of the trial is a 50% drop in PSA.
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. Given the positive interim analysis of ABX-EGF in the
colorectal cancer trial, we have reduced our discount rate from 50% to 45%
and have increased our PE from 25 to 30. We believe, these parameters are in
line with those biotech companies with products in mid-stages of development.
As a result of these changes, our price target has increased from $7 to $10.
We arrived at our price target by applying a PE of 30 to our 2007 earnings of
$1.33 discounted back 45%.
RISKS
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. The company ended the 2002 with $396.5
million in cash, which represents $2.24 in net cash per share.
OTHER COMPANIES MENTIONED:
Amgen -- (AMGN, $57.95, 1M)
ImClone -- (IMCL, $13.01, Not Rated)
INVESTMENT THESIS
Abgenix has a broad patent position in the area of fully human monoclonal
antibodies, a strong management team, a solid business strategy and a rapidly
increasing product pipeline. Abgenix has 4 products in the clinic (2 of them
are being developed by collaborators) and several product candidates in pre-
clinical stages. However, we believe Abgenix will trade in-line with the
industry given the uncertainties surrounding the efficacy of the EGF receptor
inhibitor class of drugs. Abgenix's ABX-EGF is currently in Phase II
clinical studies for colorectal, kidney, lung and prostate cancer.
Monoclonal antibodies are a relatively new class of therapeutics which have
only just begun to realize their commercial potential within the last decade.
Currently, there are twelve MAbs on the market, generating sales of over $2
billion worldwide. We believe the monoclonal antibody space represents one
of the most attractive segments of the biotech industry. With the advent of
the post genomics era, in which scientists are mining the human genome for
insights into the genetic basis of disease, we expect a substantial increase
in the number of validated targets being generated by the genomics industry.
These, in turn, will feed the product pipelines of companies that are
investigating both small molecule therapeutics and antibody-based therapies.
Therefore, we believe that investing in the monoclonal antibody space -
particularly in companies developing fully human or humanized antibodies -
might provide one of the the earliest opportunities to capitalize on the
genomics revolution.
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 aleady
in clinical development. |
