SSB: ABGX: Reports Third Quarter Financial Results
HOLD (2)Speculative (S)
Mkt Cap: $1,148 mil.
October 21, 2003
SUMMARY
ABGX reported a net loss of $43.6MM or $0.50 per share
versus our estimate of a net loss of $29MM or $0.32 per
share, as operating expenses were higher than forecasted
and revenues were lower than our forecast. In terms of
expense items, R&D spending was $36MM, higher than our
estimate of $27MM. SG&A spending of $7.8MM was also
higher than our $6.8MM estimate.
* We are revising our FY03 estimate to incorporate the recent financial trends. Consequently, our FY03 EPS estimate is revised to a loss of $2.10 from a loss of $1.78. Our Q4 2003 EPS estimate is revised to a loss of $0.46 as we have increased our R&D expense forecasts and have lowered our revenue forecast. Our FY04 EPS remains at a loss of $1.42.
* In our view, quarterly earnings results are not the primary driver for the shares, as key focus remains on progress with ABX-EGF.
* We reiterate our Hold rating on ABGX and target price of $17 per share.
FUNDAMENTALS
Revenue (12/03E) $12.5 mil.
Price (10/21/03) $13.07
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 30.1%
OPINION
Today, after the market close, Abgenix reported third quarter financial
results. The net loss for the quarter of $43.6 million or $0.50 per share,
was higher than our estimate of a net loss of $28 million or $0.32 per share
as operating expenses were higher than forecasted and revenes were lower. In
terms of expense items, R&D spending was $36 million, significantly higher
than our estimate of $27 million. SG&A spending of $7.8 million was also
higher than our estimate of $6.8 million. Contract revenues (licensing fees
and milestone payments) were $2.0 million, significantly lower than our $6.5
million estimate.
Abgenix recently received a Drug Manufacturers License from the State of
California, Food & Drug Branch, which allows the company to manufacture and
ship clinical material from this facility. As a result, the first commercial
runs with the plant as a contract manufacturer for customers is likely later
this year or early next year.
The company ended the quarter with approximately $267 million in cash and
equivalents on its balance sheet using $40 million in net cash in operating
activities. The company reiterated its goal of ending 2003 with a cash
balance of about three times the net cash used in operating activities for
the year.
AstraZeneca collaboration: On October 16th, Abgenix and AstraZeneca
announced a strategic alliance to discover, develop, and commercialize fully
human monoclonal antibodies for the treament of cancer. Under the agreement,
Abgenix and AstraZeneca will discover and develop therapeutic antibodies for
up to 36 cancer targets for which AstraZeneca will hold exclusive worldwide
commercialization rights. In regards to these product candidates, Abgenix
will conduct early clinical trials, process development and clinical
manufacturing, as well as commercial manufacturing during the first five
years of commercial sales, while AstraZeneca will reimburse Abgenix for these
activities at a competitive market rate. Abgenix will receive milestone
payments at various stages during the development process and royalties on
any future sales of these products. In addition, AstraZeneca may select
initial antibodies from Abgenix's existing preclinical oncology portfolio.
Under the agreement, AstraZeneca will be responsible for late stage clinical
development of the portfolio and is granted worldwide commercialization
rights for any developed product. In return, upon the successful
commercialization of these products, Abgenix will receive royalties on sales
of any product that result from this collaboration. The company indicated
that the royalty range will vary for each product based on the level of
sales. Furthermore, Abgenix will be involved in the selection and
development of an additional pool of antibodies, which both companies may
elect to further develop in a 50-50 cost and profit-sharing agreement.
Under the agreement, Abgenix will receive an upfront payment of $100 million
in convertible preferred stock that is convertible into Abgenix shares at an
intial price of $30 per share, a 122% premium over the Ocotober 15th closing
of $13.48. The $100 million convertible security is a zero interest, zero
dividend paying convert with $50 million maturing in seven years and the
remaining $50 million maturing in ten years. Abgenix may also receive an
additional $60 million in convertible preferred stock upon the successful
completion of certain milestones. Of this amount, $30 million will be issued
upon the achievement of one set of milestones and the remaining $30 million
will be issued upon the achievement of a second set of milestones. Although
the company did not disclose these specific milestones, they did indicate
that the payment of the additional $60 million could potentially take place
in several years. Upon the maturity of these convertible securities, if
AstraZeneca does not convert the shares, Abgenix has the option to repay
these securities in cash or convert the securities into shares of Abgenix at
market price at that time.
Revising our financial model. We are revising our financial model for fiscal
2003 to incorporate recent operating results and trends. Specifically, our
fiscal 2003 EPS estimate is revised to a loss of $2.10 from a loss of $1.78.
Our Q4 2003 loss estimate is revised to a loss of $0.46 per share versus a
loss of $0.32 per share, as we have lowered our revenue forecast from $7.1
million to $2.0 million and increased our R&D expense forecast to $35 million
from a prior forecast of $28 million. We note that our fiscal 2003 forecast
includes a $0.32 charge from the cancellation of a manufacturing agreement
with Lonza Biologics that was recorded in Q2. Our fiscal 2004 EPS estimate
remains at a loss of $1.42.
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 a key focus. In this regard,
ABX-EGF is a critical product for the company with positive news for this
antibody, in our view, critical for significant appreciation of the stock
The company continues to make progress in its development of ABX-EGF, which
is being explored in four cancer indications: colorectal cancer (as
monotherapy and in combination with chemotherapy), renal cell carcinoma, non-
small cell lung cancer, and prostate cancer. This product is being developed
under a collaborative agreement with Amgen. Under a recently announced
revision to their original agreement, Amgen will take the lead with respect
to decision making for clinical development and commercialization of the
compound. We continue to expect Amgen to conduct an additional study of ABX-
EGF as a monotherapy treatment for advanced colorectal cancer prior to
submitting a regulatory filing for the product. Abgenix indicated that it
believes Amgen may initiate this pivotal trial for ABX-EGF either later this
year or early next year.
ABX-EGF UPDATE
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 Amgen. Under a recently announced refinement of the agreement, Amgen
will 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 the company 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.
At this year's ASCO meeting in May, a preliminary interim efficacy analysis
of the first 44 patients (40 evaluable) enrolled in the ABX-EGF monotherapy
trial showed that treatment with the antibody produced an overall response
rate (ORR or CR (complete response) +PR (partial response)) of 9%, all
partial responses. This response rate is similar to that seen with Bristol-
Myers Squibb/ImClone's Erbitux in the same setting. Treatment with the
antibody was well tolerated and given the advanced stage of disease for these
patients, in our opinion, this response rate is promising. Enrollment of
approximately 100 patients was completed in this Phase II study but it is our
understanding the two companies have expanded and completed the enrollment of
an additional 50 patients to incorporate more patients that had prior
oxaliplatin (Eloxatin) therapy as well as patients with EGFR overexpression
of 1+ versus the prior criteria of 2+ or 3+ levels of overexpression. We
remain relatively cautious with ABX-EGF as we await more detailed data from
this Phase II study. In addition, given the robust data released with
Avastin in front-line therapy for metastatic colorectal cancer, we believe
Avastin will alter the treatment paradigm for these patients and therefore,
may impact the clinical development pathway of the EGF-R inhibitors, such as
ABX-EGF and Erbitux, in advanced colorectal cancer.
The two partners are also conducting another trial in colorectal cancer,
which 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 later this year.
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 2.5 mg/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.
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 has been filed with the FDA), 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. Data from certain of these studies are expected to become
available later this year and during next year.
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 per share. 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, slightly above 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 on par to its
comparables given the more advanced stage of its lead compound.
Consequently, 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.
OTHER COMPANIES MENTIONED:
Amgen -- (AMGN, $63.65, 1M)
I, Elise Wang, hereby certify that all of the views expressed in this
research report accurately reflect my personal views about any and |
