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Gregory Pepin is a co-partner of a Wealth Management company in switzerland. He has a Master of Science degree in Finance and Actuary Science from HEC Lausanne (Switzerland). He also teaches Finance at the University of St. Joseph (Lebanon). Gregory is a strong believer of the Graham Theory that... More
  • AB Science : A lifetime long term opportunity in the Biotech Sector ? 2 comments
    Oct 8, 2010 9:44 AM

    Investing in the Biotech sector is always a very risky bet because usually you face a company that only depends on the success or failure of their actual and upcoming clinical study. Predicting result for a clinical study is very hard because there is many criteria that could lead to success, failure or delay : Safety data, Safety population size, Efficacy data, Efficacy population size etc.
    There is only very few Biotech that don't depend on the success of their clinical study to survive or even grow over the long term. AB Science is one of those.

    Who is AB Science ?


    AB Science is a French Biotech that went public in April 2010 (not at the best time when you consider the Crisis Europe went through in April). They are quoted in the B compartment of the NYSE Euronext which isn't the most well known index for Biotech which explain partly why AB Science isn't well known.
    "AB Science is a pharmaceutical company specializing in the research, development and commercialization of Tyrosine Kinase Inhibitors (TKI), a new class of targeted therapeutic molecules which act by modifying signaling pathways within cells. The company focuses its research on pathologies with high unmet medical need (cancers, inflammatory diseases and central nervous system diseases) in human and veterinary medicine." (Source : AB Science Website)

    What is TKI in the oncology business ?

    TKI is described by many as the future for big Pharma to treat cancer. A very interesting Bloomberg article dated from March 5 2010 mentioned TKI drugs owned by Novartis and Pfizer as miracle drugs (Source). None of the TKI drugs under the helmet of those big pharma are allowed (to my knowledge) for non-oncology treatment due to their safety profile that would be acceptable for oncology but not for non-oncology.
    To date there is only 10 TKI molecule registered (9 of them are owned by big Pharma : Novartis (Imatinib, Nilotinib), Astra Zeneca (Gefitinib), Genentech/Roche (Erlotinib), Bayer (Sorafenib), BMS (Dasatinib), Pfizer (Sunitinib, Toceranib), GSK (Lapatinib)) in it, only one is owned by a non big pharma : :Masitinib that belongs to AB SCIENCE.

    Why Masitinib could be the best TKI in the industry ?

    As stated above, no TKI molecule is allowed in non-oncology treatment due to the safety profile that cannot be acceptable for non-oncology disease.
    Well, it isn't totally true. There is one TKI molecule that has been allowed to pursue clinical study in non-oncology : Masitinib.
    The reason underlying that is the very clean safety profile of Masitinib, as far as today, AB Science TKI molecule is the safest one in the business.
    Along of being the safest one (and the safety population passed the 1000 mark with all the study under plan), based on Phase II trial result, it seems the best one in term of efficacy.

    Just to give some quick Phase II data to show the huge efficacy potential :
    - Oncology treatment :
    Pancreatic Cancer : It is unfortunately the most violent cancer, except if the patient has Steve Jobs version (rare version of Pancreatic Cancer), the patient will most likely died in the next 6 month. There is today only one treatment know which is sold by Eli Lilly
    Over 18 month, AB Science Masitinib Survival Rate was 28 % whereas Gemcitanib product (in the market) survival rate was 10%.

    Gastro Intestinal Stromal Tumour (GIST) : The Bloomberg article (linked provided earlier in the article) called this cancer the Vampire Cancer. There is a standard treatment sold by either Novartis or Pfizer.
    Over 36 Month, AB Science Masitinib Survival Rate was 90% whereas Novartis product (industry standard in GIST) survival rate was 61%.

    Masitinib also showed great result in Multiple Myeloma.

    - Non Oncology treatment :
    Primary and secondary progressive multiple sclerosis : To my knowledge there is no treatment for this type of Sclerosis. It is disease that showed no response to treatment so far and touch a lot of people every year.
    In their Phase II trial, Masitinib received a positive response from Patient on 31% of the case against 0% for the placebo (Placebo group here since there is no treatment for this disease).

    Alzheimer :
    I don't need to elaborate on this, a very recent press release from AB Science will explain by itself what did Masitinib : Link
    Masitinib showed efficacy in the stop or reduction of cognitive decline over 24 weeks. It is a huge result in the fight against alzheimer.

    There is others Phase II data on other indication where AB Science showed great result. I strongly adviced investor to look at the investment presentation provided by AB Science during the IPO roadshow.

    What is underway for AB Science ?

    AB Science has now many project underway :
    - On going Phase III in Pancreatic Cancer
    - On going Phase III in GIST
    - On going Phase III in Mastocytose
    - Autorisation to run a Phase III in multiple myeloma, rheumatoid arthritis, asthma, and multiple sclerosis (link)
    - Positive opinion to run a Phase III in Alzheimer (link)
    - Authorization to run a Phase III in skin Cancer without having to run a Phase II (link)

    Except the Phase III of Alzheimer and the Phase III in Skin Cancer that were unexpected prior to the IPO, all the other Phase III (total of 7) are funded thanks to the capital raise made during the Public Offering.

    The two other Phase III as stated by the CEO of AB Science will either be funded by another capital raise (which wouldn't hurt the investor since it would be a direct value creation for the shareholder and most likely the capital raise would occur far above the actual market price) or later when incomes from actual project would occur.

    What makes AB Science so special ?

    AB Science is special for many reasons :
    - They have multiple Phase III underway in independent application that reduce the risk of failure of not getting an approval at all at the end for any application
    - Top level management and scientific team
    - The management took the very smart approach to spread the safety population size (which is the major element required by agencies to approve a drug) into several application which generates at the endpoint a huge cost reduction.
    - The management took the approach to stay independent and refused every Licensing proposition from Big Pharma since it would destroy value to shareholders. There is not a lot of Biotech that owns their trial alone.
    - The approval in veterinary of their molecule, again without signing with any partner to capitalize in the long term, brings in the mid-term a very solid source of income independent from human clinical data.
    - The veterinary authorization makes masitinib a real molecule and no more a "hope". Masitinib isn't anymore a concept or a project it is now a medical reality with the veterinary approbation.
    - It is the safest TKI in the industry.
    - The company has enough cash to fund 7 phase III
    - The data out of the Phase II were more then impressive in many unmet disease

    How much is valued AB Science now ?


    Right now the Market Cap of AB Science is around 315 MEuros (link). It is the second biggest Biotech in the France behind Transgene that is valued around 520MEuros despite the fact that scientifically AB Science is far more advanced and far less risky then Transgene.
    Also if you think long term, the Veterinary Franchise alone should support the actual Market Cap.
    There is 3 analyst that covers AB Science : Societe Generale, Fortis and ABN Amro. The average short term target price is 19 Euros whereas the stock stands now at 10,50 euros.
    If you read the analysis of those bank you will even find that they are very defensive in their valuation which leads to the interpretation that their target price is also a defensive target price scenario.
    The stock even lost ground on news about successful Phase II result on Alzheimer and approval to run a Phase III in Skin Cancer and 4 others indications.

    Why such an undervaluation then ?

    There is only a small float  (below 10%) which is too low to allow major fund to get in. The reason of the low float is due to the shareholders based (the historical shareholder based) that is compose of long term investor and also the will of the management to keep the majority to avoid any take over.
    Also, I believe that some so-call "investment" fund probably took a position in the IPO probably hoping to quickly profit out of the IPO but the market and the floating shares didn't allow that. Therefore they are using every bit of momentum to get out because they don't have any "investment" mentality which means that they don't think long term or even mid-term they think short term and momentum. It also explain the short term pressure on the stock. But since the management is probably working on improving the liquidity (increase of the float of shares) and I guess due to the higher then usual volume lately, those so-call investment fund that wanted to sell probably will finish soon and after that I expect a huge spike in the stock price.

    Why no big pharma don't try to buy the company ?

    It is simple : Founders and Historical investors that are real entrepreneur (it is great to know there is still people like that in the investment community) owns more then 50% of the company with make a Take Over impossible. However, if the management decided to sell itself they would be able to probably sell this story for a huge upside from the actual stock price. Just pick the purchase of Medarex (that was less advanced) from BMS in September 09 to get an order of idea about the pricing of such company.

    Conclusion

    I believe AB Science is a long term opportunity of a lifetime for Fundamental investor that think long term. The Veterinary Franchise, the safety profile of Masitinib and the data out of the Phase II makes that Biotech a must for any biotech investor. The long term downside risk seems very limited to inexistent (thanks again to the great strategy of the company and the quality of the molecule) whereas the upside potential is just amazing.

    However since it is a very illiquid stock it is important to keep in mind that it is a long term holding. The return on this investment will be huge.

    Upside expected
    - Revenue out of the Veterinary Franchise should continue to increase regularly especially when the company will get FDA approval on their drug (that is more effective and safer then the Pfizer competitor). Today the market gives NO credit to the Animal Franchise whereas it has a tremendous long term value.
    - Data out of the Phase III of Pancreatic Cancer, Mastocytose, GIST etc Starting end of 2011 and throughout 2012. It is already exceptional that Pancreatic Cancer Trial is still underway after a year when you consider the severity of the disease.
    - There is always the potential of licensing out masitinib or the Veterinary Franchise
    - There is others molecule in pre-clinical stage that are under project in AB Science Pipeline

    Due to the Market where it is listed (Euronext B), the low float of shares available now and the overall market condition that has the tendency to ignore great long term stock in favor of short term trading (yes yes I do believe we are in a liquidity bubble in the market where the bull move is due to low cost money and banks focus on generating trading profit and not on fundamental), AB Science is a huge long term opportunity for any investor that looks for great Biotech Story. I do believe AB Science could be the next Amgen or Genentech and Masitinib seems to show so far the potential to be the best TKI molecule in business (it is at least the safest one...) and it isn't own by a big pharma. Just that has a price... Don't you think so ?

    NB  : You can follow the stock here

    Disclosure : Long AB Science and increasing my position regularly




    Disclosure: Long AB Science

    Disclosure: Long AB Science
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Comments (2)
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  • in4thelonghaul
    , contributor
    Comments (344) | Send Message
     
    Sounds promising...seems a no brainer to trade on a US exchange, seeing as they are so illiquid in their domestic setting, in spite of the impressive results to date.
    1 Nov 2010, 10:28 PM Reply Like
  • Gregory Pepin
    , contributor
    Comments (120) | Send Message
     
    Author’s reply » It is true that the US market would be much better and would increase the value right away of the company (thanks to the liquidity increase it would generates) but the problematic aspect :
    The HQ of the company is in France and so as far as i know you cannot have a US listing if you don't have the HQ in the US.
    It wouldn't make sense to do a secondary listing in the US as the float would be then too small.

     

    I think the liquidity issue becomes a true opportunity for people that discover the story
    2 Nov 2010, 10:00 AM Reply Like
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