The Arbutus Story Isn't The Recent Win Over Moderna

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  • The biotech sector in the stock market has been on fire lately.
  • Stocks that are involved with potential COVID-19 vaccinations have gone on a big run, with a few gaining over 1,000%.
  • In this write-up, we focus on a company that has been getting a lot of attention lately, but not for the reasons we think it should.
  • The company has substantial catalysts in the near term that, we think, make it a good long trade and a speculative investment for certain risk-averse investors.

Written by Scott Matusow and Danny Cohen

There's been a lot of hype on Arbutus (NASDAQ:ABUS) as of late. The company recently successfully beat back a challenge to their general Intellectual Property (IP) that Moderna (MRNA) claimed was invalid - Moderna lost.

However, we think the real story with Arbutus has to do with their 2 upcoming key milestones. To begin with, the more relevant to us is the upcoming multiple ascending dose study of AB-729 in Hepatitis B infection. Notably, AB-729 demonstrated promising early results in the single ascending dose portion of the study, wherein both the 60mg and 180mg cohorts showed sustained response as measured by reductions in Hepatitis B Surface Antigen (HBsAg). As shown in the chart below, despite only one dose, responses deepened through week 12 for patients on study at both dose levels. This bodes well for the durability in the upcoming multiple dose cohort, who remain on therapy for up to 6 months.

Also, notably the typical pitfalls of a liver targeted RNA drug (in the form of liver toxicity) do not present themselves in this case - none of the patients on study experienced even a transient elevation in liver enzymes.

Chart source:

This relatively benign safety compared to other constructs in this space, coupled with the broad and longer lasting efficacy, is altogether a strong signal for the future of this program. Together, this provides the company options to engage multiple dosing that is spread out enough to avoid toxic events while maintaining better efficacy, or to address additional combinations as is the company's stated goal.

Arbutus is looking to develop other inhibitors against HBV, including their capsid-targeted agent AB-836, which is currently in IND testing. Investors may recall that Arbutus competitor Arrowhead (ARWR) also developed an RNA therapeutic against Hepatitis B, ARO-HBV, and that company's stock has done well over the last few years.

The ARO-HBV program was the subject of a lucrative and large partnership deal in 2018 with Johnson & Johnson (JNJ) for $250M upfront and up to $3.5B on the tail end. Given the early stage of the program at the time, only having just completed a small patient cohort in a multiple ascending dose study, this demonstrates just how valuable an HBV program is at this stage in development.

Many investors have turned their focus to the recent vindication of the '069 patent in court as Arbutus prevailed over Moderna's challenge of their IP. We aren't going to delve into the intricate details of this decision, given that the story is more convoluted than investors may appreciate.

Regarding the current IP situation, we think investors and traders should not expect a deal between Moderna and Arbutus regarding Moderna's COVID-19 vaccine at this time. Moderna is currently on a developmental patent (hence is why Modern is claiming they aren't 'technically' in patent violation now), and there is no reason for Moderna to make a deal right now as their vaccine isn't assured of ever proving to be successful. However, we would expect a deal to potentially emerge when and if Moderna gets its mRNA -1273 through the clinic to approval.

Additionally, Pfizer (PFE) is in co-development with BioNTech SE (BNTX) which has a license from Genevant - here is the convoluted graph in a nutshell:

Source: Evaluate Vantage

We see the above situation as a value addition for Arbutus, but not a main value driver. Some have remarked this is disadvantageous for Arbutus because they may not receive huge revenue from this. However, in our opinion, this view makes little sense as Arbutus can receive additional revenue at a no-cost, risk-free basis - this situation is a value adder, not a subtractor.

The Arbutus IP profile is no longer a question mark as the recent U.S. Patent Office decision frees the company from any challenges on their IP - The Arbutus platform IP is no longer in question. This gives the company leverage to develop and push thru their own products.

Further adding a potential value driver to the Arbutus story are the recently announced efforts to discover a treatment (not a vaccine) for COVID-19.

Arbutus is focusing its efforts on discovery of a nsp12 viral polymerase inhibitor and nsp5 viral protease inhibitor, which, if successful, would be pan-coronavirus targets. This program is being undertaken with the support of the COVID R&D program - this isn't a vaccine for COVID-19, it's a treatment which we believe is the more medically desirable and financially lucrative approach. COVID-19 is a coronavirus, and the current COVID will mutate over time. The Arbutus construct here is being designed to treat all coronaviruses, hence the word "pan." It's worth noting that The Arbutus Chief Scientific Officer (CSO) Mike Sofia has extensive antiviral expertise highlighted by the success of Gilead's (GILD) Sovaldi.

Chart source:

Sofia is no stranger to viral polymerase inhibitors, a class which Sovaldi falls under. Whether this prior success with HCV will translate to COVID-19 remains to be seen, but we believe ABUS's pedigree warrants a stronger look by speculative investors and traders in this space, along with government grantors alike. We like the saying 'once a winner, always a winner,' and Sofia has been a big winner in the past by creating and bringing forth successful drugs out of clinic and into commercialization. We like to bet on winners, and Sofia's Sovaldi has been a huge winner over time.

Valuation Metrics:

Balance Sheet

Total Cash (mrq) 88.1M (March 31st, 2020)
Total Cash Per Share (mrq) 1.23
Total Debt (mrq) 3.29M
Total Debt/Equity (mrq) 4.50
Current Ratio (mrq) 21.91
Book Value Per Share (mrq) -0.97

The company burns about $70M a year, so we expect a capital raise after the data read-out for AB-729 in Hepatitis B. We expect this data read-out sometime in mid-September to mid-October.

Share Statistics

Avg Vol (3 month) 3 7.91M
Avg Vol (10 day) 3 12.01M
Shares Outstanding 5 68.96M
Float 38.37M
% Held by Insiders 1 30.16%
% Held by Institutions 1 35.04%
Shares Short (July 15, 2020) 4 765.1k
Short Ratio (July 15, 2020) 4 0.88
Short % of Float (July 15, 2020) 4 1.49%
Short % of Shares Outstanding (July 15, 2020) 4 1.11%
Shares Short (prior month June 15, 2020) 4 573.42k

Source: Yahoo Finance

The above shows us a pretty good share structure and a very advantageous current market cap of about $250M. We speculate the company's Hep-B platform alone could generate a billion or 2 considering that this market alone is projected to generate upwards of $25B globally by 2025.

Let's take a look at the stock chart as of 8/4/20;

ABUS Chart

The Arbutus chart is showing one of our favorite setups, the pennant formation. In our opinion, the so-called 'hot money' is now out of the stock and the short sellers have run their course, and the hype over the patent decision has substantially died down. Above, we mark where we think the stock is headed in the short term, over $6 a share and potentially higher based on stock market risk-on risk-off conditions. We see a short-term downside risk potential of $3.00 to $3.30 a share, with a chart-indicated downside of $3.45 a share. We base our view on the MACD histogram, money flow, and prior pennant formation setups. A good recent example of a pennant breaker was electroCore (ECOR) that had a very similar setup:

Stock chart source: Etrade

ECOR took a bit longer to develop, but with Arbutus having an earnings call this Friday, we think the chart setup will develop faster here.

Concerning the earnings call this Friday, here is what we think traders and investors should expect and not to expect:

1. Do not expect the company to say much if anything at all about the current IP situation with Moderna. We think the company's lawyers have or will advise company management to stay quiet because of the potential ongoing litigation and/or potential deals being worked on with Moderna and/or other companies that have a vested interest in ongoing COVID-19 vaccine development.

2. Expect to hear something on the company's pan-COVID-19 treatment being developed.

3. Expect guidance on AB-729 to be on track for 2nd half 2020 data update release. Again, we speculate this will be sometime in mid-September to mid-October.

There may be a potential surprise mixed in that rallies the stock, but surprises are just that - do not expect one!

We like this play a lot, but there are risks to consider with this one. With COVID-19 out there and bound to get worse this winter, China geopolitical stress, and the fact this is a speculative play that obviously is not a commercialized pharma yet, the potential longer-term downside is also in play.

If the company is not successful in their Hep-B construct (we think they will succeed in time), it will be stressed to raise the needed cash to continue its developmental pipeline. However, one downside risk being mentioned quite a bit out there isn't real one, in our opinion. Recent articles have stated how the Arbutus stake in Genevant could get substantially diluted. This is correct, but since the company's stake in Genevant is cost-free, even with dilution, the company would potentially receive additional revenue - we see this as an additive value driver.

In a world where COVID-19 is taking hold and coronavirus is here to stay, more attention is being focused on the biotech sector of the stock market. Many biotech stocks have seen tremendous runs, even those that aren't COVID-19 related.

Novavax (NVAX) is one such company that has seen its stock run from $4 a share to upwards of $160 a share in a very short period of time. Because we expect the COVID-19 situation to get worse before it gets better, we could see market downside ahead in September.

However, we also feel COVID-19-related stocks such as Arbutus will remain stable and potentially catch a strong speculative bid because there will remain a substantial Federal Reserve liquidity tap in the markets.

This article was written by

StockMatusow profile picture
Team research and writers are: Scott Matusow; Team Leader, owner and founder of and Dan Cohen, partner, and independent investor/scientist/inventor/trader and lead contributor at Scott is an independent investor/writer/trader and team leader of He has over 20 years of stock market experience which include trading, investing, and managing his family’s trust as well as his personal account. Scott has had the most success in trading/investing in smaller cap growth companies. Because Scott is not 'officially trained' in the markets, he see things outside the box, using his experience to provide clarity and alpha. Scott uses his ability to read situations, emotion, charts, times and sales, historical data, and macroeconomic and other market forces to predict stock price movements, in both short and longer terms situations.. Using these acquired allowed for him to completely divest his own and family's money near the top of the market before the 2008 financial crisis. Dan Cohen is a partner at stockmatusow and entrepreneur in the fields of nanotechnology, medical diagnostics, and energy storage. Additionally, Dan is a Scientist and inventor. He has 7 years of experience investing and trading biotechnology focused equities with a specialty in identifying under-appreciated value in small caps. Dan utilizes his experience reading and reviewing scientific literature to evaluate prospects for success. His work with diagnostics development give him a strong background in immunology which is leveraged in evaluating immunology focused approaches. As well Dan has 5 years trading futures, specializing in E-minis and Treasury products. He utilizes a combination of technical analysis, deep scientific research, and macro views to generate alpha for the team. Places you can follow Scott are: @StockMatusow Places to follow Dan are:

Disclosure: I am/we are long ABUS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: This article is intended for informational and entertainment use only, and should not be construed as professional investment advice. They are our opinions only. Trading stocks is risky - always be sure to know and understand your risk tolerance. You can incur substantial financial losses in any trade or investment. Always do your own due diligence before buying and selling any stock, and/or consult with a licensed financial adviser.

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