It is no secret that 2022, so far, has given nearly all biotechnology investors a brutal beatdown, myself included. The main source of my own portfolio's recent pain has been focused on AbCellera Biologics (NASDAQ:ABCL) and in this article, I would like to explore some recent developments that may have been missed by investors and to explain why I believe shares are increasingly attractive for long term, patient investors.
AbCellera Biologics is primarily focused on discovering and developing preclinical antibody therapeutics in partnership with pharma and biotechnology companies using a royalty model for each partnership that averages roughly 5% per program.
AbCellera believes that it has compiled and integrated a stack of technologies and processes that are unmatched in the industry today and allow it to speed up the development process of antibody therapeutics by up to 2 times as compared to the legacy methods prevalent in the preclinical market today.
The company has shown remarkable and consistent growth in both programs under contract and perhaps more importantly, programs starts since its IPO in December of 2020. Currently, the company has 158 programs under contract, 6 molecules in the clinic and has begun work on 84 of these programs as of March 31, 2022.
This rather dramatic business success has not at all been reflected in the stock price as shares have basically gone straight down since its gangbuster IPO.
It is clear from the above graph that AbCellera successfully priced and executed its IPO at precisely the right time for the company at the height of what can be called the "post COVID bubble".
While the pain for investors who purchased shares at the height of this bubble cannot be overstated, the resulting cash on the balance sheet from the successful IPO is incredibly important for the company and its long term prospects.
AbCellera undoubtedly has a very unique business model. They earn well over 90% of their total revenue from royalties on partnered products. This business model requires them to hold a fortress like balance sheet given the roughly 10 year period between a program start and then recognizing meaningful revenue from royalties of approved drugs in the market.
For AbCellera, an extremely fortunate twist of fate appears to have made this rather unique business model even possible at all. Without the COVID pandemic, and the company's rapid response by way of bamlanivimab and bebtelovimab, I argue that AbCellera likely would have continued as a private company and eventually have been gobbled up by a Charles River Labs (CRL), Thermo Fisher (TMO), IQVIA (IQV) or an ICON (ICLR).
Instead, the company capitalized on this unique opportunity presented by way of COVID through rapidly developing antibody's to fight the pandemic in partnership with Lilly (LLY) which allowed them to both embark on a wildly successful IPO and to employ the non-dilutive financing by way of COVID royalties they now enjoy.
These royalties, along with the IPO financing, have given the company a staggering $786 million cash hoard as of March 31st 2022 with absolutely zero long-term debt.
This significant cash balance is primed to expand even further given the $334 million in receivables on the balance sheet in Q1, thanks to the bebtelovimab antibody. Much of this $334 million in receivables is likely to flow through to the bottom line in Q2 indicating that the cash balance may break the $1 billion level in short order.
In the Q1 earnings call, the company indicated that this robust cash balance will allow the company to fully complete its vision of integrating the tech stack and to allow for completion of the vitally important 130,000 sq. ft. GMP manufacturing facility in Vancouver and provides the company with "well over 3 years" of cash runway.
I personally believe that three years of cash runway is in fact, conservative. The company has a long history of capital efficient operations and I see no reason for this trend to change as the company is keenly aware of the capital required to sustain operations until non-COVID revenues begin in earnest once programs reach maturity.
CEO Carl Hansen sounded almost giddy given the solid foundation of the company amidst the raging storm among other biotech's and reiterated multiple times that the company is now in a period of integration and holds what they believe is an "insurmountable lead" over others in the space and that while they are open to making further acquisitions to expand capabilities, the company is 100% focused on organic development and integration.
Everything that I have seen leads me to believe that the company is now fully funded for the future and that the current cash balance is sufficient to take the company through the next stage of its growth.
AbCellera, during its history has focused nearly exclusively on partnerships in the preclinical development space by helping its partners to discover antibodies in spaces as directed by its partners. The internally developed T-Cell engager announcement opens new avenues for the company to explore in the future.
The T-Cell engager program announcement on April 8th, 2022, was nearly completely unnoticed by the market, however I believe that this could be a watershed moment for the company. In essence the company announced a further page out of the COVID antibody playbook by taking the initiative to address a massive unmet need in the medical field, unprompted.
The company is looking to partner this program, which it claims is the largest panel of CD3 antibodies available anywhere in the industry, out to a company just like it did for COVID, at much higher royalty rates than the 5% it normally receives.
The CEO mentioned in the Q1 call that it has received "A ton" of interest from potential partners and has led to a more than doubling of inbound interest from oncology players throughout the industry.
The company is currently validating the antibodies that it discovered (in only 6 months time) by way of combining them with tumor antigens to prove the potency of the panel before accepting and signing what could be a lucrative partnership agreement for this panel.
The speed and breadth of this achievement is truly remarkable and was completely ignored by the market. The company embarked on this project in November of 2021 and was able to turn around the single largest panel of CD3 antibodies, one of the most exciting fields of current cancer research, in only 6 months time.
It is quite clear that the company will be performing internal research on similarly exciting and unmet needs in the medical community and look to partner these programs at highly attractive royalty rates and financial terms going forward.
It is also clear that the company has abilities that others cannot achieve given that the CD3 field is widely viewed as one of the most promising pathways in cancer immunotherapy and AbCellera just created the largest panel available in only 6 months time.
In addition to the CD3 antibody panel, the company looks ready to embark on a somewhat new partnership structure as indicated by the recent Empirico deal. The company, on May 3rd, 2022, announced an additional 2 programs signed with Empirico along with the option to co-invest in development on a program by program basis.
This new structure applies to the full 7 target suite of molecules that the company is slated to develop and could see AbCellera owning up to 50% of a given program, massively increasing the downstream participation in the program's success.
What I really like about this structure is that the company can pick and choose the programs with the best possibility of success and importantly, at different points in the molecules development. This option allows the company to meaningfully expand their own participation in the downstream success on a strategic basis.
Both of these developments seems to have been completely missed by the market and yet both of these appear to be wildly positive for the future of the company.
It would certainly appear that insiders at AbCellera have been paying very close attention to these developments. Shortly after the Q1 earnings release, CEO Carl Hansen bought a whopping 1,708,468 shares in the open market via Thermopylae Holdings LTD, CFO Andrew Booth bought 85,000 shares and COO Veronique Lecault purchased 200,000 shares.
After these purchases, Carl Hansen now owns nearly 20% of the company with Ms Lecault owning 3.2% of the company and Mr Booth boosting his holdings by more than 180%. Combined insider ownership now equals over 27% of the company.
As we know, insiders sell for many different reasons but they only buy for one. They clearly believe in the company and in the long term return potential of the shares. This extreme vote of confidence exhibited by senior management likewise appears to have went largely unnoticed by the market.
This may sound insanely counterintuitive given the share price has only gone straight down since my initial purchase, but I am extremely pleased so far with my investment in AbCellera. The company is performing absolutely wonderfully on nearly every metric and its prospects have truly never been brighter.
Frankly, the short term share price declines I have viewed as a welcome opportunity to continue to build my long term position. As of today, the company accounts for a whopping 31% of my aggressive growth portfolio and nearly 5% of my total investable assets with a $10.60 total cost basis.
In my opinion, with the Q1 bebtelovimab royalties, the company has now secured adequate funding to take it perhaps all the way to non-COVID royalties later this decade and has fully funded the vitally important GMP manufacturing facility slated to come online in 2024-25, which should lead to much higher royalties in the future along with perhaps doubling the speed for partners to go from discovery all the way to the clinic.
What AbCellera has built over these last few years is a credit to the hard work and dedication of the scientists, software engineers and management team at the company and of them taking full advantage of the rather extreme luck that the COVID pandemic provided them.
I will continue to build my position in the company, full speed ahead, while shares remain below $10. While I do not expect meaningful returns for some time, I am more confident than ever before in the long-term return potential of this wonderful company.
Let me know your thoughts in the comment section below. Thank you for reading and good luck to all!
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Disclosure: I/we have a beneficial long position in the shares of ABCL either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: "I am not a licensed financial advisor. This is not a solicitation to buy or sell a specific security nor is it to be construed as investment advice, please contact your licensed financial and tax advisor for advice to your specific situation.
This article is an opinion piece only and should not be construed as fact or be represented as such, please perform your own due diligence prior to investing in this or any equity.”