LLY - AbCellera Biologics: COVID Antibody Set To Provide Continued Funding

• AbCellera Biologics reported Q2 numbers that were not all that impressive; however, the news of the commercialization agreement its partner Lilly inked has driven shares to near YTD highs.
• The commercialization plan looks to provide AbCellera with continued non-dilutive funding to further build its now $1 billion cash war chest.
• The CD3 assets are set to be proved out over the next 12 months, with a plan to partner these targets in a similar fashion to the COVID antibody partnership.
• The stock has run hard over the last few months and may be set to take a well-earned breather; however, I continue to view shares as attractive for risk-tolerant, long-term investors.

Well, the last 3 months have been pretty darn satisfying if you are a holder of AbCellera Biologics ( ABCL ). Shares have rocketed from the lows of $5.44 reached in mid-May, up over 250% to the current $13.68 level.

To be clear, the stock still remains down a whopping 72% from the IPO opening trade of $49.22, however progress is progress. With AbCellera now dominating nearly 40% of my speculative portfolio at an average cost basis of $10.57, I must admit to feeling a certain sense of satisfaction holding a paper gain of 30% with a chart that looks like this.

So, what happened? Well, Q2 results were released on Tuesday August 9th, and while the numbers reported were not exactly "refrigerator door" quality, it appears that the conference call, and in particular, comments by the CFO Andrew Booth, left investors giddy for the near term future in regards to the potential for continued COVID antibody royalties via Lilly's ( LLY ) commercialization plan.

Mr. Booth stated the following on the conference call (Author corrected spelling for context in transcript)

We continue to report six molecules in the clinic for our molecules at a commercial stage, a us government purchase order for 150,000 doses of bebtelovimab was received and partially fulfilled by our partner, Eli Lilly during June of 2022. This contributed meaningfully to our Q2 results. In addition, Lilly recently announced that they will begin commercial sales of bebtelovimab to states, hospitals and other healthcare providers starting this month. We would expect this arrangement to enable the use of bebtelovimab in the future.

According to US, HHS data bebtelovimab has recently been administered at an average rate of approximately 4,000 doses per day within the United States.

Looking ahead to the remainder of 2022, we expect continued strength in research fees and the majority of total 2022 revenue to be derived from royalties on COVID antibodies, Lilly sold and shipped over 670,000 doses of bebtelovimab to the us government.

In the first half of 2022, we expect this to reach 750,000 doses cumulatively in Q3, given the current confirmed orders by the US government, the new arrangement of commercial sales by Lilly of bebtelovimab to state's hospitals and other healthcare providers starting this month is expected to result in additional royalties to accelerate. And we will be watching that closely as usage normalizes in the coming months and quarters.

As a reminder, under our agreement with Lilly, we are entitled to receive royalties in the mid-teens to mid-twenties on sales of bebtelovimab.

As we, I think have said quite consistently on the pricing previously, the government purchase orders were at about $1,800 a dose for bebtelovimab, we noticed in the recent release that the new pricing is at $2,100 a dose for, for how doses are going out under this new commercial arrangement through with Eli Lilly selling directly to states. So that's just another data point that we've also seen in the publicly available information.

The key items of note in the above are the following:

1. 80,000 doses of bebtelovimab as part of the US government order are likely to be booked in Q3.
2. An average of 4,000 doses of bebtelovimab per day are currently being used to treat COVID-19.
3. Mid-teens to mid-twenties royalty rates are earned for bebtelovimab.
4. Pricing has been set at $2,100 per dose of bebtelovimab by Lilly.

So what can we glean from all of this? It certainly appears that the COVID antibodies will continue to pay dividends for the company for some time to come as long as it remains effective.

To illustrate this point, let's play out the rest of 2022 using the above information and by making some assumptions.

The company has clearly indicated that 80,000 doses of bebtelovimab remained to be delivered to the US government at quarters end, meaning at $1,800 per dose, this is $144 million in revenue to Lilly and $28.8 million due to AbCellera using a 20% royalty rate.

In addition, if usage remains at 4,000 doses per day in the US at a $2,100 price point and beginning non-government contract commercialization on August 15th, that leaves 138 days left in the year, or potentially 552,000 doses to sell.

552,000 doses at $2,100 each equal $1,159,200,000 in revenue to Lilly and $231,840,000 due to AbCellera. This puts a potential total of over $260 million more in COVID royalties within reach of the company, this year. This calculation can be extrapolated out over 2023 to reach an additional $613 million if similar usage (unlikely) holds into the following year.

I know that personally, I did not have nearly any COVID royalties baked into my thinking after this quarter as I had assumed, wrongly, that the antibodies were not used much in the clinical setting since the advent of Paxlovid from Pfizer ( PFE ), but it does appear that the potent antibody does still have a place in the toolshed for medical professionals.

AbCellera is certainly in the driver seat regarding COVID antibodies as it is truly the last one standing. According to AbCellera, bebtelovimab is the only antibody therapy that remains effective to all currently circulating variants.

I do not want to overstate the potential royalties that can be earned by the company; however, this pandemic has proven to be quite adept at sticking around and remaining dangerous, which bodes well for AbCellera in the near term given the effectiveness of its treatment.

CD3 potential

In addition to the good news regarding future COVID royalties, the company seems to finally be getting some recognition for its fantastic work on the internally developed CD3 panel of antibodies.

In November of 2021, AbCellera decided to take on the challenge of developing, in house, a complete panel of CD3 antibodies, which is widely considered a promising new avenue in the development of T-cell engagers for cancer treatments.

In a period of only 6 months, the company announced to the world that it had created and validated what the company believes is the world's largest panel of over 200 unique antibodies that bind broadly across multiple sites on the CD3 complex.

Importantly, the company stated that it sees properties in the lab that indicate its panel effectively kills tumor cells with no, or very low cytokine release, suggesting that these molecules could overcome a key hurdle in the clinic today. The company is now actively developing this panel against two known tumor antigens in solid tumors, with further data to be shared over the next 12 months.

This playbook should be very familiar to investors in the company as it is nearly identical to the COVID antibody development, only on a more standard drug development timeline. The company will look to partner these antibodies at a more advanced discovery stage, thus garnering potentially a much higher royalty rate than the standard 5% they earn from traditional partnerships.

This specific program will play out over time, however, it is very encouraging that the company is choosing to focus on highly differentiated programs, where it believes it is best in class, to extract additional value. GPCR's and ION channels appear to be next up on the list for the company to develop in house.

Valuation

AbCellera is certainly extremely hard to value from a traditional method given it has such a long fuse from program initiation to recognizing value in the form of royalties, however, with over $1 billion in cash on hand, with no debt, along with the prospect of continued COVID royalties for some time to come, shares were due for a bounce.

Currently, the company has a $3.9 billion market cap and an enterprise value of $2.9 billion netting off the cash on the balance sheet. I can see the rationale for the stock to continue to climb, but I can also see a strong argument that it may have risen too fast given that the COVID royalties do likely have an expiration date and are likely to remain lumpy quarter to quarter.

The company's shares tend to trade mostly on sentiment, making near term price predictions almost worthless. I am not a trader so I will not predict what may happen in the next 12 months but as a long-term investor, I continue to view the company extremely favorably in the long term.

Bottom Line

I must admit to being surprised that COVID royalties look set to continue to pour in and may in fact increase near term, this was an unexpected but welcomed piece of news.

I look at every dollar banked today from COVID as future dilution proofing and an avenue to further fund the company's leading tech stack. The company again indicated that they are fully funded for the foreseeable future, a true rarity in biotech today, along with confirming plans to open the CMC/GMP facility in 2024-25, which has the potential to provide non-COVID related revenues and profits.

Investors must continue to keep in mind that significant non-COVID related royalties are still likely many years away, making the stock rather dangerous if you are not willing to play the long game.

Let me know your thoughts in the comment section below. Thank you for reading and good luck to all!

For further details see: