APLS - Apellis Pharmaceuticals: Maintain 'Buy' Following Astellas' $5.9 Billion Acquisition Of Iveric Bio

2023-05-04 12:20:49 ET

Summary

• Apellis Pharmaceuticals, a commercial-stage biopharmaceutical company, is making significant strides with Syfovre, the first and only FDA-approved treatment for geographic atrophy (GA), a condition affecting millions globally.
• The company's strong financial position, bolstered by a $402.5 million public offering and significant cash reserves, supports its market leadership and future growth prospects.
• The recent acquisition of Iveric Bio by Astellas Pharma could potentially increase competition in the ophthalmology sector, posing a challenge to Apellis.
• Despite potential competition from Iveric's avacincaptad pegol, Apellis' first-mover advantage and comprehensive clinical data underpin its market stand in GA treatment.
• Investors should closely monitor the competitive landscape, upcoming FDA decisions, and the implications of the Astellas-Iveric deal, as these factors could impact Apellis' market position and growth trajectory.

Introduction

Operating as a commercial-stage biopharmaceutical entity, Apellis Pharmaceuticals ( APLS ) is dedicated to the discovery, development, and market introduction of groundbreaking therapeutic solutions. The company's strategy revolves around targeting the C3 protein of the complement system, aiming to tackle diseases that lack adequate treatments. In 2023, the FDA greenlighted their product, Syfovre (pegcetacoplan injection), marking it as the first and exclusive treatment for geographic atrophy ((GA)) - a condition secondary to age-related macular degeneration. GA affects over a million people in the US and five million globally, presenting a significant market potential for Apellis.

Recent news: Iveric Bio ( ISEE ) was acquired by Astellas ( ALPMY ) for $5.9 billion, despite a Bloomberg report a month earlier that suggested Apellis was receiving takeover interest.

In my previous writeup on Apellis, I mentioned that their Syfovre treatment received FDA approval as the first and only GA treatment. Their financial position was boosted by a $402.5 million public offering and a growing global ophthalmic drugs market. I estimated that if Syfovre captures 20% of the US GA patient population, it could generate $2.63 billion in annual sales. Finally, I recommended a "Buy" on Apellis, and since then, the stock has increased by approximately 35%.

This article provides an update to Apellis investors following Iveric's recent acquisition.

Financials

Let's first review Apellis' most recent financial report . Apellis had $551.8 million in cash and cash equivalents as of December 31, 2022, and total revenue of $22.7 million in Q4 2022, primarily from U.S. net product revenue of Empaveli and licensing revenue. For the full year 2022, total revenue was $75.4 million. Cost of sales was $5.6 million, R&D expenses were $387.2 million, and G&A expenses were $277.2 million. Apellis reported a net loss of $166.0 million and $652.2 million for Q4 2022 and the full year, respectively. Apellis completed a public offering of common stock and pre-funded warrants on February 27, raising approximately $402.5 million.

Implications of Astellas' Acquisition of Iveric Bio for Apellis Pharmaceuticals and the GA Treatment Market

Astellas Pharma Inc. and Iveric Bio, Inc. announced on April 29, 2023, that they have entered into a definitive agreement for Astellas to acquire 100% of Iveric Bio's outstanding shares at $40.00 per share, valuing the deal at approximately $5.9 billion. Following the acquisition, Iveric Bio will become a wholly-owned subsidiary of Astellas. According to Astellas, the purchase price represents a 64% premium to Iveric Bio's unaffected closing share price on March 31, 2023, and a 75% premium to its 30-day trading volume weighted average price.

The acquisition of Iveric Bio by Astellas signals a strategic expansion for Astellas into the growing ophthalmology sector. This $5.9 billion deal could potentially increase competition for other players in the market, such as Apellis Pharmaceuticals.

Apellis, however, remains well-positioned due to its pioneering role in geographic atrophy [GA] treatment. Its established market presence and strong brand recognition, backed by comprehensive clinical trial data and the proven safety and efficacy of its product Syfovre, provide a competitive edge.

Nevertheless, Iveric's avacincaptad pegol may pose a significant challenge to Syfovre, with positive results from the GATHER1 and GATHER2 studies. The FDA's decision on avacincaptad pegol in August will play a crucial role in determining the future competitive landscape for GA treatments.

Apellis' recent stock price surge, fueled by rumors of buyout interest from major pharmaceutical companies, highlights both increased competition and its potential as a takeover target. Whether Apellis remains independent or joins forces with a larger entity, its position in the GA treatment market seems secure.

While Apellis' market leadership, financial strength, and product pipeline offer confidence to investors, they must remain attentive to the competitive dynamics, upcoming FDA decisions, and the implications of the Astellas-Iveric acquisition on the market landscape.

My Analysis & Recommendation

As we delve into the future of Apellis Pharmaceuticals, it's evident that the company's focus on innovative therapeutic solutions in the under-served area of geographic atrophy sets it apart. Notably, the FDA-approved Syfovre distinguishes Apellis in the biopharmaceutical sector. However, the path ahead is not without potential hurdles, as demonstrated by the recent acquisition of Iveric Bio by Astellas.

The Astellas-Iveric acquisition is a major factor that could influence Apellis' future prospects. With Astellas expanding its portfolio to include ophthalmology, it acknowledges the increasing importance of this sector, but also intensifies competition for Apellis. Despite this, Apellis holds a first-mover advantage in the GA market with Syfovre, which may help counterbalance this competitive risk. This advantage could enable Apellis to establish a solid brand identity and a loyal customer base prior to the arrival of rival companies.

Financially, Apellis appears to be in a strong position, with a cash reserve of $551.8 million and a successful public offering raising $402.5 million. This healthy cash balance should provide Apellis with the financial flexibility to effectively market Syfovre, continue its R&D activities, and manage its operational expenses, thereby supporting long-term growth.

Despite the possible hurdles, I maintain a "Buy" rating for Apellis. I believe the beneficial (acknowledgment of the expanding GA market) and unfavorable (escalated competition from a larger pharmaceutical company) effects offset each other following the news of the Iveric-Astellas agreement. My optimistic view is justified by the company's sound financial status, market leadership in GA treatment, and the unmet medical need in this field. However, I suggest investors keep a close eye on potential changes in competition and upcoming FDA verdicts, which could significantly impact Apellis' market position and growth trajectory. Although the biopharmaceutical sector naturally entails higher risk, I think Apellis' distinctive position in the GA market and potential for growth justify the related risks.

Risks to Thesis

When the facts change, I change my mind.

Here are some key risks to my bullish thesis:

1. Market Acceptance: While Syfovre is a pioneer GA treatment, its success in the market is not guaranteed. The adoption rate among physicians and patients could be slower than expected, and potential side effects or issues with the treatment not seen in clinical trials could impact its acceptance.

2. Competition: Astellas' recent acquisition of Iveric Bio has the potential to heighten competition within the ophthalmology industry. The introduction of Iveric's avacincaptad pegol, following its approval, may present a challenge to Apellis' market position, particularly if the new treatment proves to be more efficacious or less harmful. Additionally, Astellas possesses greater resources than Apellis, such as cash, which it can leverage to effectively promote their GA drug.

3. Regulatory Risks: The upcoming FDA decision on Iveric's avacincaptad pegol could reshape the competitive landscape for GA treatments. A positive decision for Iveric could dilute Apellis' market dominance.

4. Financial Stability: While Apellis' financial position appears strong, with significant cash reserves and successful public offerings, the company reported a significant net loss for Q4 2022 and the full year. If the company cannot achieve profitability or positive cash flow in the near future, it may need additional funding, which could dilute current shareholders' stakes.

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