ABUS - Arbutus Biopharma Corp.: Long Road Ahead For HBV Cure

Summary

• Arbutus Biopharma Corp. has $191 million cash giving a runway of less than 3 quarters.
• ABUS stock has been reporting net losses since 2013; in 2022, the net loss per share was $0.12.
• It maintains low financial leverage with a debt-to-equity ratio of around 0.015.
• My intrinsic valuation, which averages DCF, comparable firm's P/Es, and EV/EBITDA valuations, produced an estimate for the company's value at negative $5.47, about $8 below ABUS's recent market price.
• I rate the stock a Hold, primarily based on the shares trading higher than my intrinsic value.

Thesis

Arbutus Biopharma Corp. ( ABUS ) has the potential to successfully develop and commercialize its drug candidates for treating chronic HBV infection, as well as the strategic partnerships and financial resources available to support their development and commercialization. In addition, these strategic partnerships with major pharmaceutical companies, such as Johnson & Johnson, also provide the Company with access to additional resources and expertise to further support its drug candidates' development and commercialization. However, all these potential advantages come with the risks associated with investing in a very narrow segment of the biopharmaceutical industry, such as the uncertainty of drug development and regulatory approval.

What do they do?

Arbutus Biopharma Corporation is a clinical-stage biopharmaceutical company specializing in developing innovative therapies that target specific viral diseases, utilizing its extensive virology expertise. The Company's current focus areas include developing treatments for Hepatitis B virus (HBV), SARS-CoV-2, and other coronaviruses.

To address HBV, Arbutus Biopharma is pursuing the development of an RNAi therapeutic, an oral PD-L1 inhibitor, and an oral RNA destabilizer, intending to develop a combination regimen that could potentially provide a functional cure for patients with chronic HBV by suppressing viral replication, reducing surface antigen, and reactivating the immune system. The Company's lead compound, AB-729, is the only RNAi therapeutic with evidence of immune reawakening and is being evaluated in multiple phase 2 clinical trials. It is also engaged in a drug discovery and development program aimed at identifying novel, orally active agents for the treatment of coronavirus (including SARS-CoV-2).

Recent Corporate Performance

The Company had $190.2 million in cash , cash equivalents, and marketable securities as of September 30, 2022, a slight decrease from $191.0 million reported as of December 31, 2021.

In the nine months ending September 30, 2022, the Company obtained a $40.0 million upfront payment (net of withholding taxes) from Qilu Pharmaceutical Co., Ltd. for a technology transfer and license agreement for AB-729 in greater China. The Company also received $15.0 million in gross proceeds from Qilu's equity investment and $9.2 million in net proceeds from the issuance of common shares under Arbutus's "at-the-market" offering program.

For the three months ending September 30, 2022, the total revenue was $6.0 million , representing a significant increase from $3.3 million for the same period in 2021. The increase was primarily due to revenue recognition of $2.3 million from the license agreement with Qilu. Additionally, the Company's debt-to-equity ratio is minimal, with a ratio of 0.015. The Company's debt was $2.6 million, and the equity value was $169.4 million.

The Company's research and development expenses for the three months ending September 30, 2022, were $20.1 million, reflecting an increase of $3.4 million compared to the same period in 2021, where expenses were reported at $16.7 million. The increase in expenses was primarily due to the ongoing AB-729 Phase 2a clinical trials, which incurred higher costs related to the Company's collaborations with Assembly and Vaccitech. Additionally, expenses for the Company's early-stage development programs, including AB-101 and AB-161, increased during this period.

Strengths

Arbutus Biopharma Corp has a promising drug candidate pipeline to treat chronic HBV infection. The fact that Arbutus Biopharma Corp was able to complete enrollment in its Phase 2a clinical trial combining AB-729 with nucleos(t)ide analogue ((NA)) therapy and Peginterferon alfa-2a ((IFN)) is a positive indication of the Company's ability to manage the clinical trial process efficiently. Meeting enrollment targets can be a significant hurdle for clinical trials, so the Company's ability to achieve this milestone suggests it is on track to meet its clinical development goals.

In the pharmaceutical industry, it is common to see companies under clinical trials and phase 2 development being acquired by larger pharma companies to leverage their research and development capabilities. Therefore, these drug trials represent a potentially attractive opportunity for Arbutus Biopharma Corp to be acquired.

The Company has established strategic partnerships with major pharmaceutical companies such as Johnson & Johnson to expand its capabilities and advance its therapeutics. As of September 2022, Arbutus Biopharma Corp boasts a strong cash position, with cash, cash equivalents, and short-term investments totaling $190 million. In addition, given the Company's operating expenses of $23 million, they have less than 3 quarters of runway left.

Weakness

Despite a significant increase in revenue of 58%, the company's financial results for the annual 2021 revealed a higher net loss than the previous year, 2020. The net loss of $76.25 million in 2021, or $0.48 per share, concerns investors despite the revenue growth.

Arbutus Biopharma Corp's focus on a narrow segment of the biopharmaceutical industry may limit its overall growth potential, despite establishing partnerships with other industry players. In addition, the Company's success heavily relies on the approval and revenue generated from its drug candidates for HBV. As a result, it may face significant challenges if these drugs fail to gain regulatory approval or generate sufficient revenue.

According to the Company's income and balance sheet statements for December 2021, the total debt stands at $2.6 million, while the interest expense is recorded at $2.7 million. To calculate the cost of debt annual figures are needed and the latest 10-K report (annual report) is available for December 2021.The cost of debt is calculated to be 105%, which is exceptionally high for any company. Such an exorbitant cost of debt can hinder the growth of the company, as it can increase the capital cost for expansion.

Looking Forward

The PE multiple of the sector is 17x, and the EV/EBITDA, multiple of the industry, is 13x. Given that the firm's net income and EBITDA are negative, the valuation based on PE and EV/EBITDA will be negative. The intrinsic value of DCF comes out to -$5.27, which is lower than the current market price. The average intrinsic stock price is around -$5.47 compared to the $2.7 the stock currently trades. It is not possible to have negative stock price in theory but we can have negative intrinsic value and implied equity value. This indicates that company will keep burning cash and have negative free cash flow in the future. For me, the stock is highly overvalued at this moment.

My assumptions for the DCF valuation are:

• 3-Year Beta: 2.214

• Cost of equity: 13.9%

• Cost of debt: 105%

• Weighted Average Cost of Capital ((WACC)): 14.9%

Note that the values presented above are rounded off to their nearest integers.

Based on my technical analysis of the 4-hour timeframe as shown below, it appears that a channel pattern has formed, with a clear upper limit of $2.74 and a lower limit of $2.63. The pattern seems to be prominent and may continue until it breaks the pattern. Going forward, it may be advisable to keep a close watch on the price movement of the stock in the coming weeks, to see if it breaks through either the upper or lower limits of the pattern. This could provide an indication of the stock's future direction and potential opportunities.

Conclusion

Arbutus Biopharma's financial performance for 2022 has shown mixed results, with an increase in both revenue and net loss. While the company has a strong cash position and is continuing to develop drug candidates, including AB-729 for the treatment of chronic HBV infection, it's important to note that the drug is still undergoing testing and its success is uncertain. The company has been making losses since 2013 and has limited runway left, so I would recommend to Hold the stock for now. However, it may be worth revisiting the company once the drug hits the market or if there are potential M&A opportunities.

For further details see: