VACC - Arbutus Biopharma: Our Current Take On This 2 Buck 'Soap Opera'

Summary

• Today, we revisit Arbutus Biopharma Corporation for the first time in almost a year.
• An interesting 'sum of the parts' story seems to be emerging around the company and the stock.
• An investment analysis follows in the paragraphs below.

"I could easily forgive his pride, if he had not mortified mine. "? Jane Austen, Pride and Prejudice

Today, we put Arbutus Biopharma Corporation ( NASDAQ: ABUS ) in the spotlight for the first time since mid-September of last year. We concluded that article with the following:

We have no investment recommendation on ABUS at this time. We may revisit this name in the future provided upcoming study results are encouraging as it gets to late stage development ."

The stock is down some 40% since that conclusion, but the stock seems to be building a floor at current trading levels. Given it has been almost a year since we last looked in on Arbutus Biopharma, it is time to circle back on this small biopharma concern. An analysis follows below.

Company Overview

Arbutus Biopharma Corporation is a Philly based clinical-stage biotech firm. The company is focusing its efforts on developing a cure for patients suffering from chronic Hepatitis B virus (HBV) infection as well as developing treatments for Covid. The stock trades for just north of two bucks a share and sports an approximate market cap of just south of $350 million.

Recent Developments:

As we discussed in our last piece on Arbutus, the company is advancing multiple ' shots on goal ' within its pipeline.

Several notable events have happened around the company since we last visited. In late August, Arbutus garnered a key patent that provides composition of matter patent protection for its lead clinical-stage asset, RNAi therapy AB-729 for chronic hepatitis B virus. In early June, the company initiated a Phase 2a study in conjunction with Vaccitech ( VACC ) . This 40 person trial will evaluate a combination with Vaccitech's T-cell stimulating immunotherapeutic, VTP-300, and standard-of-care to treat chronic hepatitis B Virus.

In late July, Arbutus announced that it would continue a phase 2a trial with Assembly Biosciences ( ASMB ) . This study is investigating a combination of AB-729, Assembly's candidate vebicorvir and an inhibitor therapy for the treatment of chronic hepatitis B virus infection. This is despite Assembly discontinuing their developmental efforts around vebicorvir.

Late in February, the company's journey took an interesting turn when it and Genevant Sciences filed a lawsuit against Covid vaccine juggernaut Moderna ( MRNA ). This suit does not request the stoppage of Moderna's vaccine distribution but seeks damages for violation of certain U.S. patents related to the company's COVID-19 shot, MRNA-1273.

Then a few weeks later, Acuitas Therapeutics, whose technology has been used in Pfizer ( PFE ) / BioNTech ( BNTX ) COVID-19 shot, filed a lawsuit against Arbutus seeking to head off claims that the vaccine violates Arbutus' patents. In December of last year, a federal appeals court upheld a ruling by the U.S. Patent and Trademark Office to not invalidate patents held by Arbutus Biopharma.

The eventual outcome of all this litigation is a ' wildcard ' at the moment. An article on Seeking Alpha that came out in mid-December does a good job detailing some potential outcomes. Given how early stage the company's Covid efforts are in the Covid arena, the patent litigation might be the best way to monetize the company's work in this area.

Two weeks after the win in federal appeals court, the company announced a licensing agreement and partnership with Qilu Pharmaceutical around AB-729 for hepatitis B in China, Hong Kong, Macau, and Taiwan. This deal provided Arbutus with a nice $40 million upfront payment. The company can also earn another potential $245 million in milestone payouts as well as double-digit tiered royalties up to the low twenties percent on any future commercialization.

As you can see below, the company's pipeline is progressing very slowly and is years away from commercialization. To throw one more nuance into Arbutus's investment thesis, Alnylam Pharmaceuticals, Inc. ( ALNY ) recently reported positive topline results for their Phase III study of ONPATTRO in patients with ATTR amyloidosis with cardiomyopathy.

How does that potentially impact Arbutus Biopharma? Here is the company's CEO on its last earnings call around that topic.

Arbutus is entitled to tiered royalty payments on global net sales of ONPATTRO ranging from 1% to 2.33% after offsets with the highest tier applicable to annual net sales above $500 million. Now this royalty interest was sold to Omeros ( OMER ) effective as of January 1, 2019 for $20 million in gross proceeds before advisory fees. And Omeros will retain this entitlement until they have received $30 million in royalties at which point 100% of the royalty interest on future global net sales of ONPATTRO which could include additional sales for the expanded indication if it's approved will revert back to Arbutus.

Now to date, Omeros has received approximately $14 million. In addition, we retained a second lower royalty interest ranging from 0.75% to 1.125% on global net sales of ONPATTRO with the 0.75% applying to sales greater than $500 million and that royalty stream was not part of the OMERS transaction ."

Analyst Commentary & Balance Sheet

Over that past month, H.C. Wainwright, JMP Securities ($9 price target) and Chardan Capital ($6 price target) have reissued Buy ratings on ABUS while Robert W. Baird has maintained its Hold rating and $4 price target on the equity. Here is the commentary from Wainwright's analyst at the end of August.

This morning, Arbutus announced that the Office (USPTO) issued a new U.S. RNAi therapeutic product. Specifically, Patent No. 11,427,823 includes 16 Claims and 3 Drawing Sheets, and provides composition of matter patent protection for AB-729. We note that this new patent is expected to provide Arbutus with exclusivity for at least April 2038, which is beyond our revenue projection timeframe for AB-729, which currently extends to 2037. We regard the issuance of this new patent as another crucial addition to AB-729's IP portfolio, and continue to believe that AB-729 could be a key component of a finite HBV treatment regimen based on the latest post-treatment dataset. "

Approximately four percent of the outstanding float is currently held short. There has been no insider activity in the stock so far in 2022. At the end of the second quarter, Arbutus Biopharma held approximately $200 million worth of cash and marketable securities on its balance sheet. Management stated that provided a cash runway for the company into the second quarter of 2024.

Verdict

Analyzing Arbutus reminds me of that 70s sitcom ' Soap ' whose tagline was ' Confused? You won't be after the next episode of Soap '. However, there seems to be an interesting 'sum of the parts' story emerging here. Between the $200 million on the balance sheet, the potential litigation windfall, potential milestone payouts from a recent collaboration deal with Qilu Pharmaceutical and the company's slow advancement of its pipeline with AB-729 in the lead, one can make the case that is worth more than the company's current $335 million market cap.

The equity has options available against. Therefore, Monday I will be establishing a small position in ABUS using covered call orders.

"Generosity is giving more than you can, and pride is taking less than you need ."? Khalil Gibran

For further details see: