XNCR - Vectoring In On Vir Biotechnology

2023-03-22 08:51:49 ET

Summary

• Shares of infectious disease medicines concern Vir Biotechnology are trading at only a $6-$7 per share premium to cash as the revenue from its Covid-19 medication dries up.
• The company has three compounds undergoing evaluation as both monotherapies and in combination in multiple Phase 2 trials, most of which should provide data in FY23.
• With large addressable markets with unmet needs for hepatitis B and hepatitis D and multiple shots on goal, Vir merited a deeper dive.
• A full investment analysis follows in the paragraphs below.

"Those who can make you believe absurdities, can make you commit atrocities. "? Voltaire

Today we take a deeper look at a mid-cap vaccine concern. While the company's revenues from Covid-19 will continue to fall as the pandemic ebbs, it has several other compounds in development. More importantly, it has a fortress balance sheet. An analysis follows below.

Company Overview:

Vir Biotechnology, Inc. (VIR) is a San Francisco based commercial-stage immunological concern focused on the development of treatments for infectious diseases. The company has one approved Covid-19 therapy in collaboration with GSK Plc ( GSK ) (with significantly declining revenue) and four others in the clinic pursuing four indications. Vir was founded in 2016 and went public in 2019, raising net proceeds of $126.4 million at $20 a share. Its stock trades around $23.00 a share and sports an approximate market capitalization of $3.2 billion.

Platforms

The company starts by identifying both the limitations of the immune system in its fight against specific pathogens and the vulnerabilities of said pathogens. It then embarks on one of four approaches to treating infectious diseases; each one focused on improving part of the immune system: antibodies; T-cells; innate immunity; or small interfering ribonucleic acids (siRNAs).

XEVUDY (sotrovimab)

The antibody platform launched Vir into the stratosphere with the development of sotrovimab (previously VIR-7831), a Sars-CoV-2 neutralizing antibody that demonstrated an adjusted relative risk reduction of 79% (p<0.001) in all-cause hospitalization for more than 24 hours or death due to any cause by day 29 versus placebo. Those results convinced the FDA to grant sotrovimab Emergency Use Authorization for early treatment by intravenous administration in May 2021. Soon after, temporary authorizations were granted in more than 40 countries. Commercially known in most territories as Xevudy, Vir was able to pull this rabbit out of a hat with the help of commercial collaborator GSK, who kickstarted development with a $250 million investment in the former during April 2020. The agreement was expanded in May 2021 and included an upfront payment of $225 million and an additional equity investment of $120 million.

Between the two GSK capital infusions, a follow-on offering in July 2020 that raised net proceeds of $323.2 million at $42 a share, and a 72.5% profit share on the sale of 2.1 million doses of Xevudy to date - resulting in total revenue of $1.10 billion in FY21 and $1.57 billion in the first nine months of FY22 - Vir's balance sheet cash and valuation swelled. Valued at $2.2 billion on its IPO, for a brief moment, after announcing initial data from its Phase 1 hepatitis B virus ((HBV)) trial in January 2021, its market cap surpassed $18 billion. (More on that monoclonal antibody [MAB] therapy (VIR-3434) is provided below.)

However, with mounting evidence that Xevudy was ineffective against certain Omicron subvariants of Covid-19, the FDA excluded the use of sotrovimab in the U.S. in April 2022. As such, future revenue from the sale of Xevudy is expected to drop precipitously. Only 230,000 doses were delivered in 3Q22 - all outside the U.S. GlaxoSmithKline revised its collaboration agreement with Vir on February 13, 2023 to back out of any next-generation Covid-19 vaccines or monoclonal antibodies, although they will continue to split up the gross profits from any sales of Xevudy outside the U.S.

Pipeline

Even if the Xevudy party is coming to a screeching halt, it did provide a meteoric influx of cash, which Vir is employing to advance several programs through and into the clinic against four other indications, three of which are in Phase 2 trials.

VIR-3434 and VIR-2218 . One of those indications is the aforementioned HBV, for which the company has developed two therapies. VIR-3434 is a subcutaneously administered mAb that targets hepatitis B virus surface antigens (HBsAg) to block entry of all 10 genotypes of HBV into liver cells. VIR-2218 is a subcutaneously administered HBV-targeting siRNA designed to inhibit the production of HBV proteins (including HBsAg), which should engender a more robust T cell and B cell immune response.

Although Vir believes that both these compounds as monotherapies have the potential to provide a functional cure (undetectable levels of HBsAg), they are being studied in combination with multiple compounds (Brii Biosciences' ( OTCPK:BRIBF ) T cell vaccine BRII-179, current standard of care pegylated interferon-alpha (PEG-IFN-?), PD-1 inhibitor nivolumab, and an investigational TLR-8 agonist) in no fewer than four Phase 2 studies. A VIR-2218/PEG-IFN-? combination administered concurrently for 48 weeks demonstrated HBsAg seroclearance in 30.8% (4/13) of HBV patients in a Phase 1/2 trial. Using VIR-2218 as the backbone, multiple combinations of VIR-2218, PEG-IFN-?, and VIR-3434, as well as a VIR-2218/BRII-179 pairing are all expected to produce initial or additional clinical data in five readouts throughout 2023. VIR-2218 is also being evaluated in combination with Gilead Sciences' ( GILD ) TLR-8 agonist candidate GS-9688 and nivolumab, although no timeline for data has been forwarded.

HBV can lead to hepatocellular carcinoma and cirrhosis and afflicts ~300 million worldwide. As such, if Vir is ultimately successful with one of its combos, it would have a superior offering in what it estimates as a $10 billion functional cure market opportunity, with current standard of care only achieving functional cure rates below 7%. It will also be on the hook to Alnylam Pharmaceuticals ( ALNY ) for milestones totaling $440 million and royalties in the low double-digits to mid-teens.

The opportunity expands by an additional $2 billion plus when including hepatitis D virus ((HVD)), the most aggressive form of viral hepatitis for which there is no FDA approved remedy (although one in Europe - Gilead's Hepcludex). Vir is conducting a Phase 2 trial evaluating VIR-2218 and VIR-3434 in combination and as monotherapies with initial data anticipated in 2H23.

VIR-2482 . The company is also pursuing the $5 billion plus influenza A indication, for which the company has developed mAb VIR-2484. Its version of the annual flu shot employs Xencor's ( XNCR ) half-life extending technology and has curiously attracted the attention and funding of the Biomedical Advanced Research and Development Authority ((BARDA)). In vitro, it has demonstrated the ability to neutralize all major strains of influenza A dating back to the 1918 Spanish flu pandemic. A Phase 1b prophylaxis study evaluating the safety of VIR-2484 in participants aged 65 and older initiated in September 2022. That trial start was followed one month later by the commencement of a Phase 2 study assessing two doses of the mAb in healthy subjects aged 18-64 against placebo in the prevention of influenza A. Initial data from both trials are expected in mid-2023.

As part of Vir's expanded 2021 agreement with GSK, the latter has the right to opt-in to this program for $300 million, triggering a 50/50 profit share if VIR-2482 is commercialized.

VIR-1388 . Vir is also assessing one of its T cell candidates (VIR-1388) as a potential treatment for HIV. It is anticipated to enter the clinic in 2H23. Part of the funding for this program came from the Bill & Melinda Gates Foundation.

Sotrovimab . Even with GlaxoSmithKline pulling out, Vir has not completely given up on sotrovimab, evaluating a re-engineered version for prophylactic use in uninfected, high-risk individuals in a Phase 3 trial with data expected to readout in 2H23.

Balance Sheet & Analyst Commentary:

As of the of FY2022, the company had ' approximately $2.4 billion in cash, cash equivalents, investments and profit-share payments to be received from GSK '. This means VIR currently has just over $17.00 a share in cash, marketable securities and future payments from Glaxo.

The analyst community has gotten more sanguine around Vir's prospect over the past month. In that time, six analyst firms including J.P. Morgan and Barclays have reiterated or upgraded the stock to a Buy/Outperform rating. Price targets proffered range from $34 to $100 a share. Expecting an end to sotrovimab, they forecast the company to generate revenue of only $180 million in FY23.

Verdict:

The company's future is hitched to its multiple shots on goal for HBV. Given that the current standard of care (PEG-IFN-?) confers a functional cure in less than 7% of patients, while its VIR-2218 in combo with PEG-IFN-? demonstrated a functional cure in 31% of patients - admittedly, in a tiny 13-patient population - chances for this combo repeating that result (or one of the other four combos under assessment bettering this result) are solid. There is also some optionality on long-shot influenza A candidate VIR-2482. The bet here is that one of these HBV readouts will demonstrate enough promise to propel share of VIR higher, but not terribly so - unless, of course, 100% functional cure is achieved. As such, with moderate option premium, Vir appears to be a solid covered call candidate.

"Blind belief in authority is the greatest enemy of truth ."? Albert Einstein

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