AbCellera Stock – Turning Antibodies Into Drugs
We believe it’s critically important to only invest in businesses that we understand. If you need a subject matter expert to explain a company’s value proposition, you shouldn’t be invested in it. Yesterday’s article on A Pure-Play LegalTech Stock for FinTech Investors is a great example of a value proposition that’s easy to understand. Today, we’re going to talk about a company that’s not so easy to understand – AbCellera (ABCL).
The AbCellera IPO
Figuring out which life sciences stocks to write about here at Nanalyze isn’t easy. We monitor all initial public offerings (IPOs) that are announced and make quick decisions on what to cover. When AbCellera filed their IPO late last year, we were undecided on whether or not to cover it. On one hand, they’re a full-stack, AI-powered drug discovery platform which is right up our alley. On the other hand, their business model isn’t very easy to understand. Our screener at the time thought they were pushing The Rona angle a bit too much, and we don’t like any temporary thesis. (To be fair, COVID didn’t turn out to be as temporary as we had hoped for.)
It’s a good thing we stayed out of the way because AbCellera came rocking out of the gates, more than tripling on the first day of trading to reach over $70 per share. Today, shares trade at around $29, a price that more closely resembles the $20 a share the IPO was originally priced at. Now that the dust has settled following the IPO, it may be a good time to begin accumulating the stock, provided it’s something we want to hold.
What AbCellera Does
AbCellera’s most recent investor deck starts out simple. Similar to St. Steve Jobs, the company believes that the new frontier of technology lies at the interface of computation, engineering, and biology. Their full-stack AI-powered antibody discovery engine epitomizes that idea. Let’s talk about antibodies.
Our immune system fights diseases and infections using antibodies which are proteins about 10 nanometers in size. Live Science explains them as follows:
Antibodies are specialized, Y-shaped proteins that bind like a lock-and-key to the body’s foreign invaders — whether they are viruses, bacteria, fungi or parasites.Credit” Live Science
Naturally, pharmaceutical companies find them useful for building therapeutics. Antibodies are the fastest growing class of drugs, worth $143 billion today, and expected to hit $261 billion by 2025. In 2019, antibody-based therapeutics represented five of the top 10 selling therapeutics worldwide. Over 90% of approved antibody drugs are derived from natural immune systems, and that’s where cells come into play.
At any given moment, each of us is making approximately one billion different antibodies, an infinitesimal fraction of the possible diversity of antibodies. There are over 100 trillion different possible antibody molecules. To isolate one antibody from billions of unique antibodies requires the ability to find the cell that makes the antibody. (That’s the cell screening technology AbCellera is suing Berkeley Lights over.) And that’s just one part of AbCellera’s technology stack which utilizes microfluidics, single-cell analysis, high-throughput imaging, AI, robotics, genomics, and protein engineering, all wrapped in a custom software package. Here’s how such a platform would be used to develop new therapeutics.
- Source. Generate and access a high-quality universe of antibodies for any target
- Search. Isolate the rare cells that make antibodies with the desired properties
- Find. Decode the genetic sequences of selected antibodies
- Analyze. Collect data on the relevant therapeutic properties of each selected antibody
- Engineer. Use molecular engineering to optimize and reformat lead antibodies for development.
The capabilities AbCellera has developed have attracted some of the biggest names out there. Here are just a handful of the companies they’ve begun working with over the past several years.
At the end of 2020, AbCellera had 27 discovery partners working on 103 different programs under contract. One of those companies, Eli Lilly, has already started filling AbCellera’s coffers with cash.
The COVID Use Case
At the end of 2020, AbCellera recorded $198.3 million for royalty payments related to sales of bamlanivimab, a drug they developed with Eli Lilly which is being used to treat COVID patients. (Eli Lilly recognized U.S. revenue of $850.0 million in the fourth quarter of 2020 for bamlanivimab.) That’s remarkable when you consider how recent COVID came about.
On day zero, AbCellera received a sample from one of the first U.S. patients who recovered from COVID-19. In three days they had screened 5.8 million cells, after which it took 23 days for them to identify 24 leads by analyzing 250,000 data points. Ninety days after receiving the sample, one antibody therapy, bamlanivimab, was in human clinical testing by Eli Lilly.
In November 2020, bamlanivimab was granted emergency use authorization, and has since been used to treat more than 400,000 patients. Eli Lilly is working on bringing a second antibody therapy treatment to market, one also discovered on the AbCellera platform. Known as 1404, the next treatment is expected to neutralize all circulating variant strains of COVID-19 with clinical testing to begin in Q2-2021.
The success of bamlanivimab is a testament to how well AbCellera’s platform works, which makes the stock seem quite compelling. But it also highlights a major problem with the business model – the uncertainty of cash flows. AbCellera expects the lion’s share of revenues to come from milestones and royalty payments which are subject to many external risk factors they cannot control. The timing of revenues could make for one volatile ride.
To Buy or Not to Buy
Wall Street assigns a premium to companies with software-as-a–service (SaaS) business models. That’s because such companies provide predictable revenue streams that can easily be assessed for healthiness. For example, tracking retention rate over time is an easy way to see if existing customers are spending more money or less. If the predictability and simplicity of SaaS commands a premium, then business models with unpredictable revenue streams should incur a penalty. At the very least, unpredictable cash flows create stock price volatility which equals risk.
Here’s a look at how another AI drug discovery company, Schrodinger (SDGR), compares to AbCellera.
This is a good segue into why we won’t be investing in AbCellera. We’re already long an AI drug discovery company that has a SaaS business model with predictable cash flows, an internal drug pipeline, and equity in many of the companies that are developing drugs on their platform. SaaS provides predictability, and any other upside is a bonus.
For those of you who find the AbCellera story compelling enough to invest in, we’d love to look at valuation using our easy-to-understand valuation ratio – market cap / annualized revenues. Unfortunately, it’s all but useless for companies with quarterly revenues that look like this.
It’s just another good reason risk-averse investors should avoid companies with unpredictable cash flows. The AbCellera story is admittedly quite compelling, but we don’t invest in stories.
While we came away from this exercise knowing that AbCellera doesn’t mesh well with our tech investing approach, we didn’t come away with any better understanding of how AbCellera’s lawsuits will impact Berkeley Lights. The man defending Berkeley Lights, Morgan Chu, has been described as “beyond doubt the most gifted trial lawyer in the USA” who “delivers staggering results for clients.” Seems unlikely he’d take on a case unless he was sure the outcome could be added to his already long list of accomplishments.
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