AbCellera Biologics: TCE Program Alone Could Be Worth More Than The Current Market Cap

Investing has a sadistic way of making you feel like you are the man in the above photo, with a massive pot of gold hiding somewhere in a vast labyrinth of wrong turns and dead ends.

Being a shareholder of AbCellera Biologics (NASDAQ:ABCL) over the last few years, I would argue, has been equally as frustrating; however, I would also argue that the last few years have been nothing short of a tremendous success for the company itself from an "under the hood" business perspective.

In the first quarter, AbCellera continued to deliver positive business momentum, only to be rewarded with further deep, on paper, shareholder losses. In this article, I would like to dive into the quarter, specifically, the conference call around the TCE programs and explain my continued bullishness for the future.

Highlights Under The Hood In Q1

The first quarter, on the surface, appeared to be a rather boring and unproductive affair. The company only signed one new partnership, adding 3 new programs during the quarter, while the company reported that AbCellera partner, Teva Pharmaceutical (TEVA), advanced a neurology molecule, discovered by AbCellera, into the clinic during the quarter, the company also reported no new program starts and the cash balance shrunk by over $90 million to $824 million. Not a stellar quarter for headlines in newsfeeds.

Under the surface however, the company continues to deliver on exactly what management has been telegraphing for some time now, fireworks to come from the pre-partnered programs effort, specifically, the T-cell engager programs.

During the quarter, the company presented a trove of data highlighting the progress of the T-cell engager technology development effort it is currently pursuing. These data show that the company, using its platform and with relative ease I may add, has been able to gather, catalog and analyze over 500 unique and potent bi-specific antibodies that appear to be comparable, or superior to clinical benchmarks.

This catalog of antibodies, AbCellera claims, is by far the largest in the world of its kind and the breadth, speed and diversity of the panel may in fact be groundbreaking in the treatment of cancer.

CEO Dr. Carl Hansen explained the following on the conference call in his prepared remarks:

One of our posters that at ACR demonstrated data on our newly generated CD3 panel and its use in building optimized TCEs against to cancer targets EGFR and PSMA. Key results from this poster as are as follows. First, we have built what we believe to be by far the industry's largest collection of CD3 binders with more than 500 unique antibodies. This panel offers unmatched diversity of binding properties and binding locations, excellent developability and is highly differentiated from commonly used molecules.

In our second poster, we presented an approach to addressing the second challenge of finding antibodies that are highly specific to cancer cells. Central to this challenge is that there are few known proteins that are expressed only on the surface of cancer cells and not on the surface of healthy cells. Because there are many more cancer specific proteins expressed inside cancer cells, the ability to target these with antibodies would open up a huge number of potential targets.

We screened more than a million cells and found more than a dozen fully human antibodies with high affinity, good development ability and specificity to MAGE-A4 that is comparable or superior to the clinical benchmark. Perhaps most significant is the speed and ease with which this result was obtained from a single screening campaign and without the need for subsequent antibody engineering.

This result shows that we have capabilities that can readily address a large and essentially untouched class of tumor targets for TCEs. Importantly, TCR mimetic antibodies can also be used in other therapeutic modalities, including antibody drug conjugates, radio, pharmaceuticals and cell therapy. As such, we believe this is a technological advance that has broad implications for precision oncology.

Source: AbCellera Q1 Conference Call

The fact that the company has been able to develop and catalog these antibodies, a feat that AbCellera claims, surpasses all others in the industry, during a period of only 18 months, is astounding.

You may be asking, ok, that's great, but show me the money?!?! Be patient my inquisitive friend, I believe it is only a matter of time until the company delivers the goods.

Dr. Hansen, during the conference call, alluded to the fact that the company has received substantial interest from pharma majors in the T-cell pre-partnered assets along with interest from partners wishing to utilize AbCellera's engine to develop their own candidates.

The company has stated multiple times that it wants to develop these programs as far as possible in-house, to gain both maximum leverage in financial discussions with partners and to gain maximal exposure to highlight its capabilities to future partners, allowing the company to reap the benefits of both higher royalties and up-front payments for the programs.

Frankly, this is a bold strategy and points unmistakably to the confidence that the company has in its own product. Based on the remarks of the CEO and CFO over the last few months, I believe the company may close its first transaction in these assets during late 2023 or early 2024 and I would expect a substantial up-front payment to go along with similar royalty rates to the COVID antibodies, somewhere in the range of 10 to 15 or perhaps even 20%.

In addition, this would not simply be a single transaction. The company could potentially have 5 separate, lucrative deals with this structure stemming from this program, making it potentially a huge catalyst over the coming years.

On the call, an analyst asked a rather important question regarding the monetization of the T-cell engager panel I would like to highlight below:

Stephen Willey

I guess on the TCE front, do you think that some of the CD3 focused collaborations that you could be doing here going forward would include scenarios where a partner is kind of bringing a variable domain against the tumor antigen to the table and just selecting one of the CD3 variants to pair with? Or do you envision I guess monetizing the CD3 library by kind of a built for purpose start from scratch type of approach, where you're developing both ends of the antibody?

Dr. Carl Hansen

The short answer is that we're open to working with partners in whatever way makes the most sense. So, the three ways that we envision partnerships being set up are, first, we have now initiated work on five pre partner programs as those advanced we expect that there will be partners that are interested in those specific targets. And that will be and we'll be able to partner with them either while we're still in development, and getting towards the final candidates, or after that has been done. So that's the first way.

The second way is that by doing that work, we have the data to show partners the ability to quickly generate optimized TCEs. And this has attracted interest from groups that have new targets for which they don't yet have antibodies. And of course, our business and our capabilities allow us to quickly generate those antibodies and then Pair them and test them with different CD3. So that's the second way.

And the third way is one that you alluded to where partners may have binders already that they believe are adequate or up to the task for making a new TCE. We would be happy and are interested in engaging and using our CD3 panels to properly pair those with the right binder to get the right properties. That isn't just a matter of sending over CD3s, it requires that we take the binding molecule, and we make a large panel of biospecifics and run it through the functional assays.

And there may even be a couple of iterations of that, since we have a very large panel to go through. So there's still substantial work there, but that's another path forward and one that we're definitely contemplating and there are some discussions in that direction.

Source: AbCellera Conference Call

So to summarize the above, the company believes that it has 5 individual programs that could be partnered out at what can be assumed are very attractive terms considering these are specific targets and significantly advanced, in addition, the company is highly likely to partner out specific antibodies that it will screen from its catalog in almost a plug and play solution, pairing the catalog, or developing new antibodies with specific needs of a partner. Again, with these programs likely generating higher than normal royalty rates and or up-front payments considering the work already done by AbCellera.

AbCellera, in the past, has stated that it is prepared to develop these candidates all the way up to and through pre-clinical development to garner the absolute best deal possible for the company.

So, what is the potential value of the TCE programs? That is a tough one at this early stage, however, it is certainly not absurd to think that the TCE program alone could be worth at least the current market capitalization of roughly $1.9 billion considering the potential of $100's of millions in up-fronts, along with very substantial royalties on just the 5 specific programs, not to mention the plug and play deals and more traditional partnering opportunities likely to come.

The company has, from day one, sought to maximize the value of each of its assets over the long-term and it appears that they have quite a valuable asset in the TCE program. I believe that over the course of the next few years, the company will begin to monetize these assets, giving a much needed catalyst and importantly, much needed, non-COVID related cash to shareholders.

Bottom Line

AbCellera has been a frustrating stock to own, mainly because of the initial valuation assigned to it given the COVID pandemic and the hype of 2020-21, however, under the surface, I believe that the company has been executing brilliantly on nearly all fronts. They do not make hasty and expensive acquisitions, they manage the substantial cash on hand conservatively and they clearly focus on the long term.

The company has proven, in my opinion, that their engine and platform are truly world class and I believe that the TCE program the company has detailed, yet again confirms this opinion. I also believe that the partnerships that are likely to come from this effort are not at all priced into the shares and the potential is ripe for a substantial run later in 2023 and into 2024.

In the short term, I would not be surprised whatsoever to see ABCL stock re-test or even break through the 52-week lows considering the absolutely awful sentiment in the market towards anything growth or speculative, alongside the potential of a recession and further banking tumult.

In opposition to the market, my confidence in AbCellera is only growing stronger by the quarter considering the rock solid balance sheet of over $800 million in cash, zero debt and the largely discretionary, opportunistic and high ROI CAPEX items the company is investing resources in.

I continue to add to my position in the company and have increased my already quite large position roughly another 20% during the last few weeks at the $6.50 to $7 range, bringing the cost basis of my position down to $9.50 as of writing.

I may not hold a popular opinion currently, with my stock broker, or even within my own household, considering that my fiancé has been glaring at me angrily out of the corner of her eye as I write this, but I truly believe that in the long-term, AbCellera has built a world-class platform that has the potential to reward patient shareholders handsomely.

I look forward to your comments below, thank you for reading and good luck to all!