June 10, 2019 - 9:14pm EST by
2019 2020
Price: 5.04 EPS 0 0
Shares Out. (in M): 70 P/E 0 0
Market Cap (in $M): 353 P/FCF 0 0
Net Debt (in $M): -300 EBIT 0 0
TEV ($): 53 TEV/EBIT 0 0

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It is probably worth mentioning from the start that I have been involved in the Alzheimer’s disease space for nearly two decades, investigating and in some cases providing funding for companies targeting abnormal Tau, and in the process have developed relationships with some of the leading experts in the field. AC Immune, following the collapse of its stock in January of this year, is now one of the largest positions in our portfolio.


At a market cap of $350 million and a net cash balance of $300 million, plus an upcoming milestone payment of $60 million due from Eli Lilly in the next few months, ACIU is currently being valued by the market for no more than the net cash on its balance sheet. Yet, in sharp contrast to its current valuation, the company is sitting on a gold mine of potentially $15 billion in future revenues from milestone payments and royalties, and is uniquely positioned to be the leader in the forthcoming round of anti-Tau drugs for Alzheimer’s disease (AD), which are working their way through clinical trials and whose efficacy is supported by decades of experiments and animal research.


*Please note that the USD/CHF exchange rate is approximately 0.99:1 and has been in a narrow range around 1:1 for several years. Therefore, in the discussion below, I have used the '$' symbol as a substitute for both USD and CHF for the sake of simplicity. The company's financials are stated in CHF (Swiss Francs).


Why this Opportunity Exists


On January 30 of this year, ACIU announced that their partner Roche-Genentech would be discontinuing Phase 3 clinical trials of Crenezumab, a monoclonal antibody targeting Amyloid Beta, due to the fact that it had failed to show any signs of efficacy among participants enrolled in the study. The stock cratered from $12 to $4 following the announcement, effectively valuing the remaining portfolio of AC Immune’s drug candidates at less than zero, including those targeting Tau.


Drugs and biologics that target amyloid plaques have (unfortunately) been the primary focus of the major drug companies over the last 15 years even though leading researchers in the field have argued vociferously that abnormal Tau was the better target and that targeting amyloid plaques would likely lead to failure. This has turned out to be the case. After nearly two decades of attempting to target amyloid plaques, not a single drug trial focusing on amyloid plaques has shown any promise, while billions of dollars have been wasted in the effort.


Fortunately, drug companies have now decided to focus their efforts and resources on abnormal Tau, an area that should have been pursued right from the start. Normal Tau is a protein which neurons use to stabilize the structure of microtubules, structures which run the length of the axon from the neuron cell body to the synapse, and which are used to transport nutrients from one end to the other. When these proteins become hyperphosphorylated they lose their affinity for binding sites along the microtubule pathway, cease to provide structural stability, and eventually lead to the collapse of the microtubule, disrupting the flow of nutrients. The abnormal Tau proteins then break away from the microtubule and begin to aggregate within the cell structure.  It is unclear at present whether the destruction of the neuron comes from the aggregation of abnormal Tau or the structural failure of the microtubules, or both, however the current round of drugs and biologics target a number of pathways that disrupt the process in either case.


The following short videos provide a very basic overview of Tau and abnormal Tau with the last video being a slightly more detailed, hour-long presentation by an expert in the field:


Both amyloid plaques and neurofibrillary tangles are hallmarks of AD and both must be present for there to be a definitive diagnosis.  However, neurofibrillary tangles (NFTs), which are aggregations of abnormal Tau, are better correlated with the progression of dementia and the death of neurons than amyloid plaques, which are often found in large quantites in older but otherwise healthy patients, and do not track well with the progression of dementia. See article below:


Aside from its attractive valuation resulting from the recently failed trial of Crenezumab and record bearish sentiment in the Alzheimer’s disease space, AC Immune has one of the largest and broadest portfolios of Tau-focused treatments for Alzheimer’s disease of any drug company, targeting the disease using antibodies, small molecules, vaccines, and diagnostics. Other prominent players in the space are Eli Lilly, Biogen, Roche-Genentech, and AbbVie, although none of these offer the same breadth of Tau-based therapies, and three of these have partnered with AC Immune in the areas of Tau antibodies, small molecules, and imaging agents to bolster their own portfolios. AC Immune has collaboration agreements with six major pharmaceutical companies in total with a combined value of $3.3 billion and have eight products in various stages of clinical development.  Furthermore, the leverage for an equity investor to a successful treatment for Alzheimer’s disease is far more attractive in the smaller and highly focused AC Immune than it would be for any of the major pharmaceutical companies who are also targeting the disease. Below is a brief description of AC Immune’s products targeting Tau:


Anti-Tau Antibody


AC Immune’s antibody (RG6100), which is being developed in collaboration with Roche-Genentech, targets extracellular abnormal Tau in the hope of preventing transmission of the disease from one neuron to adjacent neurons. The antibody currently has two ongoing simultaneous Phase 2 clinical trials, one which targets patients with mild dementia and another that target patients with moderate dementia. Results from these trials are expected in 2020 and 2021 respectively. There are three other companies with similar antibodies targeting extracellular Tau:  Eli Lilly with its Phase 2 antibody LY3303560, AbbVie with its Phase 2 antibody ABBV-8E12 targeting AD and Progressive Supranuclear Palsy (PSP), and Biogen, which is also targeting AD and PSP with its anti-Tau antibody BIIB092. Positive results from any of these trials would be catalytic for the stocks of all the other companies as it would add further confirmation to the idea that extracellular abnormal Tau is a viable target. Eli Lilly expects results from Phase 2 in 2020 or early 2021, AbbVie expects results from two separate trials in 2020 and 2021, Biogen anticipates results from two separate trials in 2019 and 2020, while Roche expects results from two separate trials in 2020 and 2021. We are literally 12 months away from an avalanche of confirmations regarding anti-Tau antibodies as a viable treatment for halting the progression of AD and PSP.


Links to data regarding each of these clinical trials can be found below:


The monetary value to AC Immune from a successful anti-Tau immunotherapy would be substantial.  The company is entitled to milestone payments with a total value of $430 million over the next few years and royalties running from the mid-single digits to the low double-digits depending on the level of sales, which could be worth more than $13 billion. As discussed in more detail under the “Valuation” section at bottom, the present value of the future royalty payments from this treatment alone could be worth $3.8 billion on an un-risked basis, assuming the market is divided among a total of three competitors, and even assuming that only early and mid-stage patients receive treatment.


Tau Morphomer


AC Immune’s Tau Morphomer (ACI-3024) takes a slightly different approach. Rather than targeting extracellular Tau to halt the spread of the disease from one neuron to adjacent neurons, this small molecule attempts to disaggregate malformed Tau proteins within the cell itself, thereby saving infected cells from destruction and potentially reversing the disease rather than simply halting its progress. In December 2018, AC Immune signed a collaboration agreement with Eli Lilly stipulating more than $1.8 billion in potential milestone payments, as well as royalties on sales ranging from the low double digits to the mid-teens.  The Tau Morphomer will begin Phase 1 clinical trials in Q2 of 2019, at which point AC Immune should receive a milestone payment of $60 million. Eli Lilly could eventually use the Tau Morphomer (ACI-3024) in combination with LY3303560, their anti-Tau antibody, to target both intracellular and extracellular Tau simultaneously, effectively eliminating the disease from all regions of the brain.


Tau Vaccine


The Tau vaccine (ACI-35) is designed to stimulate a patient’s immune system to produce antibodies against the misfolded and phosphorylated forms of Tau that aggregate to form neurofibrillary tangles. In pre-clinical testing ACI-35 was shown to be highly specific for these abnormal forms. The vaccine would eliminate the necessity for patients to undergo monthly infusions of anti-Tau antibodies in favor of a single vaccine that would prevent the disease from spreading between neurons by stimulating the formation of antibodies that target abnormal Tau in the extracellular region.  After positive safety results from an initial Phase 1b trial, Janssen and AC Immune plan to begin a Phase 1b/2a clinical trial in 2019.


More detail on AC Immune’s drug development pipeline, including Tau imaging, anti-amyloid, and other targets, can be found in their Annual Report and recent SEC filing, which can be downloaded here:



Why is now the time to buy?


As mentioned previously, AC Immune is being valued by the market just above its net cash balance. This is astonishing for an established biotech company with a host of products in clinical trials targeting the most expensive disease in history, and which has existing collaboration agreements with Eli Lilly, Roche-Genentech, Janssen, and Biogen, that are potentially worth more than $15 billion in future revenues. It also has one of the broadest portfolios of anti-Tau AD drugs of any pharmaceutical company, with small molecules, antibodies and vaccines, all in clinical trials.


Following the litany of failed clinical trials targeting amyloid plaques, negative sentiment in the AD space is now at all-time high, so it won’t take more than a few positive comments about Tau-based therapies in general, or encouraging data from any one of the ongoing clinical trials at several pharmaceutical companies, to rally the stock above its current level.  Importantly, we are now entering a period over the next 6 to 18 months when virtually every major pharmaceutical firm will be announcing Phase 2 results from clinical trials using anti-Tau antibodies. These results could be announced even sooner if the trials show premature signs of efficacy. Should positive data emerge from any of these trials, the whirlwind of excitement surrounding the possibility of an effective treatment for AD will engulf the media, AD researchers and foundations, affected families and investors, and the stocks of all companies in the space will balloon. Investors will be searching for any company with exposure to an anti-Tau portfolio. As mentioned earlier, data from the following Phase 2 clinical trials of anti-Tau antibodies will be released over the next 6-18 months:


2020-2021:  Eli Lilly (LY3303560)

2019-2020:  Biogen (BIIB092)

2020-2021:  Roche-Genentech/AC Immune (RG6100)

2020-2021:  AbbVie (ABBV-8E12)


But it is not just the potential for excitement among the media, investors, AD organizations, researchers and affected families that will cause stocks with a viable treatment to appreciate dramatically, but also the prospects for the out-sized revenues, royalties and milestone payments that will come from treating the most expensive disease in history, which currently costs more to treat than cancer or heart disease. In 2019, the direct costs to American society from treating people with dementia are projected to be $290 billion, of which Medicaid and Medicare will spend nearly $200 billion. A recent study also found that the average cost of taking care of someone with dementia in the last five years of life is $287,000, compared to $175,000 for heart disease and $173,000 for cancer. Please see the following articles for more discussion regarding the cost of AD to families and to government programs for the poor and elderly:



Royalties and Milestone Payments


The total of all Tau-related milestone payments that could become due in the future from existing collaboration agreements is $2.67 billion, calculated as follows:


Product Total Contract Value  Partner
        Tau Antibody         $430 million Roch-Genentech
        Tau Morphomer       $1820 million Eli Lilly
        Tau Vaccine         $500 million Janssen
        Tau Imaging         $144 million Life Molecular Imaging
Total:       $2890 million  


Less: $173 million  paid up-front

Less: $48 million    milestones received to-date


Milestone payments remaining under existing agreements:  $2890 - $173 -$48 = $2669 million


In addition to milestone payments, the company will receive royalty payments on their Tau-related portfolio according to the following schedule. The range of royalty percentages listed for each product results from the contracts being tied to the level of total sales. As an example, the royalty rate might be 5% on sales up to $1 billion but increases to 12% on sales over $1 billion:


Product Royalty (% of sales) Partner
        Tau Antibody 5% to 11% Roche-Genentech
        Tau Morphomer 11% to 15% Eli Lilly
        Tau Vaccine 11% to 15% Janssen
        Tau Imaging 5% to 11% Life Molecular Imaging


*Note: the royalty percentages are my interpretation of the rough guidelines given by management in the most recent slide show presentation, which can be found here:




To arrive at an approximate present value for the milestone payments we would have to know the details of each collaboration agreement, which unfortunately have not been made public. However, we do know the approximate time frame that each drug will take to complete clinical trials, if successful, and can discount the remaining milestone payments by some fraction of this time frame (say 7/10ths) to account for the fact that some milestone payments are received earlier than others and that the larger payments are generally back-end weighted. Below are the approximate time frames for each of the products targeting Tau to go to market:


Product Current Stage of Development Years to Market
       Tau Antibody Phase 2 6
       Tau Morphomer Phase 1 8
       Tau Vaccine Phase 1/2 7


Since the time to market is roughly the same for each product and averages about seven years, we can approximate the present value of the remaining $2.67 billion in future milestone payments by discounting them over 7/10ths of seven years, or approximately five years. The resulting present value must then be risk-adjusted for the probability of receiving each payment.


As a rough approximation, if we assume that the average milestone payment is received in five years and has only a 20% chance of success, then a discount rate of 10% would yield a present value for all the remaining future milestone payments of approximately $330 million, which is roughly equivalent to the company's current market capitalization.  In other words, even if we give zero credit for the $300 million in net cash they currently have on their balance sheet, and the $60 million payment coming from Eli Lilly in the next few months, their current market cap is roughly equivalent to a conservative estimate of the risk-adjusted present value of future milestone payments alone. This gives no credit for future royalties on any of their anti-Tau products in clinical trials, to products in early stage development, nor to any of the late stage products currently in clinical trials that relate to amyloid beta.


Now let’s look at future royalties on just one of AC Immune’s products, the Tau antibody RG6100, which is scheduled to complete a Phase 2 clinical trial in 2020.  Internal estimates by some big-pharma companies as well as some sell-side analysts, such as Carter Gould at UBS Securities, who put together an excellent initial writeup for ACIU on January 4, 2019, estimate the size of the market for a successful Alzheimer’s disease treatment in western Europe and the US combined at anywhere between $15 billion and $40 billion per year, depending on how the treatment will be administered (oral or intravenous) and whether the drug will treat only one stage of the disease or all stages of the disease. In my model for RG6100, which appears below, I make the following assumptions:


  • The addressable market in the US is 5.6 million individuals today and 6.1 million in 2035
  • The addressable market in Western Europe is 7.3 million individuals today and 8.1 million in 2035
  • Japan has an addressable market of an additional 3.7 million individuals but is not included in the model
  • Royalties are paid for 10 years from first launch of the first product in each country
  • The drug is administered via intravenous infusion once per month at a cost of $10k per year
  • Two stages of the disease can be treated – mild and moderate
  • There are two other drug companies with competing products
  • The peak penetration rate in Western Europe is 20% of affected individuals and 25% in the US. This assumes 75% of affected individuals receive treatment in the US and 60% in Western Europe, and that the market is divided evenly between three competitors
  • Royalties to AC Immune ramp from 5% to 11% of sales
  • Sales ramp to a maximum over a period of 9 years in each country
  • Time to product launch is 6 years
  • Discount rate is 10%
  • The risk-adjusted PV assumes a 25% probability of success for RG6100, calculated as follows:
    • 35% chance to move from Phase 2 to Phase 3
    • 70% chance to move from Phase 3 to NDA



The royalty stream above does not include any of the $2.67 billion in future milestone payments from RG6100 or from any of AC Immune’s other drug candidates that could be earned by AC Immune over the next few years.  Furthermore, it does not include royalties from any of AC Immune’s other anti-Tau drug candidates, such as the Tau Morphomer or Tau vaccine, or from its anti-amyloid candidates should any of those prove successful. It is solely an approximation of the present value of future royalties from a single drug candidate, the anti-Tau antibody (RG6100) which is currently in Phase 2.




I have attempted to show why AC Immune is attractive at today’s prices by highlighting that its current market cap is equivalent to its net cash position, that it has a robust pipeline with major drug companies totalling $2.67 billion in future milestones, and that the present value of these milestone payments and the present value of royalties from only a single one of its drug candidates, aggressively risk-adjusted for the probability of success, is nearly four times the current market capitalization. The reality, however, is that if any of these drugs shows promise for treating the most devastating and expensive disease of our era, the stock of any company with an anti-Tau treatment will go ballistic, potentially in late 2019 or early 2020, and measures of present value will become increasingly irrelevant. During the course of my 25-year investment career, I seldom see opportunities to make multiples of my money with little downside risk and a relatively high probability of success. AC Immune is one of those few. It combines an attractive valuation and a cash runway of 5 years with some of the most promising products in the AD space, treating the most costly disease in world history, at a time when most investors are licking their wounds from the failure of the amyloid plaque trials and are still asleep at the investment steering wheel.



I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.


2019:  Initiation of Phase 1 clinical trial for Tau Morphomer and receipt of $60 million milestone payment from Eli Lilly


2020:  Announcement of Phase 2 results for AC Immune’s anti-Tau Antibody (RG6100)


2019-2021:  Announcement of Phase 2 results for anti-Tau Antibodies of Biogen (BIIB092), Eli Lilly (LY3303560) and AbbVie (ABBV-8E12)


A small change in sentiment (won’t take much at these levels)

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