|Shares Out. (in M):||45||P/E||NA||0|
|Market Cap (in $M):||34||P/FCF||NA||0|
|Net Debt (in $M):||-38||EBIT||-37||0|
Trading at an EV of less than zero and going lower every day, there is not much priced in to this microcap biotech which just completed a major recapitalization and has multiple catalysts in 2019 and beyond. Total return could be 300-400% within the next 12-18 months.
While normally this value investor doesn't get involved with cash burning biotechs, we like the set up for this since there is downside protection:
1) Aptevo does generate revenue (28mm annualized on Q1 which grew 73% YOY). Analysts estimate $30mm in revenues in 2019.
2) The balance sheet was just refreshed.
3) Numerous value creation copportunities over the next 12 months.
Brief Company Description
Aptevo is a clinical-stage biotechnology company focused on developing oncology and hematology therapeutics. Aptevo has one commercial product IXINITY approved and marketed in the United States for the treatment of Hemophilia B. Aptevo's core technology, ADAPTIR, is a modular protein technology platform capable of generating highly differentiated bispecific antibodies which can be used to treat cancer and autoimmune diseases.
Background and History of Aptevo
Aptevo was a spinout from Emergent Biosolutions (ticker EBS) in 2016. At the time of the spinoff, Aptevo primarily consisted of the ADAPTIR platform (see below) and 4 commercial drug products (IXINITY, WinRho, HepaGam B and VARZIG). The reason for the Aptevo spinoff was that Emergent was a commercial drug company that was producing bio-defense vaccines primarily. The suite of Aptevo assets including the cash burning ADAPTIR platform did not fit into the overall Emergent Biosolutions profile. At the time of the spinoff in 2016, Aptevo had $45 million on the balance. Since the spinoff in 2016, Aptevo successfully monetized 3 of the 4 commercial drug products for $75 million.
APVO was written up on VIC before in 2016 a few months after the spinoff at $2.20/share. With the stock now at $0.75, one would think that the company has been really screwing up. Oddly however, the company has been executing pretty well over the past 2-3 years with the primary exception of its Corporate Finance Debacle which recently occurred and has created the exceptional opportunity that exists today.
Corporate Finance Debacle
Since the spinoff, it was the goal of management and the Board to fund operations of the ADAPTIR technology platform through non-dilutive capital raises. This included the sale of its commercial products, raising debt, and doing drug partnerships. During 2018, we believe management was hoping for a partnership as was eluded to in investor presentations or a possible sale of XINITY to further fund the ADAPTIR program. As the year was coming to an end, and the company was approaching a 1 year runway for cash, we believe management shifted to focusing on raising equity in the fourth quarter. Bad move. With the entire stock market decline (and cash burning biotechs in particular getting destroyed), getting a deal done was impossible. With no non-dilutive corporate event in the near future, and the company's shelf expiring upon the release of the year end financials, the company made the decision to rip the band-aid and do a total recap. In hindsight, management was very shortsighted in not planning ahead. Their stock was trading at $4-5/share during parts of 2018, and they never pulled the trigger to raise equity. Their poor planning was to the detriment of existing shareholders, and to the benefit of new shareholders today.
IXINITY--Commercially growing revenues in the US and International Expansion
IXINITY serves as the anchor of value for the company as it is currently generating $28mm (in last quarter annualized revenue), and has multiple sales initiatives to grow sales in the US and Internationally. IXINITY is a treatment for Hemophilia B, a rare blood disorder which affects 5,000 patients per year. The disease results in uncontrolled internal bleeding in organs, joints or muscle, leading to incapacitation and death. Regular treatment allows patients to live near normal lives with regular life expectancy. Currently IXINITY is selling to 12 and older patients in the US. However, 1/3 of the of the hemophilia B market is under 12, and APVO should be launching a pediatric product in 2020. Furthermore, it is estimated the the US is just 1/5 of the world market for hemophilia B. APVO is working on partnerships to expand worldwide. We currently value IXINITY at $90 million or 3X sales.
ADAPTIR--Proprietary Bispecific Technology Platform
Aptevo's ADAPTIR platform develops antibodies to treat autoimmune diseases and cancer. As mentioned above this technology was originally started by an acquisition of Trubion, and continued under Emergent Biosciences, and then on its own as a separate company. I estimate that between $200-300 million has been spent on this technology platform and its current and future pipeline of drug candidates (About $5-6/share). Given that there has been no commercial drugs coming from the platform, I value this asset at just 20% of what was spent on it.
Without going into the weeds into the science behind ADAPTIR, it can be described as a technology that creates therapeutic antibodies that can be used to treat cancer and autoimmune diseases. While no commercial drug has been developed from the platform, the pre-clinical data points look promising. We currently value this overall platform at $50 million which includes all IP, and future pipeline excluding the two clinical candidates below APVO436 and APVO210
APVO436 is a bispecific antibody targeting acute myeloid leukemia (AML). It is currently in Phase 1 trial with anti-drug antibody testing results due in Q3 of this year and safety data in Q4 of this year. While there are a few other therapies that target AML, APVO436 has the potential to be differentiated in that its therapy is safer due to less cytokine release syndrome (a potential deadly side effect due to treatment). It is management's believe based on pre-clinical tests that its treatment is superior. The eventual success of APVO436 could mean $200-300 million in revenues per year. Which we discount to just $30mm.
APVO210 is a antibody candidate that has the potential to treat mutiple autoimmune and inflammatory diseases such as rheumatoid arthritis, psoriasis, lupus, and inflammatory bowel disease. One of the features of APVO210 is the ability to treat diseases without activating side effects and unfavorable toxicity. APVO210 will have initial results in the 3rd quarter, and will present safety data in Q4. The eventual success of APVO210 may be even larger thatn APVO436 generating $300/yr. We value this at $30mm.
Management and Equity ownership
Until the end of 2018 and early 2019, I would have given management a decent score. They executed on ramping IXINITY, they monetized commercial products, they entered into a non-dilutive debt offering etc. They were on a path of a public company without even raising money in a public offering! There has been no insider selling and only insider buying. CEO bought 100k at 3 last year, and another 10k at 2.38 in December. During parts of 2018, the stock was trading north of $5/share, and the company chose not to raise money. In hindsight, it was a mistake, but it shows that they believe in the value of the company and were very sensitive to dilution. After this dilutive capital raise, management and the board are down to about 10% of shares outstanding.
Sum of the Parts Valuation
|Net Cash||$38 million||0.84/share|
|ADAPTIR Techonology Platform||$50 million||1.11/share|
|45m shares out|
|Adjusting for Exercise of Warrants Outstanding|
|Cash||$29||22 million more shares|
1. Testing data from APVO436 and APVO210 in Q3 and Q4
2. Partnership on single drug or entire ADAPTIR program- This would validate its technology and drug program with a larger drug company
3. Sale of IXINITY business- While IXINITY is doing well, the really big upside would be from the ADAPTIR program and being able to fund it for multiple years may be attractive.
4. Sale of the entire company
5. Insider Buying
Burning cash at a rate of $8-10 million per quarter
Failed testing results from APVO436 and APVO210
Unable to continue to ramp IXINITY
Management. Given the poor management of corporate finance, this management gets a weak score, and thus is a risk trusting them to bring value to shareholders.
Unable to secure partnerships to bolster balance sheet and help execute growth of commercial products.
1. Testing data from APVO436 and APVO210 in Q3 and Q4
2. Partnership on single drug or entire ADAPTIR program
3. Sale of XINITY business
4. Sale of the entire company