Description

ImmunoPrecise Antibodies (IPA.V)

Amounts expressed in Canadian Dollars

Disclosure: Small market cap (CAD $100m), mostly suited to small funds and PA, IPA.V trades on the Toronto Venture Exchange. The calendar year ends in April. We are long shares of ImmunoPrecise Antibodies. 

After a very successful transformation in the last two years, from being a company buried in Victoria, B.C. doing low value antibody research, ImmunoPrecise Antibodies (IPA.V) has become the only contract research organization (CRO) that offers a complete end-to-end service, from concept to pre-clinical trials. Other CROs, on the other hand, offer a solution at a single point in the process, forcing clients to contract up to 15 different CROs. Despite being a relatively small company, IPA has 14 of the top 20 largest pharma companies among its clients and/or partners. Insiders own 24% of the company. IPA has just had its first quarter with positive EBITDA (which is expected to grow rapidly); revenues have grown from $2.6M in FY 2017 to $10.9 M in 2019 and are expected to be at least $14M in 2020. We expect them to continue growing at least (conservatively) at 30% per annum going forward, FY 2020 results will be reported at the end of August.

In addition to having a very successful CRO, in 2019, IPA formed Talem Therapeutics, a wholly owned subsidiary focused on the discovery and development of next generation fully-human, monoclonal therapeutic antibodies. Talem is designed to take ownership stakes during the antibody’s discovery and development states. Talem has already entered into partnerships with big pharma companies such as Janssen and is yet to be discovered by the market. IPA has one of the most exciting coronavirus programs out there, a completely free option for the investment case. The company has had enormous progress since launching the COVID-19 program in January; the latest results prove that some monetization is very likely to occur. However, it is important to mention IPA is not a COVID play but a very sound business with high organic growth just with COVID-19 optionality.

The opportunity exists partially because the company has not been promotional. Its press releases are mostly written in scientific language; its shares are buried in the Toronto ventures exchange; the market misunderstands that even if a vaccine is released and is successful, it should constantly need yearly variations with different antibodies on a regular basis (similar to the flu vaccine); and most recently the stock has had an overhang of warrants. Every single one of these aspects is expected to change as warrants have been exercised in size and a big portion of these warrants will expire in September and October. The company has mentioned that a US listing (we expect NASDAQ) can be announced as early as this year., COVID-19 pre-clinical animal trials will start in September, and the possibility of news regarding partnerships with big pharma companies or with governments (the company has already been awarded government grants) can occur once the animal tests are published. We believe that the risk versus reward is extremely appealing, especially as the CRO was already growing rapidly and profitably. Talem will soon start producing dividends, and the COVID-19 program at the current price offers an exciting free option.

Description:

IPA discovers novel candidates’ therapeutics to advance to the clinic, for pharma, to biotech companies, and to its subsidiary Talem therapeutics. IPA is the only single source, full-service antibody discovery CRO that offers an end-to-end service, having operations in the US (where the company has moved its headquarters to North Dakota), Canada and Europe. It is a full-service antibody therapeutic discovery company with a focus on the next generation of antibody discovery. Their goal is to deliver the most relevant antibodies within the shortest period of time, all while offering antibodies with highest probability in succeeding in clinical trials.

Core Business: CRO, contract Research Organization

Jennifer Bath joined IPA as CEO in 2018 with the aim of restructuring the company and achieving two main market objectives. The first was to bring the most innovative discovery technologies under one company and to build a completely full-service therapeutic discovery company that supports pre-clinical drug discovery: from concept to IND-enabling studies. Within two years, she achieved both outcomes as a product of fostering internal R&D, the adding key personnel, and making two key acquisitions. The results speak for themselves with IPA’s revenues growing more than 100% over the last two years alone.

IPA being a fully end-to-end service has made clients go to IPA for all their antibodies needs. In the past, clients needed to search CROs for each particular stage in the process and dangerously transport materials. IPA has mentioned that a client moved from needing twenty-seven vendors in a particular project to using only IPA.  Again, end-to-end service is an important competitive advantage for IPA.

IPA has operated under various platforms including B-Cell, Hybridoma, and Phage Display as well as others. Prior to the arrival of Ms. Bath, the B-Cell platform was surprisingly only used with rabbit MABs. This meant IPA was ignoring the real power and monetization opportunities of using the B-Cell platform to screen lymphoid tissue from any animal, including humans, as well as transgenics, which in essence enables IPA to scan the entirety of all antibody producing B-cells.  Therefore IPA was involved only in low value diagnostic antibodies (with contracts of ~25k) as opposed of the high value therapeutic antibodies, where contracts can be into the millions. This opportunity was capitalized on when Ms. Bath with the launch of IPA’s B-Cell select antibody discovery platform.

IPA’s B-Cell select has a proven 90% success rate with front-end discovery, and, if the discovery fails, IPA retains all the data. The B-Cell Select Platform enables IPA to find antibody candidates in far less time than other platforms, plus has the possibility to screen lymphoid tissue from any animal, including humans.  Transgenics enables the company to find novel antibodies with a higher target affinity. IPA’s clients have expressed that the end-to-end services have enabled the integration of dozens of vendors. IPA’s client retention is 95%.

Onboarding Big Pharma companies takes up to 6 to 12 months, as clients scrutinize IPA’s processes, laboratories, and financial filing. Once a client is onboarded, a three-year Master Service Agreement (MSA) is signed. The MSA is normally automatically renewed. Once this lengthy process is finalized, the client’s R&D departments are able to send real projects to IPA. This process explains why IPA retains 95% of its clients, as clients would have to invest a significant amount time and money to be able to trust and send projects to IPA. Another effect is that once IPA onboards a top pharma client, it becomes easier for another big company to trust IPA. As of today, IPA has with 14 of the 20 largest pharma companies as clients, a significant milestone and a guarantee of significant additional revenue going forward.

Below is a slide showing some of IPA’s clients:

IPA’s service offerings, in addition to the existing B-Cell Select Platform, also include: Hybridoma, phage display, modivacc, characterization protein expression, antibody expression, and vivarium among others.

The CRO is the cornerstone of IPA’s business, growing more than 100% with expanding margins. It has recently reached profitability and has an important margin of safety for the investment case as shown below.

The industry:

The antibody market is a US $100 billion industry, growing around 7% per annum. The CRO is a US $30 billion sector and has grown around 40% annually, and we expect IPA to exceed the sector growth.

Currently, new antibodies are approved at record rates, and there have been major successes with therapeutic antibodies in key cancer treatment. Humira, which is the top-selling drug globally with $20 billion in sales in 2018, and the cancer drug Avastin, with sales of $7 billion, are both antibody drugs (shown below). Given the current trends, it is estimated around 75% of the 20 top-selling drugs and are going to be monoclonal antibodies. Therefore, IPA is strategically placed to capture this opportunity.

Competitors: HiFiBiO Therapeutics is in the space, but it is not a CRO but instead has an internal drug line pipeline. It is not directly competing with IPA as it only focuses on the low value wild-animal market. Abcellera Biologics is competing with IPA on B-Cell projects; however, the company focuses on B-Cell and only licenses its platform to pharma, making it not a full competitor as it does not offer additional services. Other CRO competitors are Syngener International and Wuxi services.

Talem Therapeutics

In 2019, IPA formed Talem Therapeutics, a wholly owned subsidiary focused on the discovery and development of next generation fully human, monoclonal therapeutic antibodies.  Talem is designed to take ownership stakes during the antibody’s discovery and development states.

Talem, by using IPA’s (which charges Talem at cost) CRO, has a clear advantage in developing its own therapeutic pipeline without any need to outsource or add extra personal. We believe when the company starts forming partnerships it will begin unlocking even further value. Ms. Bath has mentioned that the future of the company lies with Talem; this message is indicative of the value that she sees for it despite the rapid growth of the CRO.

The company has several programs in the pre-clinical pipeline ranging from immuno-oncology to COVID-19. The latter is a program that started in January, and the company has been focused on ever since.

Ligand’s partnership

Ligand, a roughly US $2 billion market cap company, is one of the largest transgenic platforms available for licensing. Ligand is the leading and most diversified platform. In 2019, IPA, with its Talem subsidiary, signed a worldwide OmniAb ® platform license agreement, where IPA received vendor status. The agreement is extraordinary for IPA, as IPA operates under almost any animal, and Ligand has the OmniChicken platform. Chickens are particularly interesting as they are more evolutionary removed from humans and provide an opportunity for IPA to develop new and unique antibodies.

As shown below, the latest release by Ligand already mentions IPA: “additionally, three Ligand partners (Takeda, Immunoprecise and Aldevron) are currently pursuing development of therapeutic antibodies that were discovered with OmniAb for the treatment of COVID-19.”

Below is a slide the current pipeline, which is 100% owned by Talem Therapeutics:

COVID-19 Program

Ms. Bath’s objective in the COVID-19 Program is not to be the fastest company, but the company with the best antibodies, with an aim of bringing an effective and lasting product to the market.

Talem set out to generate a therapy to fight COVID-19 using the company’s discovery platforms, ultimately enabling the company to use multiple technology (technology means species, such as rabbit, mice, lama, humanized animals, etc.), allowing for a fast discovery of multiple antibody formats. Each species and antibody format provide multiple opportunities to find unique properties that help in fighting the disease.

It is important to understand that the probability of a broad efficacious therapeutic for the current strains and potential future viral mutations increases as the study increases. We believe this is important as IPA has, to our knowledge, an extremely large pool of candidates. As per the latest releases (displayed below) ,they have selected 75 lead candidates out of a sample of 1600, which provides a lot of information to the company.

“As we characterize IPA’s approximately seventy-five functional lead candidates it is clear that our extensive program has generated therapeutics with broadly diverse profiles, providing substantial opportunities for multi-epitope targeted strategies”

“As the Company continues to screen its repository of functional antibodies, it advances the identification of synergistic neutralizing antibody pairs, which they believe will set a new precedent in the on-going fight against COVID-19.

The Company continues to further analyze multiple, additional, subsets of antibodies, including neutralizing antibodies demonstrated to bind to the S1 and S2 domains of the SARS-CoV-2 spike protein. Furthermore, the Company has begun steps for the expression of the lead antibodies for pre-clinical and clinical manufacturing.”

The company is part of several World Health Organization (WHO) working groups related to therapeutics vaccines and clinical studies. The company has been recognized by the WHO, the Milken Institute, and other organizations.

Talem’s approach for COVID-19:

The current proposed options for COVID-19 include traditional polyclonal methods, or monoclonal individual therapies, which are not likely to be effective against multiple strains of viruses' mutations, leaving a large part of the population untreatable. This is the problem Talem is trying to solve.

Talem’s goal is to formulate a therapeutic that retains the efficacy even if the virus mutates. It could thus be used to treat a broader diseased patient population. Talem is already seeing many antibodies showing robust neutralizing activity. The company aims to have its therapy to be efficacious against all strains both present and future. Talem’s results are the product of thousands of data points and ongoing monitoring of virus mutations and protein domain mutations. We believe a partnership could be months away as Talem has made too much progress to be ignored.

To illustrate the Telem’s progress these are the latest and more critical developments:

·         July 31st, 2020: IPA’s Human Anti-SARS-CoV-2 Therapeutic Antibodies Demonstrate Synergistic Neutralization

·         July 28th, 2020: IPA Awarded US$1.5M Bioscience Innovation Grant for Coronavirus Research from the North Dakota Department of Agriculture

·         July 13th, 2020 Functional, Human Antibodies Targeting SARS-CoV-2 Discovered Using IPA’s Proprietary B cell Select™ and Single Step Cloning Hybridoma Technologies

·        June 29th, 2020: IPA Confirms Discovery of Fully Human, Potent, Neutralizing Antibodies Targeting SARS-CoV-2

·         June 22nd, 2020: Collaborative COVID-19 Vaccine Project Between ImmunoPrecise Antibodies Europe and LiteVax BV, Funded Through TRANSVAC2

·         June 11th: Recombinant SARS-CoV-2 Proteins Now Available For Research From ImmunoPrecise’s European Subsidiary, UPE

·         June 4th, 2020: ImmunoPrecise Collaborates with the NIH and Integrated Biotherapeutics to Study the Structural Details of Antibodies with Therapeutic Potential to Treat or Prevent Coronavirus Disease 2019 (COVID-19)

·         May 27th, 2020: NSERC Awards Grant to Fund Collaboration Between ImmunoPrecise and the University of Victoria for the Generation of a Potential COVID-19 Antibody-Based Test in Canada that can Provide Real-Time Responses

The progress of the company is simply remarkable in the COVID-19 program as shown above. We know the company is already speaking with seven of the biggest pharma companies for a potential deal, and the optionality of this program is so large that a simple deal can be worth the entire market cap of the company or more.

To finalize, on April 14, the company announced an agreement with Janssen (this is a non COVID-19 partnership), where IPA provided Janssen exclusive access to a panel of novel monoclonal antibodies. The company has not disclosed the details of the agreement, but the agreement shows that big pharma is keen on working with IPA.

Shares Outstanding, debt and the warrants overhang

The company currently has 68 million shares outstanding, 5.3 million options and 14.3 million warrants after the June exercise of 3.8 million warrants. This results in a total of 87.6 million shares outstanding, of which insiders own 24%.

Out of the 14.3 million remaining outstanding warrants, 9.1 million with a strike of $1.25 expire this coming September and October. Only ~1.6 million of those have been exercised so far, which leaves a large overhang of at least 50% of all outstanding warrants expiring in 180 days. We believe this is the main reason the stock has not managed to break the $2 level. After the October expiry, only the 2020 expiry with strike of $0.7 will remain outstanding.

Therefore, we think the end of this overhang is a short-term catalyst for the stock.

With the exercise of the warrants, the company announced the repayment of the total of the 12.5% debentures, leaving the company with a net cash position and only with $2 million in debt.   This debt was the recent private placement executed in May, where the CEO and a board member participated (putting a little bit less than 10% of the total each).

We expect the CRO to be profitable from fiscal 2021 onward. It is important to mention that we think there is a small chance the company can get more aggressive with respect to Talem and raise funds or bring a strategic partner.

Financials, valuation and conclusion

The financials relate only to the CRO.

Revenues are recognized on % of completion. As mentioned above, the due diligence for new clients can take 6 to 12 months and the time length for medium size projects is 1.5 years. The range of revenues per project can be from $1 million up to $4 million, which is remarkable as it has been the transformation the company has had as a result of the new CEO. As mentioned before, prior to her arrival, the company was charging 25k to 75k per project in the diagnostic low value segment.

As per our latest findings the company is working in 150 projects, they are in all stages of development and some of them might not even work out, but 150 projects are a huge number. Gross margins are approximately 50%, and the company has made all the proper investments to have the CRO ready for this phase of growth. The company has more than 400 clients in total including the aforementioned large pharma companies. 

As you can see below, since the arrival of Ms. Bath and the above-mentioned changes, the company has been growing at more than 100% per annum (this growth includes acquisitions). 

Full year 2020 will be released at the end of August, but in the first nine months, the company has already generated $10 million in revenues.  We expect the quarter to have no less than $4 million in revenues. As you can see, the growth is remarkable.

IPA produced quarterly EBITDA of $700k last quarter, their first positive quarterly EBITDA. We expect this new profitability to be the new normal going forward on an annual basis (quarterly variances can of course happen).

We expect the CRO to grow conservatively between 30% to 40% going forward, which would mean the CRO would bring in revenues of $20 million for fiscal 2021 and $25 million for fiscal 2022, we expect the business to produce EBITDA margins of 30% and our estimate of next fiscal year EBITDA is $7 million. With the shares trading at $1.4 we are paying 15 times forward EBITDA for the entire company while assigning no value to Talem. We think this is a remarkable opportunity with multiple catalysts and in time Talem can be worth a multiple of the current total market capitalization.

Risks:

• Loss of projects for the CRO

• The loss of key personnel, particularly the CEO

Catalyst

• NASDAQ listing

• Organic growth of the CRO

• Talem entering into partnerships with big pharma

• Warrants expiry: There are 9 million warrants expiring in September and October both with strike of $1.25

• Progress with the COVID-19 program

• More investor awareness