Arbutus Biopharma: our current take on this $2 soap opera (NASDAQ: ABUS)

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“I could easily forgive his pride, if he had not mortified mine.“-Jane Austen, Pride and Prejudice

Today we put Arbutus Biopharma Corporation (NASDAQ:NASDAQ: ABUSE) in the spotlight for the first time since mid-September last year. We concluded this article with the following:

We don’t have any investment recommendations for ABUS at this time. We may revisit this name in the future provided the results of the upcoming study are encouraging as it reaches an advanced stage of development..”

The stock is down about 40% since that conclusion, but the stock appears to be building a floor at current trading levels. Since it’s been almost a year since we last looked at Arbutus Biopharma, it’s time to take a look back at this small biopharmaceutical company. An analysis follows below.

Stock chart

Looking for Alpha

Company presentation

Arbutus Biopharma Corporation is a Philadelphia-based clinical-stage biotechnology company. The company is focusing its efforts on developing a cure for patients with chronic hepatitis B virus (HBV) infection as well as developing treatments for Covid. The stock trades just north of two dollars per share and sports an approximate market capitalization just south of $350 million.

Business strategy

June Company Presentation

RECENT DEVELOPMENTS:

Pipeline

June Company Presentation

As we discussed in our last Arbutus review, the company is advancing several ‘shoot to the net‘ in its pipeline.

Several notable events have occurred around the company since our last visit. In late August, Arbutus was granted a key patent that provides composition of matter patent protection for its lead clinical-stage asset, AB-729 RNAi therapy for chronic hepatitis B virus. At the beginning of June, the company launched a phase 2a study in collaboration with Vaccitech (VACC). This 40-person trial will evaluate a combination with Vaccitech’s T-cell stimulating immunotherapy, VTP-300, and standard of care to treat chronic hepatitis B virus.

AB-729 attributes

June Company Presentation

At the end of July, Arbutus announced that it would pursue a phase 2a trial with Assembly Biosciences (ASMB). This study involves a combination of AB-729, Assembly’s candidate vebicorvir, and an inhibitor therapy for the treatment of chronic hepatitis B virus infection. This is despite Assembly’s discontinuation of its development efforts around vebicorvir.

At the end of February, the company’s journey took an interesting turn when it and Genevant Sciences filed a lawsuit against the Covid vaccine juggernaut. Moderna (ARNM). This lawsuit does not seek an end to Moderna’s vaccine distribution but seeks damages for infringement of certain U.S. patents related to the company’s COVID-19 vaccine, MRNA-1273.

Then a few weeks later, Acuitas Therapeutics, whose technology was used in Pfizer (PFE)/BioNTech (BNTX) COVID-19 shot down, filed a lawsuit against Arbutus seeking to avoid claims that the vaccine violates Arbutus’ patents. In December last year, a federal appeals court upheld a decision by the US Patent and Trademark Office not to invalidate patents held by Arbutus Biopharma.

Covid efforts

June Company Presentation

The end result of all this litigation is a ‘wildcard‘ at present. A Seeking Alpha article from mid-December does a good job of detailing some potential results. Given the early stage of the company’s efforts against Covid in the Covid arena, patent litigation might be the best way to monetize the company’s work in this area.

Two weeks after the federal appeals court victory, the company announced a licensing agreement and partnership with Qilu Pharmaceutical for AB-729 for hepatitis B in China, Hong Kong, Macao and Taiwan. This deal provided Arbutus with a nice upfront payment of $40 million. The company can also earn another potential $245 million in milestone payments as well as double-digit tiered royalties up to 20 percent on any future commercialization.

Collaboration agreement

June Company Presentation

As you can see below, the company’s pipeline is progressing very slowly and is years away from commercialization. To add further nuance to Arbutus’ investment thesis, Alnylam Pharmaceuticals, Inc. (ALNY) recently announced the first positive results of its phase III study of ONPATTRO in patients with ATTR amyloidosis with cardiomyopathy.

Key milestones

June Company Presentation

How does this potentially impact Arbutus Biopharma? Here’s the company’s CEO on his last earnings call around this topic.

Arbutus is entitled to tiered royalty payments on ONPATTRO’s worldwide net sales ranging from 1% to 2.33% after offsets, with the higher level applying to annual net sales above $500 million. Now that royalty interest has been sold to Omeros (OMER) effective January 1, 2019 for gross proceeds of $20 million before advisory fees. And Omeros will retain this right until they have received $30 million in royalties, in which case 100% royalty rights on ONPATTRO’s future worldwide net sales, which may include additional sales for the expanded indication. if approved, will revert to Arbutus.

To date, Omeros has received approximately $14 million. Additionally, we have retained a lower second royalty interest ranging from 0.75% to 1.125% on ONPATTRO’s worldwide net sales, with the 0.75% applying to sales over $500 million and this stream of royalties was not part of the OMERS transaction..”

Analyst Commentary and Review

Over the past month, HC Wainwright, JMP Securities ($9 price target) and Chardan Capital ($6 price target) reissued Buy ratings on ABUS while Robert W. Baird maintained his Hold rating. and his $4 price target on the stock. Here is the Wainwright analyst’s comment at the end of August.

This morning, Arbutus announced that the Office (USPTO) released a new US RNAi therapeutic product. Specifically, Patent No. 11,427,823 includes 16 claims and 3 drawing sheets, and provides composition of matter patent protection for AB-729. We note that this new patent is expected to provide Arbutus with exclusivity for at least April 2038, which exceeds our revenue projection timeline for AB-729, which currently extends to 2037. We consider issuance of this new patent as another crucial addition to AB-729’s IP portfolio, and continue to believe that AB-729 could be a key component of a finished HBV treatment regimen based on the latest set of post-treatment data.

About four percent of the outstanding float is currently held short. There has been no insider activity in the stock so far in 2022. At the end of the second quarter, Arbutus Biopharma held approximately $200 million in cash and marketable securities on its balance sheet. Management said this provided the company with a cash trail through the second quarter of 2024.

Verdict

Analyzing Arbutus reminds me of this 70s sitcomSoap‘whose slogan was’Confused? You won’t be after the next episode of Soap‘. However, there seems to be an interesting “sum of the parts” story emerging here. Between the $200 million on the balance sheet, the potential windfall from litigation, the potential milestone payments from a recent collaboration deal with Qilu Pharmaceutical, and the slow progress of its pipeline with AB-729 in the lead, one can argue the case that is worth more than the company’s current market capitalization of $335 million.

Equity has options available against. Therefore, on Monday I will establish a small position in ABUS using covered buy orders.

“Generosity is giving more than you can, and pride is taking less than you need..”- Khalil Gibran

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