AbCellera Biologics Inc. (ABCL) Earnings Call Transcript & Summary

All right. So welcome, everyone, to the 31st Annual Healthcare Conference Credit Suisse. I'm Tiago Fauth. I'm a biotech analyst at Credit Suisse, joined today by AbCellera. We have Andrew Booth, CFO of the company, for a fireside chat. So an informal conversation about the company for the next 25 minutes or so. Nice to see you in person finally.

Finally, yes, a couple of years of working together.

I always like to give you guys a couple of minutes to talk bigger picture about AbCellera business model, big picture things, and I'm going to have several detailed follow-ups after that. But yes, if you could talk -- it's a name that is a little bit unusual from a business model perspective. So I don't know if everyone is super familiar with it. So can you give us the 2 minutes rundown on what AbCellera is?

Absolutely. So what -- the company has been around for about 10 years. Actually, it was 10 years ago to the day yesterday that we incorporated the company, and the feeling back in 2012 or the thesis was could we rebuild -- so antibody discovery is the field that we're in. And antibodies, as you know, are very important modality that provide great patient benefit and therapeutic benefit. The workhorse of antibody discovery as a technology really invented in the 1970s. And back in 2012, the thesis was, could we rebuild the front end of drug discovery using modern technologies in order to go after targets that were previously inaccessible, improved probabilities of success and shortened amount of time. At the time, the answer seemed quite obvious that, yes, that was possible. It would just take quite a lot of effort and a lot of capital in order to do that to get validated. That is something we've managed to do, deploying over the last 10 years, roughly $0.5 billion in proving out the technology and validating the technology. And of course, our black swan event, we sometimes say, a couple of years ago was the performance we had with our partner, Eli Lilly, in producing the first monoclonal antibody against COVID, the fastest antibody therapy ever developed. And then following it with a second-generation therapy that was the last mab standing, as we like to say, potently neutralizing against the Omicron variant. Although recently, COVID, if anything we know about COVID, it can surprise us. But still, the -- we have announced even yesterday on our earnings call, yet another candidate that's with Eli Lilly that is also potently neutralizing against the upcoming BQ.1 and BQ.1.1 variants. The proof point there is that from our investments in technology, we can accomplish great things in antibody discovery that not just an infectious disease, of course, are actually -- the main areas of focus for the company are in all other disease areas, oncology and metabolism, pain, et cetera. So -- but we can apply that same technology to those areas to find antibodies with great therapeutic benefit for our patients.

Yes. So to your point, it's interesting because just the dynamic with COVID. It kind of allowed you to reach a proof-of-concept point probably years right before, almost any other preclinical antibody program. So one of the things that folks are always looking for in drug discovery stories is validation. And again, that takes a really long time. For you guys, there was an opportunity and you took it. How much readthrough could there be from the initial COVID antibody? Again, you've done it twice or going in the third time now. It feels like you have an infectious disease playbook that works really well. How much readthrough is there from that experience to the rest of the platform?

Well, actually, infectious disease is only a small portion of our actual effort that we focus. When you talk about validation, another proof point that we've put up there somewhat recently is in the case of CD3 antibodies. So a notoriously difficult target to find good quality antibodies against, certainly a large panel. We believe it's held back to field in T cell engagers, something that we turned our attention to about a year ago and now have produced what we would say is definitively the largest and most well-characterized and diversified panel of CD3 engagers. We showed a lot of that data at AACR in the spring. We're showing more data about exactly engagement and activation of T cells along with our bispecific platform, OrthoMab, for attaching to a tumor-targeting antibody in order to present and activate the right amount for getting great therapeutic benefit from T cell engagers. So again, a technology problem that plagued the field or held back the field for some time, which with our engine, we were able to break the barriers of conventional antibody discovery in that program. Another one, of course, is in GPCRs and ion channels that we work on regularly and we have talked about regularly. So whole swath of targets there, well characterized by biology, which we would say have been held back by limitations in antibody discovery, and those are the barriers we're breaking down with our engine that we're building that can produce those antibodies. We previously announced going from a contract to animal testing in the GPCR target in less than 12 months. We announced recently as well success we've had in advancing a molecule through preclinical development with Regeneron on a GPCR target. So Regeneron, a very highly-enabled group that's out there, well known for their expertise, and they are a great partner. What is wonderful about that, and again validating, is even though the well-enabled partner like Regeneron, they recognize that AbCellera can do things that are very difficult to do and is a valuable partner for Regeneron. And we're delighted that we were able to announce that and that, that molecule is moving forward, and it is one of multiple targets we're working on with Regeneron. So I think Tiago, the point here is that these points of validation of us breaking down the barriers of what have constrained discovery for antibodies are more and more frequent. And yes, they are in all these different areas and not -- and certainly not just in infectious disease.

Got it. And perhaps taking a step back, and again, you alluded to offering something fairly unique to the table for a highly-enabled partner. There is different value propositions for different types of clients. But let's start with the technology stack specifically. And again, originally, I know there are some proprietary IP on the single cell side of things. But you've kind of built upstream and downstream from that. Because again, one of the questions we often get from investors from a competitive perspective is how difficult is it to replicate this, is how proprietary are technologies, can someone buy single cell screening of -- license a mouse here, do something there and basically get to the same result. Again, there seems to be enough demand that the answer will be an obvious no, but sometimes walking through some of those details might be helpful. So yes, can you talk more about technology stack?

Yes. Actually, we tend to speak less about the individual pieces of technology and really more that antibody drug discovery is not any one technology. It's the thousand things that need to go right in your discovery campaign from identifying and characterizing your target all the way through to having your clinical -- your drug product to start your Phase I. That -- our strategy is to invest in technology to have best-in-class molecules from target to the clinic with speed and precision. And when you start dissecting individual slices of all the thousand things that have to happen in order to achieve that outcome, I think you start missing the point a little bit. That's why we focus not on individual pieces, but rather on the real problems out there in the industry that we have cracked in. Because as long as you get the molecule you are after, with the right binding characteristics, the right function and you know it's developable as a therapeutic in that you can transfect it well into or into a cell line and that expresses well and manufactures well, that's what you really want. You're less concerned with the bits of technology that we're involved in the process. Of course, we have world-leading technology in many of the areas that you mentioned. And we have importantly stitched them all together to build this engine that is capable of producing these molecules. And I think that's the way we think about it more. And that is a very, very difficult thing to do, very difficult to replicate. And when you talk about others who are out there and they have a solution, that may be a very good solution to 1 piece of technology in that process. One piece of technology is not -- while it might have great benefits, it is not solving the problem that customers are really after, which is the best-in-class molecule with speed and precision to the clinic. And that's really where we're focused. And we could talk about and you could see the time line of the company of how we have assembled this. And you're right, it started with single cell screening, but 80% of the investment was upstream and downstream of that proprietary rodents, antigen generation, protein engineering technology and our investments into translational sciences, CMC and GMP capabilities. But all of that is oriented and the data backbone behind the whole piece, all of that is oriented towards best-in-class molecules at speed from target to the clinic.

Got it. Perfect. Let's dive a little deeper on the business model because, again, being a partner and enabling drug discovery something that, oh, this sounds like a CRO kind of thing, just perhaps better technology. It seems a little unfair, different financial drivers potentially here. What you're trying to build actually resembles more of a portfolio of royalty claims to a sort of degree, right? So what is the right way of thinking about your relationships and the financial terms of some of these contracts? And again, recently have kind of outlined 3 potential ways of creating value at least designing some of those partnerships that were already in place. Let's walk through those.

Okay. Yes, it's great. So if our investments are in the technology, the value accrues to this diversified portfolio, this large diversified portfolio where we have a stake in the success of the molecules that we discover. As you point out, we're not a fee-for-service kind of shop. We focus on that long-term position that we have in that diversified portfolio. So we have these 3 different, let's say, classes of deals. The first is the straight partnership model, where we undergo discovery and have negotiated milestones and a royalty on the success of the molecule that we discover, and we publish the results of how many partners are in there and how many programs do we have under contract. And even in our 10-K, we see -- we publish what the -- in aggregate, how many billions of unearned at-risk milestone payments, $4.5 billion from last year as well as how the royalty is progressing over time. And as we do more, we are able to command a higher and higher royalty. The second is, again, on the theory of doing more, we have partnerships with 4 parties where we have a co-ownership of the molecules that we discover. And we also have -- we call these the co-investment part of the business. That's where we own the molecule 50-50, and we have the right to co-invest to maintain that royalty position at certain points throughout the development pipeline. We have 7 molecules that we've been working on with those 4 partners to date. It's a model that we introduced only about -- within the last couple of years. And then the third is what we call pre-partner programs. So this is -- those programs are what we would really call as technology investment projects. So when you're building this best-in-world capability, you have to be working on real things. You have to be working on things where how do you know that you've succeeded and how will the world know that the technology is actually able to crack these tough problems. Well, you have to be working on those tough problems in order to show the goods that the technology has actually solved the issues. That's where we're focused on this difficult target space. We would say either the T cell engager is an example of that, the CD3 antibodies and this broad panel. Also in there are these difficult targets, so the multipass membrane protein targets, so GPCRs and ion channels. We've started a good number of those programs as a part of that technology development effort. And of course, the happy benefit of success in those would be sole complete ownership of first-in-class molecules against these very difficult targets. We call them pre-partner programs because it is absolutely our intention to partner, then partner those out for the clinical development. Just taking a step back in the large state on the -- in broad swath, what drug development looks like, you have your ideation. So you've got some insight into biology, where if you can find a molecule that binds against a target with certain functional characteristics, maybe it would make a good drug, then you have product creation or product development where you're actually finding that molecule. And then you have 8 years of testing in clinical trials. And unlike in software, as you know, there's no such thing as minimum viable product to start that testing, you have to get the product development right. So that process of product creation is where we can really make a difference. We don't have an angle on how to run a Phase II, Phase III clinical trial better. That's where -- and the scale of manufacturing, regulatory approval, logistics, distribution sales, dealing with reimbursement, that's where pharma companies have a real core competence. So where we can make a difference with our investment in technology is in the product development stage. And when we have that candidate, the obvious thing to do, especially against these well-validated biological targets is to partner them. And of course, the obvious partners are typically the people we're already working with, we have established relationships with. It puts us in a great position from a business development perspective to take those pre-partnered programs and then partner them out. And you can imagine because of our investment, the amount of value we've created that the terms of those partnership deals will absolutely be accretive to that portfolio that we are creating that is long and diversified on biologics. And that is where the value accrues.

And when you're thinking about -- probably hard to put hard numbers into it, NPV per project, I think for the straight-up partnership, that it's a little easier because you have well-established terms. You've disclosed a lot of details around that. There seems to be a greater upside opportunity for the pre-partner programs and for the co-development opportunities. Have you put some numbers around that? Is it -- how easy actually to think about it? And to be fair, is that where the mix of the portfolio is going to evolve over time? Or is that something that is going to be more opportunistically? To your point, GPCR came up by just tech-enabled -- tech-enabling investments in the platform, right? So how recurrent do you expect to have maybe some of these pre-partner programs? How should that part of the business evolve?

Yes, that's a great question. So in the -- by the way, the standard partnership business, we still love this business. So we indicated about a year ago that we're also not interested in a real volume play in that business. It is about curating the opportunities and the programs and the partners that we work on. Roughly, we would estimate there's like 1,000 antibody discovery projects that start every year. But we're not trying to create an index fund here on that 1,000. I mean we are curating out the ones that we really, really want to work on. And that's the market that we're trying to address. And we've done 23 or so of those just in the last 12 months. So that's still actually a pretty impressive number. When we think about the pre-partner programs and then the value of each of those, it's really dependent on what assets do we have against what target? And then how much risk have we really taken off the table by our development efforts. So it's a very difficult question to ask. And I think that is one of the things that in the coming quarters or maybe a couple of years, we'll start to see because what that first deal looks like on one of those pre-partnered assets to a partner, that's going to maybe set the tone of exactly what are those worth. We have seen some very nice deals that have been done in the GPCR space, including recently. And actually, those are real validation of the value that you're creating if you have one of these antibodies against one of these class of targets. We would say that our technology puts us in a position to have really the best-in-class antibodies against those targets. And if those recent deals are kind of setting the expectation of what -- how those deals are valued, I think that's -- those are wonderful comparables to be able to use when it comes time to partner those.

Got it. No, perfect. Let's talk a little bit more about value proposition, right? And again, you've recently had a couple of announcements related to early-stage VC funds. And again, I think there is kind of this obvious value proposition for earlier-stage companies. You don't need to hire a bunch of people, buy a bunch of equipment. You can have AbCellera as a partner of choice, and that might actually have some recurring demand, right, in your capacity. Can you talk more about the value proposition for those players and also for the large biopharmaceutical companies? And again, the fact that you just had a partnership with Regeneron that actually yielded some fruit tells you that you do have something to bring to the table to those highly-enabled partners. But again, it is an area of pushback. It's like what can they do better that someone that has been working in this biology for 30 years cannot, and it seems to overlook some of the advancements that happened over the last few years, right?

Yes. I think I'll start with the big pharma, so these highly-enabled groups. They've developed their antibody discovery capabilities over the last 20 or 30 years. And it shouldn't be a surprise that the disruptive technology comes from not the incumbent. I mean you see that in so many different industries, where if you -- that highly-enabled new technology, new technology curve, comes from not within the people with the established technologies, where they've built those systems, especially when you add the ideas of computation and curation of data and using that data. The way they built those discovery groups was not at all oriented towards that mentality of how to build from scratch, rebuild the front end of drug discovery as it relates to antibodies. So they're almost predisposed to not be able to make the same kind of advances that the non-incumbent would be able to make. And then -- and I think they recognize that. They're really good ones like the Lillys, the Regenerons, the Gileads, they're very great -- they're very good groups. They're some of the first to recognize -- know that a company like AbCellera can do this, and we can go to them when we're stuck on these and have a chance of overcoming the barriers that we're hitting from these conventional technologies and techniques. So I think that's very -- as we point out, that's 1 part of the validation I didn't even mention in the beginning part of the talk. When it comes to the earlier stage groups, I think I'll talk about the value proposition of them to us as well as from us to them. So when we've built this engine, what we want are the good ideas that are coming in the front. So you've got validated biology, good teams with good financial backers and understand how to corral those. And the VC deals that we announced in the second quarter were with 2 leading VCs, Versant and Atlas, which -- that's exactly what we are looking to them for. And on the opposite side, they say, well, we absolutely don't see the need to recreate or cobble together discovery when we can get this value out of AbCellera to get the best-in-class molecule at speed. That's an extremely valuable thing for them to be able to, with a handshake and an idea and a management team and a little bit of capital get up and running, extremely valuable for them. And in today's environment, I might even say the really good VC should be asking their portfolio companies that have got antibody discoveries. They better be able to explain why they're not using AbCellera, knowing that they sure want to be conserving capital and giving up a small royalty position for having access to that technology immediately and with results that can come out quickly. In today's environment, that is also a highly valuable thing that we can bring to those companies. So we've seen that. I think many VCs noticed these announcements with Versant and with Atlas. And I think that that's a sign of more deals that we would like to do in the future.

Got it. No, that makes sense. And again, I think once you establish credibility, the recurring business from blue chip partners, it's something that adds sale value right to the story?

Absolutely.

Yes. So I want to talk more about your financial position right now and operational leverage and things like that. First, I think we need to address COVID. And again, for a short period of time, longer than I wanted it to be but with a relatively short period of time, this was a COVID story, right? And I think that was just related to the disproportionate amount of cash flow generation that you had coming from that 1 single product that has since changed a little, but you still have what seems to be some recurring revenues from your antibodies or partnering with Lilly. So can you kind of recap that side of the business? How relevant that is? What should investors expect from that in terms of cash flow generation? How meaningful it could be? Again, in our model, not a huge deal, but let's cross check that.

Well, the 2 big bullet points of value, let's say, for the COVID programs was, one, the validation, not once but twice in arguably the most competitive drug development project in the history of the world. That was extremely time-sensitive. So massive validation of the capabilities from investments in technology. The second was the commercial model and partnership model that we took it to with a great partner in Eli Lilly and in a form where we always have represented the cash flow we've received from that molecule as nondilutive source of funding that is helping us to fund in the rest of the business. It's making it possible for us to lean into and accelerate the investments into the core parts of the business, which is building this discovery engine. And it has delivered on that over the 2 years since we've been talking about it. Certainly, for the first 6 months, as you'll remember, of being listed, we traded a lot like a COVID stock and a COVID story. But I think what -- where that has played out is we have enjoyed the revenue and strengthening of the liquidity position on our balance sheet from those revenues. We just announced our earnings yesterday. And for Q3, it was approximately $100 million in revenue. 90% of that roughly was from the COVID antibodies from bebtelovimab. We also mentioned in the earnings release that bebtelovimab shows vulnerability against the BQ.1 and BQ.1.1 variants. But just like after bamlanivimab, when the real problem was breadth and potency against emerging variants, we developed bebtelovimab, and we're the only company that was looking at a second-generation technology. Of course, we didn't stop there. We have a third-generation antibody or panel of antibodies that Lilly has been looking at moving forward, including a very good option with -- that is potently neutralizing against BQ.1 and BQ.1.1, which they have said they are willing to bring forward provided the FDA gives a clear path on what the clinical and regulatory framework will look like for that, whether is COVID still an emergency that allows the emergency use authorization path to be available. And that's something that Lilly is pursuing. But we stand at the ready to do our part of the work and have done in advance in anticipation of future variants and are prepared to do it if the regulatory path and framework presents itself, if this needs to be a recurring thing where we stay ahead of thinking about how variants may emerge. And that is going to play out over the coming months in the work with between Lilly and the FDA.

Got it. And again, one of the reasons I ask that is just to think about cash flow generation and your financing position right now. I think investors understand that the value that you have from future royalty claims. But on a time continuum, that's a little bit far off. You seem to be really well capitalized for the next few years. So how should you think about either operational leverage, incremental costs as you add new programs to the platform? And what's your current runway to execute on your current strategy?

Yes. So our cash position at the moment is just under $900 million. We are not dependent nor do we model in any revenues from COVID antibodies from the -- for the future in order to execute on our vision of building out this -- the engine platform, even with the aggressive investment we've had. Of course, we've grown very aggressively. We won't grow at that same rate. We'll continue to grow in the coming years. With that investment plan, including the forward integration into CMC and GMP which, as you'll remember, is co-funded by the Government of Canada. So that really eases the capital outlay that's required to complete that journey from target to the clinic. And with the investment plan we have, we do not foresee the need for any extra capital for well beyond the next 3 years. And that's the guidance that we give. So we don't -- so we have -- we really are in a great position liquidity-wise in order to continue that journey.

Perfect. We're reaching the time, I guess. So any last remarks in terms of what investors might be missing on the story, fairly unique business model. So getting bounds from different backgrounds. So anything in particular that investors should get excited about for AbCellera story?

I think anything -- when you say anything that investors are missing, I'd say it is a long game that we are playing on opening up, on developing these capabilities that have giant long-term potential. The investors who -- and so it's really a time horizon question. I think that we're delighted by the investors that are on our cap table that really understand that long-term vision, Baillie Gifford and Capital World and Baker Bros., Allianz, Thiel Capital as well as many of the founding members and operators of the company that are still heavily invested in the long term. I think what we're not getting credit for on the market -- they understand the story, what maybe we're not getting credit for is the capabilities that -- and the outcomes that we're not focused on, like I said, these slivers of technology, but rather the product of the integration of all of them. I think people are still waiting to say, hey, show me the goods, like really show me what the -- like that you've developed clinical candidates with functional attributes against these well-known targets. We're waiting to see the goods. We're not getting credit, I think, for that capability and maybe nor should we, because we haven't shown the goods yet. So what people should be watching out for is our execution on what we say we can achieve and what they should -- we're hopeful that when we start to show in definitive terms with those molecules that have evaded the industry for a very long time and that we have cracked open a target space that people recognize it for the greatness that it is and the problem that we have really solved and that has been holding back the industry. So that's what we would expect to see in the coming quarters, and we'll be quite happy when that happens.

Perfect. I guess we're out of time. So with that, we can probably wrap up. Andrew, again, really appreciate you spending time with us.

Yes, of course, Tiago. Appreciate it.

Right.