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Do you know what you're buying? I'm bearish but it could succeed.
In the limited history of my writing, stocks I like as either long term positions or short term trades have been at the forefront, but this week I am doing something different. I'll be breaking down a company popular on fintwit in fundamental terms. Immunoprecise Antibodies(IPA) is a favorite among the retail crowd and a writeup would be helpful to shed some light on the company. Here we'll break down Immunoprecise's business, the industry, the competition, the upside, and reasons for concern. Overall, I’m bearish because of a lack of clarity and concerning trends, but the company could certainly have upside.
Immunoprecise Antibodies was founded by Robert Beecroft in 1989 to develop antibody based diagnostics for diseases. Beecroft was a veteran of the biotech industry and built a profitable company doing ~200k in net income a year on ~2 million in revenue by 2015. In 2016, with a CEO switch, the company shifted to using the developed antibody discovery/screening technologies to focus on the larger, more crowded, therapeutic antibody market via drug discovery. They invested in new facilities, made an acquisition of U-Protein, a contract research organization(CRO), and listed on the TSXV. In 2018, another CEO came in but the strategy stayed the same: sell antibody drug discovery services to pharma companies through a CRO model. They acquired another company, Modiquest, in 2019 to support their operations as a CRO, and recently started an internal pipeline of therapies called Talem.
Immunoprecise Antibodies' primary business is a Contract Research Organization (CRO) whereupon pharma and biotech companies will contract Immunoprecise to develop therapeutic antibodies. The contracts are fee-for-service, thus IPA gets paid for each project. IPA is a full-service CRO meaning they will develop an antibody from discovery to manufacturing. Beyond the CRO, the company also has Talem therapeutics: a pipeline of early stage biotech assets developed based on their experience as a CRO. While some may liken Talem to a risky biotech, that isn’t the business model. Talem takes the knowledge they gain from helping big pharma with antibody discovery to develop new drugs which can then be licensed by big pharma. Talem doesn’t want to take drugs through clinical trials but rather wants to partner with larger companies to take them through clinical trials thus de-risking the business and reducing the investment capital needed from IPA.
Antibody therapeutics and discovery process.
To understand the discovery process, we must understand the biology of antibodies. Simply put, an antibody is the key to a disease’s lock. When a disease gets into our body, our immune system, specifically our B cells, recognize the disease through markers in/on the foreign cells (antigens). The B cell that generated the appropriate antibody which binds to the antigen then starts replicating and producing more antibodies. It also gets stored by the body for future use against the same antigen. Typically, each B cell produces a unique antibody which binds to a unique antigen.
Therapeutic antibodies are needed when our body cannot produce the necessary antibodies for a disease. Antibodies can be used for antigens in foreign viruses, but they can also be used against internal receptors of diseases such as those on the surface of cancer cells. Therapeutic antibodies have a number of requirements to be effective: they must bind tightly to any antigen, neutralize the disease and not induce an immune response in a patient. As with any drug (or foreign substance) the body recognizes it as foreign and immediately starts attacking it. This is especially an issue when using animal antibodies.
The discovery process: The first step is identifying a target for the antibodies to bind to. Typically, the pharma company will find a target and bring it to the CRO to find antibodies when looking to outsource. The target must be validated in the disease process and antibodies must be found that bind tightly, are safe, and have the desired neutralizing function. One must balance high affinity and acceptance by the patient’s immune system. The two primary ways of finding matching antibodies are phage display and b cell selection. Phage display uses a library of already created human antibodies to match the target which reduces the risk of an immune response but requires workup processes to increase the affinity. B Cell selection processes use other subjects to generate matching antibodies which can then be humanized for use in patients (see the image and article above for a good overview of the process). For example, a mouse will be injected with the tumor cells, causing an immune response and the production of antibodies matching the disease target. We can then harvest the mice cells, sort them, and screen the B cells which produce the desired antibodies. While good phage display methods rely on the IP in the library of antibodies, good B cell antibody discovery methods rely on the ability to screen B cells and find the right antibodies to develop. There are numerous technologies directed at improving the speed, lowering the costs, and increasing efficiency in b cell screening technology. IPA's primary claim to fame is their "B cell select" platform which allows them to interrogate more b cells than the competition and find more candidates. The youtube video below explains this process well.
Industry and Competition
Both the antibody discovery and CRO space are large and crowded markets. The market for antibody therapeutics is more than $100B each year (a simple google search will show you numerous sources) with IPA claiming more of this is being outsourced to CROs each year. While a CRO makes sense for a smaller biotech, larger pharma companies can have their own R&D division which limits the possibilities for a CRO unless it holds a strong competitive advantage.
Among the competition for their discovery platform are Berkeley Lights which develops B cell screening tools for research organizations, Abcellera, which is another CRO dedicated to antibody discovery, and Charles River Laboratories, a large CRO servicing more than just the antibody therapeutics market. There are numerous private companies and oodles of capital flowing into the antibody discovery space because of the size of the market. With so much capital flowing into the market, I am reminded of Paul Enright on the recent Invest Like the Best.
Nobody has won the antibody discovery race so the field is still wide open. This may be great for consumers, but shareholders could be left with the short end of the stick. However, Enright does point out the power of winning a protected position in a growing industry so IPA could still be a winner if they have the right competitive advantage.
So what are Immunoprecise's competitive advantages? From CEO interviews (of which there are a lot, more on this later) and company filings, three ideas are emphasized: their full service nature as a CRO, the ability to screen lots of B cells compared to other companies, and the ability to use collected data from sequenced antibodies to generate new drugs.
Full service CRO: One edge the CRO business has vs other players is their full service nature. When a pharma company comes to them with a target selected, the pharma company need not worry about the project until it is ready for preclinical trials. Immunoprecise takes care of each step from target validation up to manufacturing. They tout this as a competitive advantage but they aren't unique in this aspect. Larger full service CROs certainly do exist and in their filings, they cite competition with "other full-service CROs." While it is certainly an advantage against non full service companies, they aren’t unique in this aspect. In addition, larger CROs (of which there are quite a few) can certainly build out this offering easily.
High throughput, Multi-Animal B Cell Screening: This is the bread and butter. Their ability to screen individual B cells faster than competition through proprietary technology is repeated as a competitive advantage. So what's their proprietary technology? No One knows. Well, almost no one knows. Investor relations told me only 2 people know the details of their proprietary platform which is a trade secret (non-patented as to not reveal the secret). It's highly guarded and could really be a source of a competitive advantage, but I don't believe the hype. IPA cites the ability to screen up to 10 million cells, but this isn't unique to them. (Example 1, Example 2, see below table)
While screening 10 million cells is better than traditional techniques, the introduction of new technology makes that advantage moot. In addition, there are signs that they use other companies’ tools such as IQue and OmniAb for high throughput screening and transgenic antibody development. It’s perfectly okay for them to outsource lots of the process but to emphasize proprietary technology while outsourcing it is another matter. Addendum/Edit: The company reached out and said they have never promoted themselves as having technology regarding screening so that was a misunderstanding on my part. However, I still lack clarity on where their proprietary technology lies in the process. I would also like to separate IQue and OmniAb as the companies do different things, one is phenotypic screening and the other is transgenic animal antibody development.
In a market where the best technology will win the race for pharma, IPA doesn't seem to have a unique advantage in screening and I am unclear where such an advantage exists for them.
Using Data to identify new targets: This is Talem's play. Through their experience developing antibodies, they believe, they can use collected data on targets/sequenced antibodies to effectively develop antibodies for future use cases which pharma has not thought of accelerating the pharma adoption. A big pharma could simply pluck an asset out of Talem to run through trials rather than generating a lead in house. Once again, color me skeptical. How can a company with only 2 years of CRO experience have a data moat? Maybe they are the first to capitalize on recent advances in sequencing technology to develop this moat, but it seems like such a logical step that I would be surprised if other companies aren't doing something similar.
Their original competitive advantage stemmed from 3 things: RapidPrimeTM immunization in mice, single step cloning for hybridomas, and technology to generate rabbit antibodies, but I still don’t know how useful each of these abilities are. The tech is currently a black box (I found the innovations in a 2017 shareholder letter not an annual report) so you must place your faith in the CEO, which I never like to do.
What about their highly touted, multi-antibody covid asset(both therapy and vaccine)? Some claim it's 100% effective against variants, but this data is only in a limited number of animal models. The primary claim by investors is that the asset was developed for long term effectiveness with variants in mind. It uses an antibody cocktail with >1 antibody working synergistically, thus improving effectiveness against any variants. This may be true but the drug hasn't even started clinical trials! (<10% of preclinical drugs are approved) The CEO claimed the asset would be in human trials by last winter and ready by April, but she assumed funding from the government which they did not receive. Antibody cocktails aren't original with a number of other approved and developing therapies using this approach.. IPA is trying to penetrate a competitive market and are less funded/established than other companies.
Other Reasons for concern
Beyond the already noted competitive concerns, There are some other ones I wanted to address as well.
The Company is extremely promotional. Some may enjoy the access to numerous CEO interviews, but I find it odd for a company developing drugs during a global pandemic. Other companies with therapies/vaccines have taken some interviews, but usually waited until after the asset was developed and in trials because of the metric ton of work they needed to do. In a year where biotech is at the forefront of rescuing the world, time spent organizing and taking interviews for investors is bizarre. I prefer some communication from the companies I invest in, but the most successful ones often aren't promoting themselves monthly to investors. In addition, each interview is the same and adds little information. The CEO has little ownership in the company and has overpromised, which offers her little trust in my opinion
They had no R&D expenses in the last quarter: This is simple, but puzzles me. They are a CRO with a pipeline of preclinical assets in Talem, how can you have no R&D for a quarter of a year? Even in a down quarter, do you not have salaried scientists? The lack of R&D supports my theory that a lot of the process is outsourced. The company says it’s just a blip and it could be just that, but it still makes me skeptical.
Declining Revenue per Client:
2019 Revenue per client = $60k. 2020 Revenue per Client = $40k. Not only are these numbers chump change for any pharma company, declining revenue per client signals they either overcount clients to report ">500 clients and 70% of top 20 pharma" or they spend heavily to acquire clients that don't pan out to full programs. One could say the pandemic year slowed rollout of pilot programs and conversion of customers to larger scale programs, but IPA still saw growth in the number of clients without seeing much in the way of revenue per client.
Growth through acquisition: The ModiQuest acquisition brought in ~$3.3 million in 2019 revenue with 800k in EBITA and the U-Protein acquisition brought in ~$2 million of revenue growing at 20%. These were both fueled by stock issuance and make up the majority of the revenue growth in recent years. Such a strategy is unsustainable considering they are barely profitable and the best companies developing antibodies aren't available cheaply.
So we've been through the business, the science behind antibody discovery, their competition, competitive advantages, the COVID assets, and reasons for concern/questions I have. Throughout the post, I have been bearish on the company and skeptical of it’s future prospects, but there is potential for the company to succeed. Details on the CRO antibody discovery platform are scarce, but they could have ground breaking technology behind their offerings. If that's the case, it should certainly be valued much higher. In addition, the increasing number of clients could represent engagement of more pharma partners who, after an initial pilot phase, will start programs with IPA. As they get more projects, they can leverage the additional data to generate effective therapies through Talem. Pharma companies would then license Talem's assets for development propelling IPA to the forefront of antibody development. In addition, the COVID asset could successfully pass clinical trials through a partnership with a larger company. Though I believe the company is overhyped at 10x EV/Sales for an unprofitable company, the upside skew for the company is large. If the story they tell is true, then it’s certainly undervalued.
For the 25 years since inception in 1989, Immunoprecise was a stable, profitable private company based in Canada that developed diagnostic antibody tests. Starting in 2016, with a new CEO, the company listed on the TSXV and shifted to becoming a CRO through an acquisition. The shift continued in 2018 with another new CEO (the current one) as IPA continued to grow through acquisition in an attempt to penetrate the pharma market. The antibody discovery market is large and crowded with well funded competition constantly innovating. I am skeptical of the claims from the company regarding their competitive advantages and pipeline of therapies (including a COVID therapy) . Combining this skepticism with other reasons for concern colors me skeptical about the company. If you want to invest in the company, understand that you are trusting your money with the CEO and for me, the company’s promotional nature, overpromising, and low insider ownership don't inspire confidence. However, as pointed out, the company could have a breakthrough technology which allows them to capture a large part of the antibody drug market propelling shares higher.
Disclosure: The opinions expressed in the Blog are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security or investment product. It is only intended to provide education about the financial industry. The views reflected in the commentary are subject to change at any time without notice.