• Absci Corporation’s stock has rebounded due to new collaborations, but skepticism about AI’s impact on drug discovery keeps it heavily underwater from its IPO price.
• Absci uses AI and wet lab technologies to speed up drug discovery, aiming to reduce preclinical periods to under two years.
• Despite partnerships with Merck, AstraZeneca, and others, Absci’s revenue remains minimal, and it has no advanced pipeline assets yet.
• With a market cap just over $300 million and cash runway into 1H27, Absci is a speculative play in the AI drug discovery space.
• An analysis around Absci Corporation follows in the paragraphs below.

Shares of AI-assisted drug creation concern Absci Corporation (NASDAQ:ABSI) have rebounded nicely in the past year as four more signed collaborations have boosted confidence in its approach. That rally has faded recently. Despite the rise of its 52-week lows, the stock is still heavily underwater from its IPO pricing as the market questions whether AI will actually speed up time to the clinic or approval rates. With a differentiated approach to drug creation versus its AI competition but no clinical data to substantiate its validity, this name merited a deeper dive. An analysis follows in the paragraphs below.

Company Overview:

Absci Corporation is a Vancouver, Washington-based drug discovery concern focused on the development of biologics leveraging artificial intelligence and scalable wet lab technologies. The company is engaged in 22 active drug candidate discovery programs with a plethora of partners, as well as three internal creation programs. Absci was formed in 2011, began commercial operations in 2018, and went public in 2021, raising net proceeds of $210.1 million at $16 per share. Its stock currently trades around $2.75 a share, translating to a market cap of just over $300 million.

Approach

The company is attempting to upend the current drug discovery model, harnessing AI to create therapies through a disease-agnostic paradigm. By doing so, it expects to greatly speed up the long iterative discovery and preclinical journey that (if successful) takes five and half years on average to achieve IND acceptance from the FDA. Using Absci’s own terminology, it leverages its “lab-in-a-loop”, which employs “the data to train, the AI to create, and the wet lab to validate” its discovery candidates in rapid six-week cycles that could reduce the preclinical period to less than two years.

As for the specifics: after leveraging reverse immunology tools for target identification, the company uses its proprietary E. coli SoluPro cell line to generate billions of cells that express proteins of interest. Those cells are run through Absci’s ACE assays to measure the binding affinity and target specificity of millions of antibody sequence variants every week. Those findings are combined with publicly available data, which are processed by AI models to create de novo (from scratch) antibody-antigen complex structures and sequences in silico (in the computer). The highest-ranked antibody sequences from the dry lab are entered into the wet lab (analyzed and tested using liquids) to validate their characteristics. This six-week cycle is continuously repeated to arrive at optimal therapeutic candidates for the clinic. The more data generated from this approach, the more its AI models learn, allowing them to create new and better engineered biologic constructs faster. Absci believes this strategy will result in shorter times to human trials with success (FDA approval) rates above the standard 10%-20% probability once in the clinic.

One example of how these AI procedures can speed up drug development and reduce discovery costs would be the ability to predict whether a newly discovered compound could induce adverse events before testing it on animals or later in the clinic on humans. A foreknown negative safety profile can save a biopharmaceutical concern years of needless preclinical testing and millions of dollars – not to mention a few animals.

Partnerships

From this approach, Absci has procured nine drug development partnerships encompassing 22 active programs. That said, they have not garnered much revenue to date. A three-program deal with Merck (MRK) in 2022 was advertised as bringing in upfront and potential milestones of $610 million plus tiered royalties after the duo teamed up for a single undisclosed program in 2019. In 4Q23, the company signed a two-program dermatology collaboration with Spanish biopharma Almirall (OTCPK:LBTSF) potentially worth $664 million in upfront fees and milestones. That was followed in the same stanza by news of a one-compound partnership with AstraZeneca (AZN) that provides an undisclosed “upfront commitment”, as well as milestones and royalties. That said, the upfront considerations from these deals are clearly not significant, as Absci has generated total revenue of $5.7 million in both FY22 and FY23.

The company also inked a five-program deal with computational biology concern PrecisionLife in December 2023, as well as a six-program co-development oncology collaboration with Memorial Sloan Kettering in mid-2024. However, neither of these partnerships will result in any upfront fees or potential future milestones, only the hope of developing clinical worthy compounds. Many of the specifics surrounding these partnerships are shrouded in secrecy with regards to disease category or target for competitive reasons.

Management anticipates signing three additional deals before YE24.

Wholly Owned Programs

Absci also has directed some of its technology inwards, with three discovery programs of its own. Its lead program (ABS-101) is in IND-enabling studies targeting TL1A for the treatment of inflammatory bowel disease, a malady with a prevalence of approximately five million worldwide. That said, Merck, Roche (OTCQX:RHHBY), and Sanofi (SNY) all have TL1A antibodies in the clinic, the data from which are being leveraged to develop and improve ABS-101, with some measurable success: it has demonstrated two to three times the half-life in the preclinic versus the competition. The company expects to file an IND in 1Q25 with an eye on initiating its first clinical trial in 1H25. Absci’s other two programs, ABS-201 (dermatology) and ABS-301 (immuno-oncology) are still in the discovery phase with preclinical data anticipated in late-2024/early 2025. For the avoidance of doubt, management expects to out-license these programs if they demonstrate potential in Phase 1 trials.

AI Development Marketplace

Although AI sounds sexy and new, the space for leveraging the technology in the field of biopharmaceuticals is already very crowded, with Generate Biomedicines, Exscientia (EXAI), Phenomic AI, BioMap, Quris, Valo Health, BenevolentAI (OTC:BAIVF), Recursion Pharmaceuticals (RXRX), Relay Therapeutics (RLAY), and Isomorphic Labs all offering AI-linked design and development capabilities. Absci’s differentiating feature is its use of the wet lab to gain a better understanding of its designs vis-à-vis the strictly dry lab approach of its competitors.

Balance Sheet & Analyst Commentary:

To help advance its partnered and wholly owned programs while it awaits potential milestone revenue, Absci raised net proceeds of $80.8 million at $4.50 per share in a secondary offering conducted in February/March 2024. In total, the company held cash and investments of $127.1 million on September 30, 2024, providing it an operating runway into 1H27, assuming no funding from existing or future collaborations.

Despite having nothing in the clinic, either on its own or through a partnership, Absci receives mostly constructive support from the Street. Since the company’s third quarter results were posted on November 12th, TD Cowen, H.C. Wainwright ($7 price target) and Scotiabank ($13 price target) have all reissued Buy ratings on the stock. Stifel Nicolaus maintained its Hold rating and six bucks a share price target on the stock.

Verdict:

After nearly doubling two weeks after its IPO in 2021, the ‘irony’ of a company pushing a quicker to clinic discovery platform with no clinical assets weighed heavily on shares of ABSI, which were down 96% from their all-time high (and 93% from their IPO pricing) at $1.11 in October 2023. Since then, Absci’s stock has caught a bid, more than doubling in the past year, in part because it was trading at cash (or a slight discount to) at its lows with upside potential from its Merck collaboration. Beyond a cheap valuation, confidence in its approach – boosted by partnerships signed with AstraZeneca, Almirall, PrecisionLife, and Memorial Sloan Kettering – has provided share price appreciation. Also, its wet-lab process holds the possibility of separating from its competition.

However, it remains to be seen whether AI is actually going to speed up preclinical evaluation or increase success rates in the clinic. With its approach valued at just under $200 million net of cash, the skepticism discount no longer exists. As such, the recommendation is to stay to the sidelines unless one is a very aggressive investor looking to increase exposure to the emerging AI drug discovery space.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• Absci’s differentiated drug discovery platform could create significant shareholder value long term.
• The company has a long and expensive path to traverse before it can prove the merits of its approach though.
• While cash burn is currently limited, Absci’s operations are ramping, meaning increased costs could begin to pressure the share price in the future.
• Absci has largely avoided the growing pessimism towards AI-enabled drug discovery companies and is beginning to look expensive relative to peers as a result.

Absci’s (NASDAQ:ABSI) share price has held up well in recent months, despite AI-enabled drug discovery peers generally falling further out of favor with investors. Much of this could be the result of Absci announcing positive preclinical data related to its ABS-101 program. The company’s association with Nvidia (NVDA) and limited cash burn are also likely viewed favorably.

I previously suggested that Absci had a differentiated approach to antibody drug development that could yield advantages relative to existing methods. While I continue to believe that this is the case, I don’t think that this makes the company immune to broader developments in the space. For example, Recursion’s (RXRX) disappointing phase II data has further dampened investor sentiment towards AI-enabled drug discovery. I don’t believe this trial is particularly important longer-term, but it highlights the fact that the benefit of AI is likely to be incremental in nature. Exscientia’s decision to merge with Recursion and AbCellera’s (ABCL) slow progress also highlight the difficulty of maintaining early hype around the technology as the business matures and cash burn begins to increase. At the end of the day, all of these companies need to be able to succeed in clinical trials, and this is a long and expensive process.

Technology

Absci combines generative AI with scalable wet lab technologies to improve antibody discovery, with the eventual goal of enabling in-silico drug design. Data is currently the limiting factor on this approach, a problem that is addressed by Absci’s E. coli strain, which is capable of cost-effectively producing diverse human antibodies at scale. Assays are then performed to identify high potential antibodies and validate Absci’s algorithms.

Absci’s background is in cell line development and over the course of a decade, the company developed SoluPro, an E. coli platform that enables the production of antibodies at scale (billions of cells, which express proteins of interest). This is difficult because antibodies are complex proteins that require special cellular machinery to ensure they are correctly assembled and folded, and E. coli normally lacks the post-translational apparatus to produce functional antibodies. Absci’s E. coli cell lines are bioengineered for production of mammalian proteins and site-specific incorporation of non-standard amino acids.

High-throughput single-cell assays are used to evaluate fully constructed protein scaffolds for target binding affinity, protein quality, and production level. Absci’s ACE assay evaluates and sorts cells to find those with the most potential and provides 4,000x the throughput of traditional high-throughput assays. This data is used to train AI models.

Other aspects of Absci’s platform that are potentially important include:

• The ability to optimize multiple drug characteristics simultaneously
• The ability to generate antibodies with epitope specificity

Absci also has the ability to use human immune responses to identify novel antibodies and their therapeutic targets. This business is supported by a network of health care institutions which provide access to patient data. Absci wants to improve the scalability of this part of the business by using AI to predict the target rather than performing screening to determine what the antibody is binding to.

Absci has stated that it can generate a differentiated antibody candidate and complete IND-enabling studies for around 15 million USD, within a 12-14 month timeframe. For example, ABS-101 was created and advanced to IND-enabling studies in 14 months for a cost of less than 5 million USD. Recursion has put its cost to generate a candidate and complete IND-enabling studies at closer to 5 million USD, with a 2-year timeline, compared to an estimated industry average of approximately 20 million USD.

Programs

Absci has previously focused on partner programs, which limited the company’s ability to communicate with investors. The company more recently pivoted to a hybrid model, allowing the company to provide more details on internal programs. While internal programs increase the cash needs of the business, it creates more upside for investors.

Absci is advancing three programs toward clinical trials, with an initial focus on cytokine biology. The company expects to initiate a phase I study for ABS-101 in patients with IBD in early 2025, with interim data expect later in 2025. Inflammatory Bowel Disease is currently a 20 billion USD market that is expected to offer single digit growth going forward.

Absci has demonstrated ABS-101’s ability to bind both the TL1A monomer and trimer, which could lead to differentiated clinical efficacy. The company also believes that it addresses all known monomer isoforms. Non-human primate studies showed 2-3x longer half-life compared to competitor molecules (Roivant RVT-3101 and Merck MK-7240) in clinical development. The candidate also has increased biodistribution, which could lead to a therapeutic benefit and potentially obviate the need for a loading dose. Studies also show that ABS-101 can be formulated a high concentration (200 mg/ml), supporting further development of a subcutaneous formulation. GLP toxicology studies are currently ongoing. While non-human primate data appears promising, it is not guaranteed that results will translate in human trials. Despite physiological and genetic similarity, factors such as differences in metabolism, immune responses, and disease progression can affect outcomes.

ABS-201 is targeting an undisclosed dermatological indication. Absci expects to select a development candidate for this program later this year.

ABS-301 could be a first-in-class antibody for an undisclosed immuno-oncology target, which was discovered using Absci’s reverse immunology platform. ABS-301 is a fully human antibody designed to inhibit an immunosuppressive cytokine and stimulate an innate immune response. It is currently being evaluated for a variety of oncology indications. Mode of action validation studies are expected to be completed in the second half of 2024.

Absci expects to share preclinical data for ABS-201 and ABS-301 either later this year or early next year. Absci also expects to advance at least one additional internal program to a lead stage in 2024.

Partnerships

Absci recently entered into a collaboration with Memorial Sloan Kettering Cancer Center to jointly develop up to six therapeutic programs. The organizations will share costs, which will help Absci to advance its pipeline while controlling costs.

Absci’s other partners include Merck, AstraZeneca and Almirall. The company is targeting an additional three drug creation partnerships in 2024. While Absci reportedly has a robust pipeline of potential partners, time is running out to announce the three additional partnerships.

Financial Analysis

Absci generated 900,000 USD revenue in the first quarter of 2024 and 1.3 million USD in Q2. R&D expenses totaled 15.3 million USD in Q2, up around 25% sequentially, driven by increased lab operations. SG&A expenses have been sitting at around 9 million USD per quarter.

Gross cash burn is expected to total around 80 million USD in 2024, including the costs of completing IND-enabling studies for ABS-101 with a third-party CRO. This is important as Absci’s cash balance is fairly modest (145.2 million USD at the end of Q2, down from 161.5 million USD in Q1).

Absci performed an underwritten public offering of common stock earlier in the year, which provided gross proceeds of around 86 million USD and will likely need to do so again in the near future. The company’s current liquidity is expected to be sufficient to fund operations into the first half of 2027. This implies cash burn of around 15 million USD per quarter, which appears optimistic given that operations are likely to scale significantly over this time frame. The company may be looking for more positive data to drive its share price higher before further diluting investors.

Conclusion

Absci has a differentiated technology platform, which has significant potential, but the stock is beginning to look expensive relative to more mature peers. While Schrodinger (SDGR) and Recursion have much larger enterprise values, Schrodinger also has a software business that probably should be worth upwards of 1 billion USD. Recursion/Exscientia has a pipeline of approximately 10 clinical readouts over the next 18 months. Most of these programs, if successful, could have annual peak sales opportunities in excess of 1 billion USD. In comparison to Absci, AbCellera has a much stronger balance sheet, and while its internal pipeline is still nascent, it has around 13 molecules in the clinic through partner programs. This makes Absci look quite attractive relative to peers, even if the company’s valuation is reasonable on an absolute basis.

Absci is potentially benefitting from operating in a hot area (generative AI, data play, relationship with Nvidia) and the fact that its cash burn is currently moderate. The company also doesn’t appear to have been hit by the negative sentiment that Recursion’s poor clinical trial data has created toward other AI-enabled drug discovery companies.

Absci continues to land new partnerships, which is difficult to do in the current environment. Companies like AbCellera have struggled to attract partners in recent years, accelerating a transition toward internal programs. While I believe this shift was inevitable, and is a positive longer term, it has raised cash burn concerns in a tight financing environment. Absci could find itself in a similar position in the next few years, particularly given its small cash position, as it increases the number of internal programs.

Even if Absci lives up to its potential, it will take time and capital to really accelerate the company’s data flywheel, which will require raising capital on favorable terms. Given this situation, I think it is likely that Absci’s share price will come under pressure when the reality of the company’s near-term future sets in.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of SDGR either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• Absci Corporation’s initiation of a phase 1 study using ABS-101 for the treatment of patients with IBD expected early 2025, with interim data to be released in the 2nd half of 2025.
• ABS-101 aims to differentiate itself with unique features like de novo antibody creation, multiparameter lead optimization, and reverse immunology, potentially offering superior potency and dosing flexibility.
• The global Crohn’s Disease treatment market is expected to reach $17.80 billion by 2033.
• The ulcerative colitis treatment market is expected to reach $14.77 billion by 2033.

Absci Corporation (NASDAQ:ABSI) is working on developing the use of its biologic drug ABS-101 for the treatment of patients with inflammatory bowel disease [IBD]. This drug is already de-risked in the fact that it is an anti-TL1A antibody which has been proven to work with several other drugs in clinical development or those which have already been approved to treat autoimmune disorders.

If this is the case, then why even bother looking at this biotech? That’s because it is taking an entirely different approach to improve upon the targeting of TL1A for inflammatory disorders. For starters, it is using AI-driven technology it has developed to form biologic that have a greater chance of success. This is done with its technology known as its Integrated Drug Creation platform, which is looking to use AI to enhance biological drug development.

That is, the ability to develop drugs like ABS-101 with a de Novo approach. In essence, the AI doesn’t use an established database to create a drug target, but instead creates an entirely new never-before-seen molecule. To take it even further, its tech establishes other advantages like reducing preclinical development time by a huge margin [removal of lead optimization being needed] and to be in a position to dose patients subcutaneously.

The importance of going over this company is because it is gearing up to have a few catalysts for investors to look forward to. The first catalyst of which involves the initiation of the phase 1 study using ABS-101 for the treatment of patients with IBD. From there, the second catalyst of which to expect from this program would be interim results from this early-stage trial for the treatment of patients with IBD in the 2nd half of 2025.

ABS-101 For The Treatment Of Patients With Irritable Bowel Disorder

The first and main clinical program from Absci Corporation would be the development of ABS-101, which will be used to target patients with inflammatory bowel disease. The first-in-human clinical study has not yet been initiated, more about that below, but it is first important to go over what IBD is and what the possible market opportunity for it could be. Irritable Bowel Disorder [IBD] is a type of disorder characterized as inflammation of the digestive tract.

It is critical to note that there are two types of IBD, both of which are large markets for this biotech to go after with its AI-driven cytokine biological drug development. The two disorders of IBD in question are:

• Crohn’s Disease
• Ulcerative Colitis.

When looking at Crohn’s Disease [CD], this may involve inflammation of the entire digestive tract, although it could also only have specific areas affected. The global Crohn’s Disease treatment market is expected to reach $17.80 billion by 2033. This is one of the large market opportunities that it could go after.

The other one that it could target would be Ulcerative Colitis [UC]. When looking into this disorder, this is classified as inflammation being only confined to the large intestine of the digestive system. Plus, along with the fact that such inflammation only occurs on the inner lining of the intestine. The ulcerative colitis treatment market is expected to reach $14.77 billion by 2033. The thing is that there are many other TL1A drugs in development. Therefore, this biotech is taking a balanced approach in using an established class of drugs, but at the same time generating an entirely different biologic with its platform technology.

It needs to create some type of product differentiation compared to other anti-TL1A antibody drugs in some fashion. Its platform technology approach is unique in that there are three things that it utilizes to create the best in class TL1A drug, as follows:

• De novo antibody creation — Creating a targeting of drugs with a new approach never before seen in other databases using its AI technology
• Multiparameter lead optimization — quicker preclinical development of a biologic with reduced lead optimization and quicker path for drug development
• Reverse immunology drug development — deploying reverse immunology to establish superior target profile because <5% of biologics achieve success from discovery to launch.

The bottom-line is that it wants to be unique with its TL1A drug it is developing. It could end up allowing ABS-101 to have differentiated features compared to other anti-TL1A antibody drugs of the same class. Thus, possibly establishing greater potency [efficacy], epitope specificity [efficacy done right with minimal off-target effects] and epitope interaction [superior mechanism of action]. Best part of all is that its Integrated drug Creation Platform technology can make use of any type of drug to be established like: Monoclonal antibody, bispecific protein drug, fusion protein drug and more.

The company was able to release highly positive preclinical data from non-human primate [NHP] testing. It was shown that ABS-101 had an extended half-life 2 times and/or 3 times more potent than competing drugs, like RVT-3101 from Roche (OTCQX:RHHBY) and MK-7240 from Merck (MRK). Why is such an extended half-life advantage achieved in NHP testing important? That’s because if this translates well to humans, then ABS-101 can be dosed Q8W or Q12W [once every 8 weeks and once every 12 weeks respectively]. A second advantage this drug could have would be a superior biodistribution profile.

A good thing about this is to have more rapid tissue penetration compared to other anti-TL1A drugs. Even better, Absci’s drug may not even have the requirement of a loading dose. Lastly, it might or may not have an advantage in terms of dosing. Thus far, it has been able to achieve drug substance formulation of 200 mg/mL. If this is the case, then it could be possible to give ABS-101 to IBD patients with a subcutaneous formulation.

The bottom-line is that ABS-101 could possibly be the best-in-class anti-TL1A antibody drug in development. Of course, that’s if this profile is established in human testing. Speaking of which, a phase 1 study using this drug to treat these patients is expected to begin in the early part of 2025. If this early-stage trial initiation goes well, then it will be in a position to release interim data from this phase 1 study in the 2nd half of 2025.

The hope is that the drug can achieve the several advantages noted above. In addition, what might also set it apart might be the fact that it goes after both TL1A monomer and trimer targets. This might create an efficacy advantage, but that just depends on how well clinical testing goes.

Financials

According to the 10-Q SEC Filing, Absci Corporation had cash, cash equivalents, and short-term investments of $145.2 million as of June 30th of 2024. The reason for the cash on hand is that back in March 2024 it sold a total of 19,205,000 shares of its common stock at an offering price of $4.50 per share. This helped it to raise total net proceeds of $80.8 million after deducing expenses. The company is likely going to end up raising additional funds soon enough.

Why do I believe this to be the case? That’s because it states in its 10-Q SEC Filing that it believes it has enough cash on hand to fund its operations, or cash runway, for at least the next 12 months. Thus, I think it is going to raise cash after an upcoming news release or other catalyst that may cause the stock price to trade higher. A good thing to note is that it does have a solid financial option to use if it decides to do so.

This would be regarding a Sales Agreement With Cowen and Company LLC stablished as an “at-the-market” offering agreement program. This is an ATM agreement by which it could occasionally offer and sell up to $100 million. As of June 30th, 2024, no securities have been issued regarding this agreement. Again, this is an option if management decides to utilize it.

It burns about $24.6 million in cash per quarter. This is broken down into selling, general and administrative expenses of $9.3 million & Research and development expenses of $15.3 million.

Risks To Business

There are several risks that investors should be aware of before investing in Absci Corporation. The first risk to consider would be regarding the development of ABS-101 for the treatment of patients with IBD as an anti-TL1A antibody. Even though preclinical testing in NHPs has shown to achieve 2X to 3X extended half-life over competing TL1A drugs, there is no assurance that this will be reproduced in phase 1 human testing or beyond. The second risk to consider here would be that even if Absci eventually receives regulatory approval for ABS-101, it will still have to go up against Merck, Roche, and Sanofi (SNY)/Teva Pharmaceuticals (TEVA). Speaking of which, Sanofi and Teva are in the process of developing an anti-TL1A antibody drug for the treatment of patients with inflammatory disorders. This drug being worked on is known as TEV-48574.

The second risk to consider would be in terms of the development of ABS-201 for the treatment of patients with dermatology and ABS-301 being worked on for immunology indications. Each is being advanced as a potential best-in-class and first-in-class drug, respectively. A development candidate is expected to be selected for the ABS-201 program in the 2nd half of 2024. The risk is that there is no assurance that such a clinical product will be selected, nor that it will eventually do well in all stages of clinical testing. In terms of ABS-301, it is expected that mode-of-action validation studies are expected to be completed for it in the 2nd half of 2024. The risk here is that there is no assurance that completion of such activities will eventually result in a product being developed to move forward with in human clinical testing.

The third risk to consider would be in terms of the partnership established between the company and Memorial Sloan Kettering Cancer Center [MSK]. The goal of both of these entities are to combine their expertise to generate 6 programs using the generative AI approach. Absci is to provide its Integrated Drug Creation Platform, while MSK is going to provide its research expertise in the field of oncology. The risk here is that there is no assurance that one or all 6 of these programs will be established for human clinical stage testing. Nor, that upon the release of data from clinical studies, that the data to be generated will be enough to warrant further investment regarding this partnership.

The fourth and final risk to consider would be in terms of the other partnerships that the company has been able to establish. It appears that many are interested in this de novo approach of establishing highly differentiated cytokine biologics to treat patients with various disorders. It has been able to generate partnerships with the likes of Nvidia (NVDA), AstraZeneca (AZN), Merck (MRK) and Almirall. The risk here is that some of these partnerships might involve upfront payments, milestone payments and/or tiered royalty agreements. Thus, there is no guarantee that these collaboration agreements will be able to generate such payments, nor that these partnerships are going to last. Any of these entities could terminate the collaboration agreement in place for any reason.

Conclusion

The premise of this company is that has been able to establish a highly innovative AI approach to drug development. I went over above the prospects of its ability to use its Integrated Drug Creation Platform. The purpose? To take currently available established targets such as anti-TL1A drugs targeting inflammatory disorders and enhancing upon the safety, potency and/or efficacy profile of it. Regarding ABS-101 for the treatment of patients with IBD, this is being done by using the AI approach I described above. In essence, having several competitive advantages over the other pharmaceutical companies developing a TL1A drug molecule.

This would be in terms of less frequent dosing Q8W or Q12W, reverse immunology targeting for enhanced efficacy, superior lead optimization development and others. Speaking of the ability to improve lead optimization, this technological approach shortens pre-clinical development from 5 to 7 years down to a possible timeline of 18 to 24 months. This allows it to continue to develop its own drugs like ABS-101, ABS-201, ABS-301 and partnered drugs as well. With interim data readout of ABS-101 in IBD in the 2nd half of 2025, plus an innovative approach to developing cytokine biological drugs with its unique Integrated Drug Creation Platform, I believe that investors could benefit with any potential gains made here.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• Absci Corporation uses IDCP technology to quickly produce high-quality drug candidates in as little as six weeks, reducing costs and improving research success rates.
• The company has promising candidates in inflammatory bowel disease, dermatology, and immuno-oncology, attracting major partnerships with over $900 million in deal value and royalties.
• ABSI focuses on three therapeutic areas: inflammatory bowel disease, dermatology, and immuno-oncology.
• Investors should be aware of the high risks due to the speculative nature of AI-driven drug discovery and potential funding needs.
• Still, ABSI trades at a reasonable valuation, making it a sound speculative “buy” for investors aware of biotech’s inherent risks.

Absci Corporation (NASDAQ:ABSI) is a biotech stock that uses its IDCP technology, combining extensive datasets, advanced AI algorithms, and wet lab validation. This produces high-quality drug candidates quickly, in as little as six weeks. ABSI’s streamlined process reduces costs and should improve its research progress success rate. Additionally, the company’s innovative approach has attracted major partnerships that yielded over $900 million in deal value and royalties in 2H2023 and has promising candidates in inflammatory bowel disease, dermatology, and immuno-oncology. I believe ABSI is a unique biotech that also leverages AI, trading at a reasonable valuation multiple. Hence, I deem ABSI a sound speculative “buy” for investors aware of the inherent risks.

Biotech AI: Business Overview

Absci Corporation is a biotechnology company that uses generative AI for drug discovery. Its platform and wet lab technologies then create and validate biologics rapidly. ABSI was founded in 2011 and is headquartered in Vancouver, Washington, with additional offices in New York City and Zug, Switzerland. The company’s Integrated Drug Creation Platform [IDCP] is its main value driver for generating new medications. It combines three components: 1) extensive datasets with genetic, biochemical, and pharmacological data that train AI algorithms for discovering drug candidates. Also, 2) AI algorithms design drugs based on patterns extracted during the training Phase. Lastly, ABSI’s 3) wet lab technologies validate AI-designed drug candidates, optimizing for specific characteristics and safety.

Currently, ABSI claims that it can generate validated drug candidates in as little as six weeks, reducing the costs and timelines to produce new drug candidates. The underlying approach uses ABSI’s IDCP and inputs millions of possible candidates, optimizing different drug versions. Then ABSI uses its proprietary SoluPro cell line to create billions of cells with proteins of interest that are further analyzed and tested. Its Activity-specific Cell Enrichment [ACE] assay technology then evaluates millions of antibody sequences and billions of parameters in weeks, allowing for rapid drug candidate screening.

Moreover, the generated SoluPro cell line and ACE assay data are combined with public datasets to produce vast training data. These datasets are then fed into AI algorithms. The AI’s output is antibodies and biologics produced by generative AI models. The final step uses ABSI’s validation lab, which receives AI-generated biologics and evaluates binding affinity and target specificity. Every six weeks, the company then uses wet lab data as feedback for the AI algorithms, which creates a constantly improving feedback loop for the AI models.

Theoretically, ABSI’s approach is an improvement over traditional biotech methods that typically take two years from drug discovery to the IND stage. Typical techniques have less than a 5% success rate and cost between $14 million and $16 million per R&D project. In contrast, ABSI’s AI platform significantly reduces the time needed to progress to the IND Phase and increases the success rate.

For example, ABSI generated ABS101 reached Phase 1 in just 14 months, spending less than $5 million. So, the potential improvements from shorter drug development timelines translate into considerable cost savings and should lead to much faster clinical development. Also, from a narrative perspective, it provides ABSI with a unique investment profile in biotech. It addresses challenging approval processes through AI that could yield new and unusual action mechanisms across different indications.

AI-Generated: Product Pipeline

The company’s pipeline focuses on three therapeutic areas. First, ABSI’s inflammatory bowel disease area targets TL1A, a cytokine related to inflammation. Here, ABS-101 is in the IND-enabling stage as a potential “best-in-class” drug. ABS-101 research started in January 2024, demonstrating high target affinity and effectiveness at low concentrations, with a long half-life and cost-effective manufacturability. Then ABS-101’s IND-enabling research began in February 2024, and Phase 1 trials are planned for 1H2025. The company’s 2) dermatology area has an undisclosed target with ABS-201, which is in the lead stage before IND. This candidate is also named as a potential “best-in-class” drug. Lastly, ABSI’s 3) immuno-oncology has an undisclosed target linked to cancer treatment through activating the immune system. Here, ABS-301 is touted as a potential “first-in-class” drug. So clearly, ABSI’s approach is quickly generating multiple unique drug candidates that, over time, could progress faster through the FDA’s regulatory approval processes.

It’s worth highlighting that ABSI’s IDCP platform was also the foundation for collaborations with a deal value of roughly $900 million, plus royalties in 2H2023. The company’s partnerships included AstraZeneca (AZN), Merck (MRK), EQRx (EQRX), PrecisionLife, and Almirall (ALMRY) (OTCPK:LBTSF). In my view, AI-designed drugs should become the future of biotech over time. According to a peer-reviewed Drug Discovery Today journal article, AI-discovery molecules have an 80% to 90% success rate in Phase 1 clinical studies due to precision algorithms and validated targets that reduce toxicity risk.

Initially, Google’s AlphaFold was a major AI-biotech breakthrough. Since safety is one of the two key parameters the FDA considers before approving a drug (the other being its efficacy), ABSI could build on this progress. Thus, the paper’s results based on data from 100 AI-focused biotechs could explain the recent surge in AI-led drug discovery that has grown over 60% during the last ten years.

Moreover, success rates through Phase 3 improved to around 9% to 18%, from 5% to 10%. If ABSI’s platform delivers similar improvements, it could double R&D its productivity relative to peers, giving it a vital edge in the long term. Note that the paper’s data was compiled from 2015. This means generative AI contributions were likely minimal in the paper’s analysis but will probably become enormous in the future. In July 2024, Morgan Stanley initiated coverage on ABSI with an “overweight” rating, mainly noting its potential for outperformance due to AI drug design processes. This, coupled with recent collaborations with pharma giants like AstraZeneca and Almirall, paints an encouraging future for ABSI in biotech AI.

Reasonable Price: Valuation Analysis

ABSI trades at a $506.6 million market cap from a valuation perspective, making it a biotech microcap. Its balance sheet holds $58.8 million in cash and equivalents plus $102.7 million in short-term investments. This amounts to $161.5 million in available short-term liquidity against $7.1 million in financial debt. ABSI has $274.9 million in total assets and only $34.8 million in total liabilities. Its book value is $240.1 million, implying a 2.1 P/B multiple. This reasonable valuation seems cheap relative to its sector’s median P/B ratio of 2.5.

I estimate its latest quarterly cash burn was $17.8 million by adding its CFOs and Net CAPEX. This would suggest an annual cash burn rate of about $71.2 million, indicating a cash runway of 2.3 years. In my view, this gives ABSI some flexibility for the foreseeable future. Still, since its most advanced drug candidate is only in the IND stage, it will likely require additional funding for Phase 2 and 3 trials that typically require larger patient populations and more rigorous testing.

However, future collaborations might yield more revenue than anticipated, particularly if ABSI’s internal research shows promising results. After all, the company has several partnerships, which, in my experience, is rare for a biotech of its size, suggesting its technology is unusually valuable. Naturally, I don’t think the company’s current revenue potential is its main value driver. Instead, investors are betting on the company’s potential across several possible indications, likely through its partnerships. Also, ABSI’s internally generated IP could tap into multiple sizeable TAMs over time, but it’s mostly speculative at this juncture.

Therefore, I believe that ABSI’s valuation makes sense for now, and its AI approach could surprise investors’ expectations. Given that ABSI trades at a reasonable valuation with a unique AI-driven biotech approach, I think it’s worth being bullish on it. Hence, I rate the stock as a speculative “buy” for AI and biotech investors.

Investment Caveats: Risk Analysis

Naturally, this investment is not without its risks. Investors need to realize that ABSI remains a highly speculative company despite its promising approach to biotech through AI. I think its cash runway will be enough to get ABS-101 into Phase 1 and maybe Phase 2 if it’s surprisingly efficient. However, there’s a high probability that the company will require additional funding at some point, which will likely involve some stockholder dilution. By then, the stock may be considerably higher, which would mitigate dilution prospects. However, this scenario is not guaranteed, and if its research disappoints the market, dilution could be considerable if done at a low stock price. Moreover, ABSI is inherently a long-term investment, as its true potential will only shine if it delivers a fully AI-generated FDA-approved drug, which will take several years.

Lastly, ABSI’s value largely hinges on its platform’s attractiveness to other pharma players. However, these companies could theoretically develop their internal AI drug generation platforms, detracting from ABSI’s value proposition. The stock faces competitive risks until ABSI builds a substantial proprietary dataset and AI models. Nevertheless, I think that as it stands, ABSI is a reasonably priced bet on AI in biotech, which holds exciting potential.

Speculative Buy: Conclusion

Overall, I lean bullish on ABSI due to its promising potential through AI for biotech, which could disrupt the industry long-term. However, ABSI is highly speculative at this juncture because its technology remains mostly unproven, with no FDA-approved products to date. I reckon its early progress with ABS-101 is proof of concept for AI-generated drugs, but until the company develops a fully FDA-approved medication, it’ll remain inherently risky. Nevertheless, I think ABSI’s current valuation provides investors a compelling entry point for AI and biotech. Thus, I rate ABSI a speculative “buy” as long as investors understand the risks and uncertainties embedded in ABSI.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Absci Corporation Leverages AI For Rapid Drug Discovery And Promising Partnerships appeared first on Up2info.com.

• Absci Corporation, an AI-driven drug discovery company, has seen its share price plummet after its IPO in July 2021.
• Nearly all AI-driven drug discovery companies have struggled with overall share price performance since IPO.
• Absci’s stock has been picking up – +250% across the past six months – thanks to investment in the sector, and a recently agreed partnership with AstraZeneca.
• Merck is another Big Pharma partner, but these deals don’t guarantee revenues and with development programs preclinical, it’s difficult to assign much value.
• Without its “AI” tag, Absci would likely be a $100m – $200m market cap valuation company. The company may show its mettle in time, but the prospect of near term revenues, or further upside, seems remote in 2024.

Investment Overview – Absci – Another AI-Driven Drug Developer With a Compromised Share Price

Absci Corporation (NASDAQ:ABSI) is a Vancouver-based drug discovery company that IPOed in July 2021, raising ~$230m via the issuance of 12.5m shares at a price of $16. After initially surging to a price of >$30, the stock price embarked on a long bear run, reaching lows of ~$1.2 per share in October last year. Across the past six months, however, it has increased by >250%. Will this momentum be sustained?

In its latest earnings, the Q1 2024 quarterly report, ABSI management discusses its business as follows:

Absci is a data-first generative AI drug creation company that combines AI with scalable wet lab technologies to create better biologics for patients, faster. With the data to train, the AI to create, and the wet lab to validate, our Integrated Drug Creation platform aims to engineer better biologics with design-in functionality and best-in-class properties.

AI-driven drug discovery companies have completed multiple IPOs recently – AbCellera Biologics Inc. (ABCL), based in Vancouver like Absci, raised ~$550m at $20 per share in 2020. Schrödinger raised $232m at $17 per share in 2020. Certara, Inc. (CERT) raised ~$335m in 2020 at $23 per share. Recursion Pharmaceuticals, Inc. (RXRX) raised ~$500m in 2021, at $18 per share. Exscientia raised $510m at $22 per share in 2021.

The hype around the potential of AI to transform the pace of drug development – and a bloated IPO market early this decade – was partially responsible for the companies being able to attract so much funding. However, to date, as we can see in the chart below, overall share price performance has been woeful.

Every company mentioned above bar Certara – down nearly 40% – is down >65% since IPO, with three companies’ share prices down >75%. Over the same period, the S&P 500 (SP500) is +20%. There are several reasons for this, I believe.

To date, there are no commercial drugs of any kind on the market that have been developed via AI-driven drug discovery. The thesis is that AI can accelerate the process of evaluating candidates, with supercomputers using neural networks able to learn about molecules and proteins and predict how they might behave.

That is all well and good, but to kick things off, a human being with a profound knowledge of the drug discovery process is required to tell the AI what to look for, otherwise, it is a case of “garbage in, garbage out.” Supercomputers can compare billions, if not trillions, or tens of trillions of possibilities, but when the possibilities are essentially infinite, that renders these numbers irrelevant.

The likes of >$25bn per annum cancer drug Keytruda, >$20bn selling (until 2023) autoimmune drug Humira, and even the GLP-1 agonist drugs developed by Eli Lilly and Company (LLY) and Novo Nordisk A/S (NVO), better known as Zepbound and Wegovy, and tipped to earn hundreds of billions of dollars of revenues over the next decade, were not discovered using AI. In fact, semaglutide, the chemical ingredient in Wegovy, was discovered in scorpion venom.

Nature, and human intuition, still trumps AI in the drug discovery process, as AI-driven drug discovery companies have discovered to their disappointment, and thus to their shareholders’ disappointment. AI is not a cheat code in this field.

There are aspects of the drug discovery process that can be speeded up with the use of AI, but not necessarily dramatically – the clinical trial process still takes years, and billions of dollars to complete, and cannot be speeded up by AI. The pharmaceutical industry essentially deals with human beings, not computers, as it is human beings that fall ill.

Absci’s Recent Bull Run Explained

Nevertheless, all hope is far from lost when it comes to AI-driven drug discovery. Give an AI platform the right information, and it can search for solutions much faster than any human can.

Additionally, companies are beginning to realize that AI on its own is more or less worthless, it has to be combined with what humans already know about developing drugs.

As we can see in the slide below, taken from a corporate presentation, Absci is beginning to understand this, and is adjusting its business model accordingly:

In short, before you hit “enter” on the AI macro, use your “wet lab” to give the AI something tangible to work with.

Despite its heavy overall losses, Absci stock is up >280% on a 1-year basis, rising from $1.5 per share to $4.8 per share at the time of writing, although the reasons for the gains are more pragmatic than a shift in its approach to how it uses generative AI.

In November last year, the entire industry was given a boost after Recursion announced a multi-year research partnership with $2.3trn market cap chipmaker NVIDIA Corporation (NVDA) to accelerate drug discovery and development using AI, with Nvidia making a $50m equity investment in Recursion.

At around the same time, Swiss Pharma giant Roche Holding AG (OTCQX:OTCQX:RHHBY) also announced it had teamed up with Nvidia to accelerate drug discovery with AI. Roche also has a partnership in place with Recursion, worth up to $12bn in potential milestone payments, in which it will use Recursion’s AI in >40 of its pipeline programs.

In early December, Absci announced an agreement of its own – with AstraZeneca PLC (AZN) to “deliver an AI-designed antibody against an oncology target.” Although Absci has not disclosed much detail, the deal is believed to be worth up to $247m, including an upfront fee, and research and development (“R&D”) milestone payments, plus royalties on commercial sales, should the candidate ultimately win commercial approval.

Absci also has an agreement in place with another Pharma giant in Merck & Co., Inc. (MRK), which involves collaboration over three targets, and up to $710m in upfront fees, and milestone payments, plus research funding, and tiered royalties on any commercial sales. I wrote about this deal back in 2022, suggesting that Pharma’s interest in AI has in part been driven by the fact that all the “low-hanging fruit” in terms of druggable proteins and targets, has been picked, and patented.

I also suggested that we may have to wait a decade to see if AI really can deliver more best-in-class drugs, and faster, than more traditional methods of drug discovery. In that context, after its recent run-up, how is Absci performing currently?

Q1 2024 Earnings & Business Updates Overview

Absci reported its Q1 2024 earnings on May 14th. The company earned just $0.9m of revenues, compared to $1.3m in the prior year quarter. R&D expenses were $12.2m, and SG&A expenses $8.7m, broadly similar to Q1 2023, and net loss was $(22m), or $(0.22) per share, versus $(0.26) in the prior year quarter. Cash plus short-term investments were reported as ~$160m.

In short, Absci is not picking up major milestone payments from any of its partners – revenues across the past four years have been $4.8m, $4.8m, $5.7m, and $5.7m, while net losses have been $(49.5m), $(103.2m), $(104.9m), and $(111m). In most industries, these figures would not support a market cap valuation of $545m – the current value of Absci – but clearly the market is hopeful a breakthrough of significance is imminent.

This feeling is not actually borne out by current progress. At present, the company does not have any clinical stage assets, its most advanced drug candidate being ABS-101, which targets TL1A, a member of the tumor necrosis factor family which is a well-known target for inflammatory diseases. The indication for ABS-101 is inflammatory bowel disease. Absci calls this market “large,” and “underserved.” It is certainly large, but I’d question if it were underserved – due to its size, most major Pharma companies have drugs targeting the indication, including AbbVie’s Humira, and multiple generic versions of the drug.

Absci points to the fact that it has been able to develop ABS-101 in just 14 months, and at a cost of just $5m, whereas management believes a traditional pharma may have taken up to three years, spending $30m – $50m per annum. On its Q1 2024 earnings call, management referred to the candidate as “best in class,” and as having a “potentially superior product profile, including demonstrated high affinity, high potency, favorable developability, and extended half life.” In its earning press release, management suggests its ability to “bind both the TL1A monomer and trimer, could potentially lead to differentiated clinical efficacy.”

Absci is looking for a Pharma partner to help develop its most advanced drug after the company itself has guided it through Phase 1 studies – an Investigational New Drug (“IND”) application – allowing in-human studies to begin – could be submitted to the FDA this year, and management hopes to produce a Phase 1 interim data readout by the second half of next year.

As we can see above, Absci compares its candidate favorably with e.g. Merck’s candidate MK-7240, which it acquired as part of its $10.8bn takeover of Prometheus Biosciences, and Roche’s RVT-1301, which it acquired via a $7.1bn takeover of Televant last year.

MK-7240 has delivered positive data from a Phase 2 study, while RVT-1301 is Phase 3 ready, making them substantially more derisked than ABS-101, which still has it all to prove in the clinic.

Meanwhile, Absci is developing two further drug candidates, ABS-201, and ABS-301, indicated for dermatology and immuno-oncology respectively – targets have not yet been disclosed.

The company expects to burn through ~$80m of cash this year – and says it “believes its existing cash, cash equivalents, and short-term investments will be sufficient to fund its operations into the first half of 2027.”

Final Thoughts – Is Absci’e Recent Upward Momentum Sustainable? The Case For Further Upside Seems Lukewarm

Based on the fact Absci has no assets in the clinic, a single IND submission in play, a cash burn of $80m per annum, and only $160m of near-term assets, as mentioned previously, if this were any other industry, it would be difficult to justify Absci’s recent gains or its $550m market cap valuation.

On a more positive note, the partnerships with AstraZeneca, Merck, and a third partner, Almirall, at least bring the prospects of milestone payments into play, although the way deals are structured, milestones for earlier stage development are minimal, and get larger the further an asset progresses through the clinic. The time to discovery and cost benefits of Absci’s AI are another key selling point; however, there is not yet any clinical data to suggest that the candidate developed, ABS-101, is a genuinely “best-in-class” candidate. I wonder if Pharma would prefer to develop AI in-house, and own the process, as opposed to contracting it R&D out to a third party?

As such, it is difficult to see how Absci will generate any meaningful revenues in the coming quarters, or even years, given how immature its existing candidates are. At present, seemingly, its partners are free to walk away from collaborations without making any milestone payments.

Drug discovery is renowned for being a “feast” or “famine” industry, where at any given time, a combination of wet lab research and AI modelling can uncover a drug candidate with genuine “blockbuster” (>$1bn per annum revenues) potential that will attract a Big Pharma partner, milestone payments in the triple-digit millions, and after the clinical trial process is complete, an approvable, marketable drug that can compete in ultra-competitive markets.

Presently, such a scenario seems a long way off for Absci. It almost seems ironic that an approach that is supposed to eliminate risk comes with a business model characterized by a high level of risk – “We may make a breakthrough, we may not.”

All things considered, it is tough to recommend Absci as a promising investment opportunity, despite the recent enthusiasm of the market. That is not to denigrate some work the company is doing – for example, with its candidate ABS-301, the company is studying a “novel immunosuppressive target” that is “independent of known immune checkpoint inhibitors.”

While the research seems valid and intriguing, were it not for the “AI” tag, Absci Corporation’s value in the marketplace would likely not support a market cap valuation much above $250m, based on my experience researching non-AI based biotech companies and their pipeline.

I would therefore award Absci a “Hold” recommendation based on its ability to potentially attract more partners with a promise to develop drug candidates faster, and at a lower cost.

This claim remains relatively unproven, and a more realistic assessment of value would lead to me giving a “Sell” recommendation. However, as we all know, the market is not rational, and the “AI” tag applied to Absci probably adds a spurious $250m – $300m to the company’s value.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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The post Absci: ‘AI’ Tag Keeping Company Afloat While Searching For Right Formula appeared first on Up2info.com.

• Absci combines generative AI with scalable wet lab technologies to improve antibody discovery, with the eventual goal of in silico drug design.
• While Absci’s stock has benefitted from AI hype in recent months, the company has substance. Its approach to antibody drug development is unique and could have advantages.
• Absci’s valuation is still reasonable given the company’s long-term potential, but the stock price is likely to be tied to AI sentiment in the near term, creating downside risk.

Absci’s (NASDAQ:ABSI) stock has performed strongly over the past 3 months, largely on the back of AI hype. Despite this, the company’s approach to antibody drug development is differentiated and could yield advantages relative to existing methods. Absci’s valuation is also still reasonably modest, even after the recent run up. While Absci could be an attractive long-term opportunity, it will take years to prove the merits of the company’s approach and the stock price could fall significantly in the meantime if investors sour on AI.

Market

Absci is a drug discovery company, focused on developing antibody therapeutics. It is doing this by leveraging a number of novel technologies to try and overcome some of the issues that have plagued pharma and biotech R&D efforts in recent years. For example:

• Preclinical development for biologic drugs takes 2-5 years on average and over 8 years from IND to FDA approval.
• R&D cost per product is in excess of 1.1 billion USD when including expenditures on failed trials.
• Success rates are often less than 5% from discovery through to product launch.

As a result, the ROI on R&D is currently low, and many diseases remain without effective treatment options. Advances in areas like next-gen sequencing, synthetic biology, robotics and AI are enabling new approaches to drug discovery though.

While it is still early days, and the efficacy of some of these approaches still needs to be validated, the opportunity is enormous, and includes both R&D services and therapeutic sales:

• Pharma R&D spend is expected to reach 254 billion USD by 2026.
• Global prescription sales are expected to be 1 trillion USD in 2026.
• Therapies based on biotechnology are expected to account for 37% of total prescription and OTC sales in 2026.

Strategy

Absci is trying to combine generative AI with scalable wet lab technologies to improve antibody drug discovery efforts, with the ultimate goal of enabling in silico biologic drug discovery. Multiple drug characteristics are optimized simultaneously, which Absci believes has the potential to significantly shorten time to clinic and increase the probability of success.

Absci believes that data is currently the limiting factor on this approach. A problem that is addressed by its E. coli strain, which is capable of cost-effectively producing diverse human antibodies at scale. Assays are then performed to identify high potential antibodies and validate Absci’s algorithms.

While AI is likely to provide substantial benefits, there is uncertainty around its use in drug discovery. Specifically, whether AI can yield large gains given that it tends to interpolate between known data points and whether there is sufficient data given the complexities of biology. These problems are exacerbated by the size of the chemical universe.

Absci’s Technology

Absci uses synthetic biology and AI, amongst other technologies, to identify novel candidates and create optimized antibodies. A multiparametric optimization of antibody properties (target affinity, manufacturability, pharmacologic properties, etc.) is performed to increase the probability of program success. Drug discovery and cell line development are also integrated, which Absci believes will accelerate timelines.

While Absci’s background is more in synthetic biology, AI is increasingly at the heart of the company. Absci acquired Denovium in 2021 for its Denovium Engine, a deep learning model built to predict the function of proteins. The integration of the Denovium Engine with Absci’s protein production capabilities supports the eventual goal of in silico design. The platform has been trained on functional data from more than 100 million proteins, using over 700,000 descriptive parameters. While the approach is still nascent, Absci believes that generative AI can be used to produce diverse antibodies with high binding affinity, that are also suitable for use as therapeutics.

A large amount of high quality and diverse training data is needed to fuel this approach though, which until recently has been a bottleneck. Antibody discovery is typically performed using:

• Mice hybridomas
• Phage display libraries
• Transgenic mice
• B cells from humans

While antibodies from mice and humans can have high binding affinity and be suitable for use as therapeutics, scientists have no control over the antibodies produced. The phage display method has a relatively poor track record and only finds the part of the antibody that binds, causing potentially important information to be lost.

Absci’s background is in cell line development and over the course of a decade, the company developed SoluPro, an E. coli platform that enables the production of antibodies at scale. This is difficult because antibodies are complex proteins that require special cellular machinery to ensure they are correctly assembled and folded, and E. coli normally lacks the post-translational apparatus to produce functional antibodies. Absci’s E. coli cell lines are bioengineered for production of mammalian proteins and site-specific incorporation of non-standard amino acids.

E. coli is used for a range of reasons, including:

• rapid growth
• ease of editing
• high production
• established protocols

SoluPro enables Absci to validate millions of designs a week versus 1,000s to 10,000s using mammalian cells. SoluPro offers shorter production cycles (1-2 days versus 20-24 days) and higher titers compared to CHO mammalian systems, which could eventually lead to dramatically lower production costs. While this has manufacturing applications, Absci is currently focused on using SoluPro to create training data for its algorithms.

High-throughput single-cell assays are used to evaluate fully constructed protein scaffolds for target binding affinity, protein quality, and production level. Absci’s ACE assay evaluates and sorts cells to find those with the most potential. This data is used to train AI models.

Absci also has the ability to use human immune responses to identify novel antibodies and their therapeutic targets, which came through the acquisition of Totient in 2021. To date Totient has reconstructed more than 4,500 antibodies from over 50,000 patients and has de-orphaned a collection of promising antibodies by identifying and validating their target antigens. This business is supported by a network of health care institutions which provide access to patient data.

Programs

At the end of 2022, Absci had 16 active programs across 5 partners. Monetization through a combination of licensing, milestones and royalties. Absci is also performing development activities for 31 additional molecules, which are a combination of internal programs and programs with third parties to demonstrate Absci’s capabilities.

Absci recently commenced IND-enabling studies for ABS-101, an anti-TL1A antibody designed using gen AI. Absci expects to submit an IND for ABS-101 in the first quarter of 2025. Assuming clearance, Phase 1 studies would commence shortly after.

Partnerships

Absci has a number of partnerships, most of which are discovery programs. Partners include Merck, EQRx, Almirall and Astra Zeneca.

• Almirall and Absci recently announced a partnership that will involve developing therapeutic candidates for two dermatological targets. Almirall is a global biopharmaceutical company focused on dermatology. In total, Absci will be eligible for up to 650 million USD in upfront fees, R&D, and milestone payments, in addition to royalties.
• Absci and Caltech are working together on a HIV vaccine after receiving a grant from the Bill & Melinda Gates Foundation.
• Absci and the University of Oxford’s Kennedy Institute of Rheumatology have partnered to develop immunotherapies for chronic inflammatory and musculoskeletal conditions. The Kennedy Institute will provide its genomics datasets which Absci will use to identify novel antibodies from patients with exceptional immune responses to inflammatory bowel disease.
• Absci recently announced a deal worth up to 247 million USD with AstraZeneca to develop an antibody-based cancer therapy. Compensation will be in the form of upfront fees, R&D funding, milestone payments and royalties on product sales.
• Absci also has a number of programs focused on developing production cell lines for partners. Two of these programs are for preclinical assets and one is for a drug candidate in Phase 3 trials.

Conclusion

AI-driven drug discovery is an area with enormous potential, but it is a relatively new approach that will likely take years to fully demonstrate its value, due to the length of drug development timelines. For example, Absci is targeting 2 years to IND versus a 4 to 6-year industry average and expects to spend 14-16 million USD to reach IND versus a 30 to 50 million USD industry average.

It is difficult to place a concrete value on Absci’s business given how early it is, but there is clearly value, even if is just developing production cell lines for partners. This, along with the company’s existing partnerships more than justify Absci’s current valuation, assuming a moderate amount of clinical success. The platform and the potential for in silico drug design could provide significant additional upside.

Relative to other companies operating in the space, Absci’s valuation also looks low. While these companies all have vastly different approaches, I don’t think there is anything that makes Absci inferior, and its antibody production method may provide an advantage, to the extent that data is important.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• Absci, a Vancouver-based drug discovery company that IPOd in July last year, has seen its market cap fall from >$2bn, to $665m at the time of writing.
• This isn’t unusual for a drug discoverer/developer – Abcellera, also based in Vancouver, has seen its stock fall >80% while even Ginkgo Bioworks stock is -30% since IPO.
• Absci has recently announced a partnership with Merck for up to three candidates which could be worth up to $640m, if all milestones are met.
• That’s not necessarily likely but it does serve as validation of the young company’s technology and approach. Merck is revamping its R&D and Absci could make itself an indispensable part of that.
• The deal will not do much for Merck in the short term, but it may help push Absci’s valuation higher – shares were 44%-plus on the news. Investing with a five-year investment horizon may offer a good ROI.

Investment Thesis – Market Has Depressed AI Drug Discovery Firms’ Valuations

Absci (NASDAQ:ABSI) is a biotech focused on early stage drug development that IPO’d in July last year, raising ~$230m via the issuance of 12.5m shares at a price of $16.

That makes Absci one of ~100 biotech companies to have IPO’d last year – a record – following on from a record 75 IPOs in 2020. Unfortunately for the biotech sector, and also for Absci, the sheer weight of recent IPOs has contributed to an unrelenting and unforgiving bear market in the biotech sector throughout 2021, and so far in 2022.

Post IPO, Absci’s shares surged to a price of $30 in early August, but the stock price has since shed 76% of its value, falling to a price of $7.2 at the time of writing.

Absci is a biotech that wants to use technology to streamline the process of drug discovery – in its IPO prospectus the company declares that “our mission is to change the world, one protein at a time,” and more specifically, that:

With our AI-powered Integrated Drug Creation Platform we enable the creation of novel biologics by unifying biologic drug discovery and cell line development into one simultaneous process.

We leverage proprietary synthetic biology technologies and deep learning AI to predict, identify, design, construct, screen, select and scale production of novel biologic drug candidates, and learn from the data we generate.

We believe our approach delivers disruptive efficiency, but more importantly enables our partners to create novel and human/AI-designed new-to-nature biologics (next-generation biologics).

Absci lists its areas of focus as Synthetic Biology, AI Enabled Drug Discovery, and Biologic Drug Discovery, which puts the company in the same sector as companies including Ginkgo Bioworks (DNA), Relay Therapeutics (RLAY), and Abcellera Biologics (ABCL). Unfortunately, these other recently IPOd company’s share prices have also underperformed, as shown below.

Share price performance of ABSI, RLAY, GINK, and ABCL – past 12 months. Source: TradingView.

It seems that presently, the market is not buying into AI-driven drug discovery – Relay’s share price is down 35% across the past 12 months, Abcellera’s down 70%, and Ginkgo’s down 33%. But at the same time, the deals keep coming – French Pharma Sanofi recently agreed a collaboration with UK based AI drug discovery firm Exscientia (EXAI), which could be worth up to $5.2bn for the company if all milestones are met.

As of Q321, Ginkgo had earned revenues of $165m, making a loss of $144m, Abcellera had earned $236m of revenue, almost entirely from royalties related to its development of Bamlanivimab – Eli Lilly’s COVID antiviral – earning net income of $123m as a result, Relay – which owns its own drug assets as opposed to discovering / developing assets for partners, as the others do, earned no revenue, and made a loss of $297m, and Absci itself reported revenue of $3.3m, and a net loss of $76m.

Ginkgo earned $1.6bn from its IPO – a record for a biotech, Abcellera $555m, and Relay $400m, which underlines the enormous potential the market believes AI-driven drug discovery has, but Bamlanivimab aside, the commercial output of the field has been negligible to date – firms haven’t yet found the needles amongst the haystacks that AI is expected to find, at a pace and in volumes that humans cannot match.

Companies are creating libraries of data, dedicated to discovering how different druggable proteins might look, and interact with other proteins, in order to uncover new molecules and targets that can be put to work treating diseases. This is important because, as Matthew Weinstock, Absci’s Chief Technology Officer, put it on the company’s Q321 earnings call:

just 10 targets, including the likes of PD-1, CD20, TNF, HER2, VEGF, IL6, EGFR, and CD19 account for roughly half of FDA new drug approvals.

Absci Makes Its First Major Deal With Merck

It’s interesting that Weinstock mentions PD-1 first because after agreeing two apparently minor discovery partnerships – with Xyphos Biosciences – a subsidiary of Astellas Pharma, and EQRx Pharma, Absci landed its first major client win earlier this month, agreeing a partnership with Pharma giant Merck (NYSE:MRK) that could be worth up to $610 million in upfront fees and milestone payments.

Merck is the owner and chief developer of Pembrolizumab – brand name Keytruda – one of the most successful monoclonal antibodies to have ever been produced to treat oncological diseases. The immune checkpoint inhibitor (“ICI”) which targets programmed cell death protein 1, or “PD1,” which is widely expressed on the surfaces of cancer cells and prevents the immune system from attacking the body’s own tissues.

Keytruda is arguably the closest thing that the medical industry has to a cancer wonder drug, indicated for melanoma, lung cancer, head and neck cancer, Hodgkin lymphoma, stomach cancer, cervical cancer, liver and kidney cancers and others besides. In 2020, the drug earned >$11bn in revenues.

The fact that Merck is entrusting drug discovery to Absci, then, is an exciting breakthrough for Absci, serving as an early validation of its technology and science – Absci shares jumped 58% on the news of the deal, to a high of $9.5, after a long bear run triggered by underwhelming Q321 earnings of just $1.54m, well short of analyst estimates.

Merck will be able to select up to three targets to take into a collaborative development process, and Absci will assist with biomanufacturing, as well as drug discovery, leveraging 2 of its 3 biggest strengths.

Merck Is Positioning Itself For Growth With R&D Revamp

Merck itself has had a so-so year, at least from the perspective of its share price, which is currently +0.2% over the past 12 months.

The company looked to have uncovered a multi-billion dollar therapy in Molnupiravir, its COVID antiviral, but after initially showing a 50% reduction in the risk of hospitalization from COVID-19, the pill’s efficacy declined to 30% in later trials, and although it has now been approved in the US and UK, Pfizer’s Paxlovid is widely considered the superior therapy, achieving a 90% risk reduction in its own trials.

Merck took the decision to spin off legacy assets and its biosimilars and Women’s Health businesses into a new company, Organon, at the beginning of the year, leaving the company’s product portfolio a little thin, with only the PARP inhibitor Lynparza – developed alongside AstraZeneca (AZN) and approved for ovarian, prostate and pancreatic cancer – and Lenvima – developed with Japanese Pharma Eisai and approved for endometrial and thyroid cancer – supporting Keytruda sales, with $246m and $188m of sales in Q321.

Gardasil – which earned >$2.5bn across the first three quarters of 2020 – leads Merck’s impressively strong vaccine division, while hospital acute care contributed >$1.5bn, immunology ~$850m, and diabetes ~$2.7m. Overall, as we can see below, Merck looks set for a successful and profitable 2021, with revenues likely to increase ~15% year-on-year, and EPS ~25%, whilst a dividend yielding ~3.5% offers an extra fillip for investors.

Merck updated guidance for 2021 revenue and EPS as at Q321. Source: Q321 earnings presentation.

Last year, Merck said goodbye to its long-term President of Merck Research Laboratories, Roger Perlmutter, promoting President of Discovery Sciences and Translational Medicine Dr Dean Li to the role.

Could Merck M&A Include A Bid For Absci?

It may be somewhat surprising, given that Absci has positioned itself as a biologics drug development pioneer, that Merck elected to spin out its biologics business into Organon – perhaps Absci will end up working with Organon also, given that biologics is estimated to become a $254bn market in 2020, rising to $418bn in 2026, according to estimates – but Merck itself could certainly do with revamping its early-stage R&D program.

The company has $10bn of cash on its balance sheet, and ~$23bn of long-term debt, and has shown that it is not averse to making acquisitions with its recent deal for cardiovascular disease pioneer Acceleron for $11.5bn.

Could Merck add Absci to its business, also, given the potentially rising importance of AI-drug development, not to mention Absci’s 77,000 square foot campus in Vancouver, Canada.

Personally, I don’t see that deal as especially likely – Absci still has much to prove, and its business model is aimed squarely at working alongside multiple partners, developing different solutions for different companies and earning revenues via participating in future revenues streams once drugs have been commercialized.

Feast Or Famine Business Model

It’s a similar business model to Abcellera, and Ligand Pharmaceuticals – a $2.4bn market cap company that has been around for many years, and whose share price has risen by 35% over the past year, primarily due to its Captisol formulation, which is used with Regeneron’s Remdesivir, boosting revenues generation.

Ligand lacks the cutting-edge AI-driven techniques of Absci, but despite their promise, there are reasons why Absci may find itself subject to the same “feast or famine” revenue growth prospects as its older rival, given it will only succeed financially when its clients’ drug discovery efforts are successful, which can take years. 1 blockbuster drug can make up for literally hundreds of early stage failures.

AI is unquestionably infiltrating all aspects of drug discovery, as discussed above, but equally, AI makes the haystacks where the needles are hidden infinitely larger, creating billions of data points and possibilities for new drug targets – before attempting to evaluate their respective merits.

Would pharmas invest so heavily in AI drug discovery if the low-hanging fruit – the targets mentioned above by Absci’s CTO for example – had not already been claimed, patented, and rolled out to the market? It’s an interesting question, and we may have to wait a decade or more to find out if AI can really uncover new and better drugs using computer models.

What Absci Brings To The Table In 2022

Absci’s rise from a company started in a Vancouver basement by its then 22-year-old founder Sean McClain, to a Nasdaq listed entity with a value (immediately post-IPO) of ~$2bn, makes for an excellent story and PR pitch.

What began as a company developing antibodies from E. coli cells with a handful of employees, has morphed into a major drug development company, with >200 employees and a wide range of tools and techniques, including in silico, manufacturing cell lines, protein scaffolding, and via the acquisition of Totient in June, antibody and target discovery technology, including mRNA sequencing, and the acquisition of Denovium in January, protein behavior.

A recent investor presentation is arguably a little long on theory, and aspirational language more similar to that of a startup tech company than a biotech (e.g. “out-evolving nature”, “what if you could create any drug you can imagine”, while its staff are referred to as “unlimiters”), which may not have too much basis in reality – and a little short on evidence of client commitment and projects in development.

Absci’s facility and expertise is very real, however, and even if the company is taking an “if we build it, they will come” approach, it has had no problem attracting major investment from biotech-focused VCs, including Redmile Group and Casdin Capital, who both have a seat on the Board of Directors.

At the end of Q321, Absci had nine active programs ongoing with seven partners that have downstream economic potential (as per the Q321 earnings call), which fell short of analyst expectations. The company is currently capable of almost any sort of drug discovery, manufacturing, and synthetic biology, but is not yet engaged in very much of either.

It’s difficult for a layperson to fully understand all of the techniques that Absci is engaged in, but equally, they’re not necessarily as different from those used by companies like Abcellera, Relay, Ginkco, and even Ligand, despite Absci’s claims to be differentiated and groundbreaking.

That’s not necessarily a bad thing in my view as these are the techniques that biotechs and pharmas are familiar with, and as well as being a thought leader, Absci needs to find ways to bring clients in the short to medium term, to build its client base and recapture the faith of analysts and the market before getting too far ahead of itself, possibly.

Personally, I think Absci’s approach to biologics drug development looks like one of its most promising fields – even if Merck is not in the biologics space, Organon certainly is, and on a much larger scale, so is Viatris (VTRS) – another spin out – this time of Pfizer’s (PFE) legacy assets, which have been merged with the generic drug development company Mylan to form a potential biologics super power.

Absci’s approach to the biologics drug discovery and development process. Source: company investor presentation.

Conclusion – Merck Deal Offers Valuable Validation For Absci – Current Valuation Attractive Based on 5-Year Timeframe

Although I have been critical of Absci’s post-IPO valuation of >$2bn, lack of revenue generating clients and partners to date, and slightly over the top rhetoric in this post, the Merck deal is an important milestone for the company, and Absci’s declining share price has reached a point where shares are beginning to look like relatively decent value, in my view.

Absci may not be as cash rich as some of its rivals i.e. Ginkgo or Abcellera, but with ~$280m in cash, and with a cash burn of $50m to Q321 in 2021, it has few financial concerns, and can afford to invest heavily in both R&D – fleshing out its various areas of business – and marketing – attracting new clients and partnerships.

The “if our clients win, we win” approach to revenue generation that most drug-discovery firms employ is definitely a “feast or famine” model, as it relies upon drugs successfully making it through the discovery, development, clinical trial and approval process, then making multi-billion dollar sales in tough commercial markets – although clinical development milestones make the operating environment less harsh.

With Abcellera also being based in Canada, I see Absci’s fortunes irretrievably tied up with Abcellera’s, as the city of Vancouver positions itself to be the future home of drug discovery.

It’s a bet that many VCs and investors appear to have made in the private market, that so far has not translated well in the public markets, with both companies’ share prices crashing heavily in 2021.

2022 may be too early for either stock price to make a full recovery, but personally I prefer Absci’s ~$650m valuation to Abcellera’s $3.3bn one, which has been swollen by its Bamlanivimab success.

As such I would consider making a speculative investment into Absci, although it would be with a five-year horizon in mind, as this young company has some tricky hurdles to overcome over the next two to three years, in my view.

As for Merck, I doubt that we will see the benefits of its investment into Absci make any material difference to the company’s valuation in the short term, but the company that developed one of the most important monoclonal antibodies ever to have been brought to market can make a real difference to Absci over the longer term.

Merck shares will perform satisfactorily in 2022 I believe, despite the Molnupiravir disappointment, as Keytruda continue to grow sales (some analysts believe peak sales could >$20bn), and in three to five years’ time shareholders could begin to see the benefit of the Organon spin-out and R&D revamp.

AI-driven drug discovery is still the future of drug-discovery, rather than the present, in my opinion – a deal such as Pfizer’s with Codex DNA – which I recently covered for Seeking Alpha – is one to watch in the near term – but Merck’s collaboration with Absci is exciting in a different way, and ought to pay off for both companies in the long run.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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The post Merck And Absci: AI-Driven Drug Development Deal Has Promise, But May Take Years To Pay Out appeared first on Up2info.com.

• Absci, a synthetic biology company whose platform technology aids in the drug discovery process, is going public today.
• CEO Sean McClain discusses the emotion around going public, acquisitions in the time of Covid and being a technology driven company.
• Providing tech solutions for pharma partners and what metric is key to watch over the next year.

Absci (NASDAQ:ABSI), going public today, is a synthetic biology company whose platform technology aids in the drug discovery process. With its AI-powered Integrated Drug Creation Platform, Absci enables the creation of novel biologics by unifying biologic drug discovery and cell line development into one simultaneous process. CEO Sean McClain joined us earlier today to discuss the emotion around going public, acquisitions in the time of Covid and being a technology driven company. Number of new programs signed up is the key metric to watch over the coming year.

The post IPO Day With Absci CEO Sean McClain – The Google Of Synthetic Biology (Video) appeared first on Up2info.com.

• AbSci has filed to raise $200 million in a U.S. IPO.
• The firm is commercializing a biologic development platform.
• ABSI has promise but is still at a very early stage of commercialization and further development of its technologies and business model, so I’ll watch the IPO from the sidelines.

Quick Take

AbSci (NASDAQ:ABSI) has filed to raise $200 million in an IPO of its common stock, according to an S-1/A registration statement.

The firm provides a fully integrated biologics drug creation platform for researchers.

ABSI commercialization efforts are at an early stage and management is seeking a very high price at IPO, so I’m in a ‘show me’ mode.

Company & Technology

Vancouver, Washington-based AbSci was founded to develop its ‘AI-powered Drug Creation Platform’ to combine biologic drug discovery and cell line development into a single, simultaneous process.

Management is headed by founder and CEO Sean McClain, who currently serves on the board of the Oregon Bioscience Association and other organizations.

Below is a brief overview video of an interview of AbSci founder and CEO Sean McClain:

(Source)

The company’s primary offerings include:

• SoluPro & Bionic SoluPro

• Custom Scaffold Libraries

• Folding & Expression Solutions

• Breakthrough Assays

• Denovium Engine

• Computational Antibody & Target Discovery

Below is a chart showing these offerings along with a brief explanation of each:

AbSci has received at least $161 million in equity investment from investors including Phoenix Venture Partners, Casdin Capital, Redmile Group, Mark Valasek and Souther Investment affiliates.

Customer Acquisition

The firm seeks development partners focused on developing production cell lines for drug candidates.

ABSI had nine Active Programs as of March 31, 2021, with companies including Merck, Xyphos Biotechnology, Alpha Cancer Technologies and others.

Selling, G&A expenses as a percentage of total revenue have varied significantly as revenues have increased, as the figures below indicate:

Click to enlarge

(Source)

The Selling, G&A efficiency rate, defined as how many dollars of additional new revenue are generated by each dollar of Selling, G&A spend, dropped to 0.1x in the most recent reporting period, as shown in the table below:

Click to enlarge

(Source)

Market & Competition

According to a 2020 market research report by Mordor Intelligence, the global market for biologic drug discovery was an estimated $303 billion in 2020 and is forecast to reach $509 billion by 2026.

This represents a forecast CAGR of 9.06% from 2021 to 2026.

The main drivers for this expected growth are a growing investment from major market participants and loss of patent exclusivity for leading biologic drugs, pushing pharmaceuticals to invest in next generation treatments.

Also, the COVID-19 pandemic will likely drive demand for biologic study.

Major competitive or other industry participants include:

• Insitro

• TScan Therapeutics

• 3T Biosciences

• Generate Biomedicines

• Schrodinger

• Recursion Pharmaceuticals

• Relay Therapeutics

• Atomwise

• Valo Health

• Escientia

• AbCellera Biologics

• Adimab

• Berkeley Lights

• Others

Financial Performance

AbSci’s recent financial results can be summarized as follows:

• Uneven topline revenue

• Sharply increased operating losses

• Increasing cash used in operations

Below are relevant financial results derived from the firm’s registration statement:

Click to enlarge

(Source)

As of March 31, 2021, AbSci had $181 million in cash and $160 million in total liabilities.

Free cash flow during the twelve months ended March 31, 2021, was ($24.2 million).

IPO Details

AbSci intends to raise $200 million in gross proceeds from an IPO of its common stock, offering 12.5 million shares at a proposed midpoint price of $16.00 per share.

No existing shareholders have indicated an interest to purchase shares at the IPO price.

Assuming a successful IPO, the company’s enterprise value at IPO would approximate $1.1billion, excluding the effects of underwriter over-allotment options.

Excluding effects of underwriter options and private placement shares or restricted stock, if any, the float to outstanding shares ratio will be approximately 13.83%. A figure under 10% is generally considered a ‘low float’ stock which can be subject to significant price volatility.

Management says it will use the net proceeds from the IPO as follows:

As of June 30, 2021, we had cash and cash equivalents of $99.5 million. We currently expect to use our net proceeds from this offering, together with our existing cash and cash equivalents, to further our investment in expanding our Integrated Drug Creation Platform’s capabilities, continued growth of our business development organization and activities, and for general corporate purposes, including working capital, capital expenditures, and operating expenses. We may also use a portion of the remaining net proceeds, if any, to acquire complementary businesses, products, services or technologies, including scientific expertise, although we have no binding agreements or commitments to do so at this time.

Based on our current plans, we believe that the net proceeds from this offering, together with our existing cash and cash equivalents, will be sufficient to fund our operating expenses and capital expenditure requirements at least through 2023.

(Source)

Management’s presentation of the company roadshow is available here.

Listed bookrunners of the IPO are J.P. Morgan, Credit Suisse, BofA Securities, Cowen and Stifel.

Valuation Metrics

Below is a table of relevant capitalization and valuation figures for the company:

Click to enlarge

(Source)

Commentary

AbSci is seeking public capital market funding to advance its general corporate expansion plans, which are unspecified.

The firm’s financials show a small amount of topline revenue and growing operating losses and operating cash burn.

Free cash flow for the twelve months ended March 31, 2021, was ($24.2 million).

Selling, G&A expenses as a percentage of total revenue have fluctuated wildly as revenue has varied; its Selling, G&A efficiency rate dropped to 0.1x in the first quarter of 2021.

The market opportunity for selling an integrated platform for biologic development is large and expected to grow at a marked rate of growth over the coming years.

J.P. Morgan is the lead left underwriter and IPOs led by the firm over the last 12-month period have generated an average return of 19.9% since their IPO. This is a mid-tier performance for all major underwriters during the period.

The primary risk to the company’s outlook is that so far it doesn’t have any partners that have ‘entered into a license for clinical or commercial use of any intellectual property rights related to biologic drug candidates or cell lines generated utilizing our platform.’

As for valuation, management is asking IPO investors to pay an EV/Revenue multiple of over 214x.

Given the ultra early stage of the firm’s commercialization efforts and the extremely high multiple it is seeking at IPO, I’m in a wait and see mode.

Expected IPO Pricing Date: July 21, 2021

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Investing in IPOs is an inherently volatile and opaque endeavor. My research is focused on identifying quality IPO companies at a reasonable price, but I’m wrong sometimes. I analyze fundamental company performance and my conclusions may not be relevant for first-day or early IPO trading activity, which can be highly volatile and unrelated to company fundamentals. This report is intended for educational purposes only and is not financial, legal or investment advice.

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