BUSINESS OVERVIEW
Facet Biotech develops oncology therapeutics, focusing ontumor biology and antibody engineering. The company hasfour antibodies in the clinical stage of development. It alsohas several investigational compounds for the treatment of cancer and immunologic disease in various stages of development with partners Biogen and BMS.
SELECTED OPERATING DATA
FYE December 31 2006 2007 2008 1Q09Revenue growth 72% -48% -32% 105%
Selected items as a % of revenue:
R&D 390% 731% 828% 251%SG&A 71% 169% 254% 107%EBIT -363% -845% -876% -301%D&A 58% 113% 111% 41%Capex 62% 346% 21% 1%
% of revenue by geography:
U.S. 40% 72% 100% n/aEurope 60% 28% 0% n/a
% of revenue by major customer:
Biogen Idec 35% 65% 47% 21%BMS <10% <10% 35% 54%Roche 60% 27% <10% <10%EKR Therapeutics <10% <10% <10% 18%
∆
diluted shares out (avg)
0% 0% 0% 0%
Source: Gridstone Research, Company filings,
Manual of Ideas
analysis.
INVESTMENT HIGHLIGHTS
•
Spun-off from PDL BioPharma
in December.
PDL contributed $405 million or $17 per Facetshare in cash to the company. Facet believes it hassufficient resources to fund expenses through 2012.
•
Products in development
include two Phase 2drugs, Daclizumab for multiple sclerosis andVolociximab for solid tumors (partner: Biogen) andtwo Phase 1 drugs, Elotuzumab for multiplemyeloma (partner: BMS) and PDL192 for solidtumors. The collaboration agreement with Biogenincludes co-promotion rights, while under the BMSdeal, Facet is entitled to royalties based on net sales.
•
Net cash of $352 million
and “net net” currentassets of $257 million at the end of the first quarter.
•
Net cash equals 139% of market value.
INVESTMENT RISKS & CONCERNS
•
Cash-burning operations.
The company used $20million of cash in operating activities in 1Q09,down from cash usage of $57 million in 1Q08, asrevenue rose from $4.7 million in 1Q08 to $9.6million in 1Q09. Headcount declined y-y.
•
Customer concentration.
The company sourced82% of revenue from Biogen and BMS in 2008.
•
Results volatile due to dependence on deals withother drug companies.
Revenue fell 48% in 2007and 32% in 2008, as termination of a collaborationagreement with Roche in 2005 resulted in theelimination of royalties on sales of
Zenapax
.
•
Drug development pipeline may not producemarketable products,
potentially leavingshareholders with little value. Facet is expected toconsume much of its cash in R&D efforts.
•
Shareholder Roderick Wong’s demand
for a $15 per-share cash dividend and sale of assets wasrebuffed by the company. While we generally favor companies paying out excess cash, a liquidation of Facet may have shortchanged shareholders, as thecompany owns material drug development assets.
COMPARABLE PUBLIC COMPANY ANALYSIS
MV($mn)EV($mn)EV /Rev.P /Tang.BookThisFYP/ENextFYP/ERHHBY 114,720 99,620 2.4x 4.4x n/a n/aABT 67,910 77,920 2.6x 296x 12x 11xBMY 39,660 37,390 1.8x 5.4x 10x 9xLLY 39,460 44,430 2.2x 10.2x 8x 8x
FACT 230 -90 n/m .6x n/m n/m
THE BOTTOM LINE
In March, large shareholder Seth Klarman articulated the downside protection afforded investors by stating that Facet “hasabout $16-$17 per share in cash… So you could clearly liquidate that, stop all discovery activities and probably mail out $10or $12 or $14 per share back to the holders.” As there are no plans to liquidate Facet and cash is being consumed in drugdevelopment, investors must assess the company’s pipeline in order to judge the intrinsic value of the shares.
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