US-bound Abcam still a growth star – Investors Chronicle

It’s not just households: recent headlines suggest UK biotech is feeling the squeeze too. With almost no laboratory space available for rent in Oxford and Cambridge – two of the hubs in the country’s so-called ‘golden triangle’ of pharmaceutical innovation – landlords have been jacking up the rents. In the past year, the sector’s cost of capital has climbed precipitously as investors have moved decidedly into risk-off mode. To top it all off, it appears one of its stars, Cambridge-headquartered life sciences firm Abcam (ABC), is set on quitting London’s Aim exchange in favour of a sole listing in the US.
Could the sector’s appeal now be vanishing for shareholders? After a few years of whipsawing fortunes and valuations, UK investors may wonder whether it is time to exit stage right. But adverse market conditions don’t change the fact that there are some genuinely innovative companies ploughing forward with research and development. That description is true of Abcam, regardless of its imminent delisting, as its expertise in an emergent and increasingly profitable field of biological analysis steadily secures its status as a globally important firm.
The first thing to understand about Abcam is that it is not a pharmaceutical company engaged in the costly and risky process of drug development. Instead, it identifies, develops and distributes research-use-only (RUO) antibodies, which are used by academics in biomedical research and by companies engaged in drug discovery. Over half of all life science research papers published in 2020 cited the use of one of the company’s products. 
With a market cap of £2.8bn, Abcam is the largest company currently listed on Aim, and one of the junior market’s greatest success stories. Despite its relative size, it remains a growth stock. “It’s important to recognise that research-use-only antibodies aren’t just used in research,” says Puneet Souda, a senior research analyst at SVB Securities. “Their use in diagnostics and other applications is growing, so new markets are opening up for Abcam.”
One such market is proteomics, which is the large-scale study of groups of proteins. For years, scientists have analysed the human genome to help them diagnose and treat disease, but some believe that looking at the “proteome” will be more effective for certain conditions. This is because proteins can provide a real-time insight into a patient’s health and disease state – and antibodies such as Abcam’s are the key building blocks of the so-called diagnostic ‘panels’ used to detect disease.
According to Souda, these diagnostic tools haven’t yet been fully built, but their potential is significant, especially in diseases that aren’t driven purely by genetics. Cancer, for instance, has a significant genetic component, whereas heart disease is driven by a combination of factors. “Many chronic diseases are a function of our environment and lifestyle patterns – the genetic component is there, but they’re more environmentally driven,” Souda explains. “In order to identify what’s really happening, one really has to look at a snapshot using proteomics technology.”
SVB Securities estimates that proteomics could become a $75bn (£62bn) market in the next decade or so, with $55bn of this total coming from its application in diagnostics and personalised medicine. The investment bank views Abcam’s goal of hitting sales of between £450m and £525m by 2024 as “conservative” given the company is an early leader in proteomics, despite management comments that this would represent a growth rate of “two to three times” the underlying market.
In the near term, margin growth at the company depends on expanding sales of the antibodies it makes in house (it also sells third-party products, although these have a lower gross margin). When it released full-year results in March, Abcam said it anticipated continued improvement in gross margins thanks in part to last year’s $340mn acquisition of BioVision, a fellow distributor of life science research tools. 
The company is now just over halfway through a five-year investment cycle which management hopes will help scale the business over the next decade. Expansion into the US, Australia and Singapore in 2021, and a 59 per cent increase in global headcount to 1,750 since December 2019, shows how far and fast this has been of late.
Now, capital spending has started to level off in a bid to fully integrate recent investments, including BioVision, and in the words of chief executive Alan Hirzel, “learn from the market”. This should offer some reassurance to investors following a period in which profit margins were knocked by Covid-19 and debts were incurred to finance expansion plans. Throw in top-line growth and efficiency gains, and the board expects the adjusted operating profit margin to exceed 30 per cent in 2024 – from 19.2 per cent in 2021. 
Analysts are bullish, too. The consensus adjusted earnings forecast for 2024 is up 9 per cent since March, while brokers lifted their average target price for the shares to £16.40 after Abcam issued another positive trading update in July. Liberum says “operating efficiencies should start to be realised” soon, followed by higher margins. “This is encouraging to see and adds further support to our belief that profit margins have now troughed,” the analysts wrote last month. Abcam expects organic growth in the mid-teens for the full financial year, due to a greater contribution from higher-margin products.
For UK investors, however, the most significant development in that July update might have been confirmation of the group’s plans to delist from Aim, something it hinted at previously. Abcam has had a listing on Nasdaq since October 2020. Disappointing as this is for its home market, there is something of a precedent for British biopharma companies issuing their shares through New York’s exchanges.
Bicycle Therapeutics (US:BCYC), also headquartered in Cambridge, went public in the US in 2019. Meanwhile, Irish drug developer Amryt (US:AMYT) completed its Aim delisting at the start of this year. Abcam has said it will continue consulting with shareholders and seek approval for delisting at a general meeting to be held later this year. 
“Today, our shares are convertible on a 1:1 basis from Aim to American Depository Shares (ADSs) listed on Nasdaq,” the company said in a statement to some investors in recent weeks. “If we were to go through the process of delisting, in line with precedent, we anticipate there to be mechanisms in place to facilitate this conversion and support existing Aim ordinary shareholders.”
Have financial markets welcomed the news of the impending single domicile? It’s hard to say. Abcam’s shares rose 5 per cent to 1,175p on the day of the July update, and have stayed above this figure since, although this may have been a reaction to solid operational momentum, or last month’s bump in growth stocks. Judging by fretful comments on share bulletin boards, some retail investors are evidently concerned by the delisting’s implications, including whether it will preclude them from holding any issued ADSs in their individual savings accounts.
Of course, some investors hope that a US-only listing will bring with it a shareholder base that is keener to support growth. If so, the timing feels a little odd, even if the shares’ forward rating of 35 times 2023 forecast earnings is a little racy by the standards of London-listed shares. Regardless, we think the company’s current market-leading position in RUO antibodies (and the significant potential in proteomics) go some way toward justifying its present price.
Its commitment to margin improvement in the years ahead should also give would-be investors pause for thought: hit the upper end of its 2024 goals, and Abcam could by then be generating adjusted operating profits of £160mn a year, and EPS approaching 50p. Growth stocks end up overpriced only if they stop growing profitably. Naturally, some remain circumspect. Panmure Gordon this year called guidance “insufficient” to justify the current premium, even as it reiterated its belief in Abcam’s long-term growth.
But in what has been a tough year for biopharma, Abcam’s consensus-matching performance, and bullish tone, suggest its best years are still likely ahead of it.
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