Discovering new drugs can be a lucrative endeavor, but things aren't working out lately for AbCellera Biologics(NASDAQ: ABCL). Shares of this unusual biotech stock are down by about 57% from the high water mark they set last summer.
The steep losses might seem surprising if you've been paying attention to Wall Street analysts who follow AbCellera Biologics. KeyBanc has an overweight rating on the stock and a $7 per share price target, which implies a 103% gain over recent prices. Benchmark has a $9 per share price target on the stock, which implies a 161% gain.
At times like these, it's important to remember that sell-side analysts have incentives to produce attention-getting price targets, but nothing to lose if things don't work out. Repairing the damage that following an underbaked investing thesis can cause to your retirement plans isn't as simple.
Why AbCellera Biologics stock is down
Biotech start-ups typically pour all their limited resources into the development of their single best candidate. AbCellera was founded on the idea that it could be an indispensable partner for drugmakers large and small by rapidly discovering dozens of antibodies and getting them ready for clinical-stage testing.
The company's bold business plan was supported by initial success with bamlanivimab and bebtelovimab. These two antibodies that treat and prevent COVID-19 infections were picked up by Eli Lilly and authorized by the U.S. Food and Drug Administration (FDA).
AbCellera was valued above $15 billion following its initial public offering in late 2020. Unfortunately, the FDA rescinded authorization of the antibodies it licensed to Eli Lilly in November 2022, and the company hasn't seen a royalty payment since.
Reasons to buy AbCellera Biologics stock now
AbCellera stock has been beaten down, but its business has been busy. As of March 31, 2024, the company has initiated 90 programs with downstream revenue potential. That was 15 more than it had a year earlier.
Downstream revenue has slowed to a trickle since 2022, but it could rise significantly over the next several years. AbCellera's partners had a total of 13 partnered antibodies in clinical-stage testing. They can't all be zingers, but they don't need to be for the company to come out ahead. If just one of these candidates becomes a blockbuster drug, it could turn AbCellera's losses into significant gains.
AbCellera knows that letting its partners run clinical trials is a great way to save money. Despite 13 programs in clinical trials, AbCellera's total operating expenses in the first quarter were just $77 million.
The company posted a net loss of $41 million in the first quarter, but it could maintain this cash burn pace for a few more years before raising capital again. AbCellera finished March with $725 million in cash, and it has access to $240 million of government funds.
Reasons to remain cautious
Having 13 candidates in clinical trials only seems like an impressive feat if you don't look at how many programs AbCellera has tried to start. As of March 31, 2022, the company had 158 programs under contract. Two years later, less than 10% had advanced to clinical-stage testing.
The company stopped reporting its total programs under contract this year, which could be a sign that it's getting harder to find new customers.
With key business metrics that suggest AbCellera isn't any better at pre-clinical stage development than the companies it wants to partner with, investors should be hyper-skeptical about its latest initiative to drum up business. In May, AbCellera announced that it was partnering with a pair of investment firms to launch multiple new companies that will become its clients.
The company doesn't have to report total programs under contract anymore, but recent trends suggest its salesforce is struggling to grow sales. First-quarter research fee revenue declined 7.5% year over year to just $9.8 million.
Is AbCellera a good investment now?
There's a chance that one or more of AbCellera's partnered programs can succeed and drive the stock to its previous heights. Unfortunately, an uninspiring percentage of partnered programs reaching clinical-stage testing makes it seem extremely risky.
For now, it's probably best to assume the revenue decline we saw in the first quarter will continue. Even investors with a high tolerance for risk will want to play watch and see with this stock for now.
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Cory Renauer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends AbCellera Biologics. The Motley Fool has a disclosure policy.
