It’s time to sell Arbutus Biopharma, says Echelon Wealth

Echelon Wealth Partners analyst Douglas Loe is changing his rating on drug developer Arbutus Biopharma (Arbutus Biopharma Stock Quote, Chart NASDAQ:ABUS) from “Hold” to “Sell.”

Last week, BC-based Arbutus announced that it was discontinuing development of its AB-506 oral capsid inhibitor for the treatment of chronic hepatitis B after two healthy volunteers for the drug’s clinical trial developed cases of acute hepatitis.

Loe says that along with the recent announcement, however, Arbutus pipeline of other drugs in development lacks visibility.

ABUS dropped 28.7 per cent in trading last Friday in response to the Thursday announcement from the company discontinuing the clinical development of AB-506, which was in a Phase 1a/1b clinical trial due to the two cases of acute hepatitis in healthy volunteers in the Phase 1a arm.

“The two subjects are experiencing resolution of their acute hepatitis. We will continue to follow them and the other study participants, as safety is our highest priority at Arbutus,” said Gaston Picchio, Ph.D. Chief Development Officer of Arbutus, in a press release. “We intend to present results from the AB-506 Phase 1a/1b clinical trial along with further details regarding the two cases of acute hepatitis at an appropriate scientific meeting later in 2019.”

“While we are disappointed in these recent clinical findings, we have a number of oral follow-on capsid inhibitor compounds with distinct chemical scaffolds that we believe have the potential to contribute to the inhibition of HBV replication as part of a combination regimen,” Michael J. Sofia, Ph.D., Chief Scientific Officer of Arbutus said. “Our objective is to select one of several lead compounds for IND-enabling studies by December of this year.”

Loe says that although his model for Arbutus ascribes value to the company’s hep B program as a whole and thus does not include revenue and EBITDA projections for AB-506 as such, the discontinuation does mean that the company’s prospects incur additional risk. Thus, he has revised his thesis on ABUS, downgrading to a “Hold” and dropping his target price from $4.00 to $1.00 per share, which represents a projected return on investment of negative 30 per cent at the time of publication. (All figures in US dollars.)

Loe says he’s not clear on the prospects for Arbutus’ other drugs.

“Arbutus does have alternative earlier-stage hepatitis B assets in its portfolio but setbacks have been common, impeding development timelines in the process. We were encouraged to hear Arbutus reflect favorably on other capsid inhibitors in its pipeline, one of which could emerge from pre-clinical testing as a candidate for future Phase I testing, but for now, we do not have strong visibility on how the firm’s capsid inhibitor library could contribute to future Phase II hepatitis B testing,” wrote Loe in an update to clients Friday.

“But that aside, we continue to reflect pensively on how the merger of Arbutus (then called Tekmira) and PA-based hepatitis B-focused private firm OnCore Biopharma merger back in Q115, with OnCore’s legacy pipeline of cyclophilin inhibitors and covalently closed circular DNA (cccDNA) inhibitors and immune modulators/STING agonists (and interestingly, including its first-generation capsid inhibitor AB-423) long ago eliminated from the pipeline, engendering cumulative asset writedowns since F2015, including $352.6M in fiscal 2015 alone,” says Loe.

The analyst thinks Arbutus will generate fiscal 2023 revenue of $11.2 million and EBITDA of negative $23 million, which will stay at revenue of $11.2 million and EBITDA of negative $23 million in fiscal 2024.