|Shares Out. (in M):||39||P/E||0||0|
|Market Cap (in $M):||1,755||P/FCF||0||0|
|Net Debt (in $M):||-470||EBIT||0||0|
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RegenxBio is a unique situation within the biotech space such that it has around 75% of its market cap in cash plus the NPV of a royalty on a drug soon to be approved & commercialized — the rest of what you are paying (~$400-500mm) buys you a healthy internal gene therapy pipeline, royalties on 29 other partnered programs and option value for additional patterned programs as gene therapy research flourishes. The opportunity exists due to 1) mis-modeling of the royalty on AVXS-101, 2) likely unfounded concerns over IP, and 3) beta from the overall sector.
Please note this investment is truly what I would describe as a “cheap option/special situation” and there is above average risk involved. There is opportunity for a 5 bagger embedded here (with the downside case not draconian) and the skew is what attracts me rather than certainty of return on capital.
RegenxBio (“RGNX” or the “Company”) is the backbone to many developing gene therapy innovations. RGNX focuses on developing the delivery mechanism (vectors) that supplant “drugs” (genes) within patients. The Company leverages a lean internal pipeline across a vast 30 drug install base of partnered programs (including a royalty on a soon-to-be approved blockbuster drug) which partially de-risks the Company to individual binary events.
RGNX owns the rights to a proprietary suite of adeno-associated virus (“AAV”) vectors developed at the University of Pennsylvania, the most notable of which are dubbed AAV7, AAV8, and AAV9. The Company calls this suite of next-gen AAV vectors, collectively, as their “NAV Tech.” The gene therapy researchers at U Penn are largely regarded as the forefathers of gene therapy; as such, RGNX’s ownership of the IP developed there, has resulted in the Company becoming the leader in AAV gene therapy.
These exclusive rights place RGNX in a very unique position within the industry today as they are for the most part the best in class delivery mechanisms (“vectors”) currently being used for viral delivery of genes. Compared to earlier generations of AAV, AAV7+ vectors have better gene expression, generate a more muted immune response, and have improved manufacturability. As such, owning RGNX is akin to owning a suite of powerful (and patented) syringes, without which the delivery of a given drug would be nearly impossible.
Why own it today?
I think an inflection in the adoption of AAV based gene therapy (and as a result RGNX’s tech) in the medical community will soon come about with the first AAV based gene therapy approved a year ago with many more to come as Phase I/II data read-outs are expected for partners & RGNX in 2019 with nearly 500 new cell & gene therapy INDs expected just in 2019 (up from 250 in 2018).
Furthermore, the stock has traded down around 35% since mid last year on 1) a significant drawdown in the broader biotech sector (the XBI ETF is down around 20% over the same time-frame) and 2) slight concerns over the validity of RGNX’s IP as it relates to new licenses. This is despite cash comprising 1/3 of the market cap and another 50% from the royalty NPV of a highly probable partnered drug.
Resultantly, you can purchase the Company today for just about its net cash position plus its royalty on AVXS-101 (the gene therapy drug for Spinal Muscular Atrophy now owned by Novartis through its recent $8.7bn acquisition of Avexis) giving little credit for its internal pipeline or vast portfolio of other partner companies. This setup essentially creates ReGenX as a call option on the proliferation of gene therapy — you are paying a stub value of $400-500mm (less cash and AVXS-101 royalty NPV) for $10b+ of potential value.
At a high level, I think of the opportunity here more simply in terms of the total market size of gene therapy as a class of treatment. As this market expands, with RGNX currently the owner of the best-in-class delivery mechanisms for in-vivo treatment, the value of RGNX’s suite of vectors will increase consummately.
I view the main business activity of RegenX as the licensing of its AAV portfolio. Licensing is done on a case-by-case basis, e.g. one license for using the AAV8 vector to deliver X gene for patients with Y indication. Such licensing contributes a high single digit to low double digit top-line royalty on sales of the resulting drugs using RGNX’s AAV technology. RGNX owes U Penn a low to MSD royalty on internal pipeline sales (I assume 4%) and a low double digit royalty on license revenue (I assume 11%).
Each additional license requires no additional capital on RGNX’s part, rather the capital burden is solely placed on licensees of the technology. This is the dynamic that truly excites me, given the proliferation of gene therapy as a treatment class comes about, RGNX will gain a meaningful fraction of the economics of all AAV based gene therapy treatments, without really any additional capital required.
Furthermore, as AAV based gene therapy becomes more ubiquitous, with the medical community (both physicians and insurers) more accepting of these radically innovative therapies, the value of both existing and future licenses will increase meaningfully – so both quantity and value of licenses of RGNX’s NAV tech will increase. As AAV gene therapy proliferates, expect RGNX to take a more meaningful fraction of the economics upfront (partially circumventing their mid to late 2020’s AAV patent expiries).
Gene Therapy Overview & Context
Understanding the situation requires some context around gene therapy in general. Gene therapy, at its core, is in many ways the pinnacle of modern medical science. The idea is simple at its core, a patient born of a genetic disorder can have their defective gene transplanted with a working copy – effectively curing the patient. The difficulty comes in gene targeting (i.e. gene x controls protein y expression) and delivery of the targeted gene within the patient (supplanting the working copy of the gene within the patient and fostering meaningful expression). While gene targeting will always be an area of development for the medical community, gene delivery has been improved vastly over time; today, I believe RGNX owns the best in-class delivery mechanisms (Appendix 1).
The first large step forward in gene delivery came with the idea of using viruses to deliver new copies of genes within patients – these worked well in terms of targeting because viruses are naturally optimized to deliver their own genes within cells (i.e. the copy and spread of the virus is a natural event). Experimentation began in the early ‘90s but was for the most part put on hold after the death of Jesse Gelsinger, who died from an immune response to the adenovirus vector (not to be confused with adeno-associated virus) that was used in the trial. Indeed, the largest issue with the idea of using viruses to deliver such genetic code is that of safety – with the body’s own immune system reacting too strongly to the injected virus.
Trials and tribulations were experienced by the medical community throughout the 2000’s with various other vector designs that either did not have efficacy or produced too strong of an immune response – rendering some technologies too harmful for experimentation, let alone FDA approval. Other viral vectors used consisted of adenovirus, herpes virus, and retrovirus – all of which did not fit the bill until the adeno-associated virus came along.
The use of adeno-associated viruses for use as vectors first began in earnest after the release of phase 1 clinical trial data in 2009 from experimentation on patients with Leber’s Congenital Amaurosis that showcased an excellent efficacy & safety profile of the AAV vectors. At the same time, RGNX was effectively formed out of a collaboration between the University of Pennsylvania and James Wilson. Since then, about 70% of all AAV gene therapy trials have used RGNX’s “NAV” vectors (data from ’12 – ’14 and taken from U.S. gov clinical trial data base for new treatment INDs).
After years of clinical development, we are just now entering an inflection point in the success of AAV based gene therapy, as the aforementioned Leber’s Congenital Amaurosis research led to further development with Spark Therapeutics’ Luxturna for the disease just recently garnering approval on December 19, 2017 – the first gene therapy technology in the U.S. using AAV. Since then two additional gene therapies have been approved. This class of therapies now fully has the FDA’s support with Commissioner Gottlieb recently stating he expects the FDA to approve 40 gene therapies by 2022.
ReGenXBio NAV Technology
Without getting bogged down in the particulars into exactly why RGNX’s portfolio of AAV vectors are superior (of which researchers still do not have a great grasp of), it is a simple enough exercise to observe some of the magnificent data generated to date with these vectors. Observe the difference in the value of the right-most column “max expression” between AAV8 and the older gen AAV2 below (i.e. efficacy):
Additionally, a study comparing immune response (measured by the production of neutralizing antibodies, “NAbs”) in hemophilia patients in 2012 shows a clear standout improvement of AAV8 over prior generations (i.e. safety):
Prior to the research of AAV vectors and the development of the NAV technology by U Penn, most viral vectors presented very poor safety profiles for in-vivo treatment within humans as the viruses used as vectors were derived from
Research eventually began on the first AAV vectors in the mid-1990s, but at the time only a few AAV viruses were known to exist. These early generation AAV vectors were largely limited in application for gene therapy due to:
At U Penn, researchers began in the early 2000s to find other AAV designs for potential use as vectors. This was done by a broad search within humans and non-human primates for existing in-tact AAV’s within cells. This search led to the discovery of over 100 new AAV vectors for potential use as gene therapy delivery mechanisms. The first of which were dubbed “AAV7,” “AAV8,” and “AAV9.” These designs were subsequently patented and initial clinical trials utilizing these “next generation” vectors began in earnest in 2010 (the rights of which are effectively owned by RGNX).
In addition to better specific targeting (e.g. AAV8 is extremely effective in transducing the liver and retina, AAV9 the CNS), these newly discovered vectors would be observed to possess much higher gene expression, induce a muted immune response, and generally have a higher ease of manufacturability.
Use of these new vectors, dubbed collectively “NAV technology,” progressed in the clinic as follows:
RGNX owns a vast patent portfol