Description

Abeona (ABEO) is a biotech company focusing on a uniquely effective cell therapy (EB-101; Pz-cel) for a terrible ultra-rare disease known as (RDEB).  We believe that Pz-cel will have a profound impact on the most severe RDEB patients, who have unimaginably challenging lives.  Pz-cel is under FDA review with a target action date of May 25th.  Because of a very niche business model centered upon ~6 "store fronts," we believe that ABEO should be able to generate in excess of $100mm of FCF treating ~200 patients per year, and that, as progress becomes evident over the next 12 months, the stock should have 4x+ upside. 

What is RDEB?

RDEB (recessive dystrophic epidermolysis bullosa) is the most severe of a group of rare genetic orders impacting the skin and GI tract's ability to function.  Patients with RDEB completely lack a specific collagen (type VII collagen) necessary for the skin to stay together.  Thus, they blister and wound easily, and are unable to heal normally.  The majority of RDEB patients have wounds covering 30%+ of their body.  

Source: American Academy of Dermatology Association

Having wounds all over the body causes immense suffering.  Life is a constant battle against infection, with caregivers needing to clean wounds and change dressings–a painful process taking hours–every couple of days. Complications with wound healing often leave RDEB patients with hands and feet that don't function:  

Source: Cure EB

RDEB patients have a mix of "chronic" and "recurrent" wounds, based upon the ability of the skin to heal at different locations. Pz-cel addresses large chronic wounds that almost never heal otherwise.  Such wounds are reported to be more painful than recurrent wounds, are at perpetual risk of infection, and carry a high risk for cancer (Squamous Cell Carcinoma – leading cause of death in RDEB patients).  

Source: ABEO Phase 3 Presentation

Debra of America is the leading nonprofit advocacy group for EB.  They are great advocates for new treatment options.  Brett Kopelan, whose daughter has RDEB, is the head of Debra and is often quoted in industry PRs.

What is Pz-Cel (EB-101)?

Pz-cel is a way to treat large chronic wounds by engineering "healthy" sheets of a patient's own skin. It starts with a biopsy of the patient's diseased skin being sent to ABEO's facility in Cleveland.  There, a gene therapy is applied to the skin cells to introduce the gene (COL7A1) that RDEB patients are lacking, thus "fixing" the disease in the sample.  These healthy skin cells are then expanded into sheets of healthy skin, each the size of a credit card, totaling ~500 sq cm of new skin.  

The engineering process takes 3-4 weeks, at which time the sheets need to promptly be grafted onto the patient in a surgical procedure, using general anesthesia, similar to what might be done with a burn victim.  The credit card size grafts can be used separately on small wounds or woven together to treat large wounds.  After the graft, the patients typically stay at or near the hospital for a week, as they must be carefully restricted in their movement in order for the grafts to "take."

Skin cells turnover every ~30 days; however, the genetic correction made by Pz-cel is passed on as cells replicate, and early data suggests that these patches of healthy skin can persist for 8+ years, leading to a more durable, long-term treatment.

Current RDEB Treatments

Prior to 2023, no drugs were approved to treat RDEB.  In 2023, Kystal's Vyjuvek and Chiesi's Filsuvez were approved.

• Vyjuvek is a topical gene therapy that is applied weekly to open wounds.  It uses a modified version of the HSV virus to introduce the COL7A1 gene, allowing wounds to heal more normally.  The genetic correction made by Vyjuvek is similar to Pz-cel, except that the correction made by Vyjuvek is lost as skin cells turnover.  Thus, the treatment effect is temporary and will be gone ~30 days after treatment.  The FDA label restricts dosing of Vyjuvek to 1.6mL per week, which equates to a maximum treatable area of ~160 cm sq.  Because of this restriction, patients must prioritize which wounds receive Vyjuvek, and are advised to keep treating the same wound until it is fully closed. Vyjuvek is typically applied at the patient's house by a trained caregiver or a contract nurse.  Our KOL checks suggest that, with the proper patient expectations and education, Vyjuvek is a good drug.

• Filsuvez is a topical birch bark extract applied directly to wounds to encourage healing.  Prior to approving the drug in December 2023, the FDA had rejected it (February 2022) and requested additional evidence of efficacy given its modest wound closure vs. placebo.  The approval in 2023 appears to be a reversal of thinking and was cheered by a DEB community seeking more treatment options.  The drug has not really launched yet.  Our KOL checks and reading of the FDA label suggest that Filsuvez has modest efficacy but is convenient, safe, and offers another option in the RDEB toolbox. 

Pz-cel Market Opportunity

There are an estimated ~3,850 patients in the US with RDEB, of which ~1,100 are diagnosed based on commentary from KRYS. We expect that Pz-cel treatments will initially be concentrated in the ~30% most severe RDEB patients, or about 300 patients based on the ~1,100 number that should increase over time.  At a high level, we believe that these patients could benefit from an average 2+ Pz-cel treatments focused on their oldest, largest, and most painful wounds.  Thus, we think there are ~600 treatment opportunities from these most severe patients.  Beyond that, we believe there are 700+ other RDEB patients in the US, perhaps half of whom could currently benefit from Pz-cel.  Thus, there are a large number of current wounds that create an initial bolus of perhaps 1,000 treatments that are eligible.  

We expect that Pz-cel will only be available at ~6 of the top research hospitals that treat RDEB. Such a small number of sites make the logistical challenges of Pz-cel most tractable and ensures that patients receiving the therapy have the specialized teams (clinicians, surgeons, anesthesia, etc.) to maximize treatment outcomes. The small ABEO footprint should pretty well cover the country, although many patients will have to travel for treatment. Our guess is that the following hospitals will be among the sites:

• Lucile Packard Children’s Hospital Stanford: This is where Pz-cel was invented and where most of the Pz-cel pivotal trial was conducted.  KOLs include Jean Tang, Peter Marankovich, and Joyce Teng.  

• University of Massachusetts: This is the other site where the pivotal was conducted.

• Children’s Hospital Colorado: This site has many local RDEB patients because it has a great treatment team and CO Medicaid offers generous benefits compared to other states.  The cost of care for RDEB is so high and the treatment burden so great that families re-locate to CO for affordable and quality healthcare.  KOLs include Anna Bruckner and Jaime Feinstein. 

• Cincinnati Children’s Hospital: This site has a very popular EB center and may see the most RDEB patients of any center.

ABEO’s current capacity is small in relation to the initial bolus of demand.  ABEO can only manufacture 10 treatments per month. For an additional investment of ~$30mm and time of 12-18 months, we believe ABEO can double its capacity using space adjacent to its Cleveland facility.  We believe they are likely to do so, but only after a couple of quarters of “at capacity” demand and better visibility of true demand.  While the initial bolus of patients should create years of demand, it is difficult to estimate what normalized demand will be in out years.  We believe the company should be conservative with capacity expansion and are assuming only a doubling of capacity to 20 treatments per month in our base case.

As for pricing and reimbursement, we believe that Pz-cel will receive broad reimbursement at pricing of $1mm+ net per treatment. Reimbursement will require extensive paperwork, but, with such a small number of centers performing all procedures, should be relatively smooth once the pump is primed. The hospital will be paid for both the drug (at cost +) and for the procedure. While the company won't set pricing prior to approval, they have said that they expect gross margins of 80%+. It’s worth noting that KRYS’ pricing comes out to be ~$800k+ for a chronic dosing topical gene therapy, so $1mm net seems fair for a potentially “one-and-done” treatment.

We expect the ABEO cost structure to be relatively lean.  We believe that the break-even level of sales is around $50mm (or 50 treatments per year, using our assumptions) and that the contribution on incremental procedures could be 70%.  Thus, very roughly, at 100 procedures per year, we believe they could make ~$35mm in EBIT and, at 200+ procedures per year (which would require the capacity expansion), they could make $125mm.  

Will Pz-cel be approved and when?

Breakthrough Designation (BTD) and Priority Review are both evidence that the agency recognizes the potential for Pz-cel as it relates to unmet need.  The Phase III VIITAL data are strong, meeting the pre-specified standards for demonstrating wound closure and pain reduction (the only RDEB therapy to show pain reduction). The biggest risk is CMC, as this is a complicated cell therapy. The company has leveraged Breakthrough Designation, which allows frequent FDA interactions, to de-risk CMC as much as possible. For instance, they delayed the BLA submission by a few months to complete additional "bridging" studies showing that the skin made in Cleveland is substantially similar to the skin made in early academic settings. This bridging work was done at the request of the FDA and might have been a review problem without close communication prior to submission.  

Thus, while every FDA review has risk and cell therapy especially so, things look good for Pz-cel.  FDA has accepted Pz-cel for Priority Review with a target action date of May 25th. On Feb 1, ABEO issued a PR stating that the inspection of their Cleveland facility was completed without negative findings and that the mid-cycle meeting was also conducted without issue. FDA appears to be tracking toward an on-time decision without need for an Adcomm.  There is a risk that the review is delayed for a couple months due to FDA resources (see RCKT), but that won’t impact the LT thesis.  

Bear Thesis: Does Krystal’s Vyjuvek eliminate the need for Pz-cel?

KRYS and its biggest supporters have put forward the view that, because they believe Vyjuvek works on wounds of all shapes and sizes, there is not much need for a complimentary wound closing treatment like Pz-cel.  Here is CEO Krish Krishan at the Guggenheim conference (7 Feb 2024):

• Debjit Chattopadhyay [Guggenheim analyst]: Got it. But, in the best-case scenario, do you think there is a case to be made for synergistic use [of Pz-cel]?

• Krish Krishnan, Chairman and Chief Executive Officer: We have never said that. We believe, VYJUVEK was designed to work on small wounds, large wounds, chronic wounds, recurring wounds, so there is no segmentation of wounds in our mind that VYJUVEK would not be applicable. So from that lens, which I get could be a bit biased, but from that lens there appears to be no reason for a synergistic situation, but that decision will ultimately be made by KOLs and patients, and we'll see what the impact is.

Given that KRYS is a $3B company widely covered by the Street, this commentary carries some weight.  However, it is easy to demonstrate that this is nonsense.  

First, let’s examine Vyjuvek's label. The maximum weekly volume is 1.6 mL. This maximum dose was established by their pivotal trial. We have confirmed that insurance companies are limiting patients to the maximum label dose per week, and that doctors are being asked to frequently re-submit pictures and paperwork to receive even that. You'll also see that dosage per wound is described two different ways. First, it says to apply a drop of Vyjuvek to each square cm within the wound.  Second, it has a table partitioning wounds into three categories.

Note that wounds larger than 60 square cm are not even mentioned and that there is only enough drug to treat 2-3 credit card sized wounds. Elsewhere in the label, it emphasizes that you should stick to the same wound until it closes, rather than hopping around week to week.  We understand from KOLs that this approach is crucial to success on Vyjuvek.  Because, unlike Pz-cel, assuming the genetic correction made by Vyjuvek lasts only a month, wounds are expected to re-open, and the label advises patients to treat those wounds again quickly to close them back up while still small.

The latest studies (Tang et al. citation) suggest that 60% of RDEB patients have open wounds over 30% of their entire body.  ABEO estimates an average RDEB patient to have 8k square cm of body surface area, which implies more than 2400 square cm of open wounds in the majority of patients.  To cover all the wounds (not practical), you would need 40 times the maximum weekly dose of Vyjuvek. 

Thus, we believe Vyjuvek is most useful in keeping a handful of recurring wounds in problem areas under control, which itself is a great benefit to patients.  We do not understand why KRYS is so reluctant to acknowledge that complimentary therapies will be necessary, but our best guess is that it has to do with pricing. KRYS has priced Vyjuvek at $24,250 per 1.6 mL drug vial, which equates to $1.261M per year. The total annual cost per patient is capped at $900k for payers willing to cover the drug per label (1 vial a week).  While having no data to support it, they are pitching to payers that the cost will go down over time as patients get their wounds under control and need less than weekly dosing.  To acknowledge the role of Pz-cel would undermine this theory and would highlight that Vyjuvek pricing is likely to remain at the $900k cap indefinitely, which is quite expensive for a partial solution.

Potential Upside: How can Pz-cel be used to prevent or treat SCC in RDEB patients?

Squamous cell carcinoma (SCC) is a common skin cancer found mainly in lighter skinned elderly people who have had too much exposure to the sun.  Because SCC is ugly and continues to grow, most people find their way to the doctor to treat it. Surgical removal and other treatments are effective, and it is rare for (non-RDEB) SCC to be fatal.

For reasons still being explored, SCC is the leading cause of death for RDEB sufferers.  The problems are a) RDEB patients get SCC very frequently and early in life (20s / 30s), b) the SCC is particularly aggressive and c) their frail skin and other RDEB problems make treatment difficult.  

The wounds most at risk for SCC are chronic non-healing wounds in the extremities, which overlap with the types of wounds best suited for Pz-cel.  There seems to be an opportunity to prevent SCC by treatment of high-risk wounds with Pz-cel.  In the Phase II and III trials, no SCC was seen on any Pz-cel treated wound.  While this is encouraging, more clinical experience will be necessary to prove out the thesis.

In addition to prevention, it is possible that Pz-cel could be used to more effectively treat patients who get SCC.  First line treatment for SCC is most often surgical excision. 2cm margins are recommended to minimize recurrence risk, but this is often not possible, especially with RDEB patients. With Pz-cel sheets available, the surgeon could take wide margins of at least 2cm.  

There is little clinical data on SCC prevention and zero data on using Pz-cel for SCC excision.  The utility of these use cases will have to be explored in the commercial setting.  However, if Pz-cel can be used to lower the SCC mortality risk for RDEB patients—which is 87% by the age of 45—it would be of great service to RDEB patients, and patients and could expand the Pz-cel market beyond our base case.

Risk to Thesis

The biggest risk is that the complexity and treatment burden associated with Pz-cel lead to a failure of the technology to be adopted.  Complexity includes the need to train teams of physicians at each center and the need to precisely schedule the biopsy, manufacture, and engraftment of each Pz-cel. From a patient journey perspective, Pz-cel is not an easy one, starting with painful biopsies, then a month of semi-quarantine, then surgery under general anesthesia, then a week of immobility.  It's a pretty rough 5 weeks, and it is not something anyone would do if they were not desperate.  

But these patients are desperate. Testimonials of patients from the trial, which we are hopeful the company will soon share, attest to the life changing impact of Pz-cel. Several of these patients are so happy with their treatment outcomes that they are seeking to get a second procedure. We believe the best way to mitigate a launch failure is to ensure the success of early treatments. The RDEB community is well established. Word of mouth will make or break this product.  

Valuation

One way to value ABEO is on a risk-adjusted base case valuation.  We assume a 25% probability of failure, whether that is FDA rejection, failed launch, etc. We value failure at zero. Otherwise, we use our base case for ABEO: $240mm of revenue and $125mm of EBIT three years out. In that scenario, we believe a conservative valuation would be ~$1.3B (conservative ~10x EBIT). 

Price target = $1.3B * 0.75 / 37mm diluted shares = ~$26 / share.

Management

Vish Seshadri joined ABEO in June 2021 and was promoted to CEO shortly after. The company was somewhat of a mess, and he has done a good job cleaning it up. He settled a litigation with RGNX, where ABEO was in the wrong and could have been bankrupted, and he partnered out three gene therapy programs—MPS IIIA (RARE), Rett syndrome (TSHA), CLN1 (TSHA)—that, while promising, ABEO lacked the resources to develop. He has focused the company entirely on Pz-cel, which we view as a smart strategy.  

Capital Allocation

ABEO has historically been a dilutive mess but has been improving under Seshadri's leadership.  In January, the company announced a credit facility with Avenue Capital Group that seems intended to eliminate any financing need pre-approval. In February, after giving a positive regulatory update, Seshadi bought 20k shares at $4.39. It appears the company views the stock as cheap and is acting accordingly.  

If Pz-cel is approved, the company should receive a priority review voucher (PRV) which should be readily salable for $75mm+. We believe the PRV proceeds are enough to fund the launch.

Non-Core Asset Brief Summary

ABEO has two potentially royalties, one for TSHA's Rett Syndrome gene therapy and one for RARE's MPS III (San Fillipo) gene therapy. Both royalties are high single digit, but TSHA has sub-license expenses that cut it in half. We assume 4% net royalty for Rett and 8% for MPS III.  Both programs show promise and could represent 8-figure cash flow streams.  

ABEO also has some preclinical gene therapy programs for the eye.  These may be promising but are not our focus. We expect the company to potentially spend a small amount of money to position one or more programs for out-licensing.

Select Reading

RDEB Disease Burden Literature Review

SCC in RDEB Patients

Catalyst

Pz-Cel FDA Approval (Target Date): May 25, 2024