A promising pipeline, collaborations with deep-pocketed partners, and adequate financing are some of the things investors look for in clinical-stage biopharma companies. AnaptysBio (NASDAQ:ANAB) offers most of those things, but has recently discovered that "promising pipeline" is a subjective term.

On the one hand, the company has advanced five unique drug candidates across immunology and oncology indications into clinical trials. It has some wholly owned assets and some partnered with Tesaro -- now part of GlaxoSmithKline (NYSE:GSK) -- and Celgene. On the other hand, investors haven't been impressed with clinical results announced to date, including the latest batch three weeks ago.

But maybe the pharmaceutical stock's 52% year-to-date collapse is a bit of an overreaction. If that's the case, then is AnaptysBio a buy?

A pile of note cards with question marks drawn on them.

Image source: Getty Images.

A promising pipeline in need of a big win

AnaptysBio is developing a handful of monoclonal antibodies that block proteins central to the pathology of inflammatory diseases and cancers. The lead wholly owned drug candidate, etokimab, is a molecular antibody that blocks interleukin-33 to reduce inflammation. It's being studied as a potential treatment for atopic dermatitis, eosinophilic asthma, and one other disease. 

The company is also positioned to reap milestone and royalty payments from four different antibody programs licensed to Tesaro in 2014. The most advanced, an anti-PD1 antibody called dostarlimab, has shown promise in endometrial cancer and should have a biologics license application (BLA) submitted for marketing approval before the end of 2019.

The collaboration with Tesaro has proved valuable for AnaptysBio, especially considering the larger peer has to pay for development costs. That has freed up financial resources for developing its wholly owned assets, including etokimab and ANB019. While the business is on pace to burn over $60 million in cash from operations in 2019, it ended June with $146 million in cash.

Metric

First Half 2019

First Half 2018

Change (YoY)

Revenue

$5 million

$0

N/A

Operating expenses

$56.4 million

$30.2 million

87%

Operating income

($51.4 million)

($30.2 million)

N/A

Operating cash flow

($31.6 million)

($21.3 million)

N/A

Data source: SEC filing. YoY = Year over year.

But the promising duo leading the pipeline has lost its luster. As the historical peak market cap of $3 billion suggests, investors used to be much more optimistic about the prospects of AnaptysBio. The current valuation of $1 billion is still relatively impressive considering the company doesn't have a single drug on the market, but there's no denying investors have grown impatient. 

The issue that's most on investors' minds is the competitiveness of wholly owned assets etokimab and ANB019. Shares of AnaptysBio crashed in late June when Regeneron noted that its own interleukin-33 inhibitor, REGN3500, didn't demonstrate a significant benefit to asthma patients compared to a commonly used treatment. 

Meanwhile, AnaptysBio announced mixed results from a small trial of ANB019 in late September. The drug demonstrated promise in treating a rare disease called generalized pustular psoriasis (GPP) in two patients, but a third dropped out due to a blood infection. While the adverse event may not have been caused by the drug candidate, a drug from Boehringer Ingelheim has successfully treated GPP patients without serious side effects. 

Simply put, the company's pipeline could use a big win. But does it really have to have one?

A doctor wearing red boxing gloves.

Image source: Getty Images.

Can dostarlimab stand up to Keytruda?

GlaxoSmithKline acquired Tesaro in January 2019, which means dostarlimab is now in the hands of a deep-pocketed partner. That's great news for AnaptysBio, but Wall Street appears to have overlooked the move's significance. Indeed, it takes a bit of squinting to see its strategic importance.

The current market-leading anti-PD1 treatment, Merck's (NYSE:MRK) Keytruda, generated revenue of over $7 billion in 2018. It's also become one of the most sought-after pairings for immuno-oncology combination therapies, which study whether two or more drugs can deliver more effective treatment than the individual drugs alone. That creates a big opening for GlaxoSmithKline.

While the initial regulatory application for dostarlimab has yet to be filed, the drug has proven at least as effective as Keytruda in completed lung and ovarian cancer studies. Even without it being superior, GlaxoSmithKline could offer its anti-PD1 antibody as a drug combo candidate for the industry. 

That could come in handy for the pharma giant, which has a number of its own assets currently relying on Keytruda in experimental combination treatments. That now includes a potential blockbuster PARP inhibitor called Zejula, acquired in the Tesaro deal. Dostarlimab provides the option to move those in-house and own the whole combination, on top of expanding the antibody's use as a monotherapy. Considering Keytruda has earned at least 15 different regulatory approvals since hitting the market in 2014 and is involved in dozens of combination therapy studies, the potential is significant.

How does that affect AnaptysBio? Under the original licensing deal for dostarlimab, AnaptysBio stands to earn up to $90 million in total milestone payments if the anti-PD1 antibody reaches a BLA submission (expected by the end of 2019) and earns approval in the United States and other markets. AnaptysBio can also earn up to $165 million in sales milestones and single-digit royalties.

Put another way, the licensing agreement for dostarlimab could significantly de-risk AnaptysBio's future and buy it time to sort out its wholly owned pipeline if need be, with the potential for a significant revenue stream in the next decade. 

De-risked, but by how much?

Investors shouldn't overlook the new connection between GlaxoSmithKline and AnaptysBio. That said, the small-cap company is valued at $1 billion today, which is relatively pricey if etokimab and ANB019 flop. And it's not ideal for a company to be completely dependent on milestone and royalty revenue. If dostarlimab continues to quietly rack up wins, though, then the collaboration could lead to a significant and steady stream of revenue for the small-cap biopharma.

Investors may be better off waiting on the sidelines for now, but they should closely watch the BLA submission in 2019 and pending approval for dostarlimab in 2020.