An Acquirer’s Dream – Applied Genetic Technologies Corp (AGTC)

An Acquirer’s Dream – Applied Genetic Technologies Corp (AGTC)
(Source: Google Finance)

One of the cheapest stocks in our All Investable Screener, which you can subscribe to here, is Applied Genetic Technologies Corp (NASDAQ:AGTC).

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Applied Genetic Technologies is a clinical-stage biotechnology company that uses its proprietary gene therapy platform to develop products designed to transform the lives of patients with severe diseases in ophthalmology.

AGTC’s lead product candidates focus on X-linked retinoschisis, achromatopsia and X-linked retinitis pigmentosa, which are inherited orphan diseases of the eye, caused by mutations in single genes that significantly affect visual function and currently lack effective medical treatments.

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Applied Genetic Technologies is also using its gene therapy expertise to expand into disease indications with large market opportunity such as wet AMD.

As you can see below, the company’s share price has been hammered in the past twelve months, down 45.95% from $18.07 on December 17, 2015 to its latest closing price of $8.75.

Applied Genetic Technologies

Collaborative Agreement with Biogen Inc

Earlier this year Applied Genetic Technologies formed a collaboration agreement with biopharmaceutical giant Biogen Inc.

AGTC’s agreement with Biogen is a broad collaboration and license agreement focused on the development of gene-based therapies for two orphan diseases of the retina and three options for early stage discovery programs in two ophthalmic diseases and one non-ophthalmic condition. The deal also includes an equity investment in AGTC by Biogen and a license agreement for manufacturing rights.

Under the terms of the agreements, Biogen will make near-term payments including an upfront payment in the amount of $124 million to AGTC, which includes a $30 million equity investment at a purchase price of $20.63 per share. Applied Genetic Technologies is eligible to receive upfront and milestone payments exceeding $1 billion in total. Biogen will be granted a license to the XLRS and XLRP programs and the option to license discovery programs for three additional indications at the time of clinical candidate selection.

Biogen obtains worldwide commercialization rights for the XLRS and XLRP programs. AGTC has an option to share development costs and profits after the initial clinical trial data are available, and an option to co-promote the second of these products to be approved in the United States.

AGTC will lead the clinical development programs of XLRS through product approval and of XLRP through the completion of first-in-human trials. Biogen will support the clinical development costs, subject to certain conditions, following the first-in-human study for XLRS and IND-enabling studies for XLRP.

Under the manufacturing license, Biogen will receive an exclusive license to use AGTC’s proprietary technology platform to make AAV vectors for up to six genes, three of which are in AGTC’s discretion, in exchange for payment of milestones and royalties.

In July 2015, when the agreement was made Sue Washer, Chief Executive Officer of AGTC said, “We are excited to combine our deep experience in gene therapy and ophthalmology with Biogen’s strong track record of developing and marketing therapies for complex and rare diseases”.

“This collaboration will provide many synergies, enabling us to accelerate our lead programs for the treatment of X-Linked Retinoschisis (XLRS) and X-linked Retinitis Pigmentosa (XLRP), two ocular conditions with significant unmet needs, and three discovery programs, including a non-ophthalmic condition.”

“In addition, we now have expanded resources to accelerate the development of several internal programs, including our program for the treatment of achromatopsia.”

Latest Financial Results

On September 12, 2016 the company released it latest financial results with highlights including:

  • In June, the company announced that the European Commission (EC) granted an orphan medicinal product designation to its investigational gene therapy product candidate for the treatment of X-linked retinitis pigmentosa (XLRP) caused by mutations in the RPGR gene.  The company had previously been granted orphan drug designation from the EC and the U.S. Food and Drug Administration (FDA) for its gene therapy product candidates for the treatments of X-linked retinoschisis (XLRS) and achromatopsia (ACHM) caused by mutations in the CNGA3 and CNGB3 genes.
  • In August, the company and the Medical College of Wisconsin announced that data from their studies evaluating the density of cone photoreceptors in patients with ACHM caused by mutations in the CNGB3 gene were published in Investigative Ophthalmology and Visual Science.
  • Also in August, Anne M. VanLent was appointed to the company’s Board of Directors and elected Chairperson of the Audit Committee.  Ms. VanLent is an industry veteran with more than 30 years of financial and healthcare leadership experience.

This is what CEO Sue Washer had to say about the results, “Over the past year we’ve continued to make progress across our clinical programs and have remained focused on advancing novel gene-based therapies to improve the lives of patients affected by rare inherited diseases. We are continuing to advance our lead product candidates for X-linked retinoschisis and achromatopsia, serious ocular indications that are caused by mutations in single genes that significantly affect visual function and currently lack effective medical treatments.”

AGTC also provided the following information on its Clinical Trial Updates.

XLRS Phase 1/2 Trial

AGTC is currently enrolling patients in a Phase 1/2 clinical trial for XLRS, a program on which the company is collaborating with Biogen.  The clinical protocol anticipates enrollment of up to 27 patients.  This trial is currently being conducted at six clinical sites that specialize in inherited retinal diseases.  As of August 2016, the company had enrolled a total of eight patients, six of whom are in the lowest dose level group and two are in the middle dose level group.

The primary endpoint of this trial is safety and safety data to date has shown that the XLRS product candidate has been generally well tolerated.  AGTC has observed mild to moderate ocular inflammation in the majority of patients which resolved either without treatment or after treatment with topical or oral corticosteroids.

Enrollment in the study has been slower than planned. Delays resulted from patients not meeting one or more eligibility criteria and as a result, the company has taken steps to increase the number of clinical sites and to enhance its outreach programs. The company made a protocol amendment to include the use of prophylactic corticosteroids that required further institutional review board approvals.

Vendor errors required the company to re-test the study agent for a process component.  Upon re-testing, the study agent met all specifications and the company now has several backup vendors as well as internal testing capabilities. The company believes it has resolved these factors in order to meet its future enrollment goals and is executing on a plan to complete the trial expeditiously.

ACHMB3 Phase 1/2 Trial

The company’s Phase 1/2 ACHM clinical trial is being conducted at four sites that specialize in inherited retinal diseases, and an additional site is performing advanced optical testing on every patient.  Two patients are currently enrolled in the trial which is a lower number than the company had planned to report on at this point in the study.  The slower-than-expected enrollment was due to vendor errors identified during testing of the study agent, which resulted in a delay to the initiation of the trial.

As a first—in-man study, the company’s internal and external teams are monitoring these first two patients very carefully over time in order to meet the primary objective of patient safety, before proceeding with further study enrollment involving a larger number of patients.  As with the XLRS program, the company intends to provide quarterly updates on its patient enrollment for ACHM, and will release results when it has sufficient data to draw meaningful conclusions.

What does all that mean?

Well, as you can see there’s been a slowdown in enrollment for both of Applied Genetic Technologies’s Phase 1/2 trials. XLRS has just eight enrollees out of the necessary twenty seven and ACHM B3 has just two enrollees out of the necessary twenty four however, its important to note what else has been happening with the company’s pre-clinical programs and research.

  • For its ACHM CNGA3 product candidate, the company expects to submit an Investigational New Drug application (IND) by the end of this year.  The company has completed all of the pre-clinical IND-enabling studies, has finished producing the study agent, and all study agent characterization tests are on-going.  Once the IND has cleared the FDA and individual sites internal review boards, the company anticipates enrolling up to 24 ACHM CNGA3 patients in a Phase 1/2 clinical trial.  The study design will be similar to that of the ACHM CNGB3 study.
  • In the XLRP program, another on which the company is collaborating with Biogen, the company is currently conducting IND-enabling toxicology studies.  A dose range finding study of the company’s XLRP product candidate in dogs demonstrated expression of the RPGR protein in photoreceptors and improvement in structural and functional parameters associated with disease progression in this model.  The company expects to file an IND for XLRP in 2017.
  • The company is also developing treatments for three additional indications, in collaboration with Biogen, which are all in the discovery phase, and continues to evaluate other indications in order to select those most appropriate for addition to its longer-term product development pipeline.  As an example, in January of this year, the company announced its research efforts in Blue Cone Monochromacy, a rare genetic disease of the retina that can result in reduced visual acuity, impaired color vision, photosensitivity, myopia and infantile-onset nystagmus.

Why Would an Acquirer be Interested in AGTC

To understand the value of AGTC it’s important to understand what activists are looking for in a takeover target.

Activists are looking for companies that are undervalued using the following calculation:

Enterprise Value / OIBDP

OIBDP differs from the ordinary enterprise multiple because it uses operating income before depreciation (OIBDP) in place of EBITDA. OIBDP is constructed from the top of the income statement down, where EBITDA is constructed from the bottom up. Calculating OIBDP from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–income that a company does not expect to recur in future years–ensures that this income is related only to operations.

It is favored over market capitalization as a measure of the total cost to acquire a company because it includes additional liabilities–like debt, preferred equity and non-controlling interests–that must be taken on by the acquirer.

With that being said let’s take a look at the balance sheet of AGTC over the past four quarters:

Amounts in thousands
Period Ending 9/30/2016 6/30/2016 3/31/2016 12/31/2015
Current Assets
Cash And Cash Equivalents 55,980 28,868 17,884 44,402
Short Term Investments 77,338 69,664 115,811 105,614
Total Current Assets 135,862 102,575 136,777 152,802
Total Assets 173,218 180,797 188,052 196,077
Current Liabilities
Total Current Liabilities 50,652 54,743 54,451 53,837
Long Term Debt
Total Liabilities 58,866 71,509 82,942 94,052

The first thing you’ll notice is that AGTC has $133 million in cash and cash equivalents and zero debt as of September 30, 2016. This by itself may seem inconsequential but when you consider that you can but the entire company for $158 million that means you’ll pay $158 million and get $133 million in cash and cash equivalents and zero debt, or an Enterprise Value of just $25 million.

Now let’s take a quick look at the income statement of AGTC (below) that shows that the company also has very strong operating earnings in relation to its Enterprise Value.

Amounts in thousands
Revenue 9/30/2016 6/30/2016 3/31/2016 12/31/2015
Total Revenue 11,806 12,113 11,997 12,189
Cost of Revenue
Gross Profit 11,806 12,113 11,997 12,189
Operating Expenses
Research Development 5,571 6,756 7,868 6,752
Selling General and Administrative 2,846 2,870 2,362 2,567
Non Recurring
Total Operating Expenses
Operating Income or Loss 3,389 2,487 1,767 2,870

As you can see, Applied Genetic Technologies has around $11 million in operating earnings (TTM). When you divide its Enterprise Value by its operating earnings you get a Acquirer’s Multiple of just 2.72. That’s what you call cheap on an activist basis!

It’s also important to note that the research and development expense for the three months ended September 30, 2016 decreased by $11.9 million to $5.6 million compared to the same period in 2015.  The year-over-year decrease was largely driven by the impact of $12.0 million of collaboration-related license fees and other costs incurred by the company in 2015 as a result of its entry into and receipt of fees and payments under the collaboration with Biogen.

The net result was net income of $3.6 million for the three months ended September 30, 2016, compared to a net loss of $9.1 million in the same period of 2015.


For me Applied Genetic Technologies provides so much upside. With its strong balance sheet, and a market cap of just $158 million this is a company that will be under the radar of most institutions because it’s simply too small.

As an individual investor however this is a great opportunity. The company is selling on an Acquirer’s Multiple of 2.72, a P/E of 15, and a P/B of 1.4. AGTC also has a collaborative agreement with biopharmaceutical giant Biogen Inc which means in addition to other benefits it can now expand resources to accelerate the development of a number of its internal programs.

This is certainly one stock that I’ll be adding to my TAM Deep Value Stock Portfolio at the end of this month.

Don’t forget to check out our FREE Large Cap 1000 Deep Value Stock Screener at The Acquirer’s Multiple.

The Acquirer’s Multiple®

Article by Johnny Hopkins, The Acquirer’s Multiple

Updated on

The Acquirer’s Multiple® is the valuation ratio used to find attractive takeover candidates. It examines several financial statement items that other multiples like the price-to-earnings ratio do not, including debt, preferred stock, and minority interests; and interest, tax, depreciation, amortization. The Acquirer’s Multiple® is calculated as follows: Enterprise Value / Operating Earnings* It is based on the investment strategy described in the book Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations, written by Tobias Carlisle, founder of The Acquirer’s Multiple® differs from The Magic Formula® Earnings Yield because The Acquirer’s Multiple® uses operating earnings in place of EBIT. Operating earnings is constructed from the top of the income statement down, where EBIT is constructed from the bottom up. Calculating operating earnings from the top down standardizes the metric, making a comparison across companies, industries and sectors possible, and, by excluding special items–earnings that a company does not expect to recur in future years–ensures that these earnings are related only to operations. Similarly, The Acquirer’s Multiple® differs from the ordinary enterprise multiple because it uses operating earnings in place of EBITDA, which is also constructed from the bottom up. Tobias Carlisle is also the Chief Investment Officer of Carbon Beach Asset Management LLC. He's best known as the author of the well regarded Deep Value website Greenbackd, the book Deep Value: Why Activists Investors and Other Contrarians Battle for Control of Losing Corporations (2014, Wiley Finance), and Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors (2012, Wiley Finance). He has extensive experience in investment management, business valuation, public company corporate governance, and corporate law. Articles written for Seeking Alpha are provided by the team of analysts at, home of The Acquirer's Multiple Deep Value Stock Screener. All metrics use trailing twelve month or most recent quarter data. * The screener uses the CRSP/Compustat merged database “OIADP” line item defined as “Operating Income After Depreciation.”
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