AbCellera Biologics(ABCL) - 2023 Q4 - Annual Report

PART I Business AbCellera operates an AI-powered antibody discovery engine to develop new therapies, building a diversified portfolio of royalty stakes through partnerships and advancing its own internal pipeline - The company's strategy is twofold: build an integrated engine for antibody drug discovery and development, and use this engine to create a large, diversified portfolio of royalty stakes through partnerships[20] - AbCellera is advancing its internal pipeline with two drug programs, ABCL635 (metabolic/endocrine conditions) and ABCL575 (atopic dermatitis), in IND-enabling studies, with anticipated IND submissions in 2025[55][56][58] - The company is expanding its capabilities with a new GMP manufacturing facility, supported by Canadian government financing, expected to be operational in 2025[48] - The company expects to generate losses and negative operating cash flow in the near-to-medium term due to continued investments in its engine and internal programs, ahead of potential long-term revenues from milestones and royalties[28] Portfolio and Partnership Status (as of Dec 31, 2023) | Metric | Value | | :--- | :--- | | Programs under contract | 203 | | Unique partners | 46 | | Programs with downstream participation | 87 | | Started programs | Over 110 | Our Company and Engine - AbCellera's engine discovers antibodies from natural immune responses, which are considered pre-enriched for higher target-binding specificity and developability compared to synthetic methods[36] - A key pillar of the engine is the integration of software and data science, which captures and standardizes data from every experiment into a central database for applying AI and machine learning[39][40][41] - The company is expanding its facilities to include cell-line development, process development, and GMP manufacturing, supported by CAD $175.6 million in financing from the Government of Canada, with the facility expected to be in use in 2025[48] - AbCellera has developed specific technology platforms to address high-value areas, including T-cell engagers, GPCR and ion channels, and pandemic response, which have generated internal and partnered programs[51] Our Pipeline - ABCL635 is a potential first-in-class therapy for metabolic and endocrine conditions, derived from the company's GPCR and ion-channel platform, with an anticipated IND submission in 2025[56] - ABCL575, targeting OX40L for atopic dermatitis, is a potential best-in-class therapy with an anticipated IND submission in 2025[57][58] AbCellera Internal Pipeline Status | Molecule | Status | Target | Method of Action (MOA) | Indication | Therapeutic Area | | :--- | :--- | :--- | :--- | :--- | :--- | | ABCL635 | IND-enabling studies (Preclinical) | Undisclosed - GPCR or ion channel | Antagonist | Undisclosed | Metabolic endocrine conditions | | ABCL575 | IND-enabling studies (Preclinical) | OX40 ligand (OX40L) | Blocking and nondepleting | Atopic dermatitis & other autoimmune/inflammation | Immunology & inflammation | Our People - As of December 31, 2023, the company had 586 full-time employees, an 18% increase from the prior year, with a highly interdisciplinary team[68][70] - The company experienced a low voluntary turnover rate of less than 4.5% in 2023, indicating high employee engagement and retention[70] - All employees receive equity awards (share options and RSUs) to promote shared ownership, alignment, and retention[66] Our Partners - As of December 31, 2023, AbCellera had 46 unique partners and 203 partnered programs under contract, of which 87 have the potential for milestone and royalty payments[76][84] - Partnership agreements typically include near-term payments, downstream clinical and commercial milestones, and royalties on net sales[77] Downstream Participation Potential (as of Dec 31, 2023) | Category | Value / Rate Range | | :--- | :--- | | Milestones (in billions, not probability adjusted) | | | Preclinical | $0.08 | | Clinical | $1.07 | | Regulatory | $1.94 | | Commercial | $5.46 | | Total Milestones | $8.55 | | Royalty on Net Sales (5th-95th percentile) | | | 2015-2019 contracts | 0-4.0% | | 2020-2023 contracts | 1.5-9.0% | Our Approach to Capital Allocation - The company allocates capital with a long-term perspective, focusing on building its engine to generate a capital-efficient portfolio, with the most meaningful royalty revenues expected after 2030[103][104] - The portfolio is built through three program types: Partner-Initiated Discovery Agreements, Co-development Agreements, and AbCellera-Initiated Programs[114][115][119][123] - The average negotiated royalty rate for partner-initiated programs increased from a mean of 2.4% (2015-2019) to 4.3% (2020-2023)[145] - As of December 31, 2023, the total hypothetical value of potential milestone payments was $8.6 billion, not adjusted for probability of success[148] Intellectual Property - As of December 31, 2023, the company owned or exclusively licensed over 80 issued or allowed patents and over 80 pending patent applications worldwide[150] - The company's IP portfolio has been expanded through strategic acquisitions, including Lineage (2017), OrthoMab (2020), Trianni (2020), and TetraGenetics (2021)[153][156][164] - The company utilizes a comprehensive approach to IP protection, including patents, trademarks, copyrights, and trade secrets[149][151] Government Regulation - AbCellera's business success is indirectly impacted by the extensive regulations governing its pharmaceutical and biotechnology partners[183][184] - The company's new GMP manufacturing facility, once completed, will become subject to various regulations, including inspections, certifications, and audits[294] - The company is subject to anti-corruption laws such as the U.S. Foreign Corrupt Practices Act (FCPA) and the Canadian Corruption of Foreign Public Officials Act[190] Risk Factors The company faces significant risks including potential unprofitability, revenue fluctuation post-COVID, dependency on partners, intense competition, and intellectual property litigation Risks Related to Our Business and Strategy - The company incurred a net loss of approximately $146.4 million in 2023 and anticipates incurring significant losses for the foreseeable future[194] - Revenue has fluctuated significantly, with royalty payments from Lilly's COVID-19 antibodies ending in November 2022 and no royalty revenue generated in 2023[199] - Future growth is highly dependent on partners successfully developing and commercializing drug candidates, as the majority of contract value lies in downstream payments[231] - The life sciences and biotechnology platform market is highly competitive, with competition from CROs, specialized platform companies, and technology point-solution providers[99][253] Risks Related to Our Intellectual Property - The company's ability to maintain a competitive advantage depends on obtaining and enforcing sufficient IP protection, which is a costly and complex process[330][331] - AbCellera is involved in ongoing patent infringement litigation against Bruker Cellular Analysis, where an adverse outcome could reduce competitive advantage[392][393] - The company is also involved in a civil lawsuit filed by the Estate of John Schrader, which alleges breach of an implied partnership and patent infringement[394] - The company relies on in-licenses from third parties like the University of British Columbia and Stanford University, and the loss of these rights could materially harm the business[349] Risks Related to Ownership of Our Common Shares - Executive officers, directors, and 5% shareholders own over 20% of common shares, giving them significant influence over matters requiring shareholder approval[415] - The company does not intend to pay dividends in the foreseeable future, retaining earnings for business development and expansion[414] - There is a risk of adverse U.S. federal income tax consequences for certain U.S. shareholders if the company is classified as a CFC or a PFIC[432][438] - As a Canadian company, shareholder rights differ from those under U.S. laws, which may affect corporate transactions and enforcement of U.S. judgments[419][426] Unresolved Staff Comments The company reports no unresolved staff comments - None[460] Cybersecurity The company manages cybersecurity through its ERM program, with oversight from the Audit Committee and Board, and threats have not materially affected the business to date - The company's cybersecurity risk management is integrated into its overall Enterprise Risk Management (ERM) program[460] - Governance is led by the Chief Legal and Compliance Officer and the IT team, with oversight from the Audit Committee[463][464] - To date, risks from cybersecurity threats have not materially affected the company, its business strategy, results of operations, or financial condition[462] Properties AbCellera's facilities are primarily in Vancouver, B.C., where it is significantly expanding its headquarters and building a new GMP manufacturing facility - The company's main facilities are in Vancouver, British Columbia, where it leases ~130,000 sq. ft. and is building a new 387,000 sq. ft. corporate headquarters and a 123,000 sq. ft. GMP facility[465][467] - The company's Australian subsidiary leases approximately 40,000 sq. ft. of office and lab space in Sydney, with a lease expiring in 2031[467] Legal Proceedings The company is involved in ongoing patent infringement litigation against Bruker Cellular Analysis and is defending a civil lawsuit from the Estate of John Schrader - The company is engaged in ongoing patent infringement litigation against Bruker Cellular Analysis (formerly Berkeley Lights/PhenomeX), which it initiated in 2020[469][471] - In October 2022, the Estate of John Schrader filed a civil lawsuit against the company, which the company believes is meritless and is actively defending[473] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities AbCellera's common shares trade on Nasdaq under "ABCL," and the company does not anticipate paying dividends, retaining earnings for business expansion - The company's common shares have been listed on The Nasdaq Global Select Market under the symbol "ABCL" since December 11, 2020[476] - The company has never declared or paid cash dividends and does not intend to in the foreseeable future, retaining earnings to fund business development[480] - As of February 15, 2024, there were approximately 75 holders of record of the company's common shares[479] Management's Discussion and Analysis of Financial Condition and Results of Operations Revenue decreased dramatically in 2023 due to the end of COVID-19 antibody royalties, resulting in a net loss driven by increased R&D investments, though liquidity remains strong Results of Operations - The 63% increase in R&D expenses in 2023 was driven by growth in program execution, platform development, and a $31.6 million one-time payment related to internal programs[530] - The company reported an income tax recovery of $27.6 million in 2023, compared to an expense of $80.6 million in 2022, driven by the net loss in the current year[540] Revenue Comparison (2022 vs. 2023) | Revenue Category | 2022 (in thousands) | 2023 (in thousands) | Change (Amount) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Research fees | $40,802 | $35,556 | ($5,246) | (13)% | | Licensing revenue | $696 | $969 | $273 | 39% | | Milestone payments | $900 | $1,500 | $600 | 67% | | Royalty revenue | $443,026 | $0 | ($443,026) | (100)% | | Total revenue | $485,424 | $38,025 | ($447,399) | (92)% | Operating Expenses Comparison (2022 vs. 2023) | Expense Category | 2022 (in thousands) | 2023 (in thousands) | Change (Amount) | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Royalty Fees | $66,436 | $0 | ($66,436) | (100)% | | Research and development | $107,879 | $175,658 | $67,779 | 63% | | Sales and Marketing | $11,270 | $14,180 | $2,910 | 26% | | General and administrative | $55,485 | $60,999 | $5,514 | 10% | Liquidity and Capital Resources - As of December 31, 2023, the company had $760.6 million in cash, cash equivalents, and marketable securities[553] - The company believes its current liquidity will be sufficient to meet working capital and capital expenditure needs for at least the next 36 months without requiring additional external funding[554] - In May 2023, the company secured up to CAD $300.0 million in multi-year contribution agreements from the Governments of Canada and British Columbia[557] Cash Flow Summary (in thousands) | Cash Flow Activity | 2022 | 2023 | | :--- | :--- | :--- | | Operating activities | $277,360 | ($43,877) | | Investing activities | ($352,625) | ($221,108) | | Financing activities | ($1,628) | $10,356 | Critical Accounting Policies and Estimates - Revenue Recognition (ASC 606) requires significant management judgment in identifying performance obligations and allocating transaction prices[572][573] - Business Combinations are accounted for using the acquisition method, requiring fair value estimates for acquired assets, liabilities, and contingent consideration[577][578] - Stock-Based Compensation is measured at the grant date fair value using the Black-Scholes model, which requires subjective assumptions for inputs[585][588] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate, foreign currency, and inflation risks affecting its investments, expenses, and operational costs - The company is exposed to interest rate risk on its $760.6 million of cash, cash equivalents, and marketable securities as of Dec 31, 2023[593] - Foreign currency risk exists as revenues are primarily in USD, while significant expenses are incurred in Canadian and Australian dollars[595] - Inflation poses a risk by increasing labor, materials, and construction costs, which the company tries to mitigate through longer-term supplier agreements[596] Financial Statements and Supplementary Data The audited consolidated financial statements are presented in accordance with U.S. GAAP and received an unqualified opinion from the independent auditor, KPMG LLP Consolidated Balance Sheets Consolidated Balance Sheet Highlights (as of Dec 31) | Account (in thousands) | 2022 | 2023 | | :--- | :--- | :--- | | Assets | | | | Cash, cash equivalents, and marketable securities | $886,485 | $760,585 | | Total current assets | $1,025,491 | $871,985 | | Property and equipment, net | $217,255 | $287,696 | | Total assets | $1,540,907 | $1,488,094 | | Liabilities & Equity | | | | Total current liabilities | $118,320 | $119,013 | | Total liabilities | $307,630 | $335,776 | | Total shareholders' equity | $1,233,277 | $1,152,318 | Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) Consolidated Income Statement Highlights (Year ended Dec 31) | Account (in thousands) | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | Total revenue | $375,203 | $485,424 | $38,025 | | Total operating expenses | $170,790 | $268,913 | $275,232 | | Income (loss) from operations | $204,413 | $216,511 | ($237,207) | | Net earnings (loss) | $153,464 | $158,519 | ($146,398) | | Diluted earnings (loss) per share | $0.48 | $0.50 | ($0.51) | Consolidated Statements of Cash Flows Consolidated Cash Flow Highlights (Year ended Dec 31) | Account (in thousands) | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | | Net cash from operating activities | $244,584 | $277,360 | ($43,877) | | Net cash used in investing activities | ($332,247) | ($352,625) | ($221,108) | | Net cash from (used in) financing activities | ($3,886) | ($1,628) | $10,356 | | Net decrease in cash and cash equivalents | ($92,974) | ($86,492) | ($254,040) | Controls and Procedures Management and the independent auditor concluded that the company's disclosure controls, procedures, and internal control over financial reporting were effective as of year-end 2023 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[599] - Based on an assessment using the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2023[601] - The independent registered public accounting firm, KPMG LLP, audited and provided an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2023[602] PART III Directors, Executive Officers and Corporate Governance This section identifies the company's directors and executive officers and incorporates further details by reference from the 2024 proxy statement - The company's executive officers include Carl L.G. Hansen (CEO), Véronique Lecault (COO), Andrew Booth (CFO), and Tryn Stimart (CLO)[606] - The Board of Directors includes Michael Hayden, John S. Montalbano, Andrew Lo, and Peter Thiel, in addition to co-founders Carl Hansen and Véronique Lecault[606] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2024 Annual Meeting of Shareholders proxy statement - The information required by this item will be included in the definitive proxy statement for the 2024 Annual Meeting of Shareholders and is incorporated herein by reference[611] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the company's 2024 Annual Meeting of Shareholders proxy statement - The information required by this item will be included in the definitive proxy statement for the 2024 Annual Meeting of Shareholders and is incorporated herein by reference[612] Certain Relationships and Related Transactions, and Director Independence Information regarding related transactions and director independence is incorporated by reference from the company's 2024 Annual Meeting of Shareholders proxy statement - The information required by this item will be included in the definitive proxy statement for the 2024 Annual Meeting of Shareholders and is incorporated herein by reference[613] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's 2024 Annual Meeting of Shareholders proxy statement - The company's independent registered public accounting firm is KPMG LLP, Vancouver, BC, Canada[614] - The information required by this item will be included in the definitive proxy statement for the 2024 Annual Meeting of Shareholders and is incorporated herein by reference[614] PART IV Exhibits, Financial Statement Schedules This section lists the documents filed as part of the report, including financial statements and an index of all required exhibits - This section contains the index to the consolidated financial statements and a list of all exhibits filed with the 10-K report[616]