Moderna Versus Arbutus: Roivant's Move Up Implies ABUS is Highly Undervalued

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Last week I wrote about the huge news of the legal decision on the status of a patent owned by Arbutus Biopharma Corporation (ABUS) and its status as an essential component of Moderna, Inc. (MRNA)'s mRNA technology built into its pipeline, namely the COVID-19 vaccine. ABUS initially spiked as high as $6.50 on this news but has since pulled back to $4.15. ABUS is being manipulated and the market truly believes that this news is much bigger than what the overall move on ABUS implies. There is no doubt that ABUS is a strong buy when looking at the total picture. 

To understand this news, one has to understand the actual relationship between all of the players involved. Although ABUS owns the patents, these patents have been licensed out to a private company called Genevant. So if Moderna was to buy out a company to make this problem go away, Genevant would be the target. Genevant is 16% owned by ABUS and 83% owned by Roivant Sciences Ltd. (ROIV). ROIV also owns 29% of ABUS. However, that's not the only part of it. ABUS also has a license deal that entitles it to single digit royalties on future sales of Genevant products covered by the licensed patents. It would also get 20% of any of Genevant's sales in sub-license deals. Assuming Moderna purchases Genevant, it would still be liable to pay out a royalty to ABUS. Assuming this is 5%, the end result would be an approximate effective ownership split of 80% for Genevant and 20% for Arbutus. Roivant might own 83%, but 5% of its 83% belongs to ABUS. While ABUS would gain another 4% - one point is cannibalized in its existing 16% ownership. 

ROIV may own a larger stake in Genevant, but ABUS is a much smaller company. Therefore ABUS should move significantly more than ROIV because Genevant makes up a higher portion of its overall value. This was initially the case but we have since seen ABUS pull back significantly while ROIV has slightly added to its gains in the two trading days after the day of the news. The following chart summarizes the issue:

ABUS has increased 30% from 11/30 to 12/3, but ROIV has increased 35%. ROIV's market cap has increased $1.6 billion compared to only $129 million for ABUS. If we sum these two figures together, ROIV has taken 93% of the gain since the news of this deal while ABUS has taken only 7%. When we compare that to the percentage ownership of Genevant, we see these numbers are heavily undervaluing ABUS. This assumes that all of the recent increase in market cap is attributed to the Genevant/MRNA patent news. I think it's fair to say so given that both companies have performed well in a very bad week for the market. 

There is a slight complicating factor in that ROIV owns 29% of ABUS, but that can be corrected for the most part pretty easily in the following chart:

ROIV increased $1,609 million in market cap since the patent news broke. 29% of ABUS' increase of $129 million benefits ROIV, but that is only $37 million. This leaves $1,572 million in market cap growth attributed to Genevant. Assuming an 80/20 split, this implies a $1,965 million increase to Genevant's valuation. As ABUS owns the other 20%, that would imply a $393 million increase in its market cap from Genevant. But ABUS only increased $129 million as it rose from $3.20 to $4.15. The additional variance implies that ABUS should actually be at $6.11. 

Now I know that the $264 million in additional ABUS market cap would result in another 29% belonging to Genevant - $77 million - but that would force me to make adjustments back and forth forever to get these numbers dead on. Let's just say that with no ambiguity, ABUS is underpriced relative to ROIV. If ROIV keeps on steadily rising, ABUS' value only increases. Even though ABUS is unambiguously undervalued relative to ROIV by about 50%, it could be much more than that. Is a $2 billion valuation on Genevant nearly enough? 

MRNA dropped from $352.43 to $306.72 in the three days since the news. We could argue market forces, but both PFE and BNTX have been pretty flat in those three days, reflecting bullishness due to the Omicron variant offsetting the market's decline. So outside forces on MRNA have been minimal to positive. This implies that the $18 billion drop in market cap can be mostly attributed to this patent news. 

Assuming a deal or settlement for Genevant at a portion of that - $10 billion - $2 billion of that would be owed to ABUS. That's just under $15 per share and it doesn't account for ABUS' other pipeline assets. But even if one doesn't agree with that amount, there can be no doubt that ABUS isn't undervalued just based on how much ROIV has moved. ROIV is a much less frequently traded and is a less manipulated stock while ABUS has a lot of day trading, shorting and manipulative noise. The relative calm way ROIV has been going up and keeping its gains should be an indicator of that. The market truly believes that Genevant is worth an extra $2 billion based on ROIV's increase versus what it was worth the day before the patent news. ABUS will be entitled to its 20% of that. 

Disclosure: I am long ABUS.