This article appeared in the January 2012 ASX Investor Update email newsletter. To subscribe to this newsletter please register with the MyASX section or visit the About MyASX page for past editions and more details.
Biotech stocks to watch, as sector continues turnaround.
By Mark Pachacz, Bioshares
The past two and a half years have been an incredibly successful period for the Australian biotech sector. Up to early 2009, the emerging sector had yet to show it was investment class, with very few commercial successes outside the majors, such as CSL. Although a lot of excellent progress was being made, external validation from acquisitions or US-style licensing deals were just not happening.
However, that validation has since transpired very quickly. In the first half of 2009, Arana Therapeutics was bought for around $300 million by Cephalon, and Peplin was acquired shortly afterwards for a similar amount.
In 2010 the sector saw the two largest licensing deals in the history of Australian biotech: Acrux signed a US$335-million deal with Eli Lilly for its testosterone gel, which has now reached the market; and in December that year Mesoblast signed not only Australia's, but one of the world's, largest clinical licensing deals with Cephalon, for access to its leading stem-cell technology. That deal included a US$130-million upfront payment and future potential milestones of US$1.7 billion.
The good news continued in 2011, when Cephalon acquired oncology company Chemgenex Pharmaceuticals for $221 million and Qiagen bought the TB diagnostic company Cellestis for $360 million.
The upshot from these events is that the Australian biotech market is now being viewed favourably by not only local investors, but also by North American biotech companies. US capital markets remain unreceptive to new listings for biotech companies, which is why three overseas companies have tested the water by listing on ASX.
The first was US medical device group Reva Medical, which is developing a biodegradable coronary stent. It raised a whopping $85 million in December 2010.
Next was Canadian biotech Bioniche Life Sciences, which had been listed on the Toronto Stock Exchange since 1994. The company had an existing Australian shareholder base and its CEO, Graeme McRae, is an Australian. It listed in January 2011, raising $12.5 million.
In September, another US medical device group, GI Dynamics, listed on ASX, raising $80 million. GI Dynamics is commercialising the EndoBarrier, a gastric sleeve that is inserted into the small intestine as a treatment for Type II diabetes and obesity.
GI Dynamics decided to list on ASX because the market here was more receptive than the US. It has an international shareholder base with investors from Europe, Asia, the US and Australia. The less onerous reporting requirements in Australia compared to the US is also a meaningful advantage.
Only one Australian biotech has listed in 2011; Bluechiip, which raised $3 million, is commercialising an acoustic tracking technology that will go up against RFID (radio frequency identification), with the claimed advantage of being able to be used to label cryogenically stored medical material, where RFID technology is unsuitable.
Success begets success
The listings of Reva Medical and GI Dynamics on ASX was probably because of the success of another US medical device company, Heartware International. It is developing an LVAD heart pump. It is listed on ASX and had a market capitalisation of $870 million in mid-December.
Two of Heartware's non-executive directors, Robert Stockman and Robert Thomas, are also directors of Reva Medical, of which Stockman is CEO. GI Dynamics director Tim Barberich is also on the board of Heartware International. Anne Keating, a prominent company director, is on the boards of GI Dynamics and Reva Medical.
Bioniche, Reva Medical and GI Dynamics are all trading below their issue price. Bluechiip in mid-December was trading at a 20 per cent premium to its listing price. Its listing was very difficult, even in raising such a small amount.
Good news story continues
Commercialising biotech assets is a capital-consuming business. It can take 10 years to bring a new medical product to market if it needs to pass through the checkpoint of a drug or medical device regulator. The GFC presented a major challenge for biotech companies and their investors, as it became harder to raise new funds.
The past year has been a continuation of trends seen in the previous two years. For larger biotech companies and those closer to bringing their products to market, capital markets have remained opened, continuing that vital lifeline of funding. In the month or so before Christmas, four companies raised $151 million. For smaller companies, where eventual product sales are probably five to seven years away, it remains a steep uphill battle.
Global regulators a stumbling block
The final hurdle for biotech companies before they can get their drugs on the market is approval from drug regulatory authorities - the Food and Drug Administration (FDA) in the US, the European Medicines Agency (EMA) in Europe and the Therapeutic Goods Administration in Australia. As the raft of Australian biotechs move through this checkpoint, it is becoming more common for setbacks to occur.
It is a dangerous point for companies and their investors, with most biotechs having only sufficient funds to get them to the next major milestone. If they do not get a clean pass through the regulatory approval process - and, incorrectly, a very high probability of success is factored into most companies' share prices - then biotechs can be placed in a precarious position.
In 2009, Chemgenex received a setback from the FDA when it asked the company to develop an FDA-approved diagnostic test before it would approve its cancer-fighting drug candidate. In 2010, Acrux had a smooth run through the US approval process, with its Axiron product being approved in 10 months. Alchemia was successful with its generic synthetic heparin drug in the US but it waited three years for approval.
Pharmaxis received a knockback from European regulators early in 2011 and its share price crashed by 75 per cent. The EMA later reversed its decision but the share price did not recover and the company was forced to raise $80 million at a much lower share price than previously expected. And Psivida's partner, Alimera Sciences, was told recently that the FDA would not approve its new application for its drug candidate, Iluvien, for the treatment of diabetic macular oedema.
QRxPharma filed its new opioid combination therapy with the FDA in August last year. Clinuvel Pharmaceuticals expected to file its drug candidate for approval in Europe by the New Year. It has developed a drug that it claims will increase the melanin density of the skin for people with a severe intolerance to light. Mayne Pharma has filed its improved anti-fungal drug, SUBACAP, with European regulators.
About the author
Mark Pachacz is co-editor of Bioshares, a specialist investment newsletter on life-science companies.
Valuing Biotechs on the ASX website provides useful information on the features, benefits and risks of investing in biotech shares.
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