Medical device makers fly high …
… but drug developers fail to follow strong offshore gains in biotech.
Last year was a tough one for many drug developers in Australia. Failures or setbacks in some of the leading drug development biotech stocks has moved investors towards investing in less risky medical device companies, which is paying off with impressive share price gains.
Many development company stocks have seen big falls following setbacks in their programs. Topping the list is QrxPharma, which was developing a combination opioid product for the treatment of chronic and acute pain. After a third knock-back by the US Food and Drug Administration in April last year, the stock plummeted 92 per cent in the 2014 financial year and continued its freefall this year, down 98 per cent, and its pain program has been closed down.
Prana Biotechnology's share price fell 79 per cent in the June quarter last year following results from a Phase II trial in Alzheimer's disease that failed to meet its primary endpoint. Alchemia's share price has fallen 88 per cent in the first nine months of this financial year after its Phase III cancer trial fell over in October last year.
The share price of transdermal drug development company, Phosphagenics, fell 57 per cent in the first three quarters of this year. And Tissue Therapies' share price is down 70 per cent over the same period after delays in getting its wound-healing product approved by European regulators.
This all follows the descent of what was once the flagship emerging drug developer in the sector, Pharmaxis, which at its peak had a market capitalisation of more than $900 million but was valued at only $39 million at the end of March this year.
Strong interest in medical device plays
On the flip side, many medical device companies have been consistently delivering on their milestones and building sustainable high-growth global businesses.
(Editor's note: Do not read the following ideas as stock recommendations. Do further research of your own or talk to a financial adviser before acting on themes in this article).
Nanosonics has emerged as one of the leading emerging medical device companies in Australia. It has developed an automated disinfection system for ultrasound probes that is becoming the gold standard of treatment throughout the world. The company has more than 4,000 systems installed in the US, which equates to 10 per cent market penetration.
What is appealing about Nanosonics is that it not only sells the Trophon EPR disinfection systems, but also receives ongoing consumable sales. These currently contribute 25 per cent of overall revenue and should exceed 50 per cent of total sales in the future.
Nanosonics generated sales of $14.3 million in the first six months of this financial year, up 48 per cent over the previous corresponding period. It recently moved to a direct sales model in the US and raised $28 million earlier this year to support its more aggressive business plan. The stock was up 121 per cent in the nine months to March this year, with a capitalisation of $535 million.
Another medical device company in favour with investors is Impedimed, whose share price gained a whopping 278 per cent over the same period. Impedimed has developed an accurate method to detect very early stages of lymphoedema, using a technology called bioimpedance spectroscopy.
Lymphoedema is a common side effect following tumour resection, particularly in breast cancer, affecting about 25 per cent of cancer survivors. If detected soon enough, it is completely preventable using compression garments. If not detected early it can be irreversible.
Impedimed gained full reimbursement from January 1 this year in the US under the Medicare and Medicaid systems, which has been a big driver of the company's share price. The company raised $41 million last year and had a market value of $249 million at the end of March.
Sleep treatment company, Somnomed, has also been receiving positive attention from investors, with its stock up 78 per cent to the end of March. The company has developed a more patient-friendly approach to treating sleep apnea using two interlocking mouthguards. The company operates in 26 countries and revenue is expected to reach $32 million this year from the sale of more than 50,000 units. At the end of March Somnomed was capitalised at $140 million.
Other medical device stocks that have performed well this year include Reva Medical, which increased 280 per cent to March, and Atcor Medical, up 54 per cent, after news that the company was likely to gain Category 1 reimbursement in the US from January 1 next year.
Lung imaging company, Cyclopharm, is up 140 per cent to March; sleep diagnostic company, Compumedics, is up 18 per cent; and Allegra Orthopaedics, a manufacturer of prosthetic implants, was up 233 per cent over the same period, albeit off a low base.
Some positives for drug developers
It has not been all bad news for Australia's emerging drug developers. In December last year the European regulator approved Clinuvel Pharmaceuticals' Scennese for sale, for the treatment of a condition know as erythropoietic protoporphyria, which is characterised by a severe intolerance to light. Clinuvel expects to launch the product this quarter. Its share price is up 89 per cent for the nine months to March.
Viralytics' share price was up 37 per cent in the year to March following continued positive news from its oncolytic virus program (using viruses to kill cancer cells) in melanoma, and interest from US and European investors last year through a $27-million capital raising.
Adelaide drug developer Biononics' share price climbed 62 per cent last financial year following a major US$506-million Alzheimer's drug development deal with Merck in June last year, which included a US$20-million upfront payment. However, its share price was down 12 per cent this year to March following termination of an anxiety drug development deal with Ironwood Pharmaceuticals last November.
Psivida's share price has increased a steady 18 per cent over this financial year to the end of March. Its eye drug Iluvien was approved by the FDA after a third attempt by its partner, Alimera Sciences, and the US launch was in March this year. Iluvien is approved for the treatment of diabetic macular edema and is on the market in Europe and pending approval in Australia.
Cynata Therapeutics' share price has surged 149 per cent over the financial year to March, with the company having successfully developed a reproducible method to produce stem cells from a single cell line. Phylogica's share price is up 48 per cent for the year to March, with the company having discovered a unique and powerful tool to transport drugs inside cells.
Arguably the most important event in the drug development space last year was the acquisition of the private Melbourne biotech, Fibrotech, for US$75 million-plus by Irish pharmaceutical group Shire. At the time of the deal, Fibrotech had only early Phase I safety data for its lead drug candidate, which has applications for the treatment of chronic kidney disease, chronic heart failure and pulmonary fibrosis.
The Fibrotech deal's significance is that the transaction allowed venture capital group Brandon Capital Partners to raise a $200-million venture fund in April this year, which will invest purely in life sciences companies. The deal was sufficient to convince superannuation funds to not only continue to back Brandon Capital, an investment firm that specialises in the sector, but to expand their investment interest in the Australian biotech sector.
About the author
Mark Pachacz is Research Principal at Bioshares, the leading investment newsletter on the biotechnology sector. In July this year, Bioshares is holding its 11th Bioshares Biotech Summit in Queenstown, New Zealand, where 25 companies are expected.
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