Photo of Tanushree Jain, Bell Potter Securities By Tanushree Jain, Bell Potter Securities

min read

Record number of drugs approved as much-needed treatments get to market faster.

(Editor’s note: Do not read the following ideas as stock recommendations. Do further research of your own or talk to a licensed financial adviser before acting on themes in this story).

A key theme Bell Potter flagged early last year for the biotech sector was an increase in licensing and mergers and acquisitions, driven by dwindling pipelines and US tax cuts and reform, giving companies larger cash reserves to play with.

ASX-listed Sirtex, Viralytics and RHS were bid at significant premiums, improving sentiment for the life sciences sector. There was also some notable licensing activity.

Starpharma licensed its VivaGel BV product to Mundipharma for the rest of the world and to ITF Pharma for the US; Neuren licensed its Trofinetide product to Acadia for the US; Mesoblast licensed its cardiovascular products for China to Tasly Pharmaceuticals; and Medical Developments licensed its Penthrox product for China to Daiichi Sankyo.

Last year there was also an increase in investments from China in life sciences. Lepu Medical Group invested in Viralytics before its takeover and Tasly Pharmaceuticals invested in and partnered with Mesoblast on a cardiovascular franchise.

A friendly regulatory environment in the US Food & Drug Administration supported the overall sector with a record number of drugs being approved, several of them via accelerated pathways and underpinning efforts to get much-needed drugs to the market faster.

Global gains yet to transfer locally
Unfortunately, ASX-listed companies have not benefited yet. Starpharma and Medical Developments faced setbacks from the regulator and both will be required to provide additional data this year. However, we expect them to benefit from the FDA’s supportive stance to work with companies addressing unmet needs.

Several ASX-listed biotech and healthcare stocks we cover reached maturity in 2018, with key middle and late-stage trial readouts, completion of enrolment in key Phase 2/Phase 3 trials, regulatory approvals and launches, increased commercial momentum and partnering activity.

Notable results were from Mesoblast for GvHD (Phase 3) and Phase 2b congestive heart failure (CHF) in LVAD patients; from Paradigm in its knee osteoarthritis trial; positive Phase 1 data from Opthea from its diabetic macular edema (DME) trial; Pharmaxis with its NASH LOXL-2 asset in Phase 1 trials; and Ellex with its 2RT laser for early age-related macular degeneration (AMD).

The most high-profile disappointment was the failure of Bionomics’ Phase 2 post-traumatic stress disorder (PTSD) trial of its lead anxiety drug BNC210.

2019 outlook
This year we believe partnering activity will remain high as there is no shortage of cash-rich companies looking to acquire or license promising assets.

In the US, two major multi-billion-dollar deals have already been announced: Bristol Myers Squibb acquired Celgene for $90 billion and Eli Lilly acquired Loxo Oncology for $8 billion. This is promising after the relatively lacklustre second half of last year in terms of partnering in the US and sets a positive tone globally.

We believe the FDA will remain friendly and open to supporting companies through accelerated pathways to get medicines with unmet needs to market faster.

Starpharma and Medical Developments have the task ahead but we expect MSB to get its GvHD product approved and Ellex to discuss an approval pathway with the FDA for its 2RT laser for age-related macular degeneration (AMD).

We also expect further maturing of ASX-listed biotechs, with more trial readouts, potential partnerships and commercial launches throughout the year. We are positive on continued investment from China into the sector.

Commercial momentum is expected to pick up for marketed products by Medical Developments, Ellex and PolyNovo that are still in the initial stages of commercial rollout.

In areas of disease, we believe oncology will remain a hot focus globally. Progress with checkpoint inhibitors, CAR T-cell therapies and others in combination with immune oncology targets will be in focus in the US.

Biotech stocks to watch
Our focus will be Starpharma, whose blood cancer drug in partnership with AstraZeneca is slated to enter the clinical and internal chemotherapy DEP-docetaxel and DEP-cabazitaxel programs. They are expected to report trial data in the second half of this year.

Another focus of ours will be Mesoblast, which is preparing to file its biologics licence application for marketing approval in the US to treat steroid refractory acute graft vs. host disease (aGvHD), a life-threatening complication in patients undergoing bone marrow transplant for diseases including blood cancers.

Both these stocks are among our top picks for 2019.

Another one to watch is Immutep with its LAG-3 immunotherapy. It will have a lot of data readouts from trials spread over 2019 and is backed by big names such as GSK, Novartis, Merck, Merck KGaA and Pfizer. Others we will be following include Imugene, Prescient and Noxopharm.

The other big disease area on our radar is non-alcoholic steatohepatitis (NASH). There are several advanced players in the space and they will have key trial data readouts. Given there is no approved treatments yet for NASH and it is expected to be the next mega-blockbuster opportunity for the industry, positive data will attract great interest.

Locally it will be a big year for another 2019 top pick of ours, Pharmaxis, which has two lead assets targeting NASH. One has partnered with Boehringer Ingelheim and is due to read Phase 2A trial data mid-year.

And the currently unpartnered LOXL-2 asset is gearing up to be partnered in a potentially multi-million-dollar deal in the next few months. The LOXL-2 assets have successfully cleared Phase 1 trials and long-term toxicology studies, and the company is in discussions with several potential partners.

Another stock worth mentioning is Opthea, which is focused on eye diseases and will have results in the second half of this year from two key trials.

Overall, the outlook for the ASX life sciences sector is positive and we expect key themes from 2018 to play out this year.

Partners and investors may become more discerning and selective in 2019, requiring additional proof of concept data before investing.

That said, companies that deliver solid, unequivocal data and commercial outcomes are likely to be rewarded for their efforts in terms of stock price appreciation and will attract investors and partners/suitors.

About the author

Tanushree Jain is the Biotech and Healthcare Analyst at Bell Potter Securities.

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