Interesting Article, I like the last paragraph. There are 4 Biotechs wanting to list on the Australian Market in the next few months, back door listing into TDX would be nice and quick.
Biotechs making a steady recovery PUBLISHED: 07 Feb 2012 21:27:13 | UPDATED: 08 Feb 2012 08:38:26
Brendon Lau
Local biotech companies are beginning to attract the attention of both local and international investors. Photo: Louis Douvis There is likely to be a sharp pick-up in interest in Australian biotechs this year as they move into their next phase of growth, which will pave the way for them to be taken over by global drug companies.
Bioscience Managers is aiming to raise $200 million for its second biotech fund that is targeting the Asia-Pacific region.
Most of the capital is expected to be invested in the Australian market as our biotech sector is considered to be the most mature in the region following the resounding success of the likes of Mesoblast, Acrux and Starpharma Holdings, which have put Australia on the global biotech stage.
The new fund is expected to lift the share prices of our most promising biotechs given that the average daily value of trades for the sector (excluding heavweights CSL, Cochlear and Resmed) over the past six months stands at a mere $226,226.
The total market capitalisation of the top 10 biotech stocks outside the S&P/ASX?100 Index is only about $2.7 billion. These 10 largest emerging biotechs have strongly outperformed the broader market over the past 12 months; they have an average total return of 1.4 per cent compared with an 8 per cent loss on the S&P/ASX All Ordinaries Accumulation Index.
Australian biotechs have matured rapidly over the past few years. While it is difficult to think of one listed player in this field that posted a net profit three years ago, there are now at least five that were in the black in 2010-11 as a record number of Australian bioscience companies have now commercialised, or are close to commercialising, their technologies.
“We intend to invest across 12?Australian mid-stage biotechs,”?Bioscience Managers’ chief investment officer, Matt McNamara, says.
Mid-stage companies are typically those that are in phase 1 or 2 clinical trials.
New drugs have to successfully complete three clinical trials before their developers can apply for a marketing licence that will allow them to sell the treatment to the market.
The specialist fund manager has raised about a quarter of its targeted amount to date but has also managed to secure IOOF Holdings as a cornerstone investor with a $45 million investment.
While that amount may not sound significant for a general equities fund, it is considered a significant investment for a biotech fund in this country.
Bioscience Managers is counting on the success of its first biotech fund, which earned investors 75 per cent over the past 42 months on a $34 million investment, to help it secure a second cornerstone investor for the new fund.
Although biotech is still considered to be a high-risk venture, investors are becoming more comfortable with the sector with a group of later-stage biotech names having little trouble raising additional capital from investors over the past few months.
Retail shareholders strongly oversubscribed for their entitlements at recent capital raisings by Alchemia, Phosphagenics and Starpharma – the latter two attracting new overseas professional and high net-worth investors.
Even Pharmaxis, whose share price collapsed by 74 per cent in May last year on doubts that it could secure European regulatory approval for its cystic fibrosis treatment Bronchitol, had little trouble raising $80 million late last?year.
Pharmaxis successfully appealed the European decision and is expected to win final approval for Bronchitol before the end of March. The stock is touted as one of the best potential turnaround stories in the sector for 2012 if sales of the drug are as good as analysts’ forecasts.
Strong drug sales are also likely to prompt a re-rating of Alchemia’s share price, which rose 9 per cent on Monday, when it said sales of its generic Fondaparinux product in the United States, which is marketed by Dr Reddy’s Laboratories, had secured an 18?per cent share of the prescription market.
What is more significant is that the drug is getting 38 per cent of new prescriptions in the retail market (outside of hospitals) and this segment is more profitable as it accounts for 70 per cent of the dollar value of the market.
Alchemia took a shellacking last August on fears that sales would not live up to expectations given that its Canadian rival, Apotex, had? struck a deal with Fondaparinux’s original developer, GlaxoSmithKline, to launch an authorised generic version of the blood-thinning drug, which had come off patent.
Australian biotechs have also been catching the eye of potential global partners, which are providing another important source of capital for the industry. Bionomics has recently announced one of the more significant deals.
The company entered into a collaboration, research, and licensing agreement with Nasdaq-listed Ironwood Pharmaceuticals to develop its anti-anxiety compound, BNC210.
The deal, which was struck early this year, could earn Bionomics up to $US345 million ($320 million) in payments and research funding on top of royalties on sales.
More significantly, this transaction is believed to be the most a pharmaceutical company has paid for a product that is only in phase 1 clinical trial.
Meanwhile, pain management drug company QRxPharma will receive $US6 million after it signed a binding letter of intent with US generic drug manufacturer Actavis in December.
The partnership gives Actavis the exclusive right to commercialise and further develop QRxPharma’s pain relief drug MoxDuo IR for the US market.
QRxPharma will receive a 50 per cent royalty on $US150 million in cumulative sales three to six months after the launch of the drug, and ongoing royalties of between 10 per cent and 30 per cent.
Phylogica has also struck a few collaborative deals with major pharmaceutical companies such as Janssen Biotech and Pfizer, which are seeking to use its peptide library to develop new drugs.
Local medical devices developers have also been successful in securing partnerships with global giants. These include blood-glucose testing device company Universal Biosensors, which has deals with Siemens and Johnson & Johnson’s subsidiary LifeScan; ultrasound transducer disinfection equipment developer Nanosonics, with its partnership with GE Healthcare; and blood pressure monitor maker AtCor Medical Holdings with Sun Tech Medical.
Investing in device developers is usually less risky, although the payoff is generally not as stellar.
“Devices are typically shorter to market but the potential upside is typically lower than pharmaceuticals,” McNamara says.
“For example, if you look at cardiovascular drugs, it could be a $US7 billion market. But if you look at devices it could be $US1 billion.”
While Australia appears to have a better track record in medical devices given the success of sleep disorder treatment company ResMed and hearing implant developer Cochlear, very few budding device developers are likely to follow in their footsteps, according to Bioscience Managers’ managing director, Jeremy Cook.
The same is also true for Australian drug companies, as Cook believes CSL is an unusual story.
“It’s a very big ask to turn into a global player from a $100 million market cap company,” he says.
The core competencies between promising drug companies are also very different to large pharmaceuticals. The former is driven by science and innovation, while the latter lives for marketing and distribution. Just because a company builds a “better mouse trap”, it doesn’t mean people will be lining up to buy it, and this is especially true for the conservative medical industry.
Cellestis and its superior tuberculosis (TB) test make a compelling case study for the sector. Its technology was clearly better than the current tests being used worldwide, but the company struggled for years to gain traction in the market.
Its failure to become the “gold standard” for TB testing paved the way for Qiagen to make what was arguably an opportunistic bid for the company last year.
But takeovers are expected to be the most likely exit strategy for most Australian biotechs, and even Mesoblast will probably end up being swallowed by a larger player. The question is how profitable can current management make the company appear before that juncture?
This is why Bioscience Managers also identifies a likely acquirer before investing in a company.
In Cook’s opinion, Australian biotechs which are most at risk of being bought include Acrux, which developed a spray-on testosterone treatment, and liver cancer treatment company Sirtex Medical.
But investing in this space is still a high-risk exercise that is best left to those with an intimate understanding of the sector, particularly since the gap between stronger and weaker players in the space is expected to widen further this year.
Shaw Stockbroking analyst Matthijs Smith estimates that about 40 per cent of biotechs could run out of cash in the next year.
“Of the 45 companies that I looked at, 18 of them had less than 12 months cash in the bank and half of these had less than six months cash in the bank,” he says.
“In this capital market, the small guys in the lower end of town are really going to struggle.”
Based on Smith’s calculations, companies with a cash runway shorter than six months include Sunshine Heart, CBio, Allied Healthcare Group, Solagran, CathRx, Agenix, Antisense Therapeutics, Cellmid, Healthlinx and Tyrian Diagnostics.
But he says the bigger biotechs are expected to enjoy “an absolutely stunning year” and his top picks for 2012 include Starpharma, Nanosonics and Pharmaxis.
The performance of the more established biotechs is the more important driver of investor sentiment towards the industry. Sector champions – stocks that have performed stunningly well and can become a beacon for Australian biotechs – are instrumental to the evolution of the sector.
“In the UK, we had a number of flagship companies and they were very important to us in the late ’80s and ’90s because they encourage the belief that something [extraordinary] could be done,” Cook says.
“I think we are going through a [similar] ‘blue period’ in Australia as long as we overcome the funding problem.”
Investors are generally more reluctant to put money into the biotech sector compared with the broader market and that lack of capital is the biggest threat facing Australian biotechs, Cook says.
If attitudes don’t change, it will be difficult to bring new floats to the market to replace those companies that have been taken over, and the poor performance of GI Dynamics, which listed in September last year, is not helping matters.
There are at least four biotechs that are believed to want to list on the Australian market over the next few months, including Minnesota-based Osprey Medical
