Why you should back a biotech

The 100-plus life sciences companies listed on the Australian Securities Exchange (ASX) do an amazing variety of things. Australian medical research is world-class and it can give rise to globally successful drugs and diagnostics.

But it is a lonely road trying to struggle along alone in a southern hemisphere market: Australian biotechs need to catch the eye of northern hemisphere backers to make a real mark.

It’s also important to note that they can be quite speculative and don’t suit the risk profiles of all investors.

But if you are looking for something different to add to the edges of your portfolio, here are four of what I believe are the most interesting biotechs. All of them have received big votes of confidence from such influential backers in the last 12 months. There are no guarantees with any of these stocks, and their share-price graphs resemble rides at Dreamworld: but there is great potential in each of them.

Bionomics Limited (BNO, 58 cents, market capitalisation $242 million)

In June, Adelaide-based Bionomics announced an exclusive research collaboration and licensing agreement with Merck – the world’s fifth-biggest drug company– for its compound, BNC 375, and the research program off the back of it. The compound has shown quite promising results on Alzheimer’s Disease and is considered to have the potential to treat a wide range of cognitive dysfunction, ranging from Alzheimer’s and Parkinson’s disease to schizophrenia and ADHD.

Bionomics (BNO)

Source: Yahoo!7 Finance, 29 September 2014

Merck is funding all research and development, including clinical development, of BNC375, and taking on responsibility for worldwide commercialisation of any products from the collaboration. Merck is paying Bionomics $20 million in ‘milestone’ payments, and if BNC375 gets to become an actual drug given to human patients, Bionomics will receive up to $506 million.

The upfront payments from Merck actually allowed Bionomics to report a maiden profit for the year ended 30 June 2014, of $3.2 million.

The deal is considered a huge endorsement and validation of Bionomics’ drug discovery capabilities. As Australian broker Shaw Stockbroking put it, “not only is it the largest deal done by an ASX-listed biotech for a single product, it surpasses anything seen for an Australian pre-clinical drug candidate by a long way.”

This agreement followed the signing of an option and licensing agreement with Merck in July 2013 for Bionomics’ program to discover and develop small-molecule candidates for the treatment of chronic pain. This deal could be worth up to US$172 million to Bionomics in option fees and milestone payments.

Bionomics also has research programs developing treatments for multiple sclerosis (MS) and other auto-immune diseases, and cancer, with its BNC105 anti-cancer agent, its cancer stem cell candidate BNC101 and its anti-cancer compound VEGRF3.

Viralytics Limited (VLA, 28.5 cents, market cap. $52.4 million)

Sydney-based Viralytics works in the virotherapy area, which involves re-programming viruses to destroy cancer by infecting and killing the cancer cells, while sparing normal tissue. Virotherapy is considered one of the “hottest” areas of biotechnology research at the moment. Viralytics’ lead product, CAVATAK, is a proprietary formulation of the common cold virus, first developed at the University of Newcastle, New South Wales, in 1999. Viralytics holds the intellectual property rights to the virus under a recently renewed contract with the university.

Viralytics (VLA)

Source: Yahoo!7 Finance, 29 September 2014

CAVATAK can be potentially used against a range of common cancer types, including prostate, lung, melanoma and bladder cancer. CAVATAK has “orphan drug” status from the US Food & Drug Administration (FDA), denoting a drug that has been developed specifically to treat a rare or major medical condition – and which, because of that, will be fast-tracked through marketing approval (and in the European Union, as well).

Viralytics raised eyebrows on the ASX in January with a capital raising of $27.1 million that almost doubled its market capitalisation and brought a dozen specialist biotech investors on to its share register. The raising will fund its clinical trial program through to the end of 2016, including its Phase II CALM (CAVATAK in Late-stage Melanoma) trial in advanced melanoma patients in the US, and the Phase I/II STORM (systemic treatment of resistant malignancies) trial in solid cancer patients and the Phase II randomised trial in advanced melanoma patients.

Mesoblast Limited (MSB, $4.35, market cap. $1.41 billion)

One of the largest biotechs on the ASX, Melbourne-based regenerative stem cell biotechnology company Mesoblast may have announced a widening loss in the year to 30 June 2014 – and no dividend – but analysts say the company could, by the end of 2014, be the first company to get a stem-cell therapy product to market in the developed world.

Mesoblast (MSB)

Source: Yahoo!7 Finance, 29 September 2014

The company’s lead product, MSC-100-IV, is the world’s first approved allogeneic stem cell therapeutic (where healthy stem cells from a donor – usually genetically related – are used to replace the person’s unhealthy ones), and the only allogeneic stem cell therapeutic designated by the FDA as both an “orphan drug” and a “fast-track” product. It is being developed for the treatment of steroid-refractory acute graft-versus-host disease (GVHD).

Japan’s JCR Pharmaceuticals has exclusive rights in Japan to use Mesoblast’s proprietary stem-cell technology. JCR is expected to file for registration of its JR-031 product (to treat GVHD in children and adults who have had bone-marrow transplants), which is based on the Mesoblast technology, in Japan in the second half of 2014.

The treatment of GVHD is one of three “Tier 1” stem-cell products that Mesoblast says have “mid-term revenue potential.” The others are aimed at chronic degenerative lower-back disc repair, and for repairing cardiac muscle damage from congestive heart failure. There is also a pipeline of what Mesoblast calls “Tier 2” products. The company expects to have at least three products in phase III trials next year and possibly to have two products in the market in 2016.

Avita Medical (AVH, 9.6 cents, market cap. $31.2 million)

Perth-based Avita Medical is commercialising its ReCell technology, which involves using a patient’s own skin cells to create a skin graft that takes away the risk of rejection or scarring, enabling better treatment of burns, wounds, ulcers and skin blemishes.

Avita Medical (AVH)

Source: Yahoo!7 Finance, 29 September 2014

ReCell was developed by plastic surgeon Professor Fiona Wood, clinical professor with the School of Paediatrics and Child Health Care at the University of Western Australia in Perth, and consultant plastic surgeon at Royal Perth Hospital, who is a non-executive director of Avita.

A Phase III Food & Drug Administration (FDA) trial is underway, involving 10 US burns centres, helped by $2.6 million in grant funding from the US Department of Defense, the US Army, and the US Armed Forces Institute for Regenerative Medicine (AFIRM).

AFIRM believes ReCell is potentially a “transformational” technology in treating wounded soldiers: the treatment also has huge implications in the area of burns and scalds, particularly in children. Given positive results from the Phase III clinical trial, US firm Zacks Investment Research says ReCell has a potential sales opportunity in the US alone of US$100 million a year.

The trial has had difficulty recruiting appropriate patients – and this has seen the share price slump – but, this month, the FDA agreed to widen the eligibility, which should get the trial back on track soon.

The beauty of ReCell is that it is a “platform” technology, with a wide range of applications, from burns to chronic wounds, such as leg ulcers, all the way up to aesthetics. Avita is targeting three very different markets – burns, chronic wounds (particularly diabetes-caused ulcers in the developing world) and aesthetics/cosmetics.

Ultimately, Avita expects ulcers to be its most profitable segment by volume, while conversely, the most profitable segment by value will be aesthetics/cosmetics in the developed world – a market in which people are prepared to pay a lot of money.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.