How long have you held the stock?
We first purchased Alchemia shares late in 2011 when the company raised monies at 24 cents per share. We also participated in the recent 30 cent capital raise.
What do you like about it?
There is now a classical opportunity to invest into Alchemia after it failed to sell-down its oncology assets. Sentiment is also being weighed down by the recent share placement and shareholder purchase plan. We believe this negative sentiment will pass and investors are getting two businesses for the price of one.
Alchemia, with its Indian partner Dr Reddy’s, today claims a 25% market share in sales of Fondaparinux in the US market. This drug Fondaparinux is primarily used in the prevention of deep vein thrombosis during orthopaedic surgery with US profits shared evenly between Alchemia and its partner.We like the fact that today’s market-cap ($102 million at 32.5 cents) is largely justified by Alchemia’s share of fondaparinux profits alone, which we expect to approach $15 million per annum within 12 months.
The real upside for investors, however, sits with clinical success of the company’s late stage chemotherapy drug in metastatic colorectal cancer. We expect the company will report its clinical results in early calendar year 2014. Their drug in development combines a compound called hyaluronic acid (HA) with Irinotecan, which is an essential ingredient in a well-known chemotherapy regime called FOLFIRI. We believe a successful clinical trial will enable HA-Irinotecan to significantly penetrate the FOLFIRI market, which we conservatively estimate at $400 to $500 million.
How is it better than its competitors?
The Alchemia collaboration with Dr Reddy’s sells a generic (chemically identical) version of fondaparinux and is one of three competitors in the US market, which include GlaxoSmithKline and Apotex.
HA-Irinotecan, if successfully commercialised, will improve the standard of care in metastatic colorectal cancer. The therapy will have 10 plus years of patent protection and will be ultimately sold into all major global markets generating high gross profit margins.
What do you like about its management?
The company has developed a generic version of fondaparinux and successfully taken it through to commercialisation, which is a respectable achievement for an Australian biotech. We acknowledge there have been many bumps in the road but the company, to its credit, has persevered. This experience improves our confidence in management’s ability to successfully commercialise the chemotherapy drug.
Is it a liquid stock?
The stock liquidity is reasonable for a $100 million capitalized company.
What is your target price on Alchemia?
We believe today’s market-cap of $102 million (at 32.5 cents) is largely underwritten by future profit streams from sales of fondaparinux, so investors are currently getting a free option for the oncology asset.
The upside for investors will come with a successful phase three clinical trial. We conservatively see $200 million value being ascribed to the metastatic colorectal cancer programme should the clinical trials be successful.
History suggests around 50% of all drugs in phase three of clinical development will ultimately be commercialised, so we derive a probability adjusted valuation for Alchemia’s metastatic colorectal programme of $100 million (AUD).
The two businesses are conservatively worth $200 million, indicating Alchemia shares are worth over 60 cents today.
At what point would you sell it?
We may sell the stock if the share price started to assign a too high probability of success to the Phase three clinical trials.
How much has it added/subtracted to your overall portfolio over the last 12 months?
The stock has detracted from our investment performance over the 12 months to 31 March 2013, but we believe value will ultimately be recovered.
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.
