The sharp fall in the US biotechnology sector in the past month has set off landmines in our lifesciences sector and reminded investors about the dangers of speculative stocks.
Prana Biotechnology was smashed in April after a poor clinical trial result, and a smaller player, Reva Medical Inc, shed more than half its value after announcing a change of focus.
This column’s readers will recall I mentioned Reva briefly in a February 2013 story on Initial Public Offerings (IPO) to watch. I favoured Osprey Medical over its other IPO peers, REVA and GI Dynamics. Osprey is down from 60 cents in early 2013 to 50 cents.
The other stock featured in “Two stellar IPOs” was Indoor Skydive Australia Group. It has raced from 35 cents in early 2013 to 72 cents, and operationally is progressing well.
I had almost given up on Reva until this month, when a well-considered note from Morgans gave a 12-month share price target of 28 cents, from 15.5 cents, and retained its “add” rating. I still prefer Osprey and GI Dynamics, but Reva has some attraction for speculators at the current price.
Morgans’ previous 12-month share-price target for Reva was $1. Plenty of other good judges were caught out by Reva’s change of product focus and share-price fall, including some small-cap fund managers who invested in its float.
Reva raised $85 million in a dreadful IPO market in 2010. Its $1.10 issued securities have languished due to product delays, strategy changes and waning confidence.
To recap, Reva is developing a bioresorbable coronary stent to restore arterial blood flow to the heart. It could help solve a significant medical problem: conventional metal stents that act as permanent scaffolding within arteries can cause long-term complications for some patients and are not needed when the artery heals. Reva scaffold stents are designed to support the artery during the healing process and later be absorbed by the body.
The plan was to develop a disruptive innovation in a $US5-billion global market for stents, which is too valuable for bigger lifesciences companies to give up.
Reva surprised investors with news last month that it would focus on its Fatom scaffold, de-emphasise its former lead product, ReZolve2, and undertake an organisational restructure. For a product years in the making, this was a significant setback.
Judging by Reva’s share-price plunge, the market was furious that ReZolve2, due to be commercialised next year, has been downgraded. Some analysts said it was a symptom of poor project management, and the market has clearly lost confidence in Reva.
Reva said the Fantom scaffold, made from a single piece of the company’s proprietary high-performance polymer, is less complex to manufacture and results in coronary scaffolds that are smaller and stronger than Reva’s current ReZolve platform.
Fantom intends to halve the strut thickness for ReZolve, with a radical decrease in strength, which in theory should make it easier to deliver and improve healing response.
Reva managing director Bob Stockman said: “The coronary stent market is now demanding that bioresorbable scaffolds emulate the deliverability, scaffolding mechanics and ease of use of metallic stents …we believe our family of Fantom scaffolds will best address these requirements.”
The market did not want to hear of further commercialisation delays, especially after REVA had earlier delays to clinical trials and research milestones. The company expects to commercialise Fantom in mid-2016.
Morgans wrote: “On closer examination, we believe that only commercial timelines have been delayed and the strategy and underlying fundamentals intact, supportive of our original thesis. As such, we are willing to give REVA a final chance to capitalise on its differentiated, proprietary bioresorbable polymer technology and create long-term value.”
I cannot see Reva going anywhere in a hurry. The odds favour further share-price weakness as the US biotech boom loses steam and as our sharemarket enters a seasonally weak period. Reva has to resolve its next stage of financing, and has a big job to win back market confidence. There is no quick fix.
But Reva has always had excellent intellectual property; a core technology that can be applied to other diseases; is targeting the multi-billion-dollar global market of coronary heart diseases; and has a technology with clear benefits over putting metal stents into arteries.
For all the negativity, the Fantom scaffold appears to be a significant upgrade on ReZolve.
If Fantom delivers on its promise and gets to market on time, Reva will be worth a lot more than its current valuation. But Fantom is arguably Reva’s final chance. With a $52-million market capitalisation, it must look attractive to global players in its market that could snap up its intellectual property and execute the opportunity.
Reva clearly suits experienced speculators. The US-based company has disappointed the market several times since listing, and some analysts and fund managers have lost patience. Those who invested in the Reva float may, understandably, have given up.
Contrarians will see that as a sign to buy, but they should not expect a quick recovery in Reva, even as it trades at a fraction of its listing valuation.
Tony Featherstone is a former managing editor of BRW and Shares magazines. The column does not imply any stock recommendations. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at April 24, 2014.
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