Biotechnology Company Mesoblast Limited (MSB) once appeared to have earned the status of ASX market darling based on the promise of its adult stem cell therapy research and development. Despite having multiple treatments in late stage clinical trials, Australian investors began to grow weary of progress at what one might deem to be a snail’s pace as well as a seemingly endless stream of capital raises.
On 13 November 2013 Mesoblast announced it had been approved for listing on the prestigious US NASDAQ market under the symbol (code) MESO. Not only that, the company entered as part of the NASDAQ Global Select Market, the most difficult in terms of listing requirements and therefore a seemingly impressive achievement. US investors yawned and the initial offering price of US$12 per share dropped to $8. Aussie investors took that as proof MSB was overvalued and sent the share price on the ASX plummeting from A$3.41 per share to $2.10.
Considering the burden of meeting listing requirements as well as the associated fees, why do foreign companies covet listings on the US NASDAQ exchange? One of the principal reasons is access to the huge pool of investment capital from the US investing community. Another is direct access to US investor trades. In theory a NASDAQ listing should serve as evidence of a company’s potential.
In the case of Mesoblast, the potential catalytic effect of US investors being able to buy and sell Mesoblast shares failed to materialise. If anything it served as a negative catalyst. However, in a matter of months US Analyst Firms weighed in with opinions differing from apparent market sentiment.
On 20 January 2016 a new biotech analyst at Credit Suisse US initiated coverage on Mesoblast with an Outperform Rating and a US$10 target price, noting that the company has “one or two late-stage programs that could generate blockbuster assets.” The stock was trading on the NASDAQ at that time at $5.15. This announcement was preceded by Overweight and Buy ratings from JP Morgan Chase and investment banker Maxim Group, with price targets of $US10 from Morgan and US$18 from Maxim.
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On 28 March Zacks Investment Research, an independent market analyst firm, upgraded Mesoblast from Hold to Buy with a US$11 price target.
The positive outlook from the likes of Credit Suisse and JP Morgan did little to raise the share price, either in the United States or here in Australia. The Zacks upgrade came after the Mesoblast share price reversed course and began moving in a positive direction. The catalyst for that reversal was positive news on Phase 2 results for the company’s treatment for rheumatoid arthritis. Here is a three month chart for MSB on the ASX and MESO on the NASDAQ GS.
It would appear the impact of the NASDAQ listing and the later positive announcement had the same effect on both exchanges. However, it is virtually impossible to make direct price comparisons of the same stock across exchanges because of the way shares in the US, issued as American Depository Reserves (ADRs), are priced as well as to a process called arbitrage. US markets have different standards for “penny stocks” and US investors generally take a very dim view of stocks under $1.00. As a result the US financial institution behind the ADR buys a large block of shares from the foreign company and then to present the US investing public with a more acceptable price, each ADR may represent a ratio of shares from 10 to 1 or higher where the purchase of 1 ADR is equivalent to the purchase of 10, or 40 shares on the home exchange. An arbitrageur is a professional investor who spots price discrepancies in the exchanges, buying the stock on the declining exchange while shorting the stock on the rising exchange, in effect leading to similar price movements.
In the Mesoblast case the price decline may have had more to do with the company failing to get the initial offering price of $12. In theory it seems impossible then to determine with certainty whether a NASDAQ listing benefits a company’s share price on its home exchange.
There are five other ASX biotech/pharma company stocks that trade on the NASDAQ as well as on the ASX. As we saw, Mesoblast got no immediate bump from its NASDAQ listing. What about the others? Are there more advantages to a NASDAQ listing than access to capital markets and prestige? The following table has some information we think relevant to that question. The figures are as of the close on 31 March, 2016.
First there is no question a NASDAQ listing gives a company access to US capital markets. 8 of the top 10 global hedge funds are based in the US. Generally speaking US investors view any stock trading under $1.00 per share as a highly speculative “penny” stock suitable only for punters, although the term “punting” in stock market investing appears to be unique to Aussie investors.
The ADR system makes it possible for investors large and small to invest in foreign companies. Perhaps the most important and rarely mentioned advantage is trading volume. High volume propels stock prices in both directions and as you can see, each ASX stock on the NASDAQ has additional investors researching, discussing, buying, and selling; not to mention coverage from the US analyst community.
The prestige that comes from a NASDAQ listing is earned. The NASDAQ has grown from an all-electronic quotation and trading platform to the second largest exchange in the world. In 2006 the NASDAQ introduced a tiered system to further differentiate its listed stocks.
The NASDAQ Global Select Market, of NASDAQ GS, is the pinnacle. The standards for listing in this tier are extremely high, reassuring the informed investor of the over-all quality of the company. There are approximately 1,200 US and International companies classified in this market.
The NASDAQ Global Market is essentially companies from the original NASDAQ listing that do not fit in the higher Global Select tier or the lower Capital Market Tier. There are approximately 1,450 companies classified in the Global Market.
The NASDAQ Capital Market tier includes companies who come to the NASDAQ for the primary purpose of capital raising. These tend to be small caps with potential.
The first share in the table of interest is Prima BioMed (PBT), the only company whose share price rose year over year and also the one with the highest volume. Newcomers to share market investing often overlook the importance of volume in selecting stocks. Companies with very low trading volumes tend to more volatile as it doesn’t take much to drive the price up or down. Consequently they are also more subject to manipulation.
Prima listed on the NASDAQ on 19 April 2012 with a first day closing price of US$7.00 and it has been falling ever since. So much for the catalytic bounce! On the ASX PRR has moved from a 31 March close one year ago of $0.03 to the current $0.04. The company he company develops immunotherapeutic products for the treatment of cancer, with its lead product, IMP321, in clinical development for the treatment of a variety of cancers. Prima has operations here in Australia as well as in France and Germany and recently featured promising results from clinical trials for IMP321.
The company already has partnering agreements with large scale pharmaceutical firms, with Swiss based Novartis; the UK’s GlaxoSmithKline (GSK); and Israel’s Neopharm among them. In December of 2015 US based Roth Capital, an investment banking firm specializing in small caps and start-ups, initiated coverage on Prima BioMed with a Buy recommendation along with a $6.00 price target (for the US ADR PMBD).
On 5 March Zacks Investment Research downgraded the stock from Hold to Sell. However, by the end of March Zacks was reporting that three other analysts covering the stock had assigned PBMD a Strong Buy Recommendation with a 1 year consensus price target of US$5.00. Here is a 5 year price movement chart for PRR and PBMD.
Another stock in the table that looks interesting based on trading volume is Genetic Technologies (GTG). The company has the intellectual property rights to a genetic analysis procedure for breast cancer screening. The lead product is BREVAGenPlus, billed as a “cost effective test that helps women assess their sporadic breast cancer risk.”
On 21 December the stock price jumped on the publication of scientific results validating BREVAGenplus. At the end of March US investors in GENE were treated to the welcome news short interest in the stock dropped close to 12%.
Novogen Ltd (NRT) is another biotech chasing after the holy grail of novel cancer drugs that improve on the performance of traditional chemotherapy. The company has been at it a long time with multiple capital raises along the way, to the disappointment of its investors. Novogen has three cancer treatments in the pre-clinical phase with the first actual trial to begin sometime in 2016.
The stock was hot in 2015 as the company released positive results of pre-clinical studies on two of its anti-cancer drugs but capital raises threw ice water on the share price. Here is a two year price chart for NRT.
Novogen does demonstrate the advantage of capital raising with a NASDAQ listing. The April 2015 announcement that sent the stock price reeling was for a $30.5 million raise, $15.5 million of which came from institutional investors in the US. It is important to note the promising results that propelled this stock upward were based on the results of pre-clinical studies.
Prana Biotechnology (PBT) shares were on fire in anticipation that the company would produce the first Alzheimer’s drug (PBT2) to show promise. On 1 April 2014 Prana announced the results of Phase 2 clinical trials on PBT2. The drug failed in every way possible and the stock price dropped about 70% – from A$1.04 to $0.28. The price of the NASDAQ listed PRAN dropped from US$59.16 to $16.80.
The shares got a boost later in the year when PBT2 as a treatment for Huntington’s disease received “orphan drug” status from the US FDA. In the US, an Orphan Drug status is granted to allow development of drugs for diseases affecting less than 200,000 people. The stock price got another lift in mid-2015 when PBT2 got Orphan Drug status in Europe. Prana may have some life left in it, pending something positive from additional trials on PBT2 for Huntington’s disease as well as for the company’s other degenerative brain disease prospects.
Benitec Biopharma (BLT) is another ASX Biotech that had a disappointing start to its life on the NASDAQ, raising far less than anticipated in its Aug 2015 NASDAQ Debut. The IPO initially was looking for an issue price of US$13.55. This later dropped to $10 and finally laid to rest at $9.21. Prior to the listing Benitec was trading on the ASX at around $0.80 per share, dropping to $0.62 immediately after the NASDAQ opening. The stock price has been in decline ever since. The following chart shows the movement of the stock on both exchanges over the last two years.
Benitec is another biotech with a mysterious sounding patented technology – gene-silencing – that impresses the lay person with its sheer complexity. Benitec is using its technology to develop treatments for chronic and life-threatening diseases, with a current focus on Hepatitis B after terminating its Hepatitis C development. The company is upbeat about its Hepatitis B program, claiming significant interest from major pharmaceuticals. The company CEO resigned on 9 December and a search for a replacement is still underway with the intent of placing the new leader in the company’s Bremner Laboratory in San Francisco.
Judge for yourself, but it does seem that aside from the capital raising advantages, a NASDAQ listing is far less important to a biotech’s stock price than some positive clinical results.