Biotech investing is risky and highly speculative, but there are strategies to increase the odds in your favour. Gauging the market size for the treatment, drug, or device, as well as determining the stage of development are critical issues. When one considers the basic problem with biotechs, two additional strategies come to mind. All biotechs are in a race against the cash clock to generate revenue. Development costs are astronomical and many of these companies are led by scientists with little interest in controlling the spigot.
The first strategy is to look for an operating officer or board member with experience bringing start-up companies to market. The second is to look for biotechs on the verge of generating earnings.
Many investors ignore these issues in favour of the glamour of the technology. Consider stem cell therapies as an example. Once a market darling, regenerative medicine with stem cell company Mesoblast Limited (MSB) continues to disappoint investors.
The company has been around for more than a decade and has yet to generate any earnings per share but has been able to secure additional cash whenever needed. From the close to 50 stocks on the ASX in biotech industry we found five on the cusp of generating positive earnings per share (EPS).
The largest and arguably the most well-known biotech in the table is Starpharma Holdings (SPL), in business since 1996. The company’s claim to fame is its proprietary dendrimer technology, with more than 100 dendrimer patents in place. Regular biotech investors know that comprehending the medical technology of a company can be challenging at best. Dendrimer technology is essentially a drug delivery system using dendrimers, or “artificially manufactured or synthesized molecule built up from branched units called monomers.” An in-depth understanding of what that means is not as critical from an investment perspective as the breadth of the targeted market. In Starpharma’s case, market potential may account for investor interest in this company.
The company has two products, with its VivaGel® sexual/women’s health products already approved in Australia and Europe and pending in the US. Australian sales are expected to begin in 2018 via a marketing partner. Starpharma currently maintains the marketing rights to VivaGel® in Europe, the US, and the rest of the world.
Perhaps even more enticing to investors is the company’s Dendrimer Drug Delivery (DEP®), that can be used with a variety of drugs. Starpharma is using DEP® to develop its own product line as well as partnering with major firms like Eli Lilly (NYSE: LLY) and GlaxoSmithKline (NYSE: GSK). Another drug with a potentially huge market is Starpharma’s DEP® Docetaxel currently in Phase 2 clinical trials.
France’s pharma giant Sanofi Aventis has successfully marketed a chemotherapy drug treatment for breast, lung and prostate tumours called Taxotere®, trademark name for the drug Docetaxal. The Starpharma website claims the 2010 sales of the drug exceeded US$3 billion. Starpharma is using its DEP® to improve the efficiency of docetaxel.
The share price is up about 350% over the last ten years, albeit on a rocky ride.
Neuren Pharmaceuticals (NEU) has a relatively unique business model in that the company focuses on new treatments for neuroglial conditions with no current drugs available. This gives the company strong advantages stemming from support from the medical community and fast-track regulatory approvals for these unmet needs.
The company’s most promising products went by the identification NNZ-2591 and NNZ-2566, which now has a name, Trofinetide. Trofinetide treats three conditions: Rhett Syndrome, Fragile X Syndrome, and Traumatic Brain Injury (TBI).
Rett Syndrome is a debilitating neurological disorder, occurring mostly young girls, that affects the ability to speak, walk, and eat.
Fragile X syndrome is an inherited intellectual disability with autism being the most common example. The drug has fast track and orphan drug designation and had promising results in Phase 2 clinical trials.
Traumatic Brain Injury is the condition with the largest market potential for Trofinetide, with about 1.7 million people suffering TBI annually in the US, according to Neuren. The company conducted a Phase 2 clinical trial in conjunction with the US Army with mixed results. Neuren attributed the inconclusive results to the composition of the trial subject, suggesting the company may plan to conduct another trial.
Trofinetide for Rett Syndrome is the key to the company moving to positive earnings, having successfully completed Phase 2 Clinical Trials with Phase 3 trials to commence in 2018. The stock price got a boost in late 2017 following positive announcements about both of the company’s drugs.
Viralytics Limited (VLA) is developing oncolytic immunotherapy, base on virotherapy. A virus that infects and then kills cancer cells without harming other cells is called an oncolytic virus. The first such virus – named Coxsackievirus A21 – was developed here in Australia at the University of Newcastle. The virus is a form of the common cold and the company is now testing it under the name CAVATAK®. The description of how this treatment works listed on the company website is fascinating. The virus finds cancer cells, attaches to them and then injects itself into the cell eventually causing the cell to burst. The fragmented cancer cells then stimulate the body’s natural immune system to join the fight.
CAVATAK® is a naturally occurring virus without genetic modification. The range of cancers subject to this treatment include colorectal, lung, prostate, bladder, melanoma, and head and neck cancer.
Both Phase 1 and 2 Clinical trials have yielded promising results. Trials continue, one conducted in the US in conjunction with pharmaceutical company Merck & Company (NYSE: MRK). Viralytics has presented the results of all its trials to both the American Society of Clinical Oncology (ASCO) and the American Association of Cancer Research (AACR). The company has been successful in capital raises to fund research and development. In January of this year a Chinese firm acquired a 13% interest in the company. The company trades in the US and has an impressive list of institutional backers, as seen in the following chart from the latest Viralytics investor presentation.
The head of research at Merck & Company stated, “there’s a growing sense in the oncology community that immune manipulation may turn out to be an even more important intervention than chemotherapy was – maybe the most important ever”
A Healthcare analyst at Bell Potter rated the company a Speculative BUY, stating:
• Cavatak has achieved outstanding results in late stage melanoma patients who have shown long duration of response that are suggestive of an improvement in overall survival. Should these results be repeated in the keynote 200 trial, the likelihood of a substantial offer for VLA increases significantly.
Bionomics Limited (BNO) had been working on treatments for cancer and central nervous system disorders such as anxiety, depression and Alzheimer’s disease. The company’s business model calls for strategic partnering with major pharmaceutical firms in later development stages of Bionomics’ drug treatments. The company is in the process of shedding its assets in cancer treatment development to focus exclusively on and central nervous system disorders. The company also exited the US market for cancer treatments.
The company’s lead candidate, BNC210, is a treatment for GAD currently in Phase 2 clinical trials. Phase 2 trials for treating PSTD are beginning.
The GAD results showed better results from BNC210 compared to current treatments, without the side effects of those existing treatments. Bionomics management estimates the GAD market should be worth around $18.2 billion in sales by 2020.
In November of 2017 Prima BioMed changed its name to Immutep (IMM) to reflect its focus on immunotherapy cancer treatments. By any name, the stock price performance over ten years highlights the extreme volatility of speculative biotech investments.
The company’s lead product is a treatment for metastatic breast cancer, currently in Phase 2 clinical trials, with another product for treating ovarian cancer in earlier stages of Phase 2 trials. Immutep’s immunotherapeutic products are based on activating lymphocyte genes to trigger a response from the immune system. The company also has treatments for autoimmune diseases – where the immune system fails and attacks healthy tissue – in pre-clinical trials.
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