Big Pharma Eyeing Oz Biotechs

This story features MESOBLAST LIMITED, and other companies. For more info SHARE ANALYSIS: MSB

By Chris Shaw

A thinning product pipeline is, in the view of Southern Cross Equities, causing Big Pharma to accelerate the pace of its acquisitions in the biotech and devices space. As evidence of this, the broker notes the numbers of deals globally among pharma and biotech plays has risen by around 10% annually since 2000, while in value terms the increase in biotech deals has been 27% annually over the same period.

This is generating a benefit for Australian biotech plays, as major companies such as Cephalon and Dow Chemical have taken stakes in the likes of Mesoblast ((MSB)), Reva Medical ((RVA)) and Starpharma ((SPL)). Southern Cross suggests more such deals are likely going forward.

This reflects a combination of factors, Southern Cross noting Big Pharma at present are cashed up, are facing looming drug patent expirations for the likes of Lipitor and have been slowing their growth in drug spending as they attempt to cut back on costs overall. 

As well, the big players are facing rising drug development costs given a new drug potentially costs as much as US$1.5 billion to develop, while there has also been a trend towards an increase in biological products hitting the market. Southern Cross notes this is a section of the market where Big Pharma are traditionally not as strong as smaller, more specialised companies.

There are a number of advantages of making acquisitions rather than attempting to develop drugs internally, Southern Cross pointing out such deals can bring late-stage development candidates with less risk as preliminary testing has already been done. This also potentially means a relatively shorter time to bring such drugs to market.

Such deals can also freshen product life by ringing new styles of products into the company, while there is another benefit from new products generally having earlier-stage patent protection. Acquisitions also tend to be cheaper than internal development, as Southern Cross notes in the cases where a listed company is acquired the market typically has been underpricing the potential value of its products, so making it an attractive purchase.

Southern Cross covers a range of biotech plays in Australia, rating all the stocks in its coverage universe as Speculative Buys. The companies covered are Anteo Diagnostics ((ADO)), Biotron ((BIT)), bioMD ((BOD)), Heartware ((HIN)), Mesoblast, Prana Biotechnology ((PBT)), Phosphagenics ((POH)), Prima Biomed ((PRR)), QRxPharma ((QRX)), REVA Medical and Starpharma.

Anteo Diagnostics is commercialising new technology that improves the economics of existing pathology tests and Southern Cross notes two licensees, Bangs and Merck, have been secured and others are showing interest. The broker has a price target of $0.13, which compares to a current share price of $0.078.

Biotron is developing new anti-viral drugs and has released some promising clinical data to date, Southern Cross seeing scope for early licensings of its BIT225 compound. A target price of $0.35 compares to a share price of $0.13.

For bioMD tissue engineering is the point of focus and here clinical data has also been favourable and suggests potential for early licensing. Southern Cross has a price target of $0.18, which is well above a current share price of $0.07.

HeartWare is commercialising a ventricular assist device for treating late stage heart failure and offers upside both from solid clinical data so far and a large and underpenetrated market. A target of $3.40 compares to the stock trading at $2.46 at present.

Mesoblast continues to commercialise the therapeutic use of mesenchymal precursor cells or MPCs to treat disorders where new bone growth or tissue is required and Southern Cross is positive on the potential for the technology. The share price of the company is $5.60, which compares to a price target for Southern Cross of $7.00.

Prana Biotechnology continues to develop its Alzheimer's drug PBT2 and Southern Cross expects strong Phase IIb trial results and from this a valuable licensing deal. The broker has set a price target of $1.10 and this compares to a current share price of $0.14.

New drug delivery technology is the focus of Phosagenics and Southern Cross notes this market offers good potential, especially given solid clinical data to date. The broker's price target is $0.40 while the stock is trading at $0.14.

Prima Biomed is developing cellular therapy for ovarian cancer and has entered Phase IIb trials. Southern Cross's price target of $0.60 implies significant upside compared to a current share price of $0.24.

QRxPharma is in late stage testing of its MoxDuo compound, a combination of morphine and oxycodone. The compound aims to lower the amount of drug required for a comparable level of analgesia, so lowering the potential side effects. A target price of $2.10 compares to a share price today of $1.20.

REVA Medical continues to develop one of the world's first bioresorbable stents, a stent being a tiny tube placed in an artery. With little competition in this space Southern Cross sees considerable upside potential, as evidenced by a price target of $2.10 against a share price of $1.29.

Starpharma is a leader in developing dendrimers and has already developed the VivaGel product, an anti-microbial. (See: Starpharma Offers Value In Oz Biotech Sector, FNArena, 3/2/11). Southern Cross has a target of $1.90 for the stock, which is currently trading at $0.985. 

The FNArena database shows only QRxPharma receives coverage, scoring two Buy ratings and a consensus price target of $1.51.

Click to view our Glossary of Financial Terms