After a quiet year for global takeover activity in the pharmaceutical sector in 2017, Trump's tax cuts have fired up the appetite for acquisitions in the sector. US firms in particular have been active in snapping up undervalued Australian biotech assets.
In February, Merck proposed a $500 million takeover offer for Viralytics (VLA). The bid of $1.75 cash per share represents a 160% premium on Viralytics' one month volume weighted average share price (VWAP) prior to the bid.
Sirtex Medical (SRX) is also the subject of a takeover offer from Varian Medical Systems in the US. Varian has agreed to pay $28.00 cash per share, representing a 60% premium to the one month VWAP prior to the bid. Sirtex had earlier received multiple unsolicited offers to acquire the company.
Listed below are three healthcare sector stocks likely to be involved in M&A activity in the foreseeable future.
Cylcopharm (ASX: CYC) (Speculative)*
Enterprise Value: $73m
Cylopharm’s key product is Technegas - a system which utilises nuclear medicine for functional lung imaging. In countries where it is approved, Technegas has become the standard of care for the diagnosis of pulmonary embolism (blood clots in the lung) in patients contraindicated for CT scan. More than 4m patients have been imaged with Technegas globally with no serious adverse events associated with the product.
Technegas is not approved in the US, however, a pivotal trial is under way and the success of this trial is important to earnings growth. Three sites are now actively recruiting patients with an additional two sites to join shortly. Thirty six patients have now been imaged from a total of 240. Following completion of the 40th patient, the company will present interim data to the US FDA and this is expected to occur in the June quarter of 2018. The FDA has given a special protocol assessment (SPA) to Cyclopharm for Technegas. This should expedite approval once the trial is completed.
The total cost of the trial is estimated at A$10m with the majority of the expense expected to be incurred in calendar 2018. If the FDA approves Technegas for use in the US, the market there is expected to generate revenues at least equivalent to the rest of the world. The company is hopeful that first US revenues will be earned in later calendar 2019.
The company’s outlook statements for FY18 are bullish. It expects continued growth in demand for Technegas generators and consumables in each of its key markets. Asia is expected to return to growth following a large one off sale in 2016.
Oncosil (ASX: OSL) (Speculative)*
Enterprise Value: $63m
Oncosil therapy consists of radioactive microspheres for the treatment of advanced pancreatic cancer. This novel therapy has so far recorded very encouraging clinical progress. The company is part way through two related clinical studies, one in the UK and Australia, the other in the US. We expect these trials will be extended into an approval study.
There has not been a significant breakthrough in the treatment of pancreatic cancer for more than a decade and indeed the pathway to success in the clinic has been a challenging one for Oncosil over the last 18 months. Nevertheless the first efficacy data from the clinical program has emerged and it appears the wait has been worthwhile.
All patients in the trial have inoperable localised pancreatic cancer (i.e. no metastatic spread). The primary endpoint is local progression free survival with overall survival as a secondary endpoint. In these trials, Oncosil is being studied in combination with gemcitabine ± abraxane (the standard of care for pancreatic cancer).
There are 28 patients in the trial who have so far been implanted. The disease control rate is 100% at week 8 and 87% at week 16. Four of 20 patients have achieved a partial response and of these, three are being considered for a surgical resection.
The safety data is also highly encouraging. There was no evidence of radiation toxicity or serious adverse event associated with the device. Side effects were of the normal profile associated with the use of chemotherapy.
Oncosil will be presenting data from the trials at upcoming conferences.
Australian Pharmaceutical Industries Ltd (ASX: API)
Enterprise Value: ~$850m
The growth of the retail business together with strong cash flow and reducing levels of debt have been the major drivers of earnings growth in the group over the last 5 to 6 years. Notwithstanding, 1H18 same store sales are expected to decline by approximately -2.5%. This follows a -0.4% decline in FY17. Overall sales growth may be still be modestly positive after the inclusion of revenues from new store openings.
During the 2017 Christmas period the traditionally high performing sectors of skin care, cosmetics and fragrance were significantly weaker than expectation. Foot traffic across the store network was also consistently lighter as was the average basket size. We conclude that lower same store growth is due to the impact of price discounting which is shrinking the value of the overall market and is not being offset by volume growth.
API’s balance sheet has low levels of debt and its earnings growth is relatively flat. While the Priceline business is not currently growing earnings significantly, it continues to spin off large volumes of cash. We believe the company is on the outlook for a growth asset – something that leverages off its 7.1m Sisterclub Loyalty Program. In 2017 API withdrew from the sale of Laser Clinics Australia.
* The stocks of biotechnology companies without strong revenue streams from product sales or ongoing service revenue should always be regarded as speculative in character.
By John Hester, Senior Healthcare Analyst at Bell Potter.
The information in this article is General Advice only. Your personal financial situation and objectives have not been taken into account. If you wish to discuss a specific investment in any of the products mentioned in this article you should contact a Bell Potter Adviser.
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