Biotech stocks: the animal spirits are back

The head of one mid-sized ASX biotech play recently told an industry forum that after a quiet 2017 for global takeover activity in the pharmaceutical sector, Trump’s tax cuts would fire up activity this year.

That’s because corporates will have more money in their tills to play with, while the tax reforms also make it easier to repatriate cash to the US.

“The animal spirits are back out there again,” he said. “Everyone is talking about opportunities and immuno-oncology is where it will happen.”

As it happened the speaker was Malcolm McColl from Viralytics (VLA, $1.69) and his comments were close to home: The immuno-oncology outfit is now subject to a $500 million cash takeover offer from big pharma Merck.

At $1.75 per share, the cash offer represents a stunning 160% premium on Viralytics’ one month weighted average share price.

Merck owns the skin cancer immunology drug Keytruda. Given Merck already had a tie up with Viralytics – which also focuses on melanoma – it was the obvious suitor. With the benefit of hindsight, of course.

Not surprisingly the Viralytics board has endorsed the offer and its biggest holder – China’s Lepu Medical which accounts for 13 percent of the register – has said it will accept.

Lepu recently injected $29m into Viralytics, making it well funded to go alone with a program of no fewer than six clinical trials for its lead drug Cavatak, initially focused on melanoma but also targeting lung and bladder cancer.

Immuno-oncology – selectively killing bad cells and persuading the body’s own defences to fight back against cancer – has its sceptics. A cheap industrial dye, rose bengal, is meant to do just as well.

But Merck’s offer highlights the global interest in the field, given the limited efficacy of chemotherapy and radiotherapy.

In the past five years the US regulator approved the checkpoint inhibitors Keytruda and Yervoy, which are antibodies that stimulate the immune system.

Viralytics hopes that by combining them with Cavatak, these checkpoint inhibitors can be made to work better and Merck has the same idea.

Cavatak is derived from the coxsackievirus, which in its more malevolent guise is responsible for the common cold. Cavatak binds to receptor protein expressed on cancer cells and then zaps hem while encouraging and ongoing immune response to keep killing them.

In “preliminary but encouraging” melanoma results, Cavatak increased the “overall response rate” in patients treated with Cavatak and Keytruda, relative to 33 per cent for those treated with Keytruda alone.

In the case of the Cavatak-Yervoy combo, the response rate was 57 per cent compared with 11 per cent for those treated with Yervoy alone.

Viralytics is progressing these trials to “pivotal” stage and is recruiting up to 250 patients. In clinical trial terms that’s getting to the pointy end of things and is a precursor to applying for FDA approval.

The company has also started early stage trials for lung and bladder cancer and this quarter plans three new trials for head and neck cancer, uveal melanoma (eye cancer) and colorectal cancer.

Under the Merck tie up, Merck provided the Keytruda for the combination trial, which at $150,000 per patient was no small contribution.

Thanks to the efforts of businessman and melanoma sufferer Ron Walker who died in January, Yervoy and Keytruda are subsidised under the Pharmaceutical Benefits Scheme.

According to the drug analytic house IMS Health, immuno-oncology will treat half of all cancers by 2020, with the overall cancer drug market worth $US150bn.

The 160% premium is made somewhat more flattering by the fact that Viralytics shares had been trading near record lows at 61.5c, having traded as high as $1.21 in December 2016.

The Lepu placement in early January was done at 82c a share, a 27 per cent premium on the prevailing price. Lepu was treating its stake as a pure investment – and as it turned a very profitable one.

The Merck offer comes after targeted radiation oncology house Sirtex Medical was subject to a $1.5 billion cash offer from Varian Medical Systems, at a 60 per cent one-month premium.

Almost every Aussie biotech professes to be an acquisitive target for a deep-pocketed global pharma company. With the latest outbreak of animal spirits, evidence is mounting that they’re not just dreaming after all.

AdAlta (1AD) 32c

With the debate about the merits of a shark cull simmering away in WA, this biotech is providing much needed positive PR for the maligned predators of the sea.

Unique to sharks, AdAlta’s protein-based therapeutic antibody AD-114 has a long binding loop that allows it to bind to a diverse range of targets.

Not that AdAlta itself is slaughtering great whites for the coveted ingredient: AD-114 is a manufactured derivative of the shark antibodies, rather like Aspirin being a derivative of willow bark.

AdAlta is targeting difficult to treat fibrotic diseases, starting with the lung condition idiopathic pulmonary fibrosis (IPF).

IPF inflicts 300,000 people globally, 5000 in Australia. Globally, about 40,000 sufferers die annually, about the same as breast cancer but with no Pink Ribbon days to fund research.

The company estimates fibrosis is prevalent in 40-50 percent of all diseases, other examples being the skin ailment scleroderma, cardiac and renal fibrosis, cirrhosis and wet aged-related macular degeneration.

“The pipeline is less developed than for other therapeutic areas,” says CEO Sam Cobb.

IPF inflicts 300,000 sufferers globally, 5000 in Australia. Globally, about 40,000 sufferers die annually, about the same as breast cancer but with no Pink Ribbon days to fund research.

The FDA has approved AD-114 as an “orphan” drug, which means it can treat conditions for which there is no other treatment. The key benefits of orphan drug status are enhanced research and development credit, assistance with clinical trials, waived fees on an eventual new drug application (normally $US2 million) and seven-year marketing exclusivity.

To date, AdAlta’s work on IPF has been pre-clinical – read in vitro lab work and mice trials. An early phase-one on healthy volunteers is due to start in the second half of calendar 2018, funded by AdAlta’s $5m of cash.

AdAlta shares are just below record highs, having been boosted by a recent AdAlta sponsored confab of global fibrosis experts (but not marine biologists).

Cobb says the company plans to seek a deep-pocketed partner after phase one, which is really about establishing the drug is safe more than anything.

There’s an encouraging precedent M&A wise: in January French pharma Sanofi bought Ablynx of Belgium for $US4.8bn.

An advanced clinical phase company, Ablynx has developed a class of antibody fragments (scaffolds) derived from camel antibodies.

In 2015 Roche acquired fibrosis play Adheron Therapeutics for $US105m (plus $US475m of potential milestone payments) in September 2015.

In November 2014 Bristol Myers Squibb bought Danish IPF specialist Galecto Biotech for $US444m. Both Adheron and Galecto were phase-one developers.

Ultimately AdAlta’s fate will be determined by the Perth venture capital firm Yuuwa Capital, which owns 53 percent of AdAlta and accounts for two of the six board seats.

Bit with a mere $30m market cap, AdAlta sure looks like shark food for a bigger predator.

Tim Boreham edits The New Criterion

tim.boreham@independentresearch.com.au

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.

ENDS