The New Criterion: is there value in the beaten-down biotechs?

Tim Boreham

Independent Investment Research

Having been buoyed earlier on by some positive clinical trials – notably from HIV drug house Biotron (BIT, 20c), the ASX-listed biotech sector is finishing the year on a bum note after a number of failed trials.

The plunging valuations of some once-storied biotech show that as with resources explorers, there’s usually more fun for investors at the ‘blue sky’ stage. That’s when companies can spruik the potential of billion dollar blockbusters without the discipline of proving their potions actually work.

While the market never lies, some of the biotechs have blamed investors for not understanding the results.

Management’s common narrative is that while the drugs may have missed the primary endpoints - the main purpose of a clinical trial as stated before the program starts - they have shown other beneficial effects to justify the push to commercialisation.

Some companies have stoically waved the white flag and accepted that their key programs are all but dead and buried (hopefully not like their patients).

At Bionomics (BNO, 13.5c) the failure of its trial for post traumatic stress disorder cost the job of CEO Deborah Rathjen, who had led the company tirelessly since 2000.

In early October Bionomics frankly revealed that its 193-patient, phase two trial showed that its compound BNC210 –touted as an alternative to benzodiazepines such as Valium – did not have a discernibly different effect relative to a placebo drug.

For stem cell play Mesoblast (MSB $1.32), the November 11 results of a long awaited trial of 159 end stage heart failure patients did not meet the primary endpoint of temporarily ‘weaning’ them off their implanted from heart pumps.

Lest investors forget, the company played up the side benefits of reduced gastro-intestinal bleeding in a subset of patients, with a fewer rehospitalisations.

Three days later Factor Therapeutics (FTT 0.02c) said its 157 patient, phase two trial to treat venous leg ulcers with a compound called VF001 “failed to meet all endpoints”. In essence, the wounds healed just as quickly (or slowly) relative to standard of care treatment (compression bandaging).

Factor chief Rosalind Wilson’s spin-free communication should set a template for all biotechs (and politicians): “Although the trial was well designed and executed, the outcome is that there is no clinical justification to progress further with the development of this asset for this indication.”

Over at respiratory diagnosis house Resapp (RAP, 10c) the white flag remains unfurled with management forging ahead with its plans to develop a mobile phone app capable of diagnosing common respirator diseases with similar or superior reliability to a stethoscope.

After initial encouraging results, a study of 1250 infants and children in August last year produced highly disappointing results, with accuracy rates for a positive diagnosis ranging between 36 percent and 89 percent.

At the time, the company blamed background noises including a second person’s cough in the recordings, as well as the clinicians treating the patients before the test contrary to instructions.

However in late October the company issued follow-up results in relation to childhood respiratory disease

While mixed, the results missed the primary endpoint of diagnosing (or discounting) pneumonia. The shares tanked more than 50 per cent on the day and CEO Tony Keating joined Mesoblast’s Silviu Itescu is lamenting the ignorance of the investing masses.

The question now is whether there’s any value in the affected stocks at beaten-down values.

Not surprisingly, Factor has halted all work on VF001 and will reduce costs “whenever possible.”

While Bionomics has ceased all trials involving BNC210 it says it will persevere with a trial for agitation in hospitalised elderly patients.

Bionomics also has a tie-up with Merck & Co, by which the drug giant funds is funding the development of a separate molecule as a cognition therapy for Alzheimer’s disease.

The deal generated an $US10m milestone payment last year and has a “potential” value of up to $US510m. “This is the jewel in the crown of Bionomics,” Rathjen told her swansong AGM in Bionomics home town of Adelaide.

Bionomics has $27m of cash and equivalents after a $9.9m placement to major shareholder BVF, which doubled its stake to 19.9 percent after subscribing to 60m shares at 16.4c apiece.

Bionomics is now subject to a corporate review by Greenhill & Co and if the numbers men recommend a change of direction at least Bionomics has some handy cash to reinvent itself.

There have been no shortage of biotech chameleons in the past.

Backed by prominent US Republicans, Innate Immunotherapeutics last year bombed out with a closely-watched multiple sclerosis trial – and also candidly admitted to failure.

Now named Amplia Therapeutics (ATX, 23c), the company is trying to regain favour as a developer of two preclinical immune-oncology drugs.

Mesoblast is defiant about the heart trial, noting the US Food and Drug Administration sees reduced gastro intestinal bleeding and reduced hospitalisations as “a clinically meaningful outcome with a high unmet need that could meet requirements for an approvable regulatory endpoint”.

Mesoblast still has a raft of programs for other indications including chronic lower back pain, rheumatoid arthritis and diabetic nephropathy.

It also has an approved drug in Japan for graft versus host disease and European approval for a perinanal fistula treatment.

The company has also entered a cardiovascular partnership with China’s Tasly Pharmaceuticals, which has delivered a $US40m upfront payment.

Resapp is heartened enough by the childhood study to pursue US Food & Drug Administration approval for diagnosing lower and upper respiratory tract disease, as well as asthma.

Resapp also has a future in the burgeoning telehealth sector, especially in remote locations where stethoscope wielding docs are not available.  

Meanwhile, Factor expects to have cash of around $1.5m by December end –enough to reinvent itself as a cannabis or blockchain stock.

 Phosphagenics (POH) 0.2c

A developer of enhanced drug delivery devices, Phosphagenics' Waterloo moment came in the courtroom, rather than the clinic.

Many investors had been punting on the outcome of the company’s patent infringement claim against drug giant Mylan Laboratories, which had a ‘headline’ value of $US300m ($416m).

The dispute related to a research and licensing agreement to deliver daptomycin, the world’s most used injectable antibiotic.

 Given Phosphagenics’ circa $30m market cap at the time, investors assumed that an award of even 10 per cent of the claimed amount would be highly material.

Instead the chosen adjudicator, the Singapore Court of Arbitration chucked out all of the Phosphagenics’ claims. What’s more, the company spent $5.6m on mounting the claim and now faces a yet unquantified order for Mylan’s costs, likely to run into the millions.

Under an ongoing licensing agreement, Mylan is still selling an injectable form of Phosphagenics’ tocopheryl phosphate mixture, used to treat skin and blood infections.

Phosphagenics is on the case for royalties, as well as Mylan demonstrating “commercially reasonable efforts” to commercialise the mixture (another requirement of the agreement).

Having lost 95 percent of its value, Phosphagenics is now worth less than its cash backing of $4m.

Some value might emerge from the wreckage, but the reality is management took a big punt on the quixotic legal system and lost. Not that the woes have stopped shareholder and former director Mark Gregory Kerr from boosting his stake on the company from 7.3 percent to 10.72 percent.

Given Phosphagenics in 2013 was almost terminally wounded by revelations of a $6m fraud -- carried out by then CEO Esra Ogru and others over nine years -- management had best avoid ladders and black cats for the time being. 

Tim Boreham edits The New Criterion

 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.



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Tim Boreham
Tim Boreham
Editor of New Criterion
Independent Investment Research

Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades’ experience of business reporting across three major publications.

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