Significant Upside Potential In Alchemia

This story features AUSTRALIAN CLINICAL LABS LIMITED. For more info SHARE ANALYSIS: ACL

The company is included in ASX300 and ALL-ORDS

 – Alchemia is a global leader in synthesis of carbohydrate-based drugs
 – Southern Cross initiates with Spec Buy rating
 – Significant valuation upside potential from fondaparinux and HyACT delivery system

 

By Chris Shaw

Alchemia ((ACL)) is a global leader in the synthesis of carbohydrate-based drugs, the complexity of synthesis and the known versatility of such drugs enough to make the company a global pharmaceutical leader in the view of Southern Cross Equities. It is also enough to see Southern Cross initiate coverage on Alchemia with a Speculative Buy rating.

Alchemia's lead product is a generic version of fondaparinux, a blood thinning drug, for which Southern Cross notes the company is currently awaiting FDA approval. This approval is expected in the current quarter and should lead to revenues being generated before the end of calendar 2011.

Alchemia has an agreement in place for fondaparinux to be manufactured and distributed by Dr Reddy's of India, Southern Cross noting Alchemia should enjoy an effective 30-35% revenue share in what is a US$400 million global market. This market continues to grow rapidly given concerns over deep vein thrombosis in particular.

This market also has the potential to expand via different delivery technologies, Southern Cross noting Alchemia is presently working with US drug delivery company Emisphere on developing the potential for oral fondaparinux.

As well as fondaparinux, Southern Cross notes Alchemia is well advanced with its HyACT delivery technology for cancer drugs. This involves using hyaluronic acid (HA) as the delivery vehicle, with HyACT having been shown to markedly improve the delivery of existing cancer drugs.

A pivotal Phase III trial of HA-Irinotecan for use in treating colorectal cancer is due to commence shortly, the broker noting this comes on the back of a solid performance in Phase II trials. As only a single trial is needed before a decision on regulatory approval, Southern Cross notes the drug's path to market is likely to be short, so a launch could come as early as FY15.

HyACT delivery offers strong upside in the view of Southern Cross, as there are a number of potential applications in cancer treatment. As an example, the broker notes Alchemia is also initiating a second clinical indication for HA-Irinotecan in helping treat small cell lung cancer, an estimated US$10 billion market.

Helping will be Alchemia's carbohydrate drug delivery engine, VAST, which Southern Cross notes allows management to assemble a pipeline of drug candidates for a particular product such as fondaparinux. 

Assuming Alchemia receives FDA approval for its fondaparinux product this year and begins to generate revenues, Southern Cross can justify a base case valuation for the stock of $1.98 per share. Factoring in more optimistic numbers with respect to potential market share for fondaparinux and other drugs generates a valuation of $3.28, so Southern Cross has set its price target of $2.00 in line with its base case scenario.

This valuation and price target are based on earnings per share (EPS) forecasts of minus 6.1c this year, a positive 1.8c in FY12 and 13.7c in FY13. RBS Australia is the only broker in the FNArena database to cover Alchemia and its EPS estimates stand at minus 5.2c this year and 7.7c in FY12, though it must be noted RBS has not updated its numbers since early last November.

RBS Australia at the time rated Alchemia as a Buy with a price target of $0.77, which is well below Southern Cross's target. Shares in Alchemia today are higher and as at 11.50am the stock was up 3c at $0.73. Over the past year shares in Alchemia have traded in a range of $0.345 to $0.77.

Click to view our Glossary of Financial Terms