Starpharma, Rising Star?

This story features STARPHARMA HOLDINGS LIMITED. For more info SHARE ANALYSIS: SPL

– Starpharma is a leader in dendrimer technology
– Demdrimers offer potential for platform technology
– VivaGel product to generate first revenues this year
– Southern Cross Equities rates Starpharma a Spec Buy

By Chris Shaw

Starpharma ((SPL)) is a leader in developing polyvalent nanoparticles known as dendrimers, which are precisely and uniformly constructed large molecules. The company's lead product is the anti-microbial compound SPL7013.

This product, branded as VivaGel, is being adapted as a coating for condoms and as a protective against sexually transmitted infections (STIs), with Southern Cross equities expecting first revenues from VivaGel to be generated this year.

Southern Cross rates Starpharma as a Speculative Buy, seeing significant upside from VivaGel given the large scale of STIs around the world and the fact the product can be applied by women to protect themselves.

Two recent announcements support Southern Cross's positive view, one being the licensing of VivaGel as a condom coating to Japanese condom maker Okamoto. Southern Cross notes the Japanese market is worth US$500 million annually, with Okamoto enjoying a 55-60% market share.

As well, Starpharma has recently announced Phase II clinical trial success with VivaGel in treating bacterial vaginosis. Southern Cross suggests success here potentially opens up a market worth at least US$300 million annually, with scope for a filing for regulatory review in 2013.

As VivaGel posts positive results this increases the potential for dendrimers to develop new markets as drug delivery agents, leading Southern Cross to suggest the technology can become a platform technology. 

This implies potential for the development of a number of earnings streams in coming years. This is especially the case if VivaGel can be shown to help prevent a range of STIs such as genital herpes, HPV and HIV.

Trials to prove this would likely be costly, Southern Cross estimating an HIV efficacy trial would require as many as 4,000 subjects. This implies a cost of US$60 million, so any such trial would likely require some government funding.

Using conservative assumptions for royalties from Durex, where a VivaGel coated condom is being commercialised and will be released this year, and ascribing some value to other programs, Southern Cross values Starpharma at $1.87 per share. Factoring in more optimistic assumptions sees this valuation increase to $3.68 per share.

As commercial interest in Starpharma's products and technologies increases, Southern Cross analyst Stuart Roberts expects the share price to re-rate to this valuation range. This implies good value in the stock at current levels. Such a re-rating may commence in the shorter-term given the upcoming launch of the Durex VivaGel coated condom.

Additional value is likely related to further dendrimer developments, Southern Cross noting the market is a fast growing one and Starpharma has the ability to make dendrimers at what are reasonable commercial prices. 

Starpharma is already involved in developing dendrimers for the fields of agrochemicals, animal health and water treatment, which Southern Cross suggests shows the potential upside from new markets if further successful products can be produced. Increasing the chances of such success is the fact Starpharma is already collaborating with Big Pharma on drug delivery technologies.

Southern Cross has a valuation-based price target on Starpharma of $1.90, which implies upside of around 30% from current levels. Shares in Starpharma today are weaker, trading down 4c at $1.425 as at 11.20am. Over the past year Starpharma has traded in a range of $0.48 to $1.525.
 

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