Southern Cross Sees Upside For bioMD (A Lot)

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By Chris Shaw

Biotech play bioMD ((BOD)) is developing its ADAPT tissue engineering technology for applications in soft tissue repair situations, Southern Cross Equities analyst Stuart Roberts noting over the last four years results have been good enough to suggest there is the potential for the technology to displace existing synthetic products.

Roberts observes the market is a relatively large one as around US$700 million is spent annually in the US on soft tissue repair procedures such as heart valve replacements, hernia surgery and pelvic floor reconstructions.

He points out bioMD is currently involved in the Phase II trials of ADAPT, one dealing with heart deformities and the other in pelvic floor reconstructions. Southern Cross expects data from the trials to be available before the end of this year and favourable results are expected given previous trials of the technology have shown it works.

Other trials are also in the planning stages as Southern Cross notes bioMD is looking for sites to open a third clinical trial in hernia repair, which the stockbrokerage points out is another significant market given an estimated 1-2% of Western world populations have had a hernia.

As the trials proceed and as regulatory approval comes closer there is scope for a re-rating of bioMD shares in Roberts' view, especially as trials results will improve the company's ability to license its technology. With regards to this, Southern Cross suggests management has done a good job in terms of positioning the technology to obtain favourable terms in any licensing agreements.

Regulatory approval is anticipated to come in Australia in 2011, to be followed by approvals in both the US and European markets and Southern Cross sees potential for an early licensing of the technology given demand from major companies operating in the tissue repair end of the market.

Last month bioMD announced a 2-for-3 issue of options at 1.5c each to raise $1.3 million and so giving the company cash on hand of around $2 million, Southern Cross noting the funds will be used for clinical development of ADAPT during the course of this year.

One positive Roberts notes about the company is a relatively modest cash burn rate of around $100,000 per month, so given its available cash the company appears well placed to fund its activities through at least 2010 and likely until the middle of 2011.

Factoring in a potential licensing deal and the recent issue of options see Southern Cross value bioMD at $0.18 per share as a base valuation, rising to $0.42 using more optimistic assumptions. Roberts expects this value will be better recognised by the market as the company achieves the various milestones associated with its clinical trials and as more investors factor in the potential for licensing deals to be signed.

To take a conservative approach, Southern Cross has set its price target in line with its base valuation at 18c, which still implies significant upside from current share price levels. This implies a fully diluted market capitalisation of almost $16 million, meaning bioMD is too small to receive a lot of coverage in the market.

The FNArena database reflects this as it shows none of the 10 leading brokers and research houses that make up the database currently research the shares. Shares in bioMD today are unchanged at $0.05, while their range over the past year is $0.02 to $0.08.

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