Starpharma Offers Value In Oz Biotech Sector

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

By Chris Shaw

Australian biotech play Starpharma ((SPL)) is a leader in the development of dendrimers, which are precisely defined polyvalent nanoparticles. Southern Cross Equities notes the first significant product developed by the company is the anti-microbial VivaGel, which should begin to generate revenues this year.

VivaGel, which has a compound name of SPL7013, is being developed as a condom coating and as a topical microbicide gel that will help protect against sexually transmitted infections (SFIs). 

According to Southern Cross this implies a large market opportunity given the large scale of SFIs around the world, as well as the fact VivaGel will allow women to protect themselves via the application of the gel form of the product.

First World demand should be strong in Southern Cross's view, while there is also scope for VivaGel to be licensed for other markets by groups looking to improve health outcomes in the Third World. Value from VivaGel should be realised through licensing and partnering transactions.

Southern Cross notes the first such deal has been signed with Reckitt Benckiser, which will see that company commercialise a VivaGel coated condom sold under the Durex brand.

Beyond VivaGel, Southern Cross sees strong commercial upside in the dendrimer market in general given potential applications such as drug delivery, which is already showing some promise in testing, agro-chemicals and water treatment. 

Southern Cross suggests the fact there are a number of potential applications for dendrimers implies Starpharma's intellectual property base is a genuine platform technology. The other positive for Starpharma in the broker's view is the costs of dendrimer production have come down significantly from previous levels. 

This leads Southern Cross to suggest Starpharma is likely to enjoy increased attention, as large companies are increasingly exploring the potential of dendrimers in general. As an example, Southern Cross notes Starpharma has collaborated with both GlaxoSmithKline and Eli Lilly on drug delivery products. 

The commercial launch of VivaGel should bring further attention to Starpharma, especially as the company is already earning some money from other products previously developed such as in-vitro diagnostic products, gene transfection technology and some DNA transfection reagents.

In terms of valuing Starpharma, Southern Cross has a base case, probability weighted, discounted cash flow (DCF) valuation on the stock of $1.88. This assumes 5% annual sales growth for Durex around the world, declining to 2% in the mid-2020s, with VivaGel contributing 30% of sales and so bringing a 15% royalty to the company.

Using more optimistic assumptions of 8% annual sales growth for Durex and with VivaGel products contributing 35% of sales and delivering a 20% royalty to Starpharma generates a DCF valuation for the stock of $3.69. To take a conservative approach Southern Cross has set its price target at $1.90.

With first revenues from VivaGel expected to come this year, Southern Cross is forecasting earnings per share (EPS) of minus 4.8c this year, rising to a positive 2.5c in 2012. There is little with which to compare Southern Cross's forecasts as the FNArena database shows no coverage of Starpharma.

As to what could affect a re-rating of the Starpharma share price towards its target, Southern Cross suggests developments such as initial clinical data highlighting the effectiveness of VivaGel, the launch of the Durex VivaGel condom, the signing up of a licensee in Japan and any signing of a funding and or development partner for the product would all likely be positive catalysts for the stock.

Shares in Starpharma today are stronger and as at 11.15am the stock was up3.5c at $0.98. Over the past year Starpharma has traded in a range of $0.46 to $1.00. 

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