Return Of The Living Dead (Part II)

This story features IMPEDIMED LIMITED, and other companies. For more info SHARE ANALYSIS: IPD

(This story was originally published on Tuesday, 14 June 2011)

By Rudi Filapek-Vandyck, Editor FNArena

Two weeks ago at the end of May, I wrote a story about life sciences companies in Australia, predicting in a few years from now, investors would look back and conclude the sector had offered some great buying opportunities in 2011. Judging from the emails and responses otherwise received since, there are quite a few investors and other experts in the market who support this assessment.

Among them is sector analyst Stuart Roberts at Southern Cross Equities (soon to be renamed Bell Potter) whom I quoted in my story. But Roberts is far from the only one. His peers at RBS Morgans, Scott Power and Tanya Solomon, also believe the sector is experiencing somewhat of a revival as previous high risk ventures are progressing towards more mature businesses.

Within this context, I thought a Take Two on the subject would be opportune.

Last week, Power and Solomon lined up their best ideas for investors on short-term and medium-term horizons.

Best ideas for the short term include:

QRXPharma ((QRX)) – reason: study 022 results due shortly;
Impedimed ((IPD)) – reason: US insurance coverage;
Alchemia ((ACL)) – reason: drug approval due;
Phylogica ((PYC)) – reason: on target for more big pharma collaborations;
Tissue Therapies ((TIS)) – reason: clinical results due July.

On a Medium term horizon, the two RBS Morgans analysts highlight the following ideas:

Sunshine Heart ((SHC)) – reason: feasibility data in October;
Biota ((BTA)) – reason: HRV update, RSV licensing, and LANI trial starting;
Reva Medical ((RVA)) reason: starting safety trial in 4QCY11;
Universal Biosensors ((UBI)) reason: pending launch of product in US;
Genetic Technologies ((GTG)) reason: roll out Breast Cancer diagnostic in US; profitability within sight;
Pharmaxis ((PXS)) – reason: company will sort out its European regulatory issues;
Neuron – funding has been sorted – clinical trial results; and
Phosphagenics ((POH)) – reason: launch of consumer product range into India and SE Asia.

As far as Longer Term plays in the sector are concerned, Power and Solomons nominated Acrux ((ACR)) with the advice "just buy it".

The latter nomination in particular caught my attention as analysts at Morningstar recently also issued a glowing research update on the company. The analysts speculate that now Sweden has granted marketing rights for the company's estradiol spray for treating menopause symptoms, soon Big Pharma partners will start knocking on Acrux's doors, if they haven't already. In addition, Acrux's pain product for dogs has now also received marketing approval from the European regulatory advisory.

The company paid out an extra $100m in dividends already, which will lift this year's dividend yield above 15%. On current forecasts this is anticipated to decline to circa 8.5% in FY12; still nearly double the broad market rate of a little under 5%. Unfortunately for investors in Australia, Morningstar doesn't think Acrux will stay independent for much longer. Eli Lilly is seen as a prime candidate to launch a take-over offer to shareholders in the not too distant future.

In the meantime, points out Morningstar, all investment gains booked from owning Acrux shares are tax-free due to the company's Pooled Development Fund status.

In addition to all of the above, I did receive emails from readers about why their personal favourites in the sector had not been mentioned in my previous story. The reason is simple: I lined up my personal favourites and that, by definition, implies that only a limited number of names can be included. For those readers who missed out on the previous story, I reiterated my view that Cochlear ((COH)) is a wonderful company but constantly overpriced. My personal favourites remain: QRXPharma, Phosphagenics, Anteo Diagnostics ((ADO)), Alchemia and Mesoblast ((MSB)).

To top it all off, I have dug up a story I wrote on the sector in September 2004, titled "Why Biotechs Sleep With The devil". Re-reading it all again nearly seven years later I had to conclude most of the content had become outdated. No surprise here. I have lined up some selected quotes from the story which I believe remain relevant for anyone interested in following and investing in the sector.

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Why Do Biotechs Sleep With The Devil? (originally September 2004, selected quotes)

"Pharmaceutical companies and biotechs sign around 500 deals per annum (with a value of $25 million or more). To put that figure in context: there are an estimated 5000 biotech companies worldwide."

"Biotech companies, in general, are pretty much the complete opposite from big pharma; they are highly research driven, focused, pushing boundaries and often characterised by a sense of world changing dynamics. So why do biotechs want to team up with big pharma? The answer is biotechs don’t really want to do business with big pharma at all. It’s just that they have to. As you would have guessed yourself, the main driver is cold hard cash."

"A survey by Ernst & Young in 2002 confirmed that the US is the centre of the world as far as biotech is concerned, employing 74% of all employees in the sector, spending 70% of all research and development, its companies representing 85% of total market capitalisation and with 72% of all products being sold in the US market."

"Developing a new drug costs on average US$330m, but not every technological discovery ends up at our local pharmacist. Corrected for failures, standard development costs run close to US$1bn and that’s simply too much for your average biotech. Even if it wasn’t, what about marketing and distribution?"

"Doing deals with big pharma is not an easy process. The average pharma-biotech deal takes 18 months of negotiations, involves 13 management meetings and talking to 26 pharma employees. From the moment an agreement has been reached, it still takes 40 weeks to finalise."

"Big pharma is predominantly interested in products that can generate at least US$1bn in global sales. More is preferred."

"The reasons why pharma-biotech deals don’t work out: 40% is due to poorer or slower results than anticipated, 24% is because of differences in cultures, 28% because of disruptions in management, 27% related to poor commitment, 26% due to poor alliance leadership, 26% because of poor communication and only 20% because of the failure of the technology or its trials."

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In a last minute announcement, Power and Solomon reported on Monday morning: "A quick chat with Biota on Friday suggests – steady progress is being made across its portfolio – it looks cheap – take a 12 month view and this stock will be much closer to our price target of $1.99." (RBS Morgans thinks Mesoblast is now overvalued).

Subscribers interested in reading the first instalment "Return Of The Living Dead", 30th May 2011 can click here (or see Rudi's Views on the website).

(The above story was written and published in the form of an email to paying subscribers on Tuesday, 14th June, 2011.)

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