Starpharma Sparkles With Dendrimer Promise

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This story features ANSELL LIMITED.
For more info SHARE ANALYSIS: ANN
The company is included in ASX100, ASX200, ASX300 and ALL-ORDS

-SPL Buy opportunity after FDA setback
-Dendrimers offer many streams
-VivaGel will provide revenue
-Agrochemical application potential

By Eva Brocklehurst

Starpharma ((SPL)), the developer of dendrimer drug delivery technology, has a fan in Bell Potter. CIMB has also initiated coverage with an enthusiastic Buy rating and $1.79 target. Why? The company had a recent setback because one of its VivaGel product trials, in the treatment of Bacterial Vaginosis (BV), failed to meet end points specified by the US Food and Drug Administration. Over $150m was wiped off its market capitalisation because a potential partnership and near-term US filing was put in doubt. However, this is a buying opportunity, these brokers maintain, because there is so much more on offer.

CIMB notes the setback will have little impact on an ongoing Phase 2 trial targeting the much larger market for prevention of BV recurrence. No impact is seen on other VivaGel programs either, such as coated-condom and in the prevention of sexually transmitted infections. Starpharma is Melbourne-based and its leading product is VivaGel, an anti-microbial dendrimer with demonstrated ability against viruses such as HIV, HSV2 and HPV as well as the bacteria that causes BV. VivaGel is currently being prepared for use as a coating for Ansell ((ANN)) and Okamoto condoms, as well as topical microbiocide to help women protect themselves against sexually transmitted infections. Bell Potter expects a re-rating of Starpharma with commercial launch of VivaGel in the condom market in 2013. CIMB views VivaGel-coated condoms as the first product to generate revenues, targeting $2.2m in FY14 to $25m by FY20.

America’s National Institutes of Health (NIH) has provided ample non-dilutive funding to Starpharma to develop VivaGel, and Bell Potter notes the potential for further NIH funding where there are clear public health benefits from products utilising dendrimer technology. Improved drug delivery is beginning to look interesting, according to Bell Potter. Starpharma has demonstrated that dendrimers have considerable utility, having been used for such functions as improving solubility of paclitaxel and reducing toxicity of doxorubicin.

There are several other catalysts besides the large upside in VivaGel. CIMB finds the prospect of dendrimer reformulation for agrochemicals a compelling value proposition. Starpharma is looking to improve the properties of a number of agrochemicals (pesticides, synthetic fertilisers, chemical growth agents) by reformulating these using dendrimers. Promising results have been shown with glyphosate (the active ingredient in Roundup) which has shown improved characteristics compared to glyphosate alone. Bell Potter concurs. It is confident dendrimers will find wide applicability in crop protection and sees strong upside from multiple licensing deals in this segment. The broker expects Starpharma will be able to license three crop protection products by June 2014, including its glyphosate program.

Bell Potter also notes that the market likes reformulated cancer drugs. Herein lies big potential for Starpharma. Bell Potter quotes Celgene16, which bought Abraxis in 2010 for US$2.9bn primarily to get hold of the cancer drug Abraxane – paclitaxel rendered more effective by the use of albumin17. That product enjoyed US$424m in sales in the year to September 2012. A similar situation could play out for Starpharma, which now wants to develop the docetaxel (Taxotere) formulation for its own account, with the potential to license this product after pre-clinical and toxicology work and perhaps an early clinical study. Given the large market for Taxotere, a cancer drug, until patent expiry and the clear safety advantages of Starpharma’s formulation, Bell Potter thinks that the resulting package has potential to attract a strong licensing deal featuring large up front payments and a double-digit royalty.

Existing commercial partnerships indicate the quality of the technology, according to Bell Potter. As well as the condom collaborations with Ansell and Okamoto, Starpharma is working with Eli Lilly, GSK and AstraZeneca on drug delivery and with Nufarm ((NUF)) on dendrimers for agrochemical use. The broker think these associations indicate the potential for market leadership across a broad range of potential applications.

Bell Potter values Starpharma at $1.19 per share base case and $1.90 per share optimistic case, using a probability-weighted discounted cash flow approach. The target price of $1.55 per share sits at the mid point of its valuation range. Of course, as with all biotechs, there remains the main risk that trials fail to live up to expectations. Another key risk is the cash burn rate of biotechs. As at September 2012 Starpharma had $37.6m cash but had burned around $1m per month over the previous twelve months. Bell Potter notes Starpharma may have to raise further capital to fund its burn rate, should licensing not yield strong revenues in the near term.

CIMB flags the benefits from royalties and licensing revenue in existing agreements across four products. While sales are modest (FY08-12 averaged $1.4m),  the broker says it does help to augment cash burn. First there's Starburst – dendrimers sold by Aldrich for use by researchers — then Superfect, a gene transfection agent licensed to Qiagen. Stratus CS is licensed to Siemen for a cardiac marker diagnostic and then there's Priofect , a transfection agent for siRNA and DNA work licensed to Merck. Dendrimers represent a platform technology. Since potential applications of dendrimers are manifold, Bell Potter regards Starpharma's intellectual property base as a genuine platform technology from which multiple value streams can emerge. 
 

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