Small Caps | Jan 30 2013
-Eclipse acquisition adds potential
-Strong drug development pipeline
-At centre of key cancer therapeutics
-Broker sees stock as undervalued
By Eva Brocklehurst
Drug discovery company, Bionomics ((BNO)), has acquired a cancer stem cell venture called Eclipse Therapeutics and Bell Potter believes the company's increased potential is underestimated. Bionomics obtains two pre-clinical drug programs as a result of the acquisition and these concern antibodies to cancer stem cell targets. The first is due to enter the clinic in 2014.
The acquisition highlights Bell Potter's opinion that Bionomics is playing an increasingly important part in cancer therapeutics. However, the company's two lead compounds are also attracting interest. Bionomics' anti-anxiety drug, BNC210, has shown that it can relieve without the side effects of addiction or drowsiness. A year ago the company partnered with Ironwood Pharmaceuticals to further develop the drug. This deal, worth US$345 million in up-front payments and milestones, has, according to Bell Potter, de-risked the company. Bionomics is considered self-sustaining at its current cash burn rate of $5.9m per annum. It is currently capitalised at US$204 million. The second major compound, BNC105, has been shown to dismantle the vascular structures of tumours, leaving healthy blood vessels undisturbed. Bell Potter believes there is potential for this compound to be licensed after the Phase II results in renal cancer and interim data from the ovarian cancer trial become available in in the first half of 2014.
Now, with cancer stem cell therapy in its portfolio, the company should benefit from more investor interest, according to the broker. Bell Potter expects pre-clinical and clinical developments over the next 12 months will drive upside for the stock. The broker has revised the numbers and finds the stock undervalued. Bell Potter values it on a probability-weighted, discounted cash flow base case at $1.67, and at $2.25 on an optimistic case, and has a 12-month target price of $1.70.
What Eclipse brings to the mix is its pedigree, as well as extending the cancer therapeutic range. The founding shareholder of Eclipse, Biogen Idec, reported US$3.8 billion in product revenue in 2011, and was a pioneer in the biotech industry. Eclipse shareholders, including Biogen, will end up with around 6.5% of Bionomics' scrip. Biogen decided to exit oncology and cardio-vascular disease research and this was how Eclipse became available to Bionomics.
Why cancer stem cells? According to Bell Potter this area of cancer research has moved along rapidly. Cancer stem cells are capable of reproducing themselves and producing new cancer cells. Traditional chemotherapy kills cancer cells but is not so good with stem cells and killing these can prevent the tumour from recurring. Cancer stem cells are easy to identify and in recent years the big pharmaceutical companies have started to take notice. Bell Potter thinks it's only a matter of time before a big partner comes knocking at Bionomics' door, ready to unlock substantial value from the company.
Bell Potter notes that Bionomics' is being tight lipped about the targets Eclipse is working on, reluctant to signal to competitors at this stage. This may make some investors reluctant but the broker believes their concerns will be eased, citing the fact that Bionomics paid $12 million in scrip to acquire Iliad Chemicals in 2005 and this acquisition has now helped Bionomics to over $100m in enterprise value.
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