Oz Biotech Stocks Worth Pursuing

This story features AUSTRALIAN CLINICAL LABS LIMITED, and other companies. For more info SHARE ANALYSIS: ACL

-Big pharma prepared to pay
-Oz biotechs being re-rated
-Portfolio approach the best
 

By Eva Brocklehurst

Baillieu Holst has become more positive on the biotech or life sciences sector. The sector sold off heavily early this year amid concerns that as US monetary policy was tightened, the environment for emerging companies would become less favourable. There were also concerns drug pricing would come under pressure. Moreover, the sector performed strongly in the preceding two years and was used as a funding source for portfolio managers to realise cash. There was also some impact from a broader selling-down of technology stocks. Since April the market has levelled and the Nasdaq Biotechnology Index has risen 15%.

The reason the broker is more positive is big pharmaceutical companies are going to need a secure pipeline of drugs coming on board if they are to avoid the fate of AstraZeneca, which attracted a hostile takeover from Pfizer. Big pharmaceuticals pay high prices for biotech companies in order to have new drugs at hand. Moreover, the passage of universal health care reforms in the US has supported the intention to enlarge the patient population for new drugs being created by biotechs. Drugs that go off patents often experience reduced prices but those that remain covered by patent are still quite economic for both the drug companies and the health care system. There has also been a push for drugs the US Federal Drug Administration designates as orphan – those that meet an unserved need – and here Baillieu Holst notes high prices are more acceptable.

The broker believes the Australian biotech sector is being re-rated over the medium term and picks stocks regarded as particularly good buying at current prices. The stocks the broker is not so bullish about, for a variety of reasons, are not published. Hence, there are no Hold or Sell ratings. The broker acknowledges target prices may look aggressive but believes this reflects current market inefficiencies. The Australian market, unlike the US, has not traditionally seen high levels of analytical expertise. Now, many companies are quite advanced in terms of clinical or commercial development and mispricing should become less common.

Life sciences are best selected with a portfolio approach, in Baillieu Holst's view. A carefully selected portfolio of around five companies at phase II stages of development has a good chance of paying off if held over a five-year time horizon. So, which are the favoured stocks? Thee broker presents 13 companies, in alphabetical order, that should be considered worthy of inclusion as they have strong value emerging from clinical and pre-clinical programs. For reasons previously stated, all have Buy ratings and the broker commends them with the appropriate risk tolerance. Baillieu Holst advises that there are no low risk companies in life sciences. Those with existing businesses, or enough capital to reach the market, are judged "medium risk". Those that remain, potentially, in need of capital, are "high risk". Everything else is "speculative".

For starters there is Alchemia ((ACL)), high risk. The company is completing a phase III study into metastatic colorectal caner with a new formulation of an old cancer drug. Admedus ((AHZ)), high risk, has gained a CE Mark and US FDA approval for CardioCel, a cardiovascular tissue patch. The company is also working on DNA vaccines. Bionomics ((BNO)), speculative risk,  has achieved positive results from phase II data for BNC105 for metastatic renal cell carcinoma. Cellmid ((CDY)), high risk, will take an anti-midkine antibody for cancer therapy to the clinic in 2015. Cyanata ((CYP)), speculative risk, is a regenerative medicine company working with adult stem cells and will dose its first patient next year in a Graft-versus-Host Disease study. Mesoblast ((MSB)), medium risk, is a leader in stem cell therapies and is at the regulatory stage with therapy for GvHD and phase II in Crohn's Disease.

Then there is Nanosonics ((NAN)), medium risk, which has a product called trophon EPR that disinfects ultrasound probes at low temperatures. Neuren Pharmaceuticals ((NEU)), speculative risk, is developing a small molecule drug which has shown efficacy in protecting brain cells after traumatic injury. The company also has another drug which is treating two Autism Spectrum Disorders. OncoSil ((OSL)), speculative risk, is developing a brachytherapy device that, implanted locally, can emit cancer-killing radiation to a tumour without damaging healthy surrounding tissues. Phosphagenics ((POH)), high risk, has developed a transdermal drug delivery solution for oxycodone and oxymorphone – patches – which avoids the metabolism problem inherent in oral drugs.

Rhinomed ((RNO)), high risk, is commercialising an internal nasal dilation platform called BreatheAssist, which was launched in the sports performance market in January 2014 as Turbine. Sirtex Medical ((SRX)), medium risk, has spent a decade building SIR-Spheres, radioactive Yttrium 90 microspheres used in the treatment of liver cancer. Last but not least, Tissue Therapies ((TIS)), speculative risk, has completed clinical work for CE Mark approval of VitroGro ECM for wound healing in the treatment of diabetic, venous and pressure ulcers.

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