Merck Backs Bionomics On Alzheimer’s

This story features BIONOMICS LIMITED. For more info SHARE ANALYSIS: BNO

-Second deal with Merck
-Larger upfront payment
-Upside, re-rating potential
 

By Eva Brocklehurst

Australian biotech, Bionomics ((BNO)), has secured a big deal. The company will receive US$20m up front in cash and is eligible for another US$486m on research and clinical development milestones, plus undisclosed royalties on sales from global pharmaceutical giant, Merck & Co. So, what has generated the partnering with this handsome suitor? It is the company's pre-clinical candidate, BNC375, and related compounds targeting cognitive impairment associated with Alzheimer's Disease and other conditions of the central nervous system. Merck will now bear all further development costs.

Bell Potter observes this is the second deal between the two in a year, and the endorsement of Merck is a validation of Bionomics' drug discovery capabilities. Bell Potter expects US$20m in development milestones in FY16. Moreover, the broker expects more licences will be forthcoming for the company's autoimmune Kv1.3 candidate BNC164 and cancer drug BNC105 in FY15. These deals, combined, are valued by the broker at US$590m and could trigger a further re-rating of the stock. Bell Potter retains a $1.00 target and Buy rating, noting the strong terms from the BNC375 deal were offset by pushing out the timeline for entering the clinic to FY16 from FY15. Upside for the stock is expected to come from the BNC101 cancer stem cell candidate moving to phase 1 trials in the second half of this year.

Baillieu Holst observes Bionomics must have a strong candidate if Merck is prepared to take it on board, ahead of entering the clinic. Alzheimer's is a large market opportunity as around one in eight over the age of 65 in the US have been diagnosed with Alzheimer's Disease or dementia. Existing drugs only provide short-lived relief before the cognitive decline continues. So what is BNC375? In a nutshell, it is a positive allosteric modulator of the a7 nicotinic acetylcholine receptor. This receptor allows brain cells to communicate to each other and researchers have long known it plays a key role in the progression of Alzheimer's Disease. Bionomics has shown that BNC375 can improve both episodic and working memory.

The company was criticised for a low upfront payment in its partnering deal with Ironwood Pharmaceuticals for the anti-anxiety drug BNC210 and Baillieu Holst thinks this deal with Merck should now put that criticism to rest. Bionomics is also collaborating with Merck in the area of pain mitigation and will potentially receive US$172m in option exercise fees and development and regulatory milestone payments. Neuropathic pain alone is a US$2-3bn market that is inadequately serviced by the existing drugs, which are mostly opioids and therefore potentially addictive.

Baillieu Holst adjusts models on the back of the deal and obtains a new price target of $1.10, using a probability weighted discounted cash flow valuation. Bionomics has multiple drug discovery platforms to drive growth and Baillieu Holst, too, expects recognition and re-rating will come with the progress on BNC105 and BNC210. The broker thinks the stock is undervalued and retains a Buy rating.
 

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