Tag Archives: Health Care and Biotech

article 3 months old

Weekly Broker Wrap: Gold, Banks, Travel, IVF And Discretionary Retail

-Russia ups gold purchases
-NAB likely to adopt IFRS 9 early
-AVG sells Yaldara, ELD sells Charlton
-Aussies increasingly heading overseas
-PRY becomes VRT competitor
-Costs a headwind for retailers
 

By Eva Brocklehurst

Central banks were buyers of gold in the first half of 2014. Macquarie notes sellers were few and far between. Three countries - Russia, Iraq and Kazakhstan - accounted for most of the purchases. Central banks and international financial institutions, as well as sovereign wealth funds, have historically been the most important holders of gold. Those that report to the International Monetary Fund reported holdings of just over 29,000 tonnes of gold as of June 2014. This understates total holdings as it does not count the gold held by some central banks which do not report, nor any gold held by sovereign wealth funds.

Why is this important to know? Annual flows in and out of the central banks are relatively small given their holdings, but can have a big impact on the gold market and the price. Extrapolating the purchases forward to the second half of the year, Macquarie estimates total net purchases of 226 tonnes, higher than 2013 but below 2012. The shift to higher purchases this year is largely Russian inspired and given that country's FX reserves have fallen, Macquarie suspects this might reflect a preference for gold over government bonds in the current political environment. The fact that gold has managed to rise in price this year should calm some nerves about its long-term outlook, in the broker's view.

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The new IFRS 9 provisioning standard for bank credit reporting is now on the table. This will come into effect on January 1, 2018. The most important aspect is a move to an expected loss-provisioning model from an incurred loss-provisioning model that is currently in place. This will, in turn, require more timely recognition of credit losses and early adoption of the new standard is permitted. JP Morgan expects annual provisioning charges will rise with a deteriorating credit environment, as opposed to banks building buffers in so-called good times.

The broker expects National Australia Bank ((NAB)) will be the most likely of the big four to adopt this provision early, as it has $550m in its general reserve for credit losses, versus major bank peer average of $170m. A move to IFRS 9 accounting by the major banks in the long run may result in early recognition of credit losses, but may not assist with smoothing out volatility in bad debt charges. Beyond expecting that NAB may be an early adopter of this accounting practice, the broker believes there are limited implications for sector valuations.

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In agricultural news, Australian Vintage ((AVG)) has announced the sale of the Yaldara winery and brand for $15.5m, while also executing a two-year processing agreement for its Barossa grapes. On face value the transaction is around 5% earnings accretive on an annualised FY15 basis, in Bell Potter's view. Meanwhile, Elders ((ELD)) has announced the sale of the Charlton feedlot for $10.1m which will provide a handy profit of $4m. A positive for the rural sector is that export markets for live cattle remain strong, with mid year reports indicating the number of head for 2013/14 is up 25% and export volume expectations for 2014/15 have been raised 11.4%.

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Bell Potter has examined how holiday travel expenditure and disposable income is shaping up after the federal budget knocked consumer confidence earlier this year. Holiday travel expenditure, including domestic and outbound, as a percentage of disposable income has been virtually unchanged at around 6.5% over the past eight years. This is consistent with the broker's view that Australians are prepared to spend money on a holiday regardless of circumstances. There is a clear shift in the numbers towards outbound travel and away from domestic - outbound has tripled the growth in domestic expenditure over the same timeframe - and the broker expects this trend to continue. In periods of material economic disruption outbound travel tends to slow. Bell Potter notes this impact tends to be transitory and periods of weakness are followed by a strong recovery.

The implications for stocks in the sector means the trends are positive for Cover-More ((CVO)). Cover-More remains the purest way to play the outbound travel theme in Bell Potter's view. Flight Centre ((FLT)) is also a likely positive beneficiary of any recovery in the household sector, given the sale of outbound travel remains the single largest driver of earnings. The trend shift from domestic has negative implications for Webjet ((WEB)),Virgin Australia ((VAH)) and Wotif.com ((WTF)). The latter has been a major loser in the shift to outbound travel at the expense of domestic.

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Primary Health Care ((PRY)) has debuted as a provider of IVF services, opening a clinic in Sydney and offering bulk billing. The offer of bulk billing should be able grow the market, given lower economic quartiles are under-penetrated because of the cost of the service. The model is in its early stages and UBS makes no adjustments to forecasts but, since a referral to an IVF specialist ultimately comes via a GP, believes Primary will have an opportunity to capture referrals from its own clinics in NSW. A risk for established IVF providers is that Primary-owned GP clinic referrals could now go "internal". At present the risk is contained to less than 2% for IVF competitor Virtus Health ((VRT)) volumes as Primary's GP base is concentrated in NSW.

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BA-Merrill Lynch expects fixed cost increases will continue to be an obstacle for discretionary retailers. In the past three years, earnings for this group have declined by 21% and the key driver of the decline was fixed cost growth. The broker expects fixed cost growth to moderate slightly in FY15 but still impose a 3.2% headwind. Margins also risk coming under severe pressure. The broker expects discretionary retailers will be dealing with Australian dollar buying rates that will be up to 10% below FY14 levels and this will put upward pressure on pricing. Price rises could be hard to pass through if sales are subdued. Even if gross margins remain flat, retailers will not enjoy the earnings benefit from gross margin expansion that they have sustained in recent years.
 

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article 3 months old

No Nasty Surprises Expected In Healthcare Sector

-Competition focus at RMD, COH and CSL
-Unwinding AUD strength supportive
-PRY, SHL considered solid performers
-ANN needs improved cash flow conversion
 

By Eva Brocklehurst

The consistent theme across the health care sector is the demand support coming from the ageing population. Aside from this, domestic names offer greater earnings certainty in the upcoming reporting season, in Deutsche Bank's view, whereas those internationally focused companies such as ResMed ((RMD)), Cochlear ((COH)) and CSL ((CSL)) have faced increased competitive headwinds.

Deutsche Bank likes Sonic Healthcare ((SHL)) and a strong result is expected, underpinned by an accretive acquisition in Germany and cost cutting in the US. CIMB believes Sonic is a premier pathology company and there is little risk to FY14 expectations, with additional upside via public-private partnerships, both domestically and offshore. Industry feedback suggests to Deutsche Bank that ResMed has pushed hard to regain share in the US but margins are likely to be lower, while CIMB thinks a new platform launch is highly likely over the near term and takes comfort in the acknowledgment that most price adjustments have occurred, and pricing and market stability is being seen.

CIMB recommends picking stocks in lieu of allocating to the sector in general, given disparate business models. Defensive stocks and yield have been the themes in the past year but defensiveness is losing its appeal as the US Fed tapers stimulus, volatility remains low and investors look for better opportunities for capital appreciation. In this environment, with a less than favourable Australian federal budget, the S&P 500 healthcare index has underperformed. The broker expects some outperformance in the index in the months ahead as the Australian dollar's strength unwinds. Where management has used funds to successfully generate earnings growth as a guide, CIMB likes Primary Health Care ((PRY)) and ResMed. The broker thinks Sonic, Ansell ((ANN)) and CSL are fairly priced and Cochlear and Ramsay Health Care ((RHC)) are overvalued.

That said, CIMB suggests FY14 guidance provided by Ramsay is achievable, as growth is underpinned by a strong domestic base and strong operational leverage. The broker also believes the purchase of a majority stake in Generale de Sante is opportunistic and strategic, supporting mid single digit earnings accretion. Deutsche Bank believes Ramsay should deliver a strong result from domestic hospitals while stable funding and robust demand should underpin Primary. CSL and Cochlear face a competitive market, in the broker's opinion, while with Ansell, Deutsche Bank will be looking for proof that acquisitions are on track and there is a pick up in organic growth. CSL has limited upside risk, in CIMB's view, but scarcity value and scope for ongoing capital management means the shares should be supported.

Credit Suisse anticipates few surprises among upcoming healthcare earnings reports. The broker expects Ramsay to deliver the highest earnings growth closely followed by Sonic, ResMed, CSL and Primary. Ansell is expected to be marginally positive, while Cochlear is expected to record substantially negative growth, down around 20% in line with a weak first half.

To become more constructive on Ansell - the broker has an Underperform rating - Credit Suisse requires evidence of improved cash flow conversion and success with the new product strategy. Ansell released 65 new products in FY12 and FY13 and posted just 1.3% organic sales growth. The broker is also looking for new production contribution from Cochlear. Management flagged a significantly stronger second quarter on the back of the Nucleus 6 procession and BAHA 4/Attract releases. CIMB thinks optimism that prior growth profiles can be restored at Cochlear is misplaced and the earnings risk is inadequately reflected in the stock's current trading levels.

UBS also expects Cochlear to underperform, although it may meet the bottom end of guidance via margin gains. The broker suggests the US winter impact may have affected second half FY14 performances for key names such as Sonic, CSL and Cochlear but this potentially recovered in the fourth quarter. The broker envisages some risk from the confusion generated after the Australian federal budget and the proposed GP co-payments but suspects this has largely dissipated. The proposal appears unlikely to pass the Australian Senate in its current form but may be resurrected in another way. Thus, it remains an unresolved policy overhang.
 

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article 3 months old

CSL To Resume Uptrend

By Michael Gable 

The ASX 200 last week managed to rise 149 points within 3 days. Positive PMI data from China and a bounce in iron ore prices sent resources stocks higher, including BHP Billiton (BHP) that we tipped here a few weeks ago, and the rest of the market was happy to follow. Taking the approach of buying into “defensive” stocks has not stopped us from profiting from this rally, with great performances in some of our recent picks such as Woolworths (WOW), Wesfarmers (WES), Brambles (BXB), and Telstra Corporation (TLS). Other recent picks such as Flight Centre (FLT) and Magellan Financial (MFG) appear to be stretching their legs now and have higher to go. We have spotted another buying opportunity, with CSL ((CSL)) looking likely to rally from current levels.
 


After peaking in March this year, CSL has now completed a 3-wave correction against the uptrend. At its recent low last week, we can see not only a crossing on the MACD (circled), but also some divergence on the Relative Strength Index (RSI). This divergence is indicated by the diagonal solid lines. This is where the price has gone to a new low but the RSI is already trending higher. As a result, we expect CSL to trade higher from here during the next several weeks. It should head towards the $72 region, which is about where the valuation is for CSL. Therefore this price offers an opportunity to buy into CSL, or if you are looking for an exit strategy, it pays to be patient here and wait for higher levels.


Content included in this article is not by association the view of FNArena (see our disclaimer).
 
Michael Gable is managing Director of  Fairmont Equities (www.fairmontequities.com)

Michael assists investors to achieve their goals by providing advice ranging from short term trading to longer term portfolio management, deals in all ASX listed securities and specialises in covered call writing to help long term investors protect their share portfolios and generate additional income.

Michael is RG146 Accredited and holds the following formal qualifications:

• Bachelor of Engineering, Hons. (University of Sydney) 
• Bachelor of Commerce (University of Sydney) 
• Diploma of Mortgage Lending (Finsia) 
• Diploma of Financial Services [Financial Planning] (Finsia) 
• Completion of ASX Accredited Derivatives Adviser Levels 1 & 2

Disclaimer

Michael Gable is an Authorised Representative (No. 376892) and Fairmont Equities Pty Ltd is a Corporate Authorised Representative (No. 444397) of Novus Capital Limited (AFS Licence No. 238168). The information contained in this report is general information only and is copy write to Fairmont Equities. Fairmont Equities reserves all intellectual property rights. This report should not be interpreted as one that provides personal financial or investment advice. Any examples presented are for illustration purposes only. Past performance is not a reliable indicator of future performance. No person, persons or organisation should invest monies or take action on the reliance of the material contained in this report, but instead should satisfy themselves independently (whether by expert advice or others) of the appropriateness of any such action. Fairmont Equities, it directors and/or officers accept no responsibility for the accuracy, completeness or timeliness of the information contained in the report.

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article 3 months old

Ansell Grips Restructuring Challenge

-Concerns over top line growth
-Modest impact from cost cutting
-Higher skew to US tax base
-Poor quality FY14 guidance
 

By Eva Brocklehurst

Ansell ((ANN)) has embarked on a major rationalisation of its organisation, impairing brands and IT assets, closing its manufacturing site in Malaysia and discontinuing the Hawkeye military glove business. Given the scale of the company's business, broker reactions were tepid, with most wanting more confirmation the company can rejig growth.

Macquarie considers the changes signal the company wants to keep the newly-acquired BarrierSafe Solutions business relatively distinct. Ansell has created a new "single use" business unit with products for both medical and industrial customers. The speciality unit will be dissolved and products moved to industrial or single use. Macquarie's main concern is the ability to generate top line growth. Thus, management's confirmation the company is tracking at the bottom end of FY14 guidance does little to alleviate those concerns.

 A one-off cost of $34.9m is slated for the restructure with $10-11m in savings from FY16. Ansell will book $90m in impairments, including $19m for its problematic investment in the Oracle ERP (enterprise resource planning) system. The company will discontinue around 30 brands. Brokers also note a considerable offset to the savings will come from a higher underlying tax rate, from earnings being skewed to higher US tax jurisdictions. CIMB thinks all the initiatives are reasonable but the overall cash impact is modest, and there are risks around disruptions and execution of the restructure which need to be monitored closely. There is little room for earnings slippage, in the broker's opinion.

Citi thinks the major issue which the company appears to be trying to address is organic growth, but a lack of balance sheet capacity also means investors are now very exposed to downside risks. Continuing rationalisation of the brands should help but the broker retains a Sell rating. Credit Suisse is also in the cautious camp, with an Underperform rating. The broker wants to see further detail at the FY14 results regarding the underlying operating performance along with evidence of improved gross cash conversion.

BA-Merrill Lynch is relieved the guidance range was reduced substantially, as it removes some of the perceived downside risk, albeit wrapping the impact up in the restructuring. The restructure underscores the broker's view that the company has so many parts that these need to be sized right to support earnings. The writing down of brands with poor growth prospects reveals to Merrills the challenges in forecasting sales in certain product areas. At a group level this leads to low confidence in revenue projections in the absence of strong macro tailwinds. The broker intends to await the second half results before revisiting the investment case and rating, as stronger revenue growth is required before the stock can justify a higher multiple. Given the weight of European earnings, Merrills considers the stock is most leveraged to growth in this region, or a fall in the Australian dollar, over and above any other theme.

JP Morgan is also concerned about deteriorating organic growth, which looks at odds with industrial production data. The broker also questions the quality of the re-stated guidance - for earnings per share in the range of US110-116c - considering it will be bundled with a raft of other initiatives. Moreover, declining input costs for latex and nitrile should have had a material benefit to the company. A lack of organic growth disappoints UBS as well but the broker finds scope for upside over the longer term as management works on the cost base. The stock has outperformed industrial peers over the last three months so UBS takes the opportunity to downgrade to Neutral from Buy.

Despite being surprised by the size of the write-offs, Deutsche Bank observes most of the impact is from legacy products. The broker is more positive regarding the confirmation of FY14 guidance, in the light of difficult trading conditions, and looks forward to stronger organic growth and acquisition synergies as well as reduced operational costs. Deutsche Bank is the sole Buy rating on the FNArena database. Thereafter is a mixture of three Hold and four Sell ratings. The consensus target is $19.85, suggesting 3.0% upside to the last share price. This compares with $19.21 ahead of the announcement. Targets range from $17.70 (Macquarie) to $22.50 (Deutsche Bank).
 

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article 3 months old

Merck Backs Bionomics On Alzheimer’s

-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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article 3 months old

Oz Biotech Stocks Worth Pursuing

-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.



Technical limitations

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article 3 months old

Mayne Pharma Ahead Of Itself?

-Bells wants more disclosure on pipeline
-Specialty pharma may be more rational
-CEO central to execution and performance
 

By Eva Brocklehurst

Specialty drug manufacturer, Mayne Pharma ((MYX)), has performed strongly in recent months but one broker has initiated coverage with a Sell rating, wanting to see more disclosure on the pipeline of products in the portfolio.

Mayne Pharma focuses on the manufacturing, formulation and distribution of both generic and branded pharmaceuticals. The company's strengths are in complex oral dose formulations, including delayed release and highly potent compounds. The company also manufactures by contract.

Bell Potter has initiated coverage with a Sell rating and 84c target. This rating is in contrast with the ratings of two brokers on FNArena's database which cover the stock - UBS (Buy) and Credit Suisse (Outperform). To Bell Potter, a significant portion of the stock's valuation is dependent on the future earnings from its development pipeline. The company's generic medicines, in which it has businesses in the US, Australia and Europe, are continually under threat from price deflation and the broker believes this requires constant topping up with new and improved products.

The stock is trading at 29 times FY15 earnings, based on Bell Potter's forecasts. With poor visibility on the longer term growth and associated risks, the broker is lukewarm, especially at the current share price. Bell Potter acknowledges that, in order to obtain scale, Mayne Pharma made a transformational acquisition of Metrics in the US, funded via a well-supported capital raising. To date the execution on this acquisition has been successful, judging by the share price performance. The company has acquired extensive distribution capability in the US and increased the product offering in that market via acquisitions and organic growth. Still, Bell Potter argues the development of new product is the most important asset on the balance sheet and, given this is where the growth comes from, there is not enough disclosure.

UBS takes a different view. The broker notes the existing portfolio of compounds has around five years to maturity and could yet be dwarfed by over 44 drug compounds in the pipeline. Specialty pharmaceutical companies focus on the development side and differentiate drugs through complexity of disease, or novel features in their formulation and manufacture. This differs from classic, high volume and solid-dose generic drugs. UBS observes specialty pharmaceuticals are normally characterised by more rational markets, with up to 60% of the original price retained.

Both Bell Potter and UBS acknowledge that the company has blossomed under CEO Scott Richards, appointed in December 2011. As a long-time player in the global pharmaceutical industry Mr Richards leverages credentials and personal networks, and has built a global footprint for Mayne Pharma. UBS rates the CEO as central to the company executing on its strategy and unlocking value for shareholders. Moreover, the broker believes companies such as Mayne Pharma do not exist in Australia because of the competitive intensity of global pharmaceuticals. Hence, the broker thinks the stock has potential as a takeover target, given its rapid growth and meaningful portfolio.

UBS initiated coverage in April with a Buy rating and $1.10 target, stating the stock's organic growth is being undervalued by the market and current sales represent only 30% of the company's pipeline.The broker is forecasting a 3-year compound annual growth rate of 29%. Credit Suisse also likes the diversity on offer and the upside in the pipeline of new products, retaining an Outperform rating and $1.05 target.

See also, Mayne Pharma Pipeline Reveals Upside on November 23, 2013.
 

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article 3 months old

Cellmid Poised For Growth With Cancer Diagnostic

-Owns IP on significant cancer target
-Diagnostic in cancer, heart disease
-Added upside in hair restoration
 

By Eva Brocklehurst

Cellmid ((CDY)) has a significant target in view - cancer. The company's technology centres on a protein called midkine, known to contribute to cancer, heart disease and inflammation. Cellmid intends to enter the clinic next year with an antibody to midkine as a cancer diagnostic.

A protein is a particularly good cancer target if it is expressed in many different kinds of tumours and not present in healthy people, and if it can be found to play a role in cancer at various stages. Midkine falls into these categories. Antibodies make good cancer drugs because they are specific and have few side effects. Example of such significant drugs in this area are Rituxan, Avastin and Herceptin. This underscores why Baillieu Holt believes there is much upside to Cellmid's potential as an antibody developer.

Cellmid has an antibody it thinks will work particularly well in gastrointestinal and thoracic cancer. Baillieu Holst believes there is substantial evidence backing up claims and there will be strong upside for the stock given the continued demand for new cancer antibodies from the big pharmaceutical companies.

A key difference with Cellmid is that the company has not developed a drug but effectively owns midkine as a target. Cancer treatment is becoming increasingly differentiated, with specific sub-groups of drugs being developed depending on whether the patient reveals certain biomarkers. The company has various early stage revenue opportunities, including licensing agreements with diagnostics developers. One of these is a bladder cancer diagnostic developed by New Zealand biotech Pacific Edge, under licence from Cellmid, that was launched in the US in mid 2013. Cellmid will earn revenue from Pacific Edge as well as from Quest Diagnostics, which has developed a lung cancer diagnostic, and from Fujikara, which is developing a diagnostic for early stage cancer.

Baillieu Holst believes the stock is undervalued and has initiated coverage with a Buy rating, a target of 7c as a base case and 26c as an optimistic case, using a probability weighted discounted cash flow. The broker expects earnings to break even and turn positive in FY15 and assumes the company raises $3m at 2c a share to complete the early clinical work on midkine in cancer. Potential catalysts for re-rating over the next 12 months include a meeting with the US Food and Drug Administration on the anti-midkine cancer program, commencement of phase 1 and II trials and first revenues from Pacific Edge.

Cancer treatment is big business. The broker's modelling uses a 14-year commercial exclusivity period for the antibody followed by a negative 3-5% per annum terminal growth rate, and assumes the cancer antibody is licensed in 2014-2015 for US$10-20m up front, US$100-150m in milestones and 10-14% royalties. Assuming the product launches by 2018-19 the broker models peak sales (year 14) of US$1.7-2.2bn. Baillieu Holst also assumes diagnostics can gain a further US$10-20m in up front and milestone revenue, and models peak sales of US$170-290m with royalties of 5-10%. 

Midkine was discovered in 1988 at Nagoya University but was not considered a high priority disease target. The reason no therapeutic possibility was pursued until now is that understanding of midkine has only emerged in the last five years. Cellmid acquired a company called Cell Signals in 2008, which held a lot of the relevant intellectual property, and this provided a library of around 120 midkine antibodies as well as a comprehensive patent portfolio protecting midkine and midkine antagonists globally. 

Cellmid believes there is potential for midkine antagonists in inflammation, particularly acute kidney injury and chronic kidney disease, as well as the prevention of surgical adhesions. Midkine is also potentially able to shrink the size of a myocardial infarct. Given the continuing high incidence of acute myocardial infarction and heart failure the broker believes strong partnering interest will emerge for midkine in these indications.

Cellmid also own a small business selling hair restoration products. In 2013 Cellmid acquired the global rights to evolis, a clinically validated treatment for hair loss that works through the inhibition of FGF-5. In 2010 Cellmid had licensed the rights for Australia. The broker believes there is strong upside for the evolis range, with estimates that around 60% of men and 30% of women are affected by hair loss. Cellmid is taking this business to a global footing and seeking distributors in key markets.
 

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article 3 months old

Virtus Health Expands In Ireland

-Opportunity for European expansion
-Immediately accretive
-More acquisitions highly likely
 

By Eva Brocklehurst

Reproductive health specialist, Virtus Health ((VRT)), has followed through on plans outlined at its IPO a year ago to move a highly successful model offshore. Singapore was considered the likely first choice for expansion, where the company has a dedicated office, but instead Ireland has turned out to be the first port of call. Virtus Health will acquire 70% of SIMS IVF, a reproductive services provider, and now has the opportunity to use this as a platform to expand in Ireland and into the UK.

Macquarie believes the acquisition price - at around 8.5 times SIMS earnings - means significant earnings upside should be forthcoming, while Virtus Health will benefit from ongoing margin expansion and operating efficiencies. Ireland has a similar population profile in terms of fertility rates compared with Australia but IVF usage is less than half that of Australia, primarily attributed to the lack of government funding. SIMS controls 25% of the Irish market with a strong focus on clinical and scientific excellence, with its IVF pregnancy rate materially higher than the Irish average. Macquarie notes, despite a lack of government funding, prices in Ireland are similar to Australia. SIMS produces higher revenue per cycle as it has a more diversified revenue stream. The broker maintains an Outperform rating and raises the stock's target price by 5% to $9.80.

The two founding doctors will retain a 30% stake but Virtus has the right to acquire these shares in two tranches in 2017 and 2019. The acquisition price, around $23m, will be funded from existing facilities. The acquisition is immediately accretive on UBS' forecasts, at around 4.5% for FY15, and the broker retains a Buy rating, raising the price target to $9.15 from $8.65. UBS expects a relatively unconsolidated European market will present further accretive acquisition opportunities and Virtus can leverage its corporate advantage beyond capital, such as integrating marketing skills, which have potential to drive even higher growth rates.

The acquisition was some time coming but fits with the stated strategy and provides good growth potential, in Morgan Stanley's opinion. The company's business model generates significant cash and Morgan Stanley expects this cash to continue to be utilised in offshore expansion. The Irish acquisition is strategically solid and net debt should fall to $129m by the end of FY15. The broker considers the company is being conservative in its estimates, given growth and synergies, and forecasts the SIMS acquisition could prove as much as 10% accretive to FY15 earnings. Morgan Stanley retains an Equal Weight rating with a price target of $8.61 - upgraded from $7.66 - and a 3.0% fully franked dividend yield. The broker also believes potential catalysts could come from closer to home such as a competitor in an Australian state where Virtus does not operate.

Morgans (as opposed to Morgan Stanley) thinks the Irish acquisition is modest and, while not modelling acquisitions specifically into estimates, already forecasts 6% cycle growth. Hence, the broker believes the upside is captured in current forecasts and retains an Add rating and $8.96 target. Expansion overseas was well flagged from the outset and Morgans believes the retention of a 30% share by the founders is a sensible decision because it aligns the interests of both groups.

See also Yeah Baby: Virtus Health On A Growth Path on May 14 2014.
 

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article 3 months old

Cynata Strikes A Chord In Regenerative Medicine

-Key iPS technology
-Ample therapeutic opportunities
-Favourable research data
 

By Eva Brocklehurst

Cynata Therapeutics ((CYP)) is not a well-known player on the biotech scene. Yet. The company is involved in stem cell development for regenerative medicine. For stockbroker Baillieu Holst, regenerative medicine has potential to revolutionise medical science, through highly favourable outcomes in areas of unmet need. The stem cell revolution is today what monoclonal antibodies were in the 1990s, in the broker's opinion, and signals a reasonable chance that companies with capitalisations of over US$1bn will emerge in this area.

Regenerative medicine involves repairing or replacing organs and tissue that have been lost or damaged from age, disease or congenital defects. Stem cells are at the core of such research. Cynata's Cymerus technology allows for unlimited quantities of Mesenchymal Stem Cells (MSCs) to be manufactured for therapeutic use from only a small number of initial donor cells. These cells are know to be able to facilitate heart repair, rebuild bone and cartilage and reduce inflammation. The company is working on a manufacturing process for the cells and will dose its first patient next year. Key to the company's therapy is the ability to manufacture unlimited stem cells. Mesenchymal cells are potent but have to be cultured and there are limitations in the amount of increase in the population before they lose the ability to divide altogether.

Cynata starts with induced pluripotent cells (iPS) that can differentiate into MSCs and be expanded indefinitely. The technology inherent in iPS is expected to make stem cells a medical reality without the ethical controversy that was created over embryonic stem cells. Part of the 2012 Nobel Price in Medicine went to Japan's Shinya Yamanaka for the invention of iPS cells. Cynata became one of the fist publicly traded companies in the world to make use of this technology. The first clinical trial of an iPS cell started last year so the technology still has some way to go before becoming main stream.

Baillieu Holst has a Buy recommendation and a 90c price target, which is derived from a base case scenario using a probability-weighted discounted cash flow. The broker thinks the stock is undervalued. For an optimistic case the value is around $2.25. Earnings are expected to exit negative territory by 2016. The broker expects Cynata will re-rate to the target price as it demonstrates the ability to make the stem cells at scale and early pilot trials take place. The broker assumes the company raises $25m at 30c a share in order to move its stem cells into mid-stage clinical trials.

So, why does Baillieu Holst believe the stock is worth owning? There are ample therapeutic possibilities with stem cells and Cynata is collaborating with recognised leaders in regenerative medicine. Favourable research data underpins the broker's view, with evidence that MSCs make a serious difference in critical limb ischemia and graft versus host disease (GvHD). The latter is an orphan disease condition with an unmet medical need and provides a good proof-of-concept test for Cynata. A phase 1 trial in GvHD is planned in order to evaluate the ability of Cynata's stem cells to reduce the disease's impact.

Why is stem cell technology so different? Stem cells potentially treat the underlying biology rather than symptoms. A stem cell treatment for heart failure could repair heart tissue whereas current therapies such as drugs, defibrillators or pacemakers only slow the rate of tissue damage. Moreover, antibodies never made an impact on disorders of the central nervous system such as Parkinson's, Alzheimer's and stroke, and this is where stem cells show promise. Baillieu Holst suspects that big pharmaceutical companies will become interested, as they did once the antibody boom started. Developers were typically emerging companies and none survived as independents, becoming absorbed in the likes of Bristol-Myers Squibb, GlaxoSmithKline and AstraZeneca once antibody development became routine.

Admittedly, there is a long lead time to market and the equity market has waxed and waned in terms of enthusiasm for stem cells. While acknowledging this situation, the broker believes time frames have shortened as the biotech industry now has a better understanding of how to develop products while regulators have decided to move the processes along at faster speed. Mesoblast ((MSB)), a competitor in stem cells, bought the Osiris business in 2013 and has now taken Osiris to the US FDA on the expectation there is enough data on clinical effectiveness in serious GvHD to warrant US approval. Osiris obtained market approval for Prochymal in paediatric GvHD in Canada and New Zealand in 2012.
 

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