Bigger biotechs shine

Investor interest in small-to-medium cap Australian listed life science companies weakened considerably in the September quarter. The Bioshares Index – a weighted index measure of the value of small-to-medium cap drug development, medical device, diagnostic and other companies – fell 9.5%. The decrease followed a 5.6% fall in the previous quarter.

The Bioshares Index was calculated using the capitalisations of 121 companies during the quarter. The broader market, as measured by the ASX 300 Index, rebounded to produce a 4.5% increase after a sharp fall in the same period.

In contrast, the Bioshares Large Cap Index – a weighted index measure of the value of the larger stocks, including CSL, ResMed, Cochlear and Sigma Pharmaceuticals– posted a 14.9% gain. The foremost global measure of investor sentiment towards biotech, the Nasdaq Biotech Index, increased by 6.4% in the quarter and appears to be trending upwards.

Small-to-medium cap biotech stocks have fallen out of favour with investors for several reasons. First, in times of market instability, as has occurred globally in recent months, speculative stocks can be among the first discarded by investors looking for more risk-averse stocks. The poor liquidity in smaller speculative stocks can result in sharp price drops when even a small number of investors seek to exit their investments.

Second, over the past two and half years a group of ASX-listed biotech companies have emerged that have proved capable of sustaining and attracting investor support. This is because they have generally been successful in moving their products under development further down the value creation chain and closer to the market. The success of these companies, of which Pharmaxis, ChemGenex Pharmaceuticals and Acrux are examples, has been at the expense of many more smaller companies.

There were 51 companies capitalised less than $20 million at the close of the September quarter. At the same time there were 23 companies capitalised at $100 million or more. Funding is a perpetual concern to many of these micro-cap companies, and the presence of a number of larger companies with more liquid stock means that investment interest at the smaller end of the market is difficult to sustain when there is weak overall sentiment to biotech.

nIndex performances by quarter
	Q3 2006	Q4 2006	Q1 2007	Q2 2007	Q3 2007
Bioshares Index	5.20%	20.60%	6.30%	–5.60%	–9.50%
Nasdaq Biotech Index	1.50%	5.90%	–2.70%	3.30%	6.40%
Bioshares Large Cap Index	2.10%	14.40%	12.50%	–2.30%	14.90%
ASX 300 Index	1.60%	10.40%	5.60%	4.80%	4.50%

Outperformers

Reflecting just how tough life has been for biotech stocks over the past quarter, of the 130 listed companies, only 32 generated a positive gain over the period. IM Medical was up 189% for the quarter with the launch of its new product, the Cardanal ECG software that greatly improves the quality of the information generated by ECG. The Brain Resource Company was up 40% for the quarter and 123% for the previous 12 months after it signed an $18 million contract in May to develop novel brain biomarkers to predict an individual's responsiveness to treatments for depression and Attention Deficit Hyperactivity Disorder (ADHD).

Brisbane-based diagnostic developer and marketer Panbio is on the market with Inverness Medical Innovation, having declared an interest in buying the company for 34¢ a share. Inverness looks to be continuing with its diagnostic company shopping spree. Panbio’s stock is up 38% for the quarter to 40¢ and up 82% for the year.

Living Cell Technologies moved a step closer to receiving the go ahead for trials of its porcine islet transplant cells for the treatment of type 1 diabetes. It has received hospital ethics approval and has made its submission to the New Zealand Minister of Health to begin the trial. Its share price was up 36% to 17¢.

Biosignal has continued to make progress with its anti-biofilm furanone technology, partnering with Saraya Co in Japan to enter that market for mouthwash and prevention of bacterial fouling in water cooling towers. Its share price was up 35% for the quarter. And the blue blood of the Australian life sciences sector, Cochlear, Pharmaxis and CSL, generated excellent gains over the quarter, up 28%, 23% and 22% respectively.

Underperformers

Metabolic Pharmaceuticals had more bad news for investors, with its Phase II neuropathic pain trial halted and discontinued after further preclinical studies indicated the trial was unlikely to generate a positive result. Its share price was down 55% for the quarter. The company's main assets now are its $18 million in cash and its oral peptide delivery platform, which the company will now move into larger animal studies.

Fermiscan Holdings is developing a breast cancer diagnostic test that uses hair samples to predict the likelihood of disease. An interim report from its ongoing trial showed that four of 14 positive breast cancer cases were missed because of chemical treatment of the hair, from use of dyes, chemical straighteners or perms. It also showed that in 19% of cases, the positive results conflicted with mammograms (indicating no sign of tumour) although there remains the possibility these patients have undetectable (by mammogram) breast cancer.

Shares in Clinuvel Pharmaceuticals were down 52% after one of its largest shareholders, the Absolute Capital Management Holdings hedge fund, had indicted it was in distress following recent financial turmoil. Apparently the fund has not sold down its stake in Clinuvel, although the fear remains that it may should the price strengthen. Clinuvel's Phase III programs remain on track and the company has $60 million in cash reserves.

Capital Raisings & IPOs

Australian biotech companies raised $153 million in follow-on financings in the September quarter 2007. The largest capital raising for the quarter was a $26.8 million rights issue conducted by CathRx. One the IPO front, three companies listed on the ASX and raised a total of $68 million, led by Hexima, which raised $40 million, Patrys ($25 million) and Helicon Group, which raised $3 million. One company, Vita Life Sciences, also relisted and raised $6.6 million through a rights issue.

In all, an estimated $221 million in funding was secured by biotech firms during the September quarter. However, this figure was down 39% from the previous quarter’s figure of $363 million.

To date, for calendar year 2007, $715 million has been raised by Australian listed biotech firms or their associates. This is more than any calendar year amount raised in the history of the listed biotech sector in Australia, and it would also suggest that figure for the full year is likely to be in excess of $800 million, assuming several IPOs get away in the December quarter.

nIPOs in Q3 2007
Company	Code	Funds Raised (m)	Issue price	Price 30/09/07	Gain/loss
Hexima	HXL	$40.00	$1.25	$1.10	–12%
Helicon Group	HCG	$3.00	$0.20	$0.13	–38%
Patrys	PAB	$25.00	$0.40 $	0.53	33%

Clinical Trial Activity

Clinical trial activity by Australian biotech firms remains at a high level in the September quarter. Significant developments included Pharmaxis’ completion of a Phase III study in which its mucociliary clearance product Bronchitol which was evaluated in a 362 patient bronchiectasis trial. The positive data obtained from the trial would appear to have been a significant driver in lifting Pharmaxis’ share price 23% in the quarter and its capitalisation to $721 million.

Acrux used positive results from a Phase II trial of its testosterone product to raise $22.5 million to support a Phase III study. Novogen subsidiary Marshall Edwards raised a net $US16.8 million (about $21 million) to support a Phase III trial of phenoxodiol in 470 ovarian cancer patients.

Neuren Pharmaceuticals commenced its Phase III trial of its peptide glypromate, enrolling its first patients in both New Zealand and Australia.

Progen Pharmaceuticals released data from its Phase II trial of PI-88 in combination with the taxol drug docetaxol, in patients with non small cell lung cancer. The trial did meet its endpoints. And Sirtex Medical, a stock that is performing exceptionally well, launched the first randomised trial of its currently selling liver cancer radiation treatment, Sir-Spheres.

David Blake is the editor of Bioshares newsletter.