KGB: Jim Fox

Biota's chairman says the company's decision to list in the US will be a game changer, allowing it to garner far more value from its products.

Biota Holdings Ltd chairman Jim Fox tells Business Spectator's Alan Kohler and Stephen Bartholomeusz:

Biota decided to delist in Australia and list on the Nasdaq because of a lack of capital supply for pharmaceuticals in Australia.

Biota’s US move allows it to shift away from its royalty-only model of raising capital meaning greater value release from its products.

Instead of seeing Biota’s shift to the US as an abandonment of Australia’s pharmaceutical market, it can be seen as creating a funding pipe across the Pacific.

The biotech considered dual listing but decided it would have been messy for both the company and shareholders.

Biota expects to have a market capitalisation of about $250 million, which represents a break point in drawing increased analyst coverage.

The fact that vaccines have shelf lives and that Relenza is coming off patent is not a threat but an opportunity.

Stephen Bartholomeusz: Jim, thanks for joining us. You announced recently that Biota was going to delist in Australia and merge with a US company, Nabi, and list on the Nasdaq. Can you explain in the most basic terms why Biota has not got a future in Australia?

Jim Fox: Well, Biota’s scientific operations have a future here. This is a great place for science and innovation. The difficulty you have with a pharmaceutical company playing in a global market and literally competing against companies that are not here is the capital supply and the capital markets. So, it becomes pretty clear when you look at the US market for capital and the shareholding sophistication and the analyst depth and breadth, that for a company which has won a two hundred and thirty million dollar contract with the US government that a move of exchange was, you know, inevitable and appropriate.

Alan Kohler: But Australia has got a massive superannuation pool. That would seem that the Australian capital market is really deep, so it can’t be the size of the capital market here, it must be to do with Australia’s attitudes.

JF: Well, if you take what’s listed on the ASX, the ASX is a mirror of what’s going on economically in the country. It’s not a light source. It’s a mirror. It reflects what happens. And our country is dominated by resources and banks and consumer products, agri products and has a very, very tiny technology base and an even tinier pharma base. So, inevitably the skills of the people running the money that goes into this mirror will reflect the activity base. And so, if you look at our analysts here in Australia and compare the analysts that are available in the US and the numbers of funds that specialise specifically in pharma companies, then you know we’re outgunned one hundred, two hundred to one. And so, there are funds that specialise just in the pharma space and, you know, you add to that the fact the US government has lined up $230 million dollars for us and they’re the major buyer ultimately of this flu drug for their stockpile, then nestling alongside all of that makes a lot of sense for the company in terms of capitalising on that down the track.

SB: Biota has been in operation in Australia for 27 years and hasn’t done this previously. You refer to that $230 million dollar barter contract. That’s got almost no recognition in this market place. Is that when the light bulb went on?

JF: That was the final light bulb going on. A few had switched on before then. That took three years of negotiation and convincing scientists and government agencies that coming all that way across the sea to get a hold of this drug technology was the appropriate strategy for their government. So, we were working for three years looking at the US market, but at the end of the day – and I’ve only been in the company two years as chairman and we pretty much immediately started a review of where we were at or stuck – the essence of the problem is that royalty only models for businesses like this really constrict the value that you can release. So, it was really important that we had an opportunity then to take a product to market, which the US government has presented us, with a $230 million dollar contract, which is the cost of clinical trials for a product that’s already selling in Japan by the way, but the US government doesn’t respect the Japanese clinical trial data, so we do it all again. And at the end of the day that gave us the opportunity to go all the way to market with a product and that’s a massive value shift for this company compared to clipping in 4, 7, 8, 10 per cent off sales.

SB: Can you explain the value chain going from the royalty model through the clinical trials phases?

JF: So, a royalty only model is that typically you license out. And in Australia you’re forced because of capital constriction to license out, usually fairly early, so that the science is created, the active ingredients identified. It’s seen to be effective and safe at early stage trials. Then it costs anywhere between $200 million and $500 million to get it through phase two and three trials before you can then sell it in the US and have it safely taken by end users. So, a drug can cost anywhere between $300 million to $1 billion to get to market and of course it’s getting tougher and tougher. So, Biota’s old model was that we always licensed out, because frankly raising three, four, $500 million dollars was not an option in this country at any meaningful price. So, the US contract then is taking that funding requirement away. This is non-dilutive funding straight to the company as long as we manufacture the product to meet FDA requirements in the US, so we’re doing that.

SB: So, between that cash, and there’s 54 million in Nabi and you’ve got 55 or something yourself. Is that enough to see you through to greater maturity in your development programs?

JF: It is. Yes, it is and that’s the key part of this transaction as well that not only does it deliver the last brick in the wall with cash because now we have a company with 100 million in the tank, $230 million dollars coming from the US government, a portfolio of products and we just recently announced another discovery in the common cold space, HRV as the scientists would call it. So, we’re now in a position if this Nabi deal can come off a shareholding based in the US, which gives us liquidity and depth, but the Australian shareholders will still own 75 per cent of the company.

AK: So you had a direct choice between a royalty model on this new cold discovery that you’ve made… You either had to go to a royalty on that fairly soon, or do the American deal and continue on with the trials yourself.

JF: Well, there are actually two different products. So, the one that the American contract is about is our influenza product. The company’s had Relenza which it sells through Glaxo Smith Kline in the market for a long time, way before my time, and so the contract that the US government has delivered to us is about the second generation flu product, so influenza is a different problem from the common cold. So, the flu route to market is now fixed and the HRV product, which has just come through its phase-two clinical trials with a big tick, is now… where do we go with that?

AK: Yeah. Well, that’s kind of what I was talking about really. I mean that plus other products that you’ve got in the pipeline, you would have had to all go to royalties on all of those. Whereas now you’ve got the choice of going to market on the Nasdaq, raising the cash and going to third base.

JF: Correct. And, you know, holding the value on the company because the earlier you sell these things the, you know, the much lower the value return. It really is a parabolic curve in terms of value release the further into the process you get. So, it’s a critical step for the company; game changer.

AK: There’s a bit of the chicken and egg. As you say there is no pharma sector in the Australian market because there isn’t much of one in the economy, but if you emigrate, we’re never going to get one. I mean, there’s no way we’re ever going to get there actually.

JF: Well, that’s a whole other topic. But another way of looking at this is that actually what we’re creating is a pipe all the way across the Pacific which runs cash back to the science base, helps the product get commercialised, takes the product back out into the market which was always going to be. It was never going to be sold just domestically. I mean we’re only one per cent of the world’s market. And then returns cash to shareholders who happen to be resident here; now also if this comes off, with some fellow US based shareholders. So, you can actually see there’s a funding pipe back here.

AK: Did you think about a dual listing?

JF: Yeah, we did. I have two problems with dual listings. For our particular company you double up costs so you’ve got accounting and tax and reporting and compliance in two different jurisdictions, so there’s an overload of different reporting costs and accounting people running left, right and centre. And secondly, because this market again reflects the economic activity, then people are used to fully-franked dividends and they’re used to companies behaving in an economic manner here, where the US market are very much are more capital driven, price driven. So, we just took the view that in the end if you’re dual listing for a company like this which is in its growth stage now, but with some massive funding, that you know we might end up being dragged by one set of views compared with another set of views, so much better to get amongst the main game.

SB: Post merger, assuming it gets ticked off, 74 per cent of your shareholders will be the existing shareholder base. Some of them are already complaining that they want to hold shares in the Nasdaq only listed company. How do you respond to them?

JF: Well, I understand that. And there is another layer of work to be done in getting an easier mechanism for people to buy and sell Nasdaq shares. Having said that, I have an eTrade cap account personally that I buy and sell Nasdaq shares in. So, you know, there are some forms to fill out and there’s some compliance stuff to sign off on, but it’s all doable. But I understand that there may be people with particular rules about whether they can hold US stock or not. But for every seller there’s a buyer. I mean yes our shares are turning over, but for everybody that’s selling there’s somebody buying in the knowledge that they will hold Nasdaq shares. So, there would be a natural rebalancing of people who are comfortable with it and see the value of it and those that don’t want the additional burden.

AK: And the currency risk.

JF: Well, you know, so there’s currency risk, but it depends whether you’re a bull or a bear on the dollar I guess as well. I happen to think that the resource bubble down the track we might actually be a good strategy.

SB: I suppose if you want to get the rerating that you expect to get over in the States, you need some of that turnover to occur anyway.

JF: Yeah. Well, you need liquidity, but we try and deliver that by actually having twenty-five per cent of the shareholders upfront being US based through the Nabi share register. So, that gives you then local trading and churn and you need that. You know, all stock needs to turnover to get people buying and selling the stock and getting moving with it and that’s a critical part of this move to the US.

SB: Post merger you’d have a market capital of a bit over two hundred million. Is that enough to be meaningful and visible in the space?

JF: Yeah. Well, we think we’ll be about 250 million and there are break points, no question, in terms of stock liquidity and analyst coverage and that was one of the motivations for this transaction for us rather than just going onto the boards in isolation ourselves and it gave us an instant shareholding base and when you look at the market data, stratifying activity in companies by market cap. As a market cap rises, then so too does liquidity and analyst coverage. So, we’ve got two or three analysts here in Australia that follow us and they’re not specifically expert in this area and, you know, a mean for a company of $250 million in this pharma space will deliver between eight and 10 analysts. So, straightaway you’re off and running. It’s just a different ballgame.

AK: If you know that figure… So, that sort of price delivers eight to 10 analysts on average?

JF: On average.

AK: That’s how it works?

JF: Yeah. Yeah because suddenly you’re into a space that, you know, there are specialist funds there and if I was to say: are there specialist pharma funds here? Well there are people who invest in pharma. I mean clearly other companies here have raised capital, but you know I’d struggle to name two or three. I can’t even name one off the top of my head, but let’s say two or three. When we went through this preparation there were more than 50 funds that specialise in pharma that is in our space, straight up. So, you know, that’s why I say the ASX is a mirror of activity. It’s not the light. It’s the mirror. It reflects what’s going on.

SB: You’ve referred in the past to the fact that in the Australian market biotech companies tend to trade sort of come issue, the funding overhang I think you referred to it. Is that the case in the States or is it different?

JF: Well yeah, if you don’t have a year’s money in the tank, then anybody in the buying side of this will say they’re going to raise some money and we know that they’d like to come out at a discount to market, you know, 15, 20, 25 per cent, maybe, if you’re really struggling. So, let’s just hang back and let them go over that funding cliff and then we’ll pick them up on the other side; why buy stock now and I can get it 25 per cent off later? So, one of the again important parts of this is that people will look at the company, the new combine company renamed Biota Pharmaceuticals and say: ah, a 100 million, that’s definitely enough to get the Lani contract with the US government through to market. So, they’re not going to raise money for that and that’s the core business, so that takes away that funding overhang and it is a critical part of the step.

AK: But you probably are going to raise money for HRV, aren’t you?

JF: Well, we’ll see. I mean, we will have enough money in the tank to actually maybe partner that at a higher level. We may not license under the normal deal, which is you fund everything from now and we’ll take our seven or eight per cent. So, we may be able to have more spin in the game. That’ll be a decision we’ll make once we finish talking to the potential partners.

SB: Vaccines have shelf lives, I think. Tamiflu stocks around the world have are going to start to have to be replenished sometime soon. Relenza’s coming off patent in a couple of years’ time. Are these threats or opportunities to you?

JF: Totally an opportunity and one critical one you left off the list is the rising resistance to Tamiflu; the bugs learning about walking their way around it. So, one of the great concerns for stockpile owners, and particularly the US government - and I met the head of that programme in Washington just a few weeks ago - is making sure they have a balance of drugs in their stockpile for pandemic purposes and basically this is the great advantage with Lani is that it’s a non Tamiflu product, so it’s its resistance profile is completely different and clean, but more importantly it’s a one shot play. With Tamiflu and Relenza you’ve got to take it day and night over a number of days and from a point of view of administering that in a pandemic you’ve got to chase people up every day. Lani is a one shot. Bang. Done. So, from a point of view of administering, you know, a public health crisis, it’s a fantastic product, which is why the US government just loves it. So, coming off patent, well no problem for us because at the end of the day Lani goes out for another nineteen years because, without getting too complicated, the delivery device is part of the patent, so it’s not just the active ingredient, it’s the gadget you puff. So, we’ve got great patent life and we don’t have a resistance profile and we know the stockpile has got to churn.

SB: But they’re one dose and smaller doses than Relenza, so are the margins smaller or larger?

JF: Well, I don’t know what Glaxo’s gross margins are, but we know what the margin on this will be and, you know, it’s a very exciting road ahead. You know, the thing to remember is the funding agency is the customer, so that’s a pretty nice place to be if our team executes the way they should.

AK: Thanks very much, Jim.

JF: Good to meet you. Stephen, good to see you again.

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