Volatile royalties often bitter pills for biotechs

This much was clear in the wake of last week's column focusing on the market's valuation of cancer therapy developer Prima BioMed (ASX: PRR).

It's understandable. Australians have been awarded no fewer than 11 Nobel prizes in science, kicking off with Howard Florey, the discoverer of penicillin, in 1945. And when an investor gets behind a story with the potential to help so many and to make so much money, he doesn't want to hear anything that might say otherwise.

This column had the temerity to suggest that Prima's market cap of $256 million might be overdoing it for a company that hasn't got much in the way of clinical evidence and even if everything goes to plan, will not make a profit for at least another four years.

It's worth looking at a couple of other biotechs that have had recent announcements. Both have products that are approved in various markets, but both have been massive disappointments to investors in the past five years.

At 82.5? Biota's (ASX: BTA) share price is a far cry from its $3.33 high in October 2009.

The biotech has had a lot of promise for a long time because of its flu drug Relenza, marketed by GlaxoSmithKline.

The fall reflects the realisation that royalties from this product are very volatile.

Last week it said that it received $1.5 million in royalties for the March quarter.

In the December quarter of 2009, when there was a flu epidemic, it received $32.6 million.

This isn't to say Biota's intended Nasdaq listing won't be a success, but it will need much more than Relenza to wet US investors' appetite. The US government seems to realise this.

It's providing it with a $US231 million ($A223 million) grant to conduct trials for its Japanese-approved flu treatment. RBS Morgans has a price target of $1.12.

Pharmaxis (ASX: PXS) has a well-regarded treatment called Bronchitol for the lung condition cystic fibrosis, and late last month received approval to market its product in Europe.

After an $80 million equity capital raising late last year, it now has enough money to stay afloat until it is profitable, which is forecast for fiscal 2013.

Such an outcome wasn't always a formality. Its stock is $1.30, but this time last year it was almost $3 and then promptly fell about 80 per cent in two days. The decline reflects uncertainty of the regulatory process.

In this case the European regulators rejected the drug, but this has been successfully appealed.

The stock still hasn't recovered, chief executive Alan Robertson tells Radar: "The convoluted regulatory process delayed our ability to launch the product. For a developmental company, when there are these unexpected delays, they do have consequences."

Shaw Stockbroking forecasts revenue from the product to climb from $1.7 million in the current year to $470 million in eight years.

If you are a believer, it's a no-brainer. But in the past year, it has been a rollercoaster ride. Such is the life of a biotech investor.

Richard Hemming (r.hemming@

undertheradarreport.com.au) is an independent analyst who edits a fortnightly newsletter: undertheradarreport.com.au.