PASSIONS run high in the biotech world.
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.
Frequently Asked Questions about this Article…
Why does the article suggest Prima BioMed's valuation might be high for everyday investors?
The article notes Prima BioMed (ASX: PRR) had a market cap of about $256 million but limited clinical evidence. It suggests the company may not be profitable for at least another four years, so investors should be cautious about paying high valuations for early-stage biotech stories.
How have royalties from the flu drug Relenza affected Biota’s stock performance?
Biota (ASX: BTA) has seen large swings because royalties from Relenza, marketed by GlaxoSmithKline, are highly variable. The company reported $1.5 million in royalties for one quarter but received $32.6 million in the December 2009 quarter during a flu epidemic, illustrating how royalty income can jump or fall dramatically and impact investor returns.
What is the US government grant mentioned in the article and which company benefits?
The article says the US government provided a US$231 million (A$223 million) grant to support trials of Biota’s Japanese-approved flu treatment, indicating significant government backing to help commercialise that product in the US market.
What recent regulatory and market events affected Pharmaxis and its Bronchitol product?
Pharmaxis (ASX: PXS) received European approval for Bronchitol after initially being rejected and successfully appealing the decision. The company completed an $80 million equity raising late last year, giving it enough cash to operate until it is forecast to be profitable in fiscal 2013. The stock has been volatile — around $1.30 now after trading near $3 last year and falling about 80% in two days when regulators first rejected the drug.
How can regulatory decisions create investor risk in biotech stocks?
Regulatory outcomes can cause sudden, large share-price moves. The article highlights Pharmaxis, where a regulatory rejection led to an ~80% drop over two days and delayed the product launch, demonstrating that unexpected regulatory setbacks can have immediate financial consequences for developmental biotech companies.
Why might a single-product biotech struggle to attract US investors despite approval in other markets?
The article argues that relying on one product can be risky because revenue streams (like royalties) are often volatile. Biota’s experience shows that even with a known product, US investors may demand more diversified or stronger pipelines; the company will need more than Relenza to fully satisfy US market appetite.
What revenue outlooks are mentioned for Pharmaxis’ Bronchitol, and what do they mean for investors?
Shaw Stockbroking forecasts Bronchitol revenue rising from $1.7 million in the current year to $470 million in eight years. For investors this highlights the high-reward potential if the drug achieves widespread uptake, but the article also stresses the rollercoaster nature of biotech commercialization and the uncertainty in reaching those targets.
What broader lessons for everyday investors does the article highlight about investing in biotech stocks?
The article emphasises that biotech investing carries both big upside and significant risks: high valuations for companies with limited clinical evidence (Prima BioMed), volatile royalty income (Biota), and regulatory uncertainty that can cause rapid share-price swings (Pharmaxis). It suggests investors should be aware of long timelines to profitability, the need for diversified product pipelines, and the possibility of sudden regulatory or sales-driven volatility.
Call 1300 880 160
Start a chat
Schedule a call
