Check out my Fairfax Under the Radar column. It's like Justin Belieber, you just have to belieb in some of the small caps at the speculative end. In the Pharmaxis case it might be too early. The company has to raise some big cash; and in the case of Matrix, it's management is definitely on the back foot and needs to put some runs on the board after two big disappointments in a row. Interested to hear your thoughts, and any suggestions for stocks to follow.
Pharmaxis tries to dictate termsRichard Hemming
October 28, 2011
This week Pharmaxis achieved a milestone almost unheard of among biotechs in recent times - the successful approval by the European drugs regulator of Bronchitol, its treatment for the debilitating disease, cystic fibrosis.
Just as amazing is that the drug is un-partnered, meaning a major pharmaceutical company hasn’t assisted in either the clinical development, or the regulatory process.
But as great an achievement as this is, investors always ask, what’s next?
The question is particularly relevant in this case because the biotech is burning in excess of $40 million a year, although it has cash reserves of about $34 million.
Pharmaxis (ASX code PXS) shares reflect this uncertainty. They fell out of bed in May after the European regulator initially rejected its application, falling from $3 to as low as 71 cents. On Monday they spiked 50 per cent on the approval, but at their current price of about $1.30, they are still well below their levels in May.
Brokers, as they do, have tried to fill the void and believe that the company will raise $50 million or so in the coming months at about $1.25 a share and have calculated valuations of the stock ranging between $1.70 and $3.
Speaking with Under the Radar, chief executive Alan Robertson makes it clear that there is no decision to raise capital, and indeed other options are being discussed:
“Anybody can read a spread sheet, but we don’t have a mandate to do anything. We came through a major gate last week with the approval in Europe and this puts us in a different position.”
Pharmaxis is making the difficult transition from being a biotech to being a speciality pharmaceutical. But even by Robertson’s own admission, the company won’t be in a position to be break-even until June 2013.
The incentive is definitely there for the company to somehow get through this period. In four or five years, analysts are forecasting revenues of over $300 million a year.
This is not out of the order. Roche has a product called Pulmozyme, which acts on patients with late stage cystic fibrosis. It has been around for about 15 years and generates sales of about $500 million a year.
The big hurdle now is approval by the US Food and Drug Administration (FDA).
Robertson says that the company will submit a New Drug Application (NDA) in March next year. Whenyour columnist asked him whether the approval process will take two years, he laughs and shoots back that the “Prescription Drug User Fee Act gives (the FDA) 10 months”.
It’s clear that after the European regulator’s decision, supporters of Pharmaxis can now afford to laugh.
President Bush and the Matrix
"There's an old saying in Tennessee - I know it's in Texas, probably in Tennessee - that says, fool me once, shame on - shame on you. Fool me - you can't get fooled again." George W Bush.
After its AGM on Tuesday, shareholders in Matrix Composite Engineering (ASX code MCE) probably won’t want to be reminded of this quote.
The company fell short of investor expectations at its fiscal 2011 result, and has done so again, only two months later.
At its results presentation in late August, its chief executive Aaron Begley gave guidance of 20 per cent revenue growth for fiscal 2012.
At the AGM he downgraded this to between 0 and 10 per cent, and cited “one-off” costs of $4.8 million that meant the company would break even for the first half.
The funny thing is that despite the disappointments, the company has a great business.
In its words, it is “the only major oil and gas equipment manufacturer and exporter in Australia and the global leader in the manufacture and supply of subsea buoyancy systems.”
Last year its revenues were a shade over $187 million, producing a net profit of $33.6 million, 88 per cent up on the same period a year ago.
Of course, not meeting expectations has hurt Matrix shareholders, which is why the Bush quote won’t seem funny. At $3.03 before today, its stock has fallen about 70 per cent in the past seven months or so.
Getting back to why the business is so good. The main reason is the massive demand for its services from oil and gas producers. This month the International Energy Agency chief economist predicted that $10 trillion in investment between now and 2035 was needed in the oil industry to meet demand.
From a shareholder perspective, Begley and his team appears to be on its last chance. President Bush hails from an oil producing family, and even he might agree that Matrix shareholders won’t be fooled again.