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Takeover Opportunities in Biotech Land

Richard Hemming

In the past 12 months the S&P/ASX 300 Pharma and Biotech Index has climbed just over 15%, while the S&P/ASX All Ordinaries Index has risen only 2%. Why Under the Radar thinks that this will keep going.

We don’t know whether you’ve noticed, but out of the blue it seems like everyone’s talking biotech. This is a sector which has blown up investors in the past like no other, but fear not, there are big profits to be made with Under the Radar.

As we’ve mentioned in the past, we have an enviable track-record of achieving an average return of 136% on stocks in med-tech and pharma land over the past seven years. But this pales against the long-term destruction wrought by the industry on less wary investors.

Picture of a microscope


Even watchers in the past five years, will remember names like cancer treatment specialist Alchemia crashing 80% over a couple of days after a failed study; the Alzheimer treatment developer Prana Biotechnology shot well over $1 in early 2014 but now trades at 4.5 cents a share. Others to crash out include Pharmaxis (PXS), the Lucy Turnbull backed Prima BioMed, now known as Immutep (IMM), Acrux and QRxPharma. We could go on, and on.

IN THE MARKET, MONEY TALKS

But in the past 12 months the S&P/ASX 300 Pharma and Biotech Index has climbed just over 15%, while the S&P/ASX All Ordinaries Index has risen only 2%.

In the market, more than anywhere else in the world, the cliché “money talks” is literally and figuratively true. There is very little else to gauge success by, which is augmented by the fact that many investor’s memories are like the proverbial gold fish, although as I will illustrate, there are important changes occurring in the industry indicating that the biotech bonanza trend will keep going.

UNDERLYING CONDITIONS ARE IMPROVING

The simple fact is that it has been a long, hard road for most investors in the biotech sector because the chances of success are so slim. Although industry conditions are improving. The US Food and Drug Administration is approving record number of drugs, but most of these are of the generic variety. The FDA approved over 1000 new generic drugs in 2017, 200 more than the previous record set in 2016; while it approved 46 brand new drugs, which was a two-decade high.

TAKEOVERS ARE ON THE RISE

But possibly the biggest key behind the outperformance is the unprecedented takeover activity occurring in the sector. M&A around the world is rising as billions of dollars are being repatriated into US currency as companies take advantage of big corporate tax cuts.

The biotech and speciality pharmaceutical industry is an area that lends itself to takeovers because of the obvious synergies and Australia seems to shoot well above its weight class. In recent times pharma companies have not been good at innovating drugs, but they remain particularly good at developing and commercialising them. It makes sense for these big companies to “buy in” innovation; that is, they’ll buy small companies, which have developed promising compounds and devices. A harbinger of things to come was in January when Pfizer announced that it was closing its neuroscience division and letting go of some 300 people. In its place the US based giant is creating a dedicated new fund to invest in other people’s neuroscience. The company spent about US$8bn last year on R&D and has said that its total spending here will not change.

EXAMPLES OF TAKEOVERS INCLUDE SIRTEX

The big action is indeed occurring offshore, exemplified in the past month by the news that Japanese pharma giant Takeda is making a US$40bn takeover of Irish rival Shire. Under the Radar column readers will be aware that in January Northern California based Varian Medical Systems bid $1.6bn for the liver cancer treatment specialist Sirtex Medical (SRX), which we consider a lucky outcome for the group. Last month immunotherapy treatment developer Viralytics (VLA) received a $502m from the US based pharma giant Merck & Co, which was a surprising 160% premium to the average stock price over the prior month. The third takeover in Australia was for $120m by the Dublin based Botox manufacturer Allergan of Elastagen, a private company which came out of the University of Sydney biochemistry laboratory.

Merck’s head of global clinical development Roy Baynes said that Australia’s top scientists and biotechnology industry is worth keeping a close eye on as these global pharma giants hunt for that ever-important growth.

ASX LISTED TAKEOVER CANDIDATES

Some ASX listed biotechs that have been re-inventing themselves could be takeover targets and include Pharmaxis (PXS) and Immutep (IMM). Both these companies have transformed their businesses in the wake of major hiccups. Previously they were going down the orthodox route of trying to get one drug to market, but now they’re creating a platform of early stage treatments. Pharmaxis in particular has been successful in getting the interest of big pharma.

Pharmaxis is one of our favourites and has been receiving milestone payments from the German pharma giant Boehinger Ingelheim for compounds it is developing and the Italian group Chiesi is taking on most of the risk for its cystic fibrosis treatment Bronchitol, as well as its partner compound Aridol. I would add that if you look at the PXS and IMM 10-year graphs you will see how far they still have to go just to get anywhere near their respective highs in 2010/11.

Other biotechs which have embarked on this early stage R&D strategy are cognitive therapies researcher Bionomics (BNO) which has more than doubled in the year to date and the sector veteran Starpharma (SPL), which produces an anti-viral product used in some Ansell condom products.

About the Author

Richard Hemming

Investment analyst and Editor of Under the Radar Report

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