Biotech is a hugely interesting and potentially lucrative hunting ground for investors on the ASX but it comes with big caveats – the news flow in biotech stocks can giveth and taketh away, in nerve-racking falls and heart-pumping rises. The sector can potentially turn world-class research and biochemical discoveries into big dollars, and should be on the radar of any investor, in the speculative, high-risk area of the portfolio, where a small proportion of funds are put aside for an informed (hopefully!) punt that could pay off big-time. Here are 4 candidates – that all come with the standard warnings.
1. Biotron (BIT, 7 cents)
Market capitalisation: $42 million
One-year total return: 288.9%
In September-October last year, Sydney-based infectious diseases specialist Biotron showed just how speculative the biotech industry can be, when its shares rocketed from 2 cents to as high as 45 cents – a 2,150% surge – in just three weeks. The trigger was Biotron announcing that its flagship drug candidate, BIT225, was “having a unique effect in patients, over and above viral suppression seen with current anti-retroviral drugs” in patients suffering from HIV, in phase 2 trials.
With BIT225 showing potentially beneficial immunological changes not achieved in the current anti-retroviral treatment – which do not kill or cure HIV, but are used to prevent growth of the virus – the trial results grabbed world attention, not least because Biotron said at the time that the test results were “a major step to the ultimate goal of curing HIV-1 infection.”
The share price has eased from those heady days, but nothing much has changed: BIT225 is still in clinical development, the company sees a potential role for the drug in improving patient health outcomes “as well as in future HIV-1 eradication strategies,” and Biotron is talking all the time to potential development and commercialisation partners. In July, Biotron wrote to shareholders to remind them that the global drug development process takes its time.
Biotron also has a promising pre-clinical program for hepatitis B virus (HBV), as well as several earlier-stage programs designing drugs that target a class of virus protein known as viroporins, which play a major role in the virus life cycle of a very broad range of viruses, many of which have caused worldwide health issues such as Dengue, Ebola, Middle East Respiratory virus, Influenza and Zika viruses.
The return-to-earth of the Biotron share price could offer a welcome opportunity for investors to enter this highly promising story.
2. ResApp (RAP, 20 cents)
Market capitalisation: $139 million
One-year total return: –14.9%
Analysts’ consensus price target: 28 cents
ResApp is an e-health company that has developed a smartphone-based diagnostic test for several major respiratory conditions, including primary upper respiratory tract disease, lower respiratory tract disease, asthma and reactive airway disease, acute paediatric respiratory disease, and obstructive sleep apnoea (OSP). Last month, the test, called ResAppDx-EU, received CE Mark certification as a Class IIa medical device, meaning that the tool can now be sold in the European Union for use in acute paediatric respiratory disease.
EU approval is the first such step for ResApp, which has also lodged applications with the US Food and Drug Administration (FDA), under the FDA’s “de novo” pathway for novel medical devices to advance safe, effective, and innovative treatments for patients, as well as with the relevant authorities in Australia, Canada and Singapore.
RAP’s differentiation in the market is that ResAppDx-EU is a “software-only solution” that can accurately diagnose lower respiratory tract disease, croup, pneumonia, asthma/reactive airway disease and bronchiolitis by using machine learning algorithms that analyse a patient’s cough sounds to make a diagnosis. It is far less intrusive than existing diagnostic aids, such as stethoscopes, imaging, and blood and sputum tests, and stands a chance replacing these processes.
The company’s study/trial data has been very strong, demonstrating that ResApp’s software is highly accurate in diagnosing the presence of the conditions it targets. ResApp also intends to move into the hardware area to back its software: in May, the company that it was working with a British medical device consultancy to develop customised hardware and wearable devices capable of running ResApp’s machine learning algorithms.
RAP is an e-health stock with an exciting future.
3. Mesoblast (MSB, $2.02)
Market capitalisation: $1 billion
One-year total return: 13.5%
Analysts’ consensus price target: $5.08
We looked at Mesoblast in October 2016 as a promising stem-cell stock when it was trading at $1.16, and again in January 2018 as one of four promising biotechs (can we link to SSR 8 Jan 2018), when it was priced at $1.475: the stock has moved to $2.02, and looks to be only getting started.
Mesoblast specialises in regenerative medicine, using its proprietary stem-cell technology platform, which is based on specialised cells known as mesenchymal lineage adult stem cells. From this platform it is developing treatments for inflammatory ailments, acute graft-versus-host disease, cardiovascular disease and chronic back pain – and it is the latter application that has pricked investors’ ears lately.
Earlier this month, Mesoblast struck a strategic partnership to develop and commercialise a stem cell treatment for chronic lower back pain. The partnership, with Grünenthal, a German company that specialises in pain management treatment, will see the companies work together to commercialise the MPC-06-ID treatment, a Phase 3 stem cell therapy used to treat chronic low back pain caused by degenerative disc disease. Mesoblast says the therapy would be applied to patients who have “exhausted conservative treatment options.” The company is currently completing a phase 3 trial of MPC-06-ID in the US, the results of which are expected in 2020.
Under the Grünenthal deal, the German company will have exclusive commercialisation rights to MPC-06-ID for Europe and Latin America. Mesoblast says it will receive up to $US150 million in upfront payments prior to product launch: the company expects to receive about US$45 million of that in the next 12 months, including a US$20 million payment upon receiving regulatory approval to begin a confirmatory phase III trial in Europe.
Further out, MSB told the stock market that cumulative milestone payments could exceed US$1 billion depending on the final outcome of Phase III studies and patient adoption. Mesoblast will also receive “tiered double-digit royalties” on product sales. What most impressed investors was that the Grünenthal deal is exactly the kind of transaction MSB has talked about in its strategy, which is “to team up with best-in-category commercial leaders to maximise market access for our innovative cellular medicines.” The deal should give investors confidence in Mesoblast’s ability to strike similar partnerships.
4. Cynata Therapeutics (CYP, $1.595)
Market capitalisation: $163 million
One-year total return: 31.8%
Analysts’ consensus price target: $2.50
Cynata Therapeutics was also one of our promising stem-cell stocks in October 2016, when it was trading at 71 cents: CYN has also hit the headlines this month, announcing a deal with Japanese company Fujifilm by which the latter will exercise its option to license one of Cynata’s stem cell-based treatments coming out of its Cymerus mesenchymal stem-cell technology platform.
Mesenchymal stem cells, or MSCs, are found in the body’s bone marrow and connective tissue. They have immune-suppressive and immune-regulatory activity, and migrate to sites of affected tissue to control local inflammation. In 2015, Cynata achieved a world-first breakthrough of manufacturing MSCs to therapeutic standards using induced pluripotent stem cells: prior to this breakthrough, manufacturing MSCs required a continuous supply of new tissue donations, but CYP’s technology using induced pluripotent stem cells gives it an effectively limitless starting material.
The Fujifilm deal was ready for the green light earlier this year, but in March, the two parties announced a six-month delay: that caused a 40% slump in CYP’s share price, but all is forgiven now on the part of skittish investors.
Fujifilm will license CYP-001, Cynata’s treatment for graft-versus-host disease (GvHD), a rare but potentially lethal complication from bone-marrow transplants, including for leukaemia. GvHD happens when immune cells from a transplant (the graft) see the recipient’s cells (the host) as foreign, and attack them, causing inflammation throughout the body. Usually, severe cases of GvHD are treated with high-dose steroids and immune-suppressants, but in about half of cases the patient fails to respond to treatment – and the consequences are usually fatal.
However, CYP-001 treatment, involving an infusion of millions of stem cells, appears to work to control and mediate the immune response. A Phase I clinical trial in 2018 showed that 14 out of 15 GvHD patients treated with CYP-001 showed improvement, with 8 of 15 having their GvHD signs and symptoms “completely resolved.”
Cynata will receive $US3 million from Fujifilm as an up-front fee, and stands to get up to $US43 million more in future milestone payments, as well as 10% royalties if the drug is successfully commercialised.
Cynata is also working to develop stem treatments for osteoarthritis and critical limb ischemia, a reduction of blood flow to the extremities that can lead to amputation and death. The company is preparing Phase II trials for its stem cells in relation to both conditions.
In July, Cynata received a $200 million takeover proposal by Japan’s Sumitomo Dainippon Pharma, at $2 a share. The company says it will update the market about the approach shortly: obviously, its response will have a significant impact on whether CYP will stay independent long enough to attain where analysts see its price as potentially heading.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.