Hot biotech turnarounds

The market for biotechs is picking up and hardier business models have positioned some Australian companies for success. By BETH QUINLIVAN.

By Beth Quinlivan

The past few years have been tough for small health and medical research companies.

A bear market in 2003-04 reduced the sector to a wasteland, and then more recently, with resources markets running hot, retail and professional investors have preferred to play that boom rather than look for value among micro-sized biotech companies.

A couple of high-profile clinical failures were not offset by any real success stories, and confidence in the sector has steadily dropped off.

The difficult times, though, weren’t all bad.

The market for biotech stocks has picked up in recent months. Some companies have had huge price rises – Avexa, Mesoblast and Pharmaxis, for example, all up more than 200% on prices of two years ago. Others, including ChemGenex Pharmaceuticals, Clinuvel, Acrux and Progen, are also well up.

What is interesting, looking at some of these companies, is how different the management and business models are compared with the typical biotech business model of even five years ago.

The legacy of the technology boom in the late 1990s was that a large number of small research-oriented companies listed on the ASX, but they all had years to go before there was even the faintest hope of commercialising their research and generating a revenue stream.

When investors pulled the plug in 2003, because they weren’t prepared to endlessly fund research that wasn’t going to generate a return for 10 years or more, it was an incentive for companies and management to review their business models and approaches to finance.

The companies profiled here have done well recently for investors, but that is because the strategies that allowed them to survive the tough times have left them well-placed to benefit from improving sentiment.

AVEXA

• SHARE PRICE: 81¢.
• GROWTH: Up 220% in 12 months; 543% in 24 months.
• EARLY STRATEGY: Biotech research, original R&D portfolio had no advanced projects.
• WHAT CHANGED?: Moved from early to later stage drug developer in 2005 when it in-licensed development of a more advanced drug.
• LATEST MILESTONE: Successful Phase II trial results reported in March, $75 million capital raising to fund Phase III trials.

Avexa was listed on the ASX in 2004, with a portfolio of projects that, although interesting, were a long way from bringing in revenue. The company scored a coup in 2005 when it licensed the development of an HIV/AIDS drug, Apricitabine (or ATC), from North American company Shire Pharmaceuticals. The drug was already in clinical trials, which meant Avexa was looking at the possibility of having a commercial product in five years instead of 10 or more.

On March 19, the company released the results of a Phase IIb clinical trial of ATC. For people with drug-resistant HIV, the conclusion was that taking ATC sharply reduced the presence of the virus. On the strength of the results, Avexa was able to raise $75 million to fund the next stage of clinical trials, expected to start later this year. If these go well – and confidence is rising because all HIV drugs that have successfully completed Phase IIb trials have been approved for sale by regulators – the drug may be on the market in three years.

Biotechnology analyst Scott Power from ABN-Amro, which handled the $75 million raising, says Avexa has a number of things going for it that make it stand out among the local companies.

“They have some very smart people, a small lean team that has excellent contacts overseas. (Chief executive) Julian Chick spends a lot of time overseas, talking to investors and clinical people; he knows the market well, and they have been able to tell the story well.”

The other critical person for Avexa has been chief scientist Jonathan Coates, who previously worked for GlaxoSmithKline and was one of the inventors of an earlier HIV/AIDS drug, Lamivudine. It was his international clout that enabled the small company to license the development of ATC from Shire, amid competition from a number of other groups.

CHEMGENEX

• LATEST PRICE: 79¢.
• SHARE PRICE GROWTH: Up 43% in 12 months, 63% in 24 months.
• EARLY STRATEGY: Early stage gene-focused researcher, called AGL Biosciences, focused on diabetes and obesity.
• WHAT CHANGED?: Moved from early stage to later stage drug developer when it merged with American company ChemGenex in 2004. ChemGenex had two cancer drugs in clinical trials.
• MILESTONES: Results of Phase II/III trials of the company’s most advanced drug Ceflatonin, are due later this year.

The merger in 2004 between the small Australian company and Californian ChemGenex was one of the best biotech deals of recent years. Three years down the track, the company has an established base in the United States, an experienced and well-connected management team, and is looking at the possibility of having its lead product, the cancer drug Ceflatonin, on the market in two years.

The ChemGenex share price is up in recent months, but the big price driver will be the results of the Phase II/III Ceflatonin trial, which is due out later this year. The drug is being tested as a treatment for people with a rare type of leukemia that is resistant to other drugs. If results are good, the company believes it can have the drug fully approved for use by 2009.

The short timeframe is possible because the US regulator, the Food and Drug Administration, has given Ceflatonin fast track status – which it will do if there are no other treatments for people with the disease.

Behind Ceflatonin, ChemGenex has a second drug – Quinamed – well into clinical trials. It is being tested as a treatment for breast, prostate and colon cancer. For anyone looking at the future of medicine, Quinamed is an interesting case.

The drug was developed years ago, and although it appeared to work in treating the cancers, the side-effects were unpredictable and it was abandoned. ChemGenex believes that the side-effects are related to a person’s particular genetic makeup.

By varying the dose, depending on a person’s genotype, they hope to treat the cancers without the side-effects. Phase II trial results are due in the June quarter, a larger study of Quinamed in treatment of prostate cancer starts later this year.

MESOBLAST

• SHARE PRICE: $2.07.
• GROWTH: Up 316% in 24 months, 32% in 12 months.
• STRATEGY: Commercialise adult stem cell treatments for orthopedic and heart diseases.
• LATEST MILESTONE: Phase II trials using stem cells in spinal fusion starts in the June quarter, as do pilot trials using stem cells to treat long bone fractures and coronary artery disease.

Mesoblast listed on the ASX late in 2004, with the aim of using adult stem cells to treat orthopedic and heart diseases. Its share price has dipped in the past couple of months, but shareholders are not likely to complain too much given it is still 316% up over the past two years.

Stem cell technology is a complex new area of medical research, and stem cell companies particularly have struggled to convince cynical investors that their cutting edge science will translate into commercial returns.

The key to Mesoblast’s market support has been the very commercial focus of management. Early on, the company outlined the path it would pursue to achieve registration of its treatments. It has always met its targeted milestones, and it has continued to update and detail new clinical trials since then.

Mesoblast has developed a way of using adult stem cells to treat bone fractures, spinal disease and even regenerate joint cartilage. A related company, US-based Angioblast Systems Inc, uses the same stem cell technology to treat heart disease.

A series of trials are planned for this year including a Phase II trial using its stem cell treatments in spinal fusion procedures. The hope is that the stem cell treatment will reduce complications, improve outcomes and eliminate the need for patients to have their own hip bone grafted as part of the procedure.

ACRUX

• SHARE PRICE: $1.48.
• GROWTH: Up 102% in 12 months, 154% in 24 months.
• EARLY STRATEGY: Commercialise its technology – a new way of administering drugs through the skin – by partnering with pharmaceutical companies with existing approved drugs.
• WHAT CHANGED?: Last year, the founding CEO departed and new management team was appointed. The purpose of the change was to speed up the rate at which Acrux was negotiating licensing and other deals.
• LATEST MILESTONE: In October 2006, an application to commence marketing the company’s first product, Evamist, was filed in the US. In March 2007, the company signed two deals with specialist women’s health group Organon, to develop a contraceptive spray.

Acrux floated in August 2004 with a portfolio of projects, including a number which were within a couple of years from commercialisation. The company had developed a way of administering drugs through the skin (transdermally), and the aim was to join with pharmaceutical/health companies that already had drugs on the market, but which could be better administered transdermally.

The IPO valued the company at $130 million, a high price given the market conditions at the time. The share price quickly dropped after listing and until the past few months has been essentially under the issue price.

Acrux made more progress than most local biotechs. Its first product, Evamist (to treat symptoms of menopause) successfully completed all clinical trials in the US early last year.

But the board and larger shareholders were dissatisfied with the rate at which commercial deals were being done and the continuing low share price. The upshot was that founding chief executive Igor Gonda left the company in May.

He was replaced by a new management team, led by a long-time commercial player in the pharmaceutical business, Richard Treagus.

This month, the company announced a huge coup. It has signed two deals with women’s healthcare company Organon. Organon is the third-largest company worldwide in the contraceptive market.

The deal means Acrux will develop spray versions of a yet to be determined number of its contraceptive products. For each one that gets to market, Acrux stands to make $US12–16 million in license fees plus royalty payments.

CLINUVEL

• SHARE PRICE: $1.20.
• GROWTH: Up 223% in 12 months, 130% in 24 months.
• EARLY STRATEGY: Develop a product based on a naturally occurring hormone that stimulates the production of melanin, a dark brown pigment. The main market was identified as cosmetic, allowing people to darken skin colour without damaging it through tanning.
• WHAT CHANGED?: Since it is very difficult to gain regulatory approval for pharmaceutical products taken for primarily cosmetic reasons, the company refocused its strategy. It appointed a new CEO in 2005, and has since identified skin-related health concerns that could benefit from its drug.
• LATEST MILESTONE: Has completed a number of Phase II trials on its lead molecule, raised $41 million to fund ongoing trials.

Clinuvel, then called Epitan, listed on the ASX in 2001. Scientists had discovered a naturally occurring peptide that stimulates the body’s production of melanin, a dark brown pigment. Although having darker skin is a protection against sun damage, it was always thought that the main market for the product – then called Melanotan – would be cosmetic.

In 2005, the strategy changed. It became clear that if Clinuvel was going to be able to successfully register the product for sale, it needed to prove that there were clinical and not just cosmetic applications.

Chief executive Phillipe Wolgen joined the company in 2005, with a background in international pharmaceutical and medical companies. The priority was to identify a number of real health problems that their molecule, now called CUV1647, could address.

In February 2006, the company’s name changed to Clinuvel to reflect its new pharmaceutical focus. The company raised $41 million to fund its clinical trial program. By this month, researchers had identified five skin disorders or diseases that they believe may benefit from CUV1647.