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7 biotech stocks with bounding share prices

7 biotech stocks with bounding share prices

By Bob Kohut 18.11.2013


Some biotech stocks have been running hard. Let's take a look at some standouts.

Mesoblast Ltd (MSB) has been in the news recently. It finally received approval from the US Food and Drug Administration (FDA) to start a Phase 3 trial for its congestive heart failure treatment (Mesoblast's partner Teva Pharmaceuticals will absorb the $150 million price tag for the trial). The share price rallied, but then retreated as analysts pointed to the long delays in the company’s clinical trials.  Here is its one-year chart:

With a market cap of around $1.9 billion, Mesoblast is the largest biotechnology stock on the ASX.  But high share price volatility over the past year hasn't been kind to risk-adverse investors.  Why not go with the proven powerhouses in healthcare – CSL Limited (CSL), the largest stock on the index at $23.2 billion – or Resmed Ltd (RMD) with a market cap of $5.9 billion?  Five year price charts provide the answer.  First, let’s compare MSB to CSL over five years:

While CSL’s share price has appreciated an impressive 100%, MSB’s price is up about 600%.  The picture for Resmed is virtually identical.  Here is the chart:

Mesoblast operates in one of those “next big thing” areas - the broad field of regenerative medicine.  Think of regenerative medicine as any treatment derived from naturally occurring and recurring biological processes, mimicking the human body’s ability to heal itself in certain areas.  There is more to this field than stem cell research.  Treatments derived from any form of existing cell are classed as regenerative as are treatments that manipulate human gene sequencing. 

Below are 7 stocks operating in different aspects of regenerative medicine. You can pretty well boil down this sector into the five “P’s”:

•    Professionals

•    Pipeline

•    Potential

•    Partners and

•    Payments

Professional Management is not limited to the quality of the scientific minds working on the company’s treatments.  You need management with business experience as well; and not just any business experience.  The ideal stock candidate will have managers with experience in bringing start-up companies from exploration phase to production and profit.  As strange as it may seem, a CEO who brought a junior miner from what analysts like to call a “pre-cash flow” company to a profitable one is a better fit than one with years of experience with a large cap big pharma company.

In the Pipeline are the treatments under development and a company with two or more treatments in progress is superior to one with a single treatment.  Treatments need regulatory approval before they can be commercialised. Companies with pipeline products in latter stages of the approval process from the Holy Grail of all regulatory agencies – the USFDA – are seen by many investors as the pick of the litter.

The sad but true fact is that a company with a revolutionary treatment in the works for an obscure condition (found in a small percentage of the population) will not be as attractive to investors as a company with a treatment with greater potential.  You need to know roughly now many people suffer from the condition to be treated and where in the world they are.  In addition, these stocks present investors with rebound potential as well.  In the absence of real fundamental measures, news drives the share price. 

When a top ten global pharmaceutical company like Teva Pharmaceuticals partners with a company like Mesoblast you should take note.  Companies like Teva are looking for not just sound science, but high returns.

Partners also help solve a major issue with all pre-cash flow companies – payments.  With no revenue coming in, payments must be made for the company to continue operations.  In the absence of partnership arrangements, investors need to keep a wary eye on the financing ability of a biotech or pharma or health care start up.  Low debt is of course desirable but equally important is the company’s ability to borrow or raise cash through capital raises.

With that introduction, let us take a look at seven ASX companies that may have what it takes to become a “ten-bagger”.  Here is our table:

Company

Code

Market Cap

Share Price

52 Wk % Change

Gearing

 

Total Debt

Total Cash

Allied Health Group Ltd

AHZ

$213m

$0.17

+600%

0

(FY 2013)

0

(FY 2013)

$2.45m

(FY 2013)

Regeneus Ltd

RGS

$50m

$0.37

+37%

0

(FY 013)

0

(FY 2013)

$14.2m

(FY 2013)

Living Cell Technologies Ltd

LCT

$31.4m

$0.08

+73%

0

(MRQ)

0

(MRQ)

$4.5m

(MRQ)

Patrys Ltd

PAB

$29.6m

$0.059

+84%

0

(MRQ)

0

(MRQ)

$5.2m

(MRQ)

Benitec Biopharma Ltd

BLT

$25.3m

$0.55

38%

0

(MRQ)

0

(MRQ)

$1.6m

(MRQ)

Cellmid Ltd

CDY

$25.3m

$0.04

+160%

0

(MRQ)

0

(MRQ)

$1.8m

(MRQ)

Avita Medical Ltd

AVH

$24.5m

$0.11

+32%

0

(MRQ)

0

(MRQ)

$10.6m

(MRQ)

 

At the beginning of the trading year Allied Health Group (AHZ) could be snapped up for 2 cents.  At its current price of 17 cents per share it is approaching ten bagger status.  Nervous investors might fear the stock has run too far too fast.  An analyst at CIMB Securities disagrees; with an Outperform rating, this analyst predicts a share price run should the company get European regulatory approval for its CardioCel® heart treatment.  The recommendation from CIMB came back in April 2013 and the company got the approval at the end of October; it is now selling CardioCel® in Europe.  Here's the chart:

Allied is a diversified company born of the marriage between the privately held Allied Medical, part of the Andrew Forrest empire, and bioMD (BOD).  The new company began trading as AHZ in June 2011 and has a threefold business focus, investing in new medical technologies, acquiring companies, and expanding existing marketing and distribution channels.  Attracting investor attention were the lead products from two of the company’s acquisitions – the tissue engineering company Celxcel is responsible for CardioCel® – and Coridon where work on vaccine technology based on DNA is underway.  Allied expects approval for CardioCel®, which is a tissue generated patch used for cardiac repair, from the USFDA in mid-2014.  Given the market potential of cardiac repair, FDA approval should be a major catalyst for AHZ.

Regeneus Ltd (RGS) was founded in Sydney in 2007 and went public in September 2013.  The company uses adipose-derived cell therapies to treat inflammatory and orthopaedic problems in humans and animals.  Adipose cells are basically fat storage containers.  On 30 October the company announced the availability of something called HiQCell therapy in Melbourne for the treatment of sports-related muscular/skeletal disorders.  HiQCell was developed by Regeneus and since 2011 has been used to successfully treat more than 800 arthritic joints in more than 350 people.  To date, the company’s reach is limited to Australia.  The company’s cell therapy treatments can be used in animals as well.  On 14 November 2013 the US Department of Agriculture approved another of Regeneus’s therapies, a cancer vaccine for dogs made from the dogs own tissue.  Share market participants were impressed.  Here is a price chart for RGS since it came on the ASX:

Consider this.  There are more than 40 million people in the United States alone suffering from some form of arthritis with about 26 million with osteoarthritis.  Recent clinical studies indicate HiQCell therapy appears to have a positive impact on osteoarthritis. Watch this one.

Living Cells Technologies (LCT) has two regenerative treatments in clinical development.  The first is DIABECELL®, a cell based treatment using porcine (pig) cells to treat Type 1 Diabetes.  DIABECELL® is in Phase 1 Clinical Trials in Argentina.  The second is NTCELL®, a treatment for Parkinson’s disease now in Phase 1 Trials in New Zealand.  

The Argentina Trial has had positive safety and efficacy results, as reported on 1 November, paving the way for regulatory approval by 2018 according to company management. The New Zealand Trial began on 20 September following the release of a pre-clinical study where the NTCELL® treatment had positive results in primate trials.  Predictably, the stock price jumped.  Here is the chart:

LCT has solid partnership arrangements with a private company, Otsuka Pharmaceutical Factory, Inc., based in Japan.  LCT and Otsuka formed a 50/50 joint venture company to manage the development of DIABECELL®, with Otsuka putting up $25 million for development costs.  Otsuka is underwriting the cost of the NTCELL® trial and will invest $20 million for further development, should the Phase 1 Trial in New Zealand prove successful.   

Patrys Ltd (PAB) is an Australian based company with research and development operations in Germany.  Like the first three companies in our table, the company has no debt and the stock price surged on positive news.  Here is the chart.

Patrys is developing a completely new form of cancer treatment, derived from natural human antibodies.  The company has seven products in various stages of clinical trials, with two in discovery, one in pre-clinical testing, one in Phase 1 Trials and two in Phase 2A.  

On 6 November the company announced the USFDA had awarded “orphan drug“ designation for one of Patry’s cancer treatments.  Orphan drug status is granted to promising treatments for unmet needs with incentives to assist in development.  Incentives include scientific assistance and possible funding grants as well as seven years of exclusive marketing rights should the treatment receive full FDA approval.

On 8 November the company announced it had received a US patent for another of its treatments and on 11 November Patrys announced a partnership arrangement for a clinical study with Onyx Pharmaceuticals, a subsidiary of US based Amgen (NASDAQ:AMGN), one of the world’s leading biotechnology companies.

Benitec Biopharma Ltd (BLT) has a moderately complex organisational structure with multiple subsidiaries, but its focus is potentially revolutionary.  Researchers are finding more evidence many disease conditions have a genetic component and Benitec is working on “gene-silencing” therapies.  Basically, we are talking about interfering with what the “bad” genes do.  Its ddRNAi technology is being used by BLT alone and in partnership to develop treatments for both chronic and life-threatening conditions such as hepatitis C and B, muscular dystrophy, macular degeneration, lung cancer, and as a treatment for cancer related pain.  BLT has licensed its technology to other companies that are working on conditions like Huntington’s disease and HIV/AIDS.   The company was issued an ASX “speeding ticket” following an abrupt upturn in the stock price.  Bennitec could cite no reason other than a gradual upward rise following a management roadshow presentation in September 2013.  Here is a one year chart for BLT:

Although Cellmid Ltd (CDY) has seen its share price appreciate 160% year over year, the ride has been bumpy, to say the least.  Here is the chart, which serves as a reminder of the inherent risk in these highly volatile companies:

Cellmid’s claim to fame is a broad based array of intellectual property rights for diagnostic testing based on midkine analysis.  Midkine is basically a protein that promotes cellular health.  Elevated levels have been shown to be indicative of cancerous conditions.  Cellmid’s first product was a test to measure midkine levels.  The company licenses its technology, which has been extended to include diagnostic tests and therapies for heart attacks, and a variety of inflammatory diseases.  

The company also has a subsidiary involved in developing hair loss treatments and acquired another hair loss treatment company, Japan’s Advangen in a deal seen to enhance Cellmid’s revenue generation substantially.  

Avita Medical Ltd (AVH) is an ASX listed company with offices in the UK.  The company also trades in the US on the Over the Counter (OTCQX: AVMXY) market.  The company’s patented regenerative technology uses a patient’s own skin cells to treat an array of skin defects, scars, and wounds. The principal offering is ReCell® Spray on Skin, used to treat burns and in a variety of reconstructive, plastic, and cosmetic procedures.  The product is approved for sale in Europe, Australia, and China, but not in the United States.  However, a Phase 3 FDA trial is underway and that alone is reason to consider this stock.  If that is not reason enough, on 17 June 2013 the highly respected US based small cap research firm Zack’s Investment Research initiated coverage of AVH with a Buy and a US$4.00 price target.  Zack’s called the market cap at that time of $32.5 million “far too low and highly attractive for a long-term investment.”   

Click on the links below to read other articles from this week's newsletter

1. Don't bet the house on big banks at current valuations: Small investors should look closer at...

2. 7 biotech stocks with bounding share prices: Some biotech stocks have been running hard...

3. 18 Share Tips - 18 November 2013: 18 Share Tips to BUY, SELL & HOLD from...

4. Introduction To Momentum Trading: Momentum traders may hold their positions for a...

5. Can Investors Trust The P/E Ratio?: Price/earnings ratios are used to assess the...

6. Concentrated investments are bad bets: Here we examine the risk of a single share...

7. The sharing economy spooking big business: Collaborative consumption initiatives tap into...

8. Top 10 shorted stocks: Each day we feature the top 10 shorted stocks...

9. Stocks on a roll: ASX rolling 52-week highs for the previous...

10. Stocks on the slide: ASX rolling 52-week lows for the previous...

 

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