Time to bag biotech bargains

One key theme over recent years has been that the lumbering leviathans of the drug development sector – known commonly as Big Pharma – have, by their sheer size, tended to hamper their own internal innovation. Even minor decisions can take months to pass through their many management channels, to say nothing of the time frames involved in green-lighting expensive development processes.

Swine flu causes a stir
Consequently, most have taken the opportunity to either take over drug developers with promising pipelines outright, or buy choice drugs (or fund their development) from the smaller players. These days, the swine flu pandemic is causing not only a panic, but also a clamour for vaccines that is providing a powerful shot in the arm for Big Pharma such as GlaxoSmithKline and Roche in the form of massive government orders.

The success of giants such as Glaxo in particular could spell good news for smaller biotechnology companies, argues sector sage and KBC Peel Hunt analyst Paul Cuddon, as it should encourage the large players to ‘take more risks on investing in biotech’.

Novartis is one sizeable player actively striking deals, and it is partially for this reason that Cuddon is a fan of Vectura and Antisoma, both valued at around £200 million on the Full List. Both have ample cash and drugs nearing commercialisation, and their deals with the Basel-based behemoth will not only ensure the drugs in question are funded through to fruition but also provide a powerful validation of their work. Shares in both have dipped below their highs of the past four years and offer potential to recover that lost ground and strike out for new peaks.

Poised for flight?
As drugs first prove their safety and efficacy to regulatory bodies in Phase I and II clinical trials, before moving to the larger tribulations of Phase III, market anticipation can reach fever pitch, driving share prices higher along the way as milestones are reached. However, prices habitually fall immediately after results are released – even if successful – as speculators take profits. Both Vectura and Antisoma could be classed as being in the ‘anticipatory’ stage, with at least one Phase III drug in the pipeline apiece.

Likewise, cannabis-derived drug specialist GW Pharmaceuticals is due to complete European Phase III tests this year for its long-awaited multiple sclerosis treatment, Sativex. After many tortuous years of development, this much-anticipated product should be able to launch in certain territories late this year or early next, with £10 million due to GW then from UK licence holder Bayer and other milestone payments from other partners to follow too. At 79p, the shares of GW, which recently received £8 million from Spanish partner Laboratorios Almirall, have blazed higher from last year’s 26.5p low and value the company on AIM at just under £100 million.

Another worth watching is Ark Therapeutics, focused on gene-based medicine but with a small revenue-producing wound care division, which has two products in Phase III stages. While kidney failure drug Trinam is just beginning US trials, Cerepro, a treatment for a fatal form of brain tumour, is expected to receive a decision from the European regulators in the second half of this year and, according to independent broker Nomura, this is ‘likely to be the major inflection point for the share price’. The stock, which topped 150p two years ago, has oscillated around 50p in the past year and could reward a speculation.

Minnows set to fly
Stem cell specialist EpiStem recently enjoyed just such a major ‘inflection’ as its shares soared from 152p to 350p in less than a year. This followed a cooperation deal with none other than Novartis, under which the Swiss colossus will fund all development work on EpiStem’s discovery pipeline over the next couple of years, paying up to a further $45 million on top for each new drug the partnership takes through clinical trials.

The pipeline at EpiStem, which also has three profitable operational businesses based on this same area of expertise, is much more early-stage than aforementioned peers, but as its share price performance has shown, this has proved no impediment to investors looking to make a profit.

One of those who have profited is chairman David Evans, even though the serial company backer’s name is usually associated with medical diagnostics rather than drug development. He believes another, even smaller, one of his chairmanships has the potential to deliver similar gains. This is PLUS-quoted minnow Scancell, where he has shown his faith by taking the chair and backing its £1.6 million flotation with his own money in December.

Scancell’s novel approach to treating cancer, via vaccination with engineered antibodies, was discovered by accident after a terminal cancer patient at a Nottingham clinic surprisingly survived, but its treatment still has to clear all the regulatory hurdles to make it to market. Initial trials of the ‘ImmunoBody’ process on melanoma are due to begin early next year and, with costs kept ultra-low and further cash milestones expected, Evans is more than hopeful of positive test results and sees the potential for ‘a five or ten times’ leap in the 39.5p shares.

Massive markets
Futura Medical fans have looked to Pfizer’s successful journey on the back of its famous blue pill as an illustration of the huge global potential for its own product for a similar market. In partnership with Durex condom-maker SSL, Futura will trust that its CSD 500 erection-maintaining condom can grab some of this considerable demand, though investors have felt less stimulated by prospects lately, with the shares having fallen from a 45.5p year high to 24p.

Likewise, Plethora Solutions has just published strong Phase III results for its treatment for premature ejaculation. However, its shares, up from November’s 14.5p low to 33p, fell back to 26p on the news, perplexing house broker FinnCap’s analyst Keith Redpath. ‘How a company with an asset with potential sales in excess of $1 billion can have a market cap of £9 million remains a mystery,’ he laments, though funding issues are a likely concern.

Perhaps because of its avant-garde use of computer modelling to work out which chemical compounds should successfully treat certain conditions, a process that has already seen two potential drugs pass Phase II trials in double-quick time, Newcastle-based e-Therapeutics has also seemingly suffered from incredulity rather than share price ‘inflections’. However, that could change, with CEO Professor Malcolm Young reporting that Phase III trials are imminent for products for asthma and depression – both markets with ‘blockbuster’ potential – that will both be marketed in India by a local partner funding the trials. If it is Western validation that the market seeks, then Young’s indication that such discussions are ‘under way’ with various parties could deliver the necessary kick.

Reduced risks, reduced rewards
While securing a sizeable partner in the drug development sector can reduce risk for the smaller players and guarantees a level of funding, it also means that much, if not most, of the profits of any successful drug making it to market will not flow directly back to the company that developed it in the first place.

It is for this very reason – or so certain small but sanguine developers argue – that many choose to take their drug all the way through to commercialisation under their own steam.

However, there is another reason why companies might choose to eschew a partner and go solo on drug development – no-one else agrees with their hype. As Cuddon explains, ‘When a company goes it alone, it can mean that there was absolutely no interest from Big Pharma whatsoever. If a company is looking to take its drug all the way through Phase III on its own, it is therefore difficult to believe there is really any potential in it.’

One example Cuddon cites is Alizyme, which has not secured a money-spinning deal with a larger partner for any of its four Phase III drugs for obesity and bowel disease. With cash running out, its shares have suffered, crumbling from above £1 to below 5p since 2007 and are, appropriately, best left alone.

Other companies in the sector have simply failed to justify their initial promise, and have seen their once-hyped drugs fall at certain key clinical hurdles. For example, Minster Pharmaceuticals’ migraine-prevention drug Tonabersat failed to prevent migraines (though the Essex-based company has a schizophrenia drug in reserve); Neuropharm’s potential treatment for autism proved no more effective than a placebo; and Cambridgeshire-based Phytopharm’s shares tumbled after its hunger-suppressing product failed to meet the safety and efficacy standards of its commercial partner Unilever (though its Cogane treatment for Huntington’s disease could inspire a big leap in the share price when results emerge late this year).