NDF Research

Interesting Valuation difference as reported by Stuart Roberts


source: Stuart Roberts for The Life Sciences Report  (8/10/16)
Concerned about investing in the life sciences in the United States, where markets have slumped in 2016 and the presidential election furthers volatility? NDF Research Founder Stuart Roberts makes an argument for taking a look at investment opportunities Down Under.

Imagine you are a successful bio-entrepreneur in the San Francisco Bay Area or Cambridge, Massachusetts, and are concerned about who is going to be America's next President. You are so concerned, in fact, that you plan to leave America and move to another country. But it has to be a free country with an active and growing life sciences sector and a local capital market that can back it.
I believe there are only around sixteen other countries you could move to, and near the top of the list is Australia. Indeed, I argue that, after the U.S. and the UK, Australia is the third most powerful life sciences country in the world, as measured by the quality of the life sciences ecosystem.
I have been covering biotech and medical device companies listed on the Australian Securities Exchange (ASX) since 2002, and I have never been more bullish on the prospects of the sector. In fact, I am so bullish that this year I started a new independent equity research firm, NDF Research, to cover it.
"I argue that, after the U.S. and the UK, Australia is the third most powerful life sciences country in the world."
Why am I so bullish about ASX-listed life science companies? For one thing, many companies have made progress with the clinical or commercial development of their products over the last twelve months. For another, Australian investors have finally started to recognize that the life sciences are an attractive investment proposition.
You could tell that investor interest in this sector was rising at the recent Bioshares meeting in Queenstown, New Zealand, which is the preeminent life sciences investor conference for our region (I call it "JP Morgan South"). Attendance this year was at a record high, so the venue had to be changed to accommodate everybody. I noted a number of institutional investors who hadn't come to Queenstown in the past.
Another indicator that investor interest is rising is the large number of new listings. In any one year there are around 100 emerging drug and medical device companies traded on ASX, and the last twelve months have seen around 10 new listings. The new kids on the block include drug reprofilers such as Dimerix Ltd. (DXB:ASX), Paradigm Biopharma Ltd. (PAR:ASX), and Race Oncology Ltd. (RAC:ASX); digital health companies such as Alcidion Group Ltd. (ALC:ASX) andVolpara Health Technologies Ltd. (VHT:ASX); and natural product companies such as AusCann Group Holdings Ltd. (TWH:ASX) andBotanix Pharmaceuticals Ltd. (BOT:ASX).
Why the strong investor interest? One is a negative motivation: The resources sector remains more or less out of favor. Like Canada, Australia's capital market has a traditional affinity for mining and oil ventures. When commodity prices are down, investors go looking for other sectors to make money. Australia's life science sector benefits from this.
There is, however, a positive motivation: So many companies that have been listed for a while have enjoyed strong progress over the last twelve months.
Take just four notable examples: ResApp Health Ltd. (RAP:ASX) had a great 2015/2016 on the back of clinical data showing that its smartphone-only diagnostic could detect various respiratory disorders with a high and increasing level of sensitivity and specificity just by recording the patient's cough.Viralytics Ltd. (VLA:ASX) showed its oncolytic virus was a highly effective new immuno-oncology agent across a range of cancers. Polynovo Ltd. (PNV:ASX)gained FDA approval for BTM, a biodegradable polymer indicated for reconstructive and surgical wounds. And Opthea Ltd. (OPT:ASX) showed, in early clinical work, that its VEGF C and D "trap" seemed to be an effective new therapy for wet AMD (age-related macular degeneration).
The trouble with Australia and investment in the life sciences is that, traditionally, investors here are good at providing relatively small amounts of capital for Phase 1 and 2 studies, but then larger licks of capital are required for the later-stage work. In recent years, however, ASX-listed companies have gotten much better at attracting the interest of U.S. investors for large transactions. In August 2015 the gene silencing company Benitec Biopharma Ltd. (BNTC:NASDAQ; BLT:ASX) raised US$14 million (US$14M) in a NASDAQ IPO. And in late 2015 the Melbourne-based stem cell company Mesoblast Ltd. (MESO:NASDAQ; MSB:ASX) made it onto NASDAQ after a US$68M raise.
"One of the attractions of the ASX is that you can often get attractive companies at a fraction of the value comparable companies would trade at on NASDAQ."
The brief bear market that hit the U.S. life sciences sector in early 2016 had people somewhat concerned about the knock-on-effect in Australia, and those concerns weren't completely misplaced. Mesoblast, for example, has been badly impacted, even though it's arguably one of the world's leading regenerative medicine companies. It started 2016 on the ASX at AU$1.86 per share and has since been as low as AU$1.02. However, the big issue for Mesoblast was that in June, Teva Pharmaceutical Industries Ltd. (TEVA:NYSE) handed back a key stem cell program in cardiovascular disease that had earlier been licensed to Cephalon. I actually think regaining the program is good news for Mesoblast, as the company can potentially relicense it to a more receptive partner. However, the market has so far declined to agree with me.
But with regard to the early 2016 sell-off, Australia had one advantage over NASDAQ: Its life sciences sector hadn't become as overheated as NASDAQ in 2015. Indeed, one of the attractions of the ASX as a life sciences investment market is that you can often get attractive companies at a fraction of the value comparable companies would trade at on NASDAQ or elsewhere.
I think this gap will close over time as Australia matures, but for now I argue that there's some great valuation gaps to take advantage of. Say, for example, you like Axovant Sciences (AXON:NYSE) at a market cap of ~US$1.6 bilion. Perhaps you should take a look at Actinogen Ltd. (ACW:ASX), at a mere AU$40M. The Sydney-based Actinogen's lead molecule is Xanamem, a cortisol blocker being studied for the treatment of Alzheimer's disease. There's a good body of data showing that lowering cortisol helps to reduce dementia, and the early data from Actinogen looks promising.
How can investors learn more about this relatively fresh life sciences marketplace? There's a lot of useful information on my website, ndfresearch.com. I would also recommend making a trip to Australia to check it out. It is not only a life sciences power house, it's a very beautiful and friendly country as well. We look forward to saying "G'Day Mate," to you when we get Down Under.
Stuart Roberts, founder and senior analyst of NDF Research, has been involved in the healthcare and biotechnology sector since early 2002, initially as a sellside analyst doing equities research in the sector in Australia for participant member firms of the Australian Securities Exchange (ASX), then, from the start of 2015, as an executive inside ASX-listed biotech companies. He founded NDF Research after he decided to move back to equities research in mid-2016..................................   Vin