Pep talkCRITERIONTim Boreham February 09, 2007 Peptech (PTD)...

Pep talk
CRITERION
Tim Boreham
February 09, 2007

Peptech (PTD) $1.76
DO the tentacles of the private equiteers know no bounds? An early-stage biotech seems an odd target for these predators, especially one whose main value consists of a pile of cash.
In a convenient prelude to its AGM yesterday, Peptech disclosed it was in early stage discussions with a number of private equity firms on "possible acquisition and/or strategic investment opportunities".
We say convenient because the board of the serial disappointer was in for a right old bollocking over a proposed executive incentive share scheme which looked a tad on the undemanding side.

The board pulled the proposal at the last moment, arguing the private equity advance - which pushed the share price up 23c, or 15 per cent - moved the goalposts.

Spared the expected backlash, chipper chairman Mel Bridges dubbed 2006 the "most successful" year to date for the patchy biotech.

Many holders, tired of Peptech's peppy promises, would disagree, given that the company has been around since the First Fleet (at least that's how it feels) and the share price has gone nowhere.

Peptech's existing assets are $177 million from the sale of its 31percent of British outfit Domantis, and a royalty stream worth up to $130 million. Johnson & Johnson, Abbott, and Centocor agreed to pay the royalties for using certain Peptech compounds in their drugs, but not before trying to squirm out of paying anything.

To its credit, Peptech reaped a $136 million profit from the Domantis sale, so it's hugs all round for benevolent purchaser GlaxoSmithKline.

While Peptech has changed its spots a few times over the years, its core interest is in autoimmunology and oncology; peptide based drugs to treat inflammations and cancers.

Peptech's greatest white hope is its anti-inflammatory compound PN0621, hailed as a treatment for rheumatoid arthritis.

First stage human clinical trials are due in the second quarter of 2007. Stage two and three trials and regulatory submissions then follow, but it takes years (and wads of cash) to get to market.

All up, Peptech plans to spend $19 million on R&D this year, rising to $38 million in 2008 and $51 million in 2009.

Talk to investors about Peptech and a disparate view emerges. According to ABN AMRO Morgans, the cash and royalties mean Peptech is "both an attractive target and also in a position to make an investment".

Australian Shareholders Association rep Stephen Matthews says Peptech for years talked up the potential of its dog contraceptive, Suprelorin 12. But after three years on the local market, sales were a mere $1million in 2006.

"All you are buying with Peptech is cash and blue sky," Matthews says. "Every year they talk it up and ... nothing follows through."

A specialist fundie says: "The market's view of management is not particularly favourable.

"Institutional managers don't believe they are capable of growing the business." Indeed, management admits that attempts to woo instos to the register have come to naught.

Given biotechs are so hard to value, we're grateful for management's own assessment of Peptech's worth: $1.77 a share, or $291 million.

This includes $186 million of cash, $74 million of royalty and licence revenues, $16 million yet to be received from the Domantis sale and $15 million for the animal health business. There's no attempt to value any blue sky from human drug development.

We rate Peptech a HOLD - and certainly wouldn't be buying. The private equity stuff is opaque and management has a record of talking big and delivering little, but something's afoot. It's worth remembering CSL last year took out antibody specialist Zenyth (formerly Amrad) for $108 million. This was at a massive 79 per cent premium to Zenyth's recent share price, but valuable real estate was included in the deal.

http://www.theaustralian.news.com.au/story/0,20867,21195185-23634,00.html