Recommendation: Speculative Buy Price: $0.29 Sector Drug...

Recommendation: Speculative Buy Price: $0.29

Sector
Drug Developer
Market Cap
$117.7m
52 Week High/Low
$0.84 - $0.28

2 Year Price Chart



Note: Marker indicates price of $0.29 at publication date.
Risk
Moat Rating: None
Business Risk: High Pricing Risk: High



Avge Annual Growth Rates 10yr 5yr 1yr
Earnings per Share -- -- 46.8%
Dividends per Share -- -- --





Nothing amiss with the underlying story


We consider AVX outstanding value around current levels. How can this be? What are other investors missing? There are a number of issues. The prime driver of the weakness is the severe bear market in non-resource stocks and heightened risk aversion. AVX stock caught up in the Opes Capital debacle that lenders to Opes are selling with little regard to price, is another factor. The volume of stock involved is unclear, as is whether the selling is complete.


The expectation of potential dilution of current shareholders by another equity issue to complete funding of AVX's lead drug candidate apricitabine (ATC's) Phase III trial and to fund the company's earlier stage development programs is another negative - and is magnified by the falling share price. We expect a major pharmaceutical partner to meet the $30m or so funding deficiency. This may not occur via an equity issue but in that case the licensing deal would reflect the assistance.


Meanwhile the company has made an interesting non-executive director appointment in Nathan Drona. According to AVX "he is an experienced international investment banker in the life sciences industry and has successfully advised numerous companies in the US, Europe, and Australia in mergers and acquisitions strategy. Most recently, he was a managing director for Challiss, an independent M&A advisory firm based in New York."


This could turn out to be a valuable appointment and attests to the promise of AVX's lead HIV program. Drona has the potential to assist with a partnering deal, to advise should a takeover bid for AVX eventuate, and to engender additional investor interest.


The 1800-patient ATC Phase 3 trials will begin in the near future, while AVX hopes to have the drug approved in the US in 2010.


We have reduced our valuation and recommendation price trigger levels by around 10% to reflect the increased cost of capital, but have no hesitation recommending the stock as a Speculative Buy. We remind investors that all 30 or so HIV drug candidates that began Phase 2 trials reached market and ATC has successfully completed Phase 2 trials. It is virtual certainty ATC will reach the market given its strong Phase 2 results. What is less certain is the revenue it will ultimately generate. Its efficacy, safety and resistance profiles and the sales of comparable drugs suggest the potential for annual sales of $400m+, however this remains to be demonstrated.