sti opportunities as big name drugs off patent

Company presentations have often referred to the opportunities coming up for STI as big name drugs come off patent. This extract illustrates how the market is heating up and for STI shareholders, the latest industry sector news making deals.....
An extract of a section of an article in the Australian online....

"Driving the trend is the desire of global drug companies to refresh their product repertoire as a slew of big-name drugs go off-patent in the next few years.

For instance, Pfizer is about to lose the patent on two popular drugs: Viagra (erectile dysfunction) and Lipitor (cholesterol).

When the companies lose patent protection they lose revenues to generic alternatives and the only way to shorten the tortuous lead time for new drugs is to buy a company or two.

"They are on a burning platform and they need to move rapidly," AusBiotech chief executive Anna Lavelle says.

According to Lavelle, big pharma companies have discovered their own R&D efforts have not yielded the next blockbuster drugs.

"So they're looking around for clever stuff from biotechs globally," she says.

"Australian biotechs are seen as having sound intellectual property and are seen as sound and capital efficient."

Cellestis co-founder Tony Radford, who will reap $40m if the scheme of arrangement is approved, says the time has come for this technology to come to fruition.

RBS Morgan biotech analyst Scott Power describes the "patent cliff" as a global trend: Cephalon was at least partly motivated by the fact its blockbuster drowsiness drug Provigil goes off patent next year.

Cephalon, in turn, is under a $5.5bn hostile takeover attack from Canadian drug house Valeant Pharmaceuticals.

"They are snapping up appropriate companies globally," Power says. "It just happens a band of Australian companies have matured nicely over the past couple of years."

Lavelle says there are other reasons why the eyebrow-raising deals have followed in quick succession.

"A cohort of maturing companies have done extremely well and are becoming very attractive," she says.

Lavelle says the time frame is consistent with the usual maturation period for drug developers.

The winning biotechs share a similar time line because their genesis was in the same era of generous government grants for the sector.

"It's perfectly predictable," she says. "We are starting to reap the fruits of these early investments."

Behind the good news about lucrative deals, there is some disquiet that founders of innovative technology are selling out too cheaply for short-term gains.

The Cellestis deal faces an early backlash from a group of investors claiming to account for about 30 per cent of the register.

Blake says there will always be a conflict between venture capitalists, who want to "flip" an asset in the short term, and companies that want to develop their drugs to a more advanced stage and perhaps even retain marketing control.

"It takes longer but at the end of the day they are sold for a better return," he says.

"There is a conflict between being a business and getting rid of it at a seemingly good price but well below the potential of the business."

Power is more sanguine.

"It's a global industry," he says. "It's appropriate that these things get into the hands of larger players. For example, ChemGenex has taken it as far as makes perfect sense."

Lavelle says there were objections when Cephalon paid $318m for Arana Therapeutics in 2009.

"But Cephalon paid a 70 per cent premium at the height of the GFC," she says.

Lavelle says she has heard few complaints about Acrux's $100m special payout to patient investors. "I'm just delighted to see a dividend paid," she says.

Blake says multinational companies usually prefer to buy cash-generating businesses, but the bar is being lowered in terms of development stages of targeted companies.

Mesoblast's technologies, aimed at treating bone and cartilage disorders, eye disease and diabetes, are far from proven, let alone commercialised.

"It was a huge surprise to see them secure a licensing deal in addition to Mesoblast making a 19.9 per cent investment," Blake says.

He says buyers are more open to seasonal products such as vaccines and antivirals, which might depend on a pandemic for decent sales.

In the case of Biota, there is little dissent about the worth of the deal: the company gets funding for getting Laninamivir to market, without having to cede a cent of equity or any ownership or manufacturing rights over the drug.

Blake says the deal is "absolute recognition about building capability in the face of many detractors who say it's not worth it".

In short, the biotech is hot property, but it is far from a case of a rising tide lifting all boats.

As with our two-speed "miners versus the rest" economy, there is a danger many of the 100 or so listed biotechs will be left behind.

For every biotech that taps the mother lode, there are a dozen early-stage stragglers.

According to newsletter Bioshares, 47 biotechs have market capitalisation of less than $20m and four are valued at $1m to $2m.

Its quarterly survival index lists 29 companies with insufficient cash to last more than 12 months at current burn rates.

Lavelle is concerned about the minnows that don't enjoy the same government support.

"Early funding has been quite difficult to get since the GFC in 2008" she says. "It really was a perfect storm for them and some have never recovered."

In an unusual approach, AusBiotech organised a presentation by 18 companies to a Perth gathering of 100 or so mining investors.

"They have a similar risk appetite and might want to diversify their portfolio," Lavelle says.

Given that success breeds success, she hopes recent deals will bring renewed interest from "quarters not usually motivated about life sciences investment".

Lavelle expects big pharmas to become more creative, not just buying licences on a royalty arrangement, but seeking broader equity or partnership arrangements."