Better Value for Australian Biotech Investors in 2004
Melbourne, Australia
Wednesday April 28 2004 6.00PM AET

Over the last 12 months there have been 15 listings of biotech and medical device companies on the ASX. In this year alone, four biotech companies have listed and there are now two clear trends emerging. New biotech stocks are offering investors better value for money and microcap stocks (with a capitalisation less than $10 million) are performing outstandingly well.

In 2000/2001, at the height of the genomics boom, there was a flood of biotech stocks that came onto the market at valuations that were certainly more in favour of the listing company. The table below lists eight early stage drug discovery companies that came onto the market over this period. The pre-money valuations of these companies varied from the top end at $53 million for Starpharma, $48 million for Pi2 and $43 million for Analytica, to $10 million for Epitan, $14 million for Peplin Biotech and $17 million for Prana Biotechnology at the bottom end. Of interest is that the top five companies are now trading at a discount to their listing price (Pi2 is no longer trading) and the bottom three companies are all trading at a premium.

The valuation rules have certainly moved back in favour towards investors in 2004. Companies that are looking to list now at a price of $20 million need to have a very convincing story for underwriting brokers and investors. And valuations of $50 million or more are a very difficult sell and commercialisation paths need to be very well established, over and above just blue sky potential.

Alchemia which listed at the end of 2003 at a pre-money valuation (valuation before listing) of $49 million traded only briefly above its issue price and is now trading at a 20% discount. The company has the potential to become one of the country’s biggest biotech success stories and has already secured commercial manufacturing and marketing contracts with some serious international players. However its lead product is still four years away from market and at this stage it has failed to excite investors.

Pharmaxis which listed in November last year at a pre-money valuation of $24 million and had $7 million in cash has just managed to tread water although fell to 32% below its issue price at one stage. The company has two products in later stage clinical trials and the hallmarks for a solid biotech company. However there are fewer free rides for the larger biotechs which indicates the market is becoming more efficient, less volatile, and there is better long term value for investors.

Pharmaxis and Alchemia have also experienced the problem of over-satisfying investor demand for their stock in listing. The companies raised $25 million and $21 million respectively on listing and there has been a lack of post-listing demand for their shares. On the other side, microcap stocks that have come onto the market at an early stage of their commercial development but at very low valuations have generally performed exceptionally well. These companies have left considerable upside on the table for retail investors who have been quick to recognise the value and support the stock. (See also John Ballard’s feature in last week’s edition).

Four microcap stocks have listed in the last year and to date have returned investors an average 70% gain. Select Vaccines listed at a pre-money valuation of only $2 million and after soaring as high as 91 cents (350% gain) it now trades at a 90% premium to its issue price. Cryptome Pharmaceuticals continues to trade at a 20% discount to its listing price, although its business model has always been somewhat vague. It listed at a pre-money price of $6 million. Most recently, Tissue Therapies listed at a price of $3.2 million and is currently trading at a 70% premium. And Biosignal listed at $6.1 million and its investors have enjoyed a 140% gain in the last two weeks since listing.

Early stage/lower priced biotechs are currently offering investors good value on the whole and this is being recognised by the market. This warm reception from investors is also changing the investment dynamics for unlisted entities. Companies such as Tissue Therapies and Biosignal are bypassing the traditional venture capital investment route because the funding terms for listed companies are more favourable and their early stage commercialisation models are being accepted by retail and professional investment funds.

On the radar
We expect up to 10 more biotech listings in 2004. These may include PacMab, Acrux, Proteome Systems, GenePharm, Xenome and a microcap company Living Cell Technologies (LCT).