Biota (Nasdaq: BOTA) – The long road from Melbourne to Alpharetta
“An ignorant person is one who doesn't know what you have just found out” - Will Rogers (1879-1935), US humourist and showman.
Last year the board of one of Australia’s oldest drug development companies, Biota Holdings, got tired of what it perceived to be a lack of appreciation on the part of local investors and made the decision to delist the company from the Australian Stock Exchange (ASX). Biota now trades on Nasdaq using the ticker BOTA, having gotten there using the shell of a company called Nabi, whose nicotine addiction vaccine had failed in mid-2011. The day the Biota/Nabi merger was announced, 23 April 2012, Biota closed on ASX at A$0.86 per share, which translated to US$0.888. When the new Biota Pharmaceuticals started trading on Nasdaq on 9 November 2012 the stock ended the session at US$4.12, valuing the old Biota shares at US$0.515 (each old Biota share was worth 0.12485 of the new shares in the merger). Last Friday, just under a year after the transition, Biota closed at US$3.75, which would be US$0.4686 in the old money. So the old Biota shareholders from the company’s ASX days are now down 47% on where they started. By contrast the Nasdaq Biotechnology Index has increased 69% over the same period.
These facts prove just one thing: If you’re a non-US biotech company, simply moving your primary listing to the US doesn’t automatically reprice your stock, even if the transition takes place during a wonderful bull market for biotech stocks.
What the current share price of Biota doesn’t prove is whether or not Biota was overvalued or undervalued when it was on ASX, or whether it is overvalued or undervalued on Nasdaq now, at a market capitalisation of US$107m, of which US$61m is cash as at 30 September. The wise biotech investor judges these things, in the first instance, on what the company has got and who is running it, leaving where exactly you can buy or sell the stock as a secondary consideration. What you get with Biota at US$46m on Nasdaq today (ie US$107m minus US$61m) is two things I consider interesting. The first is a next-generation influenza drug called Laninamivir octanoate. The second is a key part of the leadership team which help build Inhibitex into a US$2.5bn company.
Historically people have known Biota as the Melbourne-based company that gave the world the influenza drug Relenza. Back in the 1980s three Australian scientists - Peter Colman, Mark von Itzstein and the late Graeme Laver (1929-2008) – collaborated on an influenza drug approach that involved small molecule inhibitors to influenza’s neuraminidase protein. Biota, which was formed around this project, went public on the ASX in late 1985 and by 1990 was able to license to Glaxo what ultimately became the neuraminidase inhibitor drug Relenza. GSK gained FDA approval for Relenza in 1999, making Biota the first publicly-traded Australian biotech company to go from start-up to major-league approved prescription drug. Biota has more or less basked in the glory of this achievement ever since. Relenza, however, proved to be a curse rather than a blessing for Biota shareholders. The drug struggled commercially against Roche’s Tamiflu because the latter was orally available and Relenza was inhaled, and after a while GSK stopped pushing it. Biota’s response, in 2004, was to sue GSK for breach of contract, claiming that the British company hadn’t used its best endeavours in the marketing effort. Alas, the lawsuit approach to shareholder value creation didn’t work out well for Biota. When the matter finally settled in mid-2008 through mediation, Biota only got A$20m from GSK and had to pay its own litigation costs. Media reports subsequently suggested that the litigation had cost Biota A$35-40m, and that Biota board had previously knocked back an offer of A$75m plus costs (click here). Biota stock was down to around A$0.75 by then, a far cry from the ~A$7.00 of mid-1999. GSK has sold a bit of Relenza here and there in recent years, whenever pandemics start to panic folks, but the sales figures have been nothing to write home about, and the drug starts to go off patent from next year.
Biota, however, has had another round of luck come its way since 2008 that points to a potential second coming for the stock. By 2008 the company had been working for several years on an inhaled long-acting neuraminidase inhibitor (LANI) for influenza infection that would cut dosing to once-weekly or less, versus the daily or more frequent dosing regimen required of Relenza. In 2003 Biota had reached agreement with Japan’s Daiichi Sankyo, now the world’s 18th largest pharma company, for the two companies to merge their respective LANI programmes, leaving most of the upside outside Japan to the Australian company. Shortly after the end of the GSK lawsuit Biota was able to announce the results of a Daiichi double-blinded Phase II of the LANI compound, then called CS-8958. The drug was so good that a single inhaled dose of CS-8958 was statistically indistinguishable from 75mg of Tamiflu twice daily for five days in terms of fever and symptom resolution. Phase III trials replicated this outcome in 2009 and CS-8958, now called Laninamivir, was able to gain Japanese approval in 2010 (click here for published data on clinical effectiveness). Biota gets a 4% royalty on sales of the drug in Japan. That, country however, isn’t where the big money is, which is the US, and here the news has been fantastic. Uncle Sam, always on the lookout for new drugs to protect his citizens given that influenza can occasionally get very nasty, liked what he saw with Daiichi’s work, and in 2011 BARDA – America’s Biomedical Advanced Research and Development Authority –awarded Biota a US$231m contract to pay for Laninamivir’s US development. This funding enabled Biota to activate its US IND, and a 636-patient Phase II study of Laninamivir, called ‘IGLOO’, started in June 2013. This study will compare 40 and 80 mg of inhaled Laninamivir with placebo. As I understand it, the reason Biota had to go back to Phase II with Laninamivir is that the Japanese studies didn’t measure the 80 mg dose and didn’t adequately track placebo compared to what the FDA wants to see. That said, the study will only need one flu season to complete, with top-line data expected in mid-2014.
So what you get for US$46m, in buying Biota today, is Laninamivir at Phase II ahead of Phase III in 2014/2015, with Japanese data already showing the drug works, a reasonably short wait before confirmatory data comes through, and the potential for better patient outcomes than with previous trials thanks to the 80 mg dose cohort. Given that Roche enjoyed ~US$600 in global net sales from Tamiflu in 2012, it’s reasonable to say that an influenza drug as good as Laninamivir represents a potentially lucrative product. Remember, three to five million people get severe influenza every year and 250,000-500,000 people will die from their infections, and there’s been the growing problem in recent years of Tamiflu resistance. Throw in the scare factor of the influenza pandemics that come around every now and then, and Biota stock has potential to re-rate every time something goes wrong with the vaccine supply or when Google Flu Trends shows the flu season to be worse than usual. Probably the main downside here is that Laninamivir’s main competition, by the time it gets to the market around 2016, will be orally available generic Tamiflu for those whose infection isn’t resistant.
After Laninamivir Biota’s pipeline gets a bit thin. Boehringer Ingelheim once had an option over an earlier version of Biota’s RSV drug programme, and Cubist’s purchase of Trius in August for US$818m in August 2013 points to the upside in an anti-bacterials programme, but both programmes are pre-clinical. The only Biota compound with a clinical record other than Laninamivir is Vapendavir, a drug that treats human rhinovirus infection and has successfully completed Phase IIb. A lot of folks have been deprecatory about Vapendavir over the years, citing that old Maxwell Smart joke about there being no cure for the common cold. Those folks miss the point. There are a number of clinical instances in which getting a cold is a really bad thing and Biota tried out Vapendavir in asthma patients where a cold can cause dangerous asthma exacerbations. In the 300-patient Phase IIb, which finished in March last year, Vapendavir cut cold symptoms in mild-to-moderate asthmatics with statistical significance. Given the prevalence of asthma these days (7-10% of all US adults) and the fact that the exacerbation event count is still in the millions in America, Vapendavir could prove a useful new tool that AstraZeneca and GSK would value as they struggle to maintain respiratory franchises afflicted by patent expiries. That said, Biota doesn’t intend to spend any more money on Vapendavir, and is looking for other licensing or collaboration parties.
So one doesn’t buy Biota for the pipeline. US$46m does, however, get you what I call the Inhibitex halo effect even if you don’t rate Laninamivir. Inhibitex, you’ll recall, was the company from Alpharetta, Ga., in the suburbs of Atlanta, which was a big success story from the Hepatitis C boom last year. The company had developed IDX-189, an NS5B polymerase inhibitor of Hepatitis C. When it became apparent in 2011 that a new generation of effective and orally available Hep C drugs had arrived, Gilead bought Pharmasset for an enormous US$11bn and Bristol-Myers Squibb, deciding it needed to be in the game as well, bought Inhibitex for US$2.5bn. In the end the deal wasn’t so good for BMS, which had to shut down development of IDX-189 in August 2012 due to a patient in the Phase IIb trial dying of heart failure and several others being hospitalised due to cardiac and renal issues. The deal was good, however, for the shareholders of Inhibitex, whose leadership had correctly read the future demand for new Hep C drugs before the boom and positioned their company accordingly. Before 2008, Inhibitex’s lead compound was a shingles drug called FV-100 and you could buy the stock for under a dollar US per share. BMS paid US$26 per share because the data on IDX-189 was genuinely impressive – as with most good drugs that go bad, the earlier clinical work had given no hint of the toxicity to come.
The reason the Inhibitex story is relevant to Biota is that the transition to Nasdaq for the Australian company came with new leadership in the form of three Inhibitex veterans who have moved Biota’s headquarters to Alpharetta, leaving only a small team behind in Melbourne. Biota’s new CEO, Russ Plumb, had been with Inhibitex as CFO from 2000 and as CEO from 2006. Joining him in the new shop are Joseph Patti, EVP for Corporate Development & Strategy, and Peter Azzarello, VP, Finance. If you believe that Biota stock is undervalued because investors in Australia hated the old Australian management, the new good 'ol boys from Georgia who have taken the helm at Biota and who probably know a thing or two about drug development may be just the trick. Indeed, they could make this one worth doing one’s homework on.
Stuart Roberts, Australian biotechnology analyst, with global focus
+61 (0)447 247 909
About Stuart Roberts. I started as an equities analyst at the Sydney-based Southern Cross Equities in April 2001, focused on the Life Sciences sector from February 2002. Southern Cross Equities was acquired by Bell Financial Group (ASX: BFG) in 2008 and I continued at Bell Potter Securities until June 2013. I joined Baillieu Holst in October 2013. Over the last twelve years I have built a reputation as one of Australia's leading biotech analysts. Before joining Southern Cross Equities I wrote for The Intelligent Investor, probably the most readable investment publication in Australia. I have a Masters Degree in Finance from Finsia. My hobbies are jazz, cinema, US politics and reading patent applications filed by biotechnology and medical device companies.
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Disclaimer. This is commentary, not investment research. If you buy the stock of any biotech company in Australia, the US or wherever you need to do your own homework, and I mean, do your own homework. I'm not responsible if you lose money.