the growth of biotech

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    The growth of biotech


    Biotech and pharmaceutical stocks have been in a comeback phase of late. Many stocks have doubled in value this year, and many investors are asking "is it a flash-in-the-pan recovery, or is there more to come?" It's a good question.

    Some stocks have certainly run ahead of themselves, and the higher the valuation, the tougher the questions that should be asked of such companies. Does the company have credible points of difference for its drug or medical technology? Is it overly ambitious by attempting to create a new product for a new market? Does it have a secure intellectual property position, which includes freedom to operate as well as granted patents in key markets?

    Biotech has come back in favor for several reasons. Clearly, the resolution of the war in Iraq spurred global markets back into action. Interestingly, buying in a number of biotech and healthcare stocks commenced while the war was in progress. For example, Clover Corporation had climbed 75 per cent at June 5 from three months before. Peptech and EpiTan increased 72 per cent over the same period.

    The event that has really turned around interest in biotech in the US was Genentech's announcement at the end of May that its anti-angiogenesis drug Avastin had yielded favorable results in a Phase III study in combination with three chemotherapeutic drugs as a treatment for metastatic colorectal cancer. Avastin had not been successful in several other trials, so the results came as a

    surprise to many observers. What did catch the attention of analysts was that the data was generated from a trial with 800 patients, which gave the data a great degree of meaning in statistical terms.

    One other event with more long-lasting effects, but that dates back to late 2002, has been the appointment of Mark McClellan as the Commissioner of the US Food and Drug Administration (FDA). McClellan filled a position kept vacant for 22 months. An absence of leadership has been one recent factor that has impaired the FDA's role as a drug-approving authority.

    McClellan's aim is to build a more responsive and scientifically up-to-date FDA in order to meet industry complaints about the authority - namely that it takes too long to review new drug applications. A recent example of the new-look FDA was the involvement of the National Cancer Institute in the speeding up of a number of new cancer drug approvals, such as Millennium Pharmaceutical's Velcade for multiple myeloma and AstraZeneca's Irressa for lung cancer.

    With this background of a rejuvenated FDA, a string of new drug approvals rolling through and an upbeat mood permeating the US biotech sector (as reflected in the Nasdaq biotech index climbing 45 per cent this year), Shares takes a look at four Australian biotech stocks with distinctive growth possibilities.

    Clinical Cell Culture (CCE)

    In October last year, listed pooled development company ECAT Development Capital completed its acquisition of CCE (C3), a company that has developed a novel spray-on skin treatment. The listed company formally changed its name to Clinical Cell Culture and re-listed in November 2002. It is capitalised at $52 million.

    The spray-on skin technology, called CellSpray, has been developed over 10 years by plastic surgeon Fiona Wood and scientist Marie Stoner. Wood is head of the Royal Perth Hospital burns unit and Stoner is now the chief scientific officer of C3. The technology involves taking a small skin graft from the patient, culturing (and so expanding) those skin cells in a laboratory for between five and seven days, then spraying the skin cells on to the wound. This differs from the alternative approach of skin sheets, which are grown in the laboratory and applied to a wound 21 days after taking the initial skin cell sample.

    The major benefit from the spray-on skin approach lies in the time taken to apply the new skin cells to the wound. With the spray-on approach, the wound can be treated about two weeks earlier than with a cultured skin sheet. This is because the CellSpray technique applies the skin cells before they join, allowing the sheet to be grown in situ to form the final outer skin layer on the existing wound. The benefits of earlier treatment are a lower risk and a lower level of scarring. If a wound takes 10 days to heal, the risk of scarring is only 4 per cent. If it takes 21 days, the risk of scarring jumps to 74 per cent.

    The main applications for CellSpray are for use in cosmetic applications, such as plastic surgery; for mending the donor site used in split-skin (traditional) grafts; for first degree burns; or for deeper burns in conjunction with tissue matrix.

    C3 has many favorable investment aspects that reduce the risk profile of this company. It is in strong financial position, having recently raised $7 million. It has products on the market generating a revenue stream. Regulatory approval in key markets is expected over the next 12 months, and it has a novel technology with multiple applications in potentially very large markets.

    Imugene (IMU)

    IMU is a company new to many investors, having achieved a backdoor listing in 2002 through the shell of spray-fry company Vostech. Imugene is based in North Ryde, Sydney, and is the brainchild of corporate adviser Graham Dowland and veterinarian Warwick Lamb. Originally Lamb, who is the managing director, and Dowland, the executive chairman, wanted to apply consolidation strategies to the veterinary industry, but decided against this. Instead they scouted for novel animal industry technologies, two of which form the basis for Imugene's core assets.

    IMU's now wholly owned subsidiary VectoGen is developing vaccines and growth promotants for feed animals. The technology emanates from the CSIRO. Imugene also has 37.5 per cent stake in ParaGen, with Murdoch University owning the rest. ParaGen is developing a flea vaccine for companion animals such as cats and dogs. This may represent a major advance in flea treatment as it would potentially displace current chemical treatments.

    What makes Imugene an interesting growth story? The Vectogen technology sits at the front and is the most advanced commercially. The Vectogen technology relates specifically to a virus delivery system (adenovirus) for vaccines and growth promotants, and also patented immune system stimulants called cytokines.

    The company has shown that when delivered to feed animals such as chickens, cytokines can stimulate and therefore strengthen the immune system of these animals. This reduces the incidence of infection, which is common with production animals such as pigs and chickens. Reducing the rate of infection in feed animals quickly translates into larger animals, which translates into higher yields and higher sale prices.

    A second key point is that Imugene has signed three evaluation and sub-licence contracts with Merial, one of the world's largest animal health companies. It has also signed a contract with Intervet, the world's fourth largest animal health company.

    The company's management is also worth noting. Lamb is a commercially minded vet who has built, in terms of the veterinary industry, a very large 24-hour-a-day practice on the north side of Sydney. The company is very conscious of the need for accurate market research that also accounts for political and cultural factors. And it is Lamb's background as a vet that puts him in a position to know what vets think and require. "Our products are driven by market pull, not technology push," he says.

    IMU is capitalised at $22 million. Imugene's share register has been strengthened by the presence of several institutional shareholders with medium-term investment horizons.

    Benitec (BLT)

    A rags to riches story? Not quite, but BLT is one of the most interesting stocks on the ASX today. It is one of less than a handful of companies around the world with an interest in gene silencing or interfering RNA (RNAi). Gene silencing has taken the world of medical research by storm, and was named by the journal Science as the "breakthrough of the year" for 2002. It is frequently talked of as the next breakthrough in biomedical research.

    Gene silencing involves designing small double-stranded pieces of RNA that specifically target selected regions of messenger RNA and therefore "silence" or "knock out" genes. This is of great relevance to researchers who want to develop animal models lacking genes implicated in disease processes. Gene silencing offers a much quicker means of developing these animal models and ultimately speeds up what is called "target validation" (proving that the biological target is relevant to the disease and disease intervention).

    There are two approaches to gene silencing. The first, siRNA (short interfering RNA), triggers the silencing mechanism from outside the cell. BLT has an alternative approach called DNA directed RNAi (ddRNA). A gene identical to the target gene is used to carry the string of silencing oligonucleotides into the cell.

    The companies that hold cornerstone gene silencing know-how and intellectual property, which include Benitec, Alnylam Holdings and Ribozyme, have drawn high levels of interest for one unusual reason. Products in the form of gene silencing kits have been on the market and garnering sales at a rapid rate before the property rights and normal commercial partnering overlays have been sorted out. BLT itself is being challenged by the CSIRO regarding various intellectual property entitlements, though at this stage the dispute is with IP Australia and is not in the courts.

    BLT has reached an agreement with life sciences research products company Promega. This arrangement should see a revenue stream emanate from the aggregation of rights from potential sub-licencees. In addition, BLT intends to develop therapeutics based on its technology, but as with any new therapeutic technology, this will take time and money, and the technology will need to satisfy delivery and toxicity requirements.

    If and when BLT's IP situation is favorably resolved and made clear, then the company should have a bright future. BLT is capitalised at $71 million.

    Antisense Therapeutics (ANP)

    ANP is a time-driven company, and as investors know the world over, time is money. ANP stands out as a growth story for a number of reasons, some of which were previously discussed in the Shares of July 2002.

    In almost no time at all, the company will have taken a drug from pre-clinical development into proof-of-principle Phase II studies. There are similar companies that over the same period have not even identified a lead candidate.

    It helps that ANP has been on the receiving end of a very positive deal from the technology leader in the field of antisense drug development, Isis Pharmaceuticals.

    ANP is developing compounds to treat multiple sclerosis and psoriasis. Its MS drug, ATL1102, is currently in Phase I trials in Britain and is expected to enter Phase II trials in early 2004.

    This is an exciting drug because a great deal of target validation has been achieved with Biogen's monoclonal antibody drug Antegren. Both ATL1102 and Antegren shut down an immune cell protein, VLA-4. However, ATL1102 may offer better dosage properties than Antegren. Antegren itself appears to be better than the current standard treatment, inteferon-beta. So there is a strong commercial argument for progressing ATL1102, and the prospects for ascertaining its success are close. ANP is capitalised at $42 million.


    These four companies have one thing in common: within six or possibly eight months, solid value accretion points will occur.

    They all carry varying degrees of risk of course, as befits many technology development companies. However, the potential offered in just these four of Australia's 100 listed biotech and healthcare companies is collectively very impressive.

    David Blake, co-editor of Bioshares - an independent investment report specialising in biotech stocks - has interests in ANP
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