Since my background is biotech, I spend a lot of time looking for opportunities in this area. Biotech isn’t easy because there’s a lot of risk in emerging technologies: Will they succeed? Can the emerging company survive years of no earnings and still reward investors? A section of my investment portfolio plays in the risky, high-return space and I’m starting to get a sense of what works for me. Here I give some examples of my biotech investment journey. I have an advantage because I have a sense of the potential of emerging technologies, but there are some things that even investors with no biotech experience can consider when embarking on how to allocate small funds at the risky end of their portfolio. This article emerged from reading about AstraZeneca’s (NASDAQ:AZN) approach to building its innovation pipeline through acquisition. This quickly led me to think about one of my favorite, much unloved, biotech companies Australian company Starpharma (OTCQX:SPHRY) (ASX:SPL). Here I give some thoughts about how investors might think about biotech, and also why investing in big Pharma companies is not for quick capital gains.
Big pharma is complex and hard to understand
Big pharma companies have lots of balls in the air and so it’s often hard to get a real sense of the investment opportunity. AstraZeneca is an interesting big pharma which, like all of the big pharma companies, has turbulence in its history as revenues climb with blockbusters followed by pain when they go off patent. It’s a dog-eat-dog world with constant search for the next big thing. Considering AstraZeneca today, in September and October the company had 23 press releases on treatments for various cancers, asthma, viral diseases, rare blood disorders, chronic kidney disease. This reflects a very broad palette of programs which fall into six broad therapy areas. The company has 184 projects in their pipeline, with 17 new drugs in their late stage pipeline and three new molecular entities under review. It’s really hard to make sense of the overall opportunity and the timelines for key events. Focusing on top selling products, AstraZeneca had 12 drugs with revenues between $1 and $5 billion annual sales in 2021. This is useful, and looking at revenues over time gives an investor a sense of where each drug is in its product cycle. However, this doesn’t help to understand where the 184 projects fit and the likely upside down the track. The point is that AstraZeneca’s No. 2 product in 2021 was Vaxzevria COVID-19 vaccine, with $3.9 billion revenue. Remember that there was no COVID-19 vaccine in 2020 and Vaxzevria was conditionally approved in Europe only at the end of January 2021. The Vaxzevria story is an extreme one because, as indicated below, it’s likely that AstraZeneca plans to exit its vaccine interests going forward.
CEO Pascal Soriot indicates that AstraZeneca has a solid pipeline to make the next three years very strong. The question is what about after that?
AstraZeneca’s search for companies to acquire
AstraZeneca did well with COVID vaccine development even though in the end mRNA technology has caused a revolution for vaccine makers, meaning that companies (like AstraZeneca) with previous state of the art technology are no longer competitive. This means that, without major investment in mRNA technology, vaccines are a dead end for AstraZeneca. Recently it has decided not to compete in this space, but instead it intends to focus on areas of strength, where it can better hope to outperform.
Reverting to a well-traveled path (25 M&A deals between 2018 and 2022), CEO Pascal Soriot has indicated that success beyond 2025 will rely at least in part on acquisitions that complement AstraZeneca’s current strengths. The focus is on oncology, cardiovascular disease and rare diseases and the plan is to identify small to midsize bolt-on acquisitions. Obviously the company is very focused on its internal R&D, but an additional focus is how to leverage their own programs with innovation outside. Recent acquisition of Alexion Pharmaceuticals in a big $38 billion takeover gave AstraZeneca a powerful position in immunology medicine and rare diseases. The focus may be on smaller companies in the next phase.
A recent deal is acquisition of LogicBio Therapeutics, which is a pioneering genomic medicines company that focuses on genome editing and gene delivery for rare diseases. This is a technology company that will enable AstraZeneca’s rare diseases program to deliver solutions.
AstraZeneca (or Merck or Genentech) and Starpharma
Australian biotech company Starpharma is completely unloved at the moment for no good reason. Check out the Q1 2022/2023 (Sept. 30) report and then help me understand how this company can have an enterprise value (share price less cash) of $US121 million. The risk that investors have with this stock is that the board might accept a lowball takeover offer.
Starpharma has its own products based on one class of proprietary dendrimers (VivaGel for bacterial vaginosis, and Viraleze for nasal prevention of viral infection (SARS-Cov-2 (COVID), RSV (Respiratory Syncytial Virus) other respiratory viruses).
The rubber hits the road for Starpharma on its proprietary DEP dendrimer technology, because this technology is proving its worth in three in-house programs (each in Phase 2 trials) on previously toxic cancer drugs now off patent. The DEP-coupling makes the drugs soluble and substantially eliminates side effects (eg neutropenia) that made use of these drugs problematic. Of course the DEP-coupled variants get a new patent life as they’re different chemical entities. These are DEP-cabazitaxel (Jevtana, a Sanofi (SNY) product), DEP-docetaxol (Taxotere, a Sanofi product) and DEP-irinotecan (Camptosar, a Pfizer (PFE) product). Starpharma is also developing a DEP conjugate version of gemcitabine (an Eli Lilly (LLY) product).
The above indicates that Starpharma is investing in repurposing a number of previously successful cancer drugs that had problematic aspects. The company indicates that the Phase 2 trials are well advanced and partnering discussions are underway for each drug. There’s little doubt that the success of the above programs has got the attention of a number of major pharma companies.
I’m paying particular attention to Starpharma’s partnerships with AstraZeneca and Merck (MRK).
The AstraZeneca partnership involves AZD0466, which is a DEP-coupled version of an AstraZeneca drug AZD4320 which is a potent Bcl-2/xL dual inhibitor but which AstraZeneca could not take into the clinic because of its toxicity. It seems that DEP-coupling substantially eliminates the problems which prevented taking AZD4320 into the clinic. It seems that the initial Phase 1/2 trial has sufficient attraction to AstraZeneca to expand this program and to initiate a second Phase 1/2 trial targeting Advanced Non-Hodgkin Lymphoma. There’s also a combination therapy of AZD0466 with acalbrutinib being explored for a particular class of therapeutic resistant lymphoma. The indications are that AZD0466 could become a blockbuster drug for AstraZeneca.
The expected benefits to Starpharma from successful commercialization of AstraZeneca AZD0466 involve $US124 million development, launch and sales milestones, plus (undisclosed) tiered royalties on net sales, noting that all development costs are funded by AstraZeneca. Note that the partnership with AstraZeneca involves a multi-product DEP licence, which currently involves AZD0466 and a second novel AstraZeneca oncology molecule. Of interest is that Starpharma also has a Development and Option agreement with AstraZeneca for a DEP version of one of AstraZeneca’s major marketed oncology medicines.
The Merck partnership is at an earlier stage than the AstraZeneca partnership. It concerns undisclosed partnerships on use of DEP to couple Merck lead compounds for use as ADC (Antibody Drug Conjugates). Merck first partnered with Starpharma in 2021 and recently expanded the partnership with another ADC candidate. Note that Merck bears all of the costs of developing the DEP-conjugates. Starpharma has impressive in house results for a DEP HER-2 ADC. Note that DEP-coupling can provide up to 32 drug molecules attached to a single antibody-coupled DEP with precision and avoiding solubility issues. ADC’s are in the news and Starpharma’s DEP technology looks impressive. The market opportunities here are huge.
The Genentech (Roche (OTCQX:RHHBY) (OTCQX:RHHBF) partnership is, like that with Merck, at a R&D stage, but like that with Merck, the partnership was expanded shortly after the initial agreement, presumably because the early results were interesting to Genentech. There are no details about the Genentech drugs being DEP-coupled, although the indication is that improved solubility, efficacy and pharmacokinetic controls seem to be key issues being addressed by DEP coupling.
Starpharma also has a disclosed partnership with Chase Sun on DEP coupled anti-infectives and a number of undisclosed partnerships on DEP coupling.
In the light of the above, my takeaway from the recent disastrous share price performance of Starpharma (down 60.7% year on year) has been to substantially increase my SPHRY holding. AstraZeneca is especially of interest as a potential acquirer as it has a track record of acquiring technology companies to enhance its product developments. Merck has a big interest in ADC technology and Starpharma’s DEP dendrimer platform looks powerful for ADC.
Seres Therapeutics and the emerging field of microbiomics
Another way that biotech investment can be successful is by investing in a company in a new technology area, where there’s yet to be success. This is more interesting when the company has suffered from a reversal as it seeks to bring its products to market. This does require work to identify possible investments and then look for reasons why there could be substantial upside in a relatively short time frame. I think that Seres Therapeutics (MCRB) fits this picture and I’ve written a number of articles as the company gets closer to commercial success with one of the first products in the field of microbiomics. Investors interested in this story might track how it has developed from a number of prior articles I’ve written. My most recent article provides views as of August 2022 on why I’m invested.
If I’m correct Seres will experience substantial share price recovery within 12 months.
As is pretty much expected for an unloved stock, strange things happen with Seres. On Oct. 24 there was a significant drop (below $6) in the MCRB share price perhaps due to a “sell’ report based on nothing. Last week there was significant news with announcement that the FDA has accepted for priority review Seres BLA (Biologics License Application) concerning SER-109 for recurrent C.difficile infection. The share price has recovered to $8.07, and it’s now substantially above a low of $2.70 in mid June.
Seres indicates that if approved by the FDA this would be the first FDA approved oral microbiomic treatment. Priority review means that the review will be completed in six months rather than the normal 10-month review period. The action date is April 26 2023. This indicates that plans for market release in the first half of 2023 are on target, although the share price is unlikely to show significant further increase until SER-109 achieves FDA approval for its BLA application.
Investment in big pharma is tough because these companies are huge and therefore it needs big advances to turn the dial. AstraZeneca’s ephemeral success with its COVID vaccine Vaxzevria is a case in point, with steady share price rise, but not without some reversals. I haven’t tried to cover AstraZeneca’s business in detail here, but I’ve given a brief overview. The fact that the AZN stock price fell between late August from $68 to $53 in late September, with recovery now to $59, suggests that this might be a time to think about investing if you are seeking big pharma investment. Note however, that other big pharma companies (eg Pfizer, Merck & Co) are showing similar recoveries from lows in late September.
A point I make in this article is that for investors seeking a more risky high reward path, it might be productive to focus on companies that could be of interest to big pharma to enhance their programs. Here the game is to benefit through exit at a premium. There are some guide rails to de-risk this strategy. It’s no bad thing if more than one big pharma might be interested in your target small company. It’s also important that the big pharma company has expressed interest in the small company through a partnership that has clear commercial upside for the big pharma partner. It also helps if the small company is well funded (ie not desperate for cash) and has its own future plans that don’t require exit through takeover.
This is what I’m looking for with Starpharma, and if a big pharma acquisition doesn’t happen, I think they have enough happening to make the company successful anyway. I have been invested in SPHRY for longer than I care to admit and I’ve written 16 Seeking Alpha articles on the company. I have benefited by selling on a number of occasions when the share price was attractive. Now it’s the reverse and I’ve followed my research conclusions and substantially increased my investment.
Finally one can look for companies breaking ground in new areas. Nothing is easy but I’m quite hopeful that I’ll be saying soon that my timing for investment in microbiomics company Seres was a smart move.
I’m not a financial advisor but I’ve covered biotech for a long time, from the discovery end, to start up and going public. This article is not aimed at providing financial advice. I’ll leave it to you and your financial advisor to sort out a biotech investment strategy if you are interested. However, I hope that my personal investing experience will give you some ideas about how you can approach this challenging but potentially very rewarding investment area.
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