IDT Takes Big Bite, Now to Chew It
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IDT is one of the few Australian-owned biotechnology companies that have secured FDA approval, which gives it access to the large and lucrative pharmaceutical market in the United States.
You have to feel sorry for Australian contract drug manufacturer IDT Australia (IDT). Earlier this month, the tiny ($14 million) company signed a potentially transformative deal, only to see its share price drop 8%.
For some time, IDT has been talking about its strategy to maximise the value of its globally accredited – but under-used – drug manufacturing plant in Victoria, and to develop a generic (off-patent) drug portfolio in its own right.
In the first week of November, IDT announced a deal to buy a portfolio of 23 marketed generic drug products, from an undisclosed global generic drug company, for up to US$18 million ($20.7 million). The company has entered a conditional agreement to acquire the drugs for an initial US$13.5 million: the agreement also stipulates trailing payments of $4.5 million, as it meets a series of regulatory and sales milestones.
Announcing the arrangement, IDT said the product suite includes products for treating Parkinson’s disease, depression, infections, anti-inflammatory, ADHD, post-surgical clots, hypertension, pain and other conditions. All products are (or have previously been) approved by the US Food & Drug Administration (FDA) as abbreviated new drug applications, which is the approval for an existing licensed medication or approved drug. Once an abbreviated new drug application is approved, the applicant may manufacture and market the generic drug product, to provide the public with a safe, effective, low-cost alternative to branded pharmaceuticals.
Once the acquisition is completed, IDT will transfer manufacturing of the products into its world-class manufacturing plant at Boronia, in Melbourne, which is licensed by both the FDA and the Australian Therapeutic Goods Administration (TGA) for the production of active pharmaceutical ingredients. This will be the only step required for most products.
IDT is one of the few Australian-owned biotechnology companies that have secured FDA approval, which gives it access to the large and lucrative pharmaceutical market in the United States. IDT is targeting product launches and initial revenue for the generic drugs in the first half of calendar 2016. The total current annual global market for the products being acquired is about $460 million: IDT says the peak in market revenue for the product suite is attainable within three years of launch, and is sustainable without further price erosion.
“This acquisition redefines the business of IDT as a manufacturer and supplier of its own range of specialty generic drugs,” IDT Australia CEO Dr Paul MacLeman said in a statement. He added that the new suite of products would “transform our business by growing our revenue base, expanding our share of the value chain and leveraging our advanced manufacturing facilities and capabilities.” MacLeman said that discussions had already commenced with potential distribution partners.
All of the products coming through the November deal are solid oral dose products, and this is where IDT’s Boronia plant is fit-for-purpose, with large excess capacity – it will have to spend very little both to commence production, and scale it up. The plant will see a 40% lift in capacity utilisation, over a five-day week. Because there will be minimal increase in fixed costs, increased volumes will drive very substantial operating leverage for IDT. That is the beauty of the deal.
Importantly, IDT retains its contract manufacture and drug development services, including the deal it struck in July with Mayne Pharma (MYX) to distribute its generic oral chemotherapeutic Temozolomide in the US. Temozolomide is used to treat melanoma and glioblastoma multiforme, and had US sales of US$340 million in the 12 months ending 31 May 2014.
So why did the share price fall?
The simple answer is that – as could be expected from a potentially transformative deal – the payment is a big one. In effect IDT is stumping up more than its current market capitalisation to buy the increased revenue and manufacturing volumes, in the expectation that will flow through to bottom-line profit in due course.
And that would certainly be welcome.
For the financial year ended 30 June 2014, IDT’s revenue was virtually static at $13.4 million, while its net loss worsened by 24%, to $6.6 million. The company did get a 28% revenue boost from its clinical trials unit, IDT CMAX: established in 1993, this is Australia’s largest Phase I clinical trials unit, with a 50-bed facility located at the Royal Adelaide Hospital. But the manufacturing segment saw its revenue decrease by 60% to just $1.5 million.
The Institute of Drug Technology started life in 1975 as a university-owned not-for-profit organisation operating as part of the College of Pharmacy in Victoria, established as a consulting business to give academics and industry the chance to conduct research and development together. In 1986, then-professor Graeme Blackman led a management buy-out of the consulting business, which listed on the Australian Stock Exchange in 1988 as IDT.
From 1988 to the early 1990s, there was a move away from an academic orientation and towards a manufacturing focus, as the company won commissions to make active pharmaceutical ingredients (APIs) under long-term manufacturing contracts. As a result, the company moved from being a licensor of technology to a production-oriented company. The manufacturing division has a portfolio that includes anti-cancer drugs (specialising in cytotoxics), anti-psychotics, antibiotics, narcotics and anti-inflammatory drugs.
However, the company has struggled in recent years, posting negative financial returns for the last five, three and one-year periods. The refocused strategy under MacLeman, its relatively new chief executive officer – appointed April 2013 – has now been clearly enunciated: but now IDT has to pay for it.
The generic products acquisition requires shareholder approval: shareholders will also be offered a proposed share purchase plan at 15 cents a share, to raise a maximum of $3 million, while a private placement of shares to “sophisticated investors” – that is, investors able to verify with an accountant’s certificate that they either have net assets of at least $2.5 million, or a gross income for each of the last two financial years of at least $250,000 – of up to 100 million ordinary shares, also at 15 cents, to raise up to $15 million. This placement is fully underwritten by Wilson HTM Corporate Finance Limited.
Once IDT is given the approval by shareholders to bite off this acquisition, it will then have to show that it can chew it. Numerically it is a big task, but the key to the deal lies in the fact that these are proven products, with hefty sales, and at a stroke the deal will galvanise IDT’s manufacturing operation – and with considerable operating leverage to be applied, which should boost revenue, margins and ultimately, profits.
James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au