Look Global, Act Local - Healthcare Takeover Plays
The Australian share market is a strong representation of the Australian economy, although the direction the ASX moves if often driven by global forces. Understanding these external forces can reveal early-stage opportunities for Australian investors on the ASX.
Developed economies across the globe are evolving to the new ‘normal’ of interest rates being ‘lower for longer’ which is re-shaping investor’s approach and outlook.
In Australia, on the ASX, we’ve already seen the change to new leaders in the retail sector brought about by global changes in spending habits. These new market leaders have followed the global-trend in consumer’s behaviour that centres around the psychology of how we all ‘treat’ ourselves with smaller purchases.
Leading market analysts have identified another global trend that is gaining speed; the consolidation of the healthcare industry. They’re seeing the large, dominate healthcare companies swoop in and take-over the smaller, most promising innovators.
The current global economic environment is fostering this healthcare consolidation. “With low interest rates likely to remain for some time globally and major players seeking more avenues of growth and new products, the healthcare industry is in the midst of a consolidation wave” says Kevin Hua co-founder of AtlasTrend.
Scanning the international markets Hua notes “One specific area of interest are those companies developing drugs to fight cancer and neurodegenerative diseases like Alzheimer’s”.
Hua cites two recent international actions that have peaked predatory interest in the Healthcare space:
- AbbVie (NYSE: ABBV) recently acquired Stemcentrx for US$5.8 billion to focus on drugs to target cancer stem cells
- Medivation (NASDAQ: MDVN), a developer of treatments for various cancers is attracting strong interest from major healthcare players such as Pfizer, Celgene and Sanofi
“Medivation (MDVN US) recently rejected a US$58 per share offer from Sanofi but has agreed to enter confidentiality agreements and a due diligence process with potential acquirers to acquire it for at least US$10 billion” says Hua.
With all attention in the healthcare space, Australian investors are looking to position themselves for similar corporate activity and capital growth.
“The majority of companies (ASX) listed, regardless of whether they are developing a cancer or neurodegenerative drug, are more likely to be involved in a licensing transaction that have a take-out offer” explains Marc Sinatra Biotechnology and Life Sciences Analyst at Lodge Partners. “Their programs are, generally, quite early stage and these players will want a risk-sharing deal.” Continues Sinatra.
Continuing the cancer-fighting drugs theme and casting an eye over the ASX “There are a number of companies developing drugs to treat cancer” says Sinatra, and these include:
- Bionomics (BNO);
- Imugene (IMU);
- Novogen (NRT);
- Patrys (PAB);
- Prescient (PTX);
- Prima Biomed (PRR);
- Starpharma (SPL) and
- Viralytics (VLA)
It is worth noting that “Bionomics and Novogen are two companies that have programs in the cancer stem cell space.” Continues Sinatra. And that “Sirtex (SRX) and Oncosil (OSL) are medical device companies, even though they do treat cancer.” Says Sinatra.
ASX listed “Companies developing drugs for neurodegenerative diseases are thinner on the ground” explains Sinatra.
The target list includes companies like:
- Actinogen (ACW)
- Bionomics (BNO)
- Innate Immunotherapeutics (IIL)
- Neuren Pharmaceuticals (NEU) and
- Prana Biotechnology (PBT).
“Viralytics, with its oncolytic virus, CAVATAK, is probably the most likely take-out target I have listed.” Says Sinatra
Viralytics (VLA) insights
“Their drug looks likely to demonstrate activity in a number of tumour types.” Says Sinatra
Explaining the dug and how it’s used Sinatra says “Importantly, CAVATAK may work well in combination with the so-called checkpoint inhibitors, currently, the hottest cancer drugs. Certainly, the initial data looks promising.”
Looking at other international take-over transactions is this space Sinatra notes “In 2011, Amgen paid USD$425m upfront and USD$575m in contingent value rights for a similar product, now marketed as IMLYGIC.” Showing there is great promise for these companies, especially VLA.
Innate Immunotherapeutics (IIL) insights
“Of the neurodegenerative disease drug companies, Innate Immunotherapeutics is probably the most likely take-out target” Says Sinatra.
“For this to happen, though, their phase IIb clinical trial of MIS416 in secondary progressive multiple sclerosis (SPMS) must come up trumps next year” explains Sinatra.
Looking at the take-over prospects, IIL is in a high-demand area because “SPMS is a debilitating disease and an unmet medical need” says Sinatra,
“Larger pharmaceutical companies would be willing to write very big cheques for a successful drug to treat SPMS. Although the downside is that neurodegenerative diseases has been a very difficult area for drug development” says Sinatra.
“Developing drugs for SPMS has been a graveyard, in particular, so while the potential returns are high, you would also probably need to factor a fairly low probability of MIS416 proving an efficacious treatment for SPMS” explains Sinatra.
Christopher is head of equites at Spring Financial Group. Christopher has over 10 years' experience managing equities desks with thousands of retail clients and responsibility for maintaining and servicing retail and wholesale relationships.