Falling Knife: Biota Holdings Ltd. (BTA)
Speaking of falling knives how about Biota? This Melbourne based anti-viral company, or I should say small molecule biotech company since their European anti infective acquisitions, had a serious haircut after royalties from their one current marketed product, Relenza, were well below estimates. Punters and analysts alike were disappointed when Relenza royalties of $9.7M fell well short of the expected $35M this quarter. Biota closed yesterday at $1.33.
Have speculators over reacted? I think so. This is the first time since Biota crossed up over $2 last September that it’s looked inexpensive to me. GSK have ramped production and two development deals should be sealed this year on LANI and HRV. LANI royalties from Japan will kick in in 2011 and with depth in their pipeline, there is now considerably more upside than downside in the share price.
Detailed analyst reports can be read here.
Disclosure: Long Biota
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I don’t normally put a lot into biotechs (<5%) but I chose to double-up on Biota after it broke $1.50 because the case for more Relenza and less Tamiflu in global stockpiles is just too compelling for what the share price implied. The share price assumes that Relenza adoption from here on out has permanently declined from the first year, which is insensible even for government bodies who are still overweight as much as 90% in Tamiflu, i believe? My hunch is that government bodies got "sick" of being castigated for "over-reacting" and are waiting out the coming months for clues on further flu spread, mutation & lethality, i.e. the public are going to get what they asked for, which is more deaths first then future prevention thereafter. And as you say, that's without considering the upside potential from LANI and HRV. A shame about the HCV though.
Hi Dean. Like you I’ve been a Biota supporter for some time and was surprised at the March 2010 royalty figure. I’ve spoken to the company and while not admitting, I believe they too were surprised. I’ve long been frustrated at Biota’s inability to maximize the commercial potential of Relenza and have had a rethink. This is my theory as to why sales of Relenza have never taken off as many had hoped.
The business model for sales of Relenza has a defect that stops it maximizing commercial potential. Pandemics periodically provide a chance for the barrier to be substantially breached through sales to both the seasonal and stockpile markets, but in the absence of pandemic concerns its largely dependent upon government orders.
The major players who influence Relenza sales are GSK and governments- Biota plays no role. Most governments (with the exception of Japan) don’t want Relenza available for seasonal use as it might cause resistance, damaging its stockpiles. Instead they prefer to rely on vaccines to keep the flu in check. This is why it is difficult to purchase Relenza for personal use and doctors are relatively unaware of it. GSK has no real incentive to change this thinking as it is a major overseas supplier of vaccines. Hence in the absence of personal stock piling or seasonal use, its back to the sporadic and lumpy government stockpile market for sales.
In Japan there is less reliance on vaccines and greater use of anti-virals. This is their accepted way. It is why more than 60% of seasonal sales of anti-virals are in Japan. Unfortunately it could also mean that other countries attempts to stop any resistance developing are false (if it’s going to happen it’ll happen in Japan anyway) and all they’ve done is restrict the sales that Relenza could have been achieved.
Biota’s royalties for stockpiling may be higher as a result of a rebalancing toward 50% Relenza, but this could happen slowly and revised forward estimates of $50m royalty per annum may only match its spend on R&D. Any extra fat for significant profit and dividends may not exist.
Unfortunately Lani may suffer the same fate, particularly if it is licenced to a vaccine producer like GSK. (An entity without an interest in vaccines would have greater incentive to lobby governments for a change in thinking, and to educate doctors and the public on this product.) In the absence of change, Lani may just take share from Relenza and Tamiflu in the government stockpile market as governments slowly rebalance, and with the royalty shared, be not much more financially advantageous than Relenza.
The main chance of short term upside would be a sizable up front fee for licencing Lani. Estimates range between $20m and $200m. Unfortunately my gut instinct tells me the market is rarely wrong and the current share price is saying the lower figure is more likely.
Maybe current share prices aren’t an over reaction. Interested in your thoughts.
Greg
Hi Greg, thanks for detailing your view.
Sales and marketing (S&M) is an expenditure. Businesses want to maximise their return on investments. When preparing their budgets GSK would decide on how much funds to allocate to Relenza S&M, based on their expected return and weighed against cannibalism of their other products, namely their flu vaccines. It would seem GSK get better ROI from other products as they sure haven’t invested in S&M for Relenza. However, one quarter of governments curtailing spending on flu drugs does not constitute a trend.
As far as government goes I think you imbue them with too much intelligence and planning. My understanding is Relenza is fundamentally different from Tamiflu and as such it’s less likely for resistance to occur. That aside the main reasons governments rely on vaccines is price and prevention. Vaccines costs $2-6, which is 1/10th to 1/4th the price of Relenza. Vaccines stop spread while anti-virals assist with symptoms once infected.
A key to LANI profitability is the current prophylactic trial. That moves it from treating symptoms to prevention; however, the cost issue remains.
Cutting to the chase it is clear that GSK should not be the preferred partner for LANI. As to the size of any future deal I can only but hope that Biota don’t turn down $100M in favour of $20M a year later!
Hi Greg,
“This is why it is difficult to purchase Relenza for personal use and doctors are relatively unaware of it.” I’m not sure if this is true. I would have thought most GP’s would be more aware because of the swine flu hysteria than ever before. If this could not help the underlying sales of relenza then what will? I suspect the main reason it is not prescribed more in australia is because it is not subsidized by the PBS and so costs $50 to the individual. Few people want to pay $50 for 1 day less flu symptoms and the risk of side effects. There is no public health reason for it to ever be subsidised by the PBS for seasonal flu. The reason for this is that is the economic benefit of the drug is not very good.
It’s use in pandemics is also questionable. I suppose governments have to do something, but how much actual evidence is behind stockpiling? Not much and maybe they are aware of it. You can find the following articles on cochrane.org
1. “It should be remembered that at times the manufacturer makes no claims for oseltamivir to influence symptoms and complications: “Tamiflu has not been proven to have a positive impact on the potential consequences (such as hospitalisations, mortality, or economic impact) of seasonal, avian, or pandemic influenza” (Doerler 2009). Since NIs do not prevent infection or stop nasal viral excretion, they may be a sub-optimal means of interrupting viral spread in a pandemic. If used to contain a severe pandemic outbreak, NIs should be part of a package of measures to interrupt spread, including physical measures (Jefferson 2009d), rather than used alone. Finally, the inability of NIs to prevent infection and to suppress viral nasal excretion raises doubts as to their effectiveness in interrupting viral spread in a pandemic, although NIs may have a role in addressing symptoms and complications. We conclude that in a pandemic, NIs should be used within a package of measures to interrupt spread, that is to say, together with barrier, distance and personal hygiene measures.”:”Neuraminidase inhibitors for preventing and treating influenza in healthy adults”. Cochrane review. 2010.
Jefferson, Tom; Jones, Mark; Doshi, Peter; Del Mar, Chris; Dooley, Liz; Foxlee, Ruth
2. QALY is Quality Life Year. “The incremental cost-utility (ICU) of seasonal influenza prophylaxis was estimated to be [pounds]16,630 per quality adjusted life year (QALY) for at-risk children; the ICU for all other subgroups was estimated to be in the range of [pounds]38,000 to [pounds]428,000 per QALY. The cost-effectiveness of oseltamivir and zanamivir for post-exposure prophylaxis was estimated to be below [pounds]30,000 per QALY in unvaccinated children, at-risk adults and the elderly.
“Amantadine, oseltamivir and zanamivir for the prophylaxis of influenza (including a review of existing guidance no. 67): a systematic review and economic evaluation.” Tappenden P, Jackson R, Cooper K, Rees A, Simpson E, Read R, Nicholson K. Health Technology Assessment. 2009;13(11):1-268. NHS Centre for Reviews and Dissemination. University of York, York
I watched Biota when it got to $5 or whatever years ago then back to 50c and more recently up again. In my simple opinion, Biota is a flawed company and for this reason I refuse to invest in it as a long term investment as I fail to see a viable business model. If you wanted to make money from researching and producing a vaccine for a viral illness, why choose the seasonal flu? Although it sounds sexy to produce a cure for a the common cold, this is a virus that rapidly mutates, for which a yearly vaccine will be much more effective from a public health perspective. In my humble opinion, if Biota had started with a reasonable business idea ie. spent their efforts on researching an antiviral for Hepatitis B or C or some other high prevalence stable virus that causes mortality and morbidity, then they would probably have something useful. Instead from what I can gather, which maybe wrong, they started with expertise in respiratory viruses and tried to produce a marketable product from a great research team (in respiratory viruses). I reckon they should have done this the other way around.
Maybe they will find a useful drug in the future, maybe Lani will be a super success. I’d rather put $200 on Kevin Rudd losing the next election ($1.4 currently). Someone commented what’s the difference between a super profit and a profit? It’s hilarious, tragic and highly amusing to watch!
Also, NPS guidelines (Australia):
http://www.nps.org.au/__data/assets/pdf_file/0015/30237/AntiviralsPositionStatement.pdf
http://www.nps.org.au/news_and_media/media_releases/repository/swine_flu_guidelines
I hold no position in BTA. Much of the information which I have cited and my own views maybe completely incorrect. None of this is advice to buy or sell the stock. Good luck !
Hi Sean, for someone without a position you sure do have strong views
Thanks for sharing them.
As Taleb pointed out in one of his books the biotech is one of the few industries which profits from good black swans, i.e. people underestimate the potential, they underestimate the probability of the home run. Biota’s business model is to sell that RHS black swan so they can operate a more ‘normal’ sustainable business. The model makes sense to me, though you’d be pushed to find an investor who thought it was being executed flawlessly. Biota were working Hep C, it recently got handed back to them. Flu is hugely profitable and an excellent target. The common cold, which I now have, is slightly annoying for most of us, but for a significant minority of people with respiratory problem is a serious concern. HRV has a good addressable market.
Hep C of course is one of the fattest targets out there, but Vertex is highly likely to stitch that market up; thus I was not concerned when BI handed back HCV.
Would like to clarify a fundamental difference between a vaccine and anti-virals is that vaccine’s are created as an “after-the-fact” solution whereas anti-virals are designed to minimise influenza severity and proliferation, amongst other measures to reduce spread (e.g. quarantine, travel restrictions).
Relenza is not designed for seasonal use. As pointed out, it’s clearly not for casual consumption with many reasons to limit its dissemination, chief of which is the resistance issue that we now see in the predominant anti-viral Tamiflu.
But that does not mean anti-virals are useless. Recall what happened in Mexico. The deaths among healthy people were real, as was the fear. The job of governments is to ensure that in the event of a lethal pandemic, measures are in place to limit deaths. Vaccines cannot be brought in fast enough to do this and the evidence is against the ability of governments to impose measures fast enough to safeguard regions and countries from contagion, such is the ubiquity of air travel.
Thanks to Dean, I’ve learnt that Taleb commented on biotech as a play on the black swans, which captures the essence of my first comment. Modern *democractic* governments face difficulties in justifying any sort of preparation for rare yet high impact events. I do not wish a pandemic on anyone and I invested in Biota because I thought that enough government bodies were sage enough (and GSK savvy enough) to act on the small but extreme risk of an uncontrolled lethal flu pandemic. As it is, the quarter’s results suggest that governments will only continue stockpile rebalancing “after-the-fact” when the fickle start asking questions about the quality of first-line intervention. Evidence-based health funding sucks when it requires fresh bodies.
Thanks for the clarification John. I’ve made it so many times that I’ve given up.
I don’t think there is any misundertsanding on the difference between anti-virals and vaccines.
The fact is there is a US$800m seasonal market for anti-virals, $500m of which is in Japan. Can anyone explain why it is so strong in Japan and why that demand can’t be repeated elsewhere?
I’m not sure why the flu antiviral market is so strong in Japan. It may be density of population, high use of public transport or their pill popping ways (simplified generalisation).
As far as the short term upside goes, there are numerous possibilities; buyout, LANI deal, HRV deal or a decent Relenza quarter in 10 weeks. However, that’s speculation and as such not a path I like to travel.
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