The fundamentals and demographic trends for the healthcare and biotech sector remained strong in 2019 and we expect some of the key themes from this year to continue to play out in 2020:
- Supportive regulatory environment – We believe the US FDA will continue to balance its historical standards of safety and efficacy with its desire to speed drugs to patients in need, through accelerated pathways. New FDA commissioner Hahn may take a few months to get his bearings, but we believe the culture at FDA is unlikely to change.
- Licensing and M&A activity to remain high with fewer but bigger deals – 2019 was a year of mega-merger deals in the US (BMS/Celgene and bbvie/Allergan) making it a record M&A year. However, another trend which emerged was fewer but bigger licensing deals, driven in part by smaller companies having stronger negotiating power due to their ability to access alternative sources of financing to move their projects forward. While the mega merger deals may not repeat in 2020, we expect the trend of fewer but bigger deals will be evident in 2020, supported by companies having other fundraising options for promising assets.
- Further maturing of ASX listed biotechs/medical devices – We also expect further maturing of companies we cover, with more trial readouts, potential partnerships and commercial launches throughout the year. For medical device/diagnostic companies in initial stages of commercial roll out, we expect commercial momentum for their marketed products to pick up, driven in part by expansion into new geographic markets.
We continue to believe that companies that deliver solid, unequivocal data and commercial outcomes in 2020 are likely to be rewarded for their efforts in terms of stock price appreciation and will attract investors and partners/suitors, with OPT, MSB and PXS our Top 3 picks for having the potential to do so.
Opthea (OPT) (Speculative)
Opthea is a Melbourne-based biopharmaceutical company focused on the development of therapies for the treatment of eye diseases. Its drug OPT-302 is targeting wet age-related macular degeneration(wet AMD) and Diabetic Macular Edema (DME), an attractive market with 2 standard of care (SOC) anti-VEGF-A drugs generating US$10bn revenue in 2018. Recent results from OPT-302’s Phase 2b wet AMD trial demonstrated strong vision gain with OPT-302 combination over SOC alone and led to a strong re-rating of the stock. In the current landscape, there is scarcity of novel combination approaches, existing blockbuster drugs are facing patent expiry and biosimilar competition and focus has moved to increasing durability with longer acting anti-VEGF-A agents. The meaningful additional efficacy offered by OPT-302 and its potential to be combined with any anti-VEGF-A agent, in our view makes the company a strong candidate for takeover or partnering. A recent placement has strengthened its negotiating position (proforma cash of $80m provides cash runway through 1HCY21), providing flexibility to evaluate all strategic options while preparing for Phase 3 registrational trials for wet AMD. Strong re-rating catalysts in 2020 include results from Phase 2A DME trial in 2QCY20 and a potential global licensing deal in 2HCY20 (BPe worth over US$1bn).
Mesoblast (MSB) (Speculative)
Mesoblast is the leading allogeneic regenerative medicine player with one of the most diversified pipelines and several products in late stage. It has strategic licensing agreements in place with Tasly for China (heart) and Grunenthal for EU and LATAM (back pain). The company is heading towards a transformational 2020 with its first US product approval in sight, two Phase 3 clinical trial results and potential for further partnering deals. The company’s focus remains on completing its BLA filing for remestemcel-L product for SR aGvHD in children in US, with approval and launch expected in 3QCY20. In preparation for commercial launch MSB is building inventory with Lonza and a 15 person sales force. Other late stage assets are also approaching inflexion points. Revascor for advanced heart failure is on track for full accrual of events in Phase 3 trial by end of CY19, with Top-line results expected in 1HCY20. For Revascor for end stage HF, the Phase 3 trial protocol has been agreed on with InCHOIR and the trial is expected to start in 1QCY20. The low back pain Phase 3 trial in US is on track to report in mid-CY20. Royalties from Temcell GvHD product in Japan are continuing to grow which bodes well for remestemcel-L’s US launch. MSB has cash runway into 2HCY21 (proforma cash of ~US$99m, US$30m milestone from Grunenthal in CY20, US$35m drawdown from existing debt facilities).
Pharmaxis is a biopharmaceutical company focused on the development of drugs for inflammatory and fibrotic diseases. Its lead assets Phase 2 SSAO/VAP-1 inhibitor BI_1467335 partnered in a multi-million dollar deal with Boehringer Ingelheim (BI) and currently unpartnered Phase 1 LOXL- 2 inhibitors are targeting Non-alcoholic Steatohepatitis (NASH), a multibillion dollar market with currently no approved treatments. PXS is approaching key inflexion points – a) Commercial assessment and results from Phase 2A NASH trial run by partner BI is expected in Dec’19. Decision by BI to move to Phase 2b trials could add over 10 cents to our valuation; b) completion of commercial process for LOXL-2 asset is targeted by end CY19 (BPe US$700m deal); c) FDA approval decision on Bronchitol for cystic fibrosis in 2QCY20, with US$10m milestone from partner Chiesi and launch in US in 3QCY20 and d) Commercial assessment and results from Phase 2A diabetic retinopathy trial run by partner BI in 3QCY20. Proforma cash of ~$29m provides runway through CY20, with a further boost expected through Bronchitol US milestone and upfront from LOXL-2 deal in 2020.