Four Hidden Australian Life Sciences Growth Stocks Revealed: Scott Power


Scott Power To find undiscovered stories, investors must venture into unfamiliar territory. In this interview with The Life Sciences Report, we go halfway around the world to speak with Scott Power of Morgans Financial Ltd. about companies under coverage in Australia. Power helps investors get comfortable with the idea of putting money into newfound names, and unveils four strong ideas that could invigorate adventuresome portfolios and investors hungering for excitement.

The Life Sciences Report: You are based in Brisbane, Australia, where your firm, Morgans Financial, is headquartered. All the names on your coverage list have traded on the Australian Securities Exchange (ASX). How would you compare investing in Australian biotech or medtech stocks to investing in those same types of stocks in the U.S. or Europe?

SP: The Australian market is well established, and the rules and controls around listed companies are clear and transparent. In terms of medtech and biotech, in particular, the limited pool of venture and development capital in Australia tends to make companies list at an earlier stage than they would in the U.S, which has its advantages and disadvantages.

But access to capital for early-stage companies is more readily available in Australia than in other parts of the world, in part because the resource market over here is fairly well established, and has some similar risk characteristics to biotech. Australian investors are more educated about putting small amounts of money into higher risk biotech and medtech investments.

The other point to make is about cycles: The window for raising capital opens at certain points, and closes at certain points. Certainly, in the last 12–18 months, with the activity in the U.S. biotech market, we've found increasing interest in Australia. It's been a little bit patchier in 2014, but, again, what we're finding is the better quality names in Australia are not having too much trouble finding the necessary cash at the moment.

TLSR: One thing you said really got my attention—that limited access to venture capital causes Australian biotech companies to go public a little earlier. By implication you are saying that companies go public when they are less mature than they might be in North America and Europe.

SP: Yes, that's correct.

TLSR: In the U.S., small investors are unable to access the venture capital market. Is it plausible to say that an investor putting money into publicly traded Australian biotechs might be able to invest at levels similar to venture capital levels in the U.S.?

SP: Yes. A number of companies in Australia are at much earlier stages and have much lower valuations than is typical in the U.S. That's just a function of the market. The point is that interest comes and goes. When things are running, there's the opportunity to fund earlier-stage projects, but when the window closes, it's pretty tough to get much interest.

TLSR: I want to ask you about how small life sciences companies interface with regulators. For reasons of proximity or regulatory leniency, do Australian biotechs and medtechs typically seek clearances in Europe, or Japan versus coming to the U.S.?

SP: No. Generally, the U.S. is seen as the largest market for Australian programs and products, and I think the European regulatory framework is becoming as strict as in the U.S. So proximity or the ease of getting through isn't necessarily an issue anymore. Also, management teams are looking for where their products have the biggest markets and biggest potential. The U.S. is where Australian companies quite often have a lot of resources—both people and products.

TLSR: You have a lot of stocks under coverage that U.S. investors may never have heard of. Could you go ahead and talk about one?

SP: Sure. Let's talk about Alchemia Ltd. (ACL:ASX), which first listed on the ASX more than 10 years ago. There are a couple of parts to this business. One is a revenue-generating generic drug being marketed by Dr. Reddy's Laboratories Ltd. (RDY:NYSE) in the U.S. The drug is a generic version of fondaparinux, a synthetic heparin. Dr. Reddy's has about 30% of the market share of that business.

Another part is that Alchemia is about to complete a Phase 3 trial with its HA-irinotecan (hyaluronic acid-irinotecan) for metastatic colorectal cancer. Those results are due to read out in the next couple of months.

"The limited pool of venture and development capital in Australia tends to make companies list at an earlier stage than in the U.S, which has its advantages and disadvantages."

In addition, the company has some newer shareholders on board, and attempted a NASDAQ listing in 2012, before the biotech boom started to pick up heat. The listing effort wasn't successful; however Alchemia did raise some money back in Australia. Now, with any success in this clinical trial—which is what we're expecting—Alchemia will be in a position to possibly license HA-irinotecan out. With its HyACT platform technology, the company is positioned such that if this particular trial works, the opportunity exists to use the technology in other solid tumors. Alchemia would then be able to run clinical programs for other drugs.

TLSR: Would you briefly describe the HyACT platform?

SP: HyACT refers to hyaluronic acid, which is wrapped around the existing chemotherapy treatment FOLFIRI (folinic acid + fluorouracil + irinotecan), the regimen of chemo drugs used in treatment of colorectal cancer. HyACT is essentially a drug delivery system that gets more of the drug into the tumor site.

TLSR: A known problem in treating solid tumors, unlike hematologic cancers, is getting the drug inside the tumor mass. Hyaluronic acid is a way to enzymatically get into the tumor—is that right?

SP: Yes. The pivotal trial includes almost 400 patients. The primary endpoint is six-weeks progression-free survival.

TLSR: Scott, you noted that Alchemia's board has some very strong U.S. ties.

SP: Yes—most of the board is now U.S.-based. The new nonexecutive chairman is Santo Costa, who, among other things, was president and chief operating officer of Quintiles Transnational Holdings Inc. (Q:NYSE), the world's largest contract research organization, which drug developers use to outsource clinical trials. There is also Susan Kelley, an oncologist, formerly with Bayer (BAYN:XETRA), where she was involved with global strategic development. Up until 2011 she was chief medical officer of the Multiple Myeloma Research Foundation/Consortium. The new CEO, Thomas Liquard, came on board in 2013. He spent the previous seven years with Pfizer Inc. (PFE:NYSE), where he had various commercial functions. Alchemia has a very U.S.-centric look about it.

TLSR: Another company?

SP: ImpediMed Ltd. (IPD:ASX) has an early-detection bioimpediance device system to detect early onset of lymphedema. It is working toward Category I CPT (current procedural terminology) coding, which it expects to see by Jan. 1, 2015. It currently has a Category III experimental code assigned to its test.

"The better quality names in Australia are not having too much trouble finding the necessary cash at the moment."

Moving from the experimental code to the mainstream Category I code will be a major step for the company. Right now the ImpediMed technology, called L-Dex, is being used primarily by breast cancer physicians and surgeons to detect lymphedema post-surgery. The product works by detecting small changes in the cellular fluid levels, which is far more accurate and can enable an earlier reading than the current method, which is simply to use a tape measure to determine changes in the arm circumference. For investors, moving to a new Category I code represents an opportunity to expand the market by a factor of three.

TLSR: Will the company have to seek clearance and do trials on the lower extremities?

SP: No. The expectation is that the device will have a broad claim. Once it has proven that it can detect lymphedema in the upper extremity—in the axilla of the arm—then a physician could use it for the lower extremities.

TLSR: How is the device used?

SP: Electrode sensors are placed onto the body. It takes 15 minutes or less to get the base reading, and that's followed by a regular reading done every four months post-surgery. Semi-annual or annual tests are conducted thereafter. It is a very noninvasive test.

TLSR: Scott, another name you follow is QRxPharma Ltd. (QRX:ASX). Could you describe it and its value proposition?

SP: QRxPharma is a very simple story. The product is called Moxduo (Q8003; morphine sulfate + oxycodone HCl)—basically two opioids put together. The indication is for use in the hospital for acute pain after bunionectomy, knee replacement or hip replacement surgery—in other words, when a lot of pain is expected. The product has gone through all clinical trials, and it will be evaluated by a U.S. Food and Drug Administration (FDA) Advisory Committee on April 22. The Prescription Drug User Fee Act (PDUFA) date is May 25.

But QRx has had a couple of slipups already—two complete response letters (CRLs) from the FDA. The company believes it has answered all questions raised by the FDA.

TLSR: What did the CRLs require? Was the new drug application (NDA) incomplete or sloppy?

SP: No. In one of the data sets, there was some confusion between time zones—a daylight savings time issue—that meant the data had to be rescrubbed. It was a small oversight that cost QRx some data integrity.

TLSR: What is the advantage of Moxduo versus other opioids?

SP: Lower side effects. In particular, the respiratory depression data are much better than for existing analgesics used in these indications, either morphine or oxycodone. Ironically, the combination of the two drugs results in fewer side effects than when the drugs are used individually or alone.

TLSR: Because of this safety/side-effect profile, do you foresee dramatic uptake of Moxduo if it is approved?

SP: Yes. Also, the company's marketing partner will be Actavis Inc. (ACT:NYSE), so once the product is approved, it should be available for patient use within the next month or so.

TLSR: You are also following an in vitro fertilization (IVF) company. Can you tell me about it?

SP: Yes. The Australian IVF market is quite well corporatized, and the leading player is Virtus Health Ltd. (VRT:ASX), which listed on the exchange last year. The company has done very well since then. Right now Virtus is looking at the possibility of overseas destinations, where it can duplicate its successful corporatization model.

TLSR: Is the company business model like a physician practice management group?

SP: That's exactly right. Basically, Virtus has 84 fertility specialists who provide IVF services for patients. It has a number of day hospitals and laboratories that perform all tests for a couple. It has a 35% market share in Australia, where it is the No. 1 operator.

TLSR: What is the value proposition here? Is it the fact that the company has a proven model, along with efficient use and economies of scale?

SP: All of that. Also, Virtus has a very attractive model for the fertility specialists to work under. It is able to offer flexibility to the physicians who are contracted, so that they also have the opportunity to maintain their own private practices.That's a very attractive proposition for a number of these specialists, who also own equity in the company.

"The U.S. is seen as the largest market for Australian programs and products."

The incentive is attractive because it provides some upside potential to those relationships. The infrastructure is there. The flexibility is there. And Virtus is looking to duplicate what has been a very successful corporatization model in Australia in other geographies.

TLSR: Scott, Virtus has been weak for about six months, while some of the other stocks in your coverage have been quite strong. Are there any issues that have caused this phenomenon?

SP: That's a good observation. Virtus has had a very strong run, so part of the weakness was that the stock may have gotten a bit expensive. Weakness in the market, plus the prospect of another player getting into the IVF market in Australia, has caused some uncertainty. The stock has since recovered. We are seeing a real buying opportunity right now.

TLSR: Would you think of Virtus as the least speculative of the four names we've talked about?

SP: Absolutely. It's a revenue-generating, profitable business. The others are still very much in the development phase or, in ImpediMed's case, the early sales phase.

TLSR: I've enjoyed talking with you. Thank you.

SP: Thanks to you too.

Scott Power has spent 20 years investing in and researching emerging companies, first in the venture capital industry and as portfolio manager with Queensland Industry Development Corp., and more recently with Morgans Financial Ltd., which he joined in 1997. He has a wide network of contacts across the healthcare and life sciences sectors, which help with identification of key trends and developments. He has a bachelor's degree in commerce from the University of Queensland, and a graduate's degree in applied finance (FINSIA). He is also a certified practicing accountant. Read Power's blog for regular industry updates and assessments.

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1) George S. Mack conducted this interview for Streetwise Reports LLC, publisher of The Gold Report, The Energy Report, The Life Sciences Report and The Mining Report, and provides services to Streetwise Reports as an independent contractor. He owns, or his family owns, shares of the following companies mentioned in this interview: None.
2) The following companies mentioned in the interview are sponsors of Streetwise Reports: None. Streetwise Reports does not accept stock in exchange for its services.
3) Scott Power: I own, or my family owns, shares of the following companies mentioned in this interview: Virtus Health Ltd., ImpediMed Ltd., Alchemia Ltd. I personally am, or my family is, paid by the following companies mentioned in this interview: None. My company has a financial relationship with the following companies mentioned in this interview: None. I was not paid by Streetwise Reports for participating in this interview. Comments and opinions expressed are my own comments and opinions. I had the opportunity to review the interview for accuracy as of the date of the interview and am responsible for the content of the interview.
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