Canaccord Genuity's man on the beat in Australia delivers the insider scoop on how biotechs Down Under are faring in the markets. Matthijs Smith reveals a world of great firms, new products and competitive buys in this interview with the The Life Sciences Report. His enthusiasm for his work—spotting opportunities that help people cope with illness and injury—is contagious, and could bring renewed vigor to investors' portfolios.
The Life Sciences Report: From your investment firm's perspective in Australia, how are the life sciences performing this year?
Matthijs Smith: It has been a tough year in the Australian biotech sector. At Canaccord Genuity, we run a biotech index covering the top 25 life science stocks in the country. It excludes the large caps, such as Cochlear Ltd. (COH.ASX), CSL Behring Ltd. (CSL:ASX) (CMXHY) and ResMed Inc. (RMD) , and, instead, focuses on the innovative companies. This index is down 20% for the year to date, whereas the NASDAQ is up 13% for the year. To put that in context, the index's overall underperformance has been heavily influenced by half a dozen companies that surprised the market on the downside, either with negative pivotal trial results or by getting knockbacks from regulators. On average, these stocks have taken a haircut of about 80%—affecting the whole Australian biotech space. We are looking for the reciprocal movement, when these companies bounce back in H2/14.
TLSR: How do the Australia-New Zealand life sciences markets differ from the North American and European markets? Are the testing regimes the same in the various countries?
MS: The U.S. has the most onerous regulatory regime. U.S. Food and Drug Administration (FDA) approval is the gold standard everywhere, and the U.S. is the largest market in the world. While a product needs to pass through all sorts of hoops to get FDA approval, once it is approved, that approval applies everywhere within the country. By comparison, with European approval, every country has a slightly different system and different requirements.
The testing regime in Australia is high quality and strict. It is not easy to get regulatory approval for a drug here. The path most firms take is to get FDA approval, and use that to support other approvals. There are cases where a Therapeutic Goods Administration (TGA; Australia's medical and drug regulatory agency) approval will support a European approval.
But it is a mistake to look at Australia as a soft market from a regulatory perspective. All the life sciences companies here are focused on the global market. They are not looking to develop a drug only for the Australian market. They have their eyes on CE mark approval, European Medicines Agency (EMA) approval or FDA approval. Those are the big markets, where the money flows. We have plenty of indigenous companies, but from day one, they look to play on the global stage.
TLSR: What attracts biotechs into the Australian market?
MS: Australian companies enjoy a generous research and development (R&D) tax incentive. Research in Australia done by companies with revenues less than $20 million ($20M) can receive a 45% tax cash rebate on the money they spend on R&D. It is not a credit; it is money in the bank. Some U.S. companies have come over here looking for that leverage. Plus, the quality of our healthcare system is extremely high, and provides an attractive site for conducting clinical trials. Companies like to run clinical trials here to get access to more patients.
TLSR: What biotech companies are on your plate?
MS: We like ImpediMed Ltd. (IPD:ASX), which has a simple way of measuring and detecting early signs of lymphedema. About one in three patients who are treated for cancer will develop lymphedema, primarily as a result of radiation, surgery, or chemotherapy agents damaging the lymphatic system. Currently, lymphedema is detected using the type of tape measure you get from the haberdashery to estimate any volume changes in the arm. It is unsophisticated and very inaccurate. By the time a physician detects lymphedema with a tape measure, it is already well established. ImpediMed's device allows the physician to detect lymphedema 200 days earlier than with a tape measure. The patient can then wear a compression garment and return the lymph to its normal condition.
About a month ago, ImpediMed announced a clinical trial with Vanderbilt University in Tennessee. It has also signed with Macquarie University in Australia, which is globally recognized as one of the leading lymphedema research sites. The company is going through ethics committees and contract negotiations with several other high-profile oncology sites in the U.S. The trials will attract a lot of attention to ImpediMed.
TLSR: What other buy-rated firms in your coverage universe address cancer issues?
MS: A standout company in the Australian cancer treatment market is Sirtex Medical Ltd. (SRX:ASX). It has a brachytherapy for treating colorectal cancer that has spread to the liver. The therapy provides highly localized radiation to the tumor by inserting radioactive beads that lodge into the vasculature within the tumor. Compared to standard chemotherapy and standard radiation treatments, the new brachytherapy has fewer side effects. Patients are treated with Sirtex's SIR-Spheres during an outpatient procedure; the impact on their lives is quite minimal.
We forecast that Sirtex Medical will come in with sales of $125M this year. It has shown consistent quarter-over-quarter growth for close to 40 quarters. The company is conducting a number of clinical trials that expand the primary usage of its product from "salvage patients"—patients who have failed most of the therapies available—to use as a first-line therapy.
Another company moving up the price charts is Starpharma Holdings Ltd. (SPL:ASX). It has a dendrimer-based delivery technology that delivers established chemotherapy drugs using a scaffold that makes them soluble, more efficacious and safer. Dendrimers are a very special type of spherical polymer that can be manufactured with a high degree of precision and consistency to have specific physical and chemical properties.
The company has terrific preclinical data. In relation to safety, Starpharma has shown, in animal models, that combining its scaffold with a well-known cancer drug such as docetaxel significantly reduces a side effect called neutropenia (diminished white blood cell count). Chemotherapy wipes out a lot of white blood cells, and this leaves patients highly susceptible to infections. A lot of cancer patients develop neutropenia while on chemotherapy, and many get infections and die as a result. But neutropenia is a short-term condition. It occurs within three days of the chemotherapy. The white blood cell count usually returns to normal in seven or eight days. However, for those seven or eight days, patients are very vulnerable, and preventing neutropenia will end up saving lives.
The Starpharma technology is currently in a Phase 1 dose escalation trial. It is starting to hit doses typically used in the clinic, at which point one would normally see a high level of neutropenia and hair loss. None of the patients in the trial so far have shown either. It is in very early days, but Starpharma is a very exciting company. There are a couple of companies in the U.S.— BIND Therapeutics Inc. (BIND) and Cerulean Pharma Inc. ($CERU) —trying to do the same type of thing. I have looked extensively at their results, and while they show positive data in terms of efficacy, as far as I can tell, they have not shown a major benefit in terms of reducing the devastating side effects of the chemotherapy.
TLSR: What about medical devices?
MS: Our firm spends more time looking at medical devices than at pharmaceuticals, because the regulatory and testing regimes for the devices are less risky. Historically, in the Australian market, the big successes have been with medical devices. Cochlear and ResMed are medical device companies. In fact, Sirtex's SIR-Sphere is classified officially as a medical device. In addition, HeartWare Inc. (HTWR) , which is now listed on the NASDAQ and is a $1.4 billion ($1.4B) company, came out of Australia. And Sunshine Heart Inc. (SSH) has just migrated from Australia to the US.
One of our favorite new players is Osprey Medical Inc. (OSP:ASX), which came out of the Baker IDI Heart and Diabetes Institute in Melbourne. The company relocated to Minnesota several years ago, and is now run by Mike McCormick, who has a long history of working in medical devices with companies such as Boston Scientific. The company has a simple but very effective technology for reducing the amount of x-ray dye that needs to be injected into a patient for doctors to visualize the patient's vasculature. This is particularly important when clinicians are placing stents inside blood vessels—obviously, doctors need to see where they are going to unblock the blood vessel.
The standard x-ray dye in use is, unfortunately, quite toxic and has a long history of causing kidney damage. The firms that make the dye are well aware of the problem and have tried for years to make the dye safer. However, the reality is that it is necessary to have a heavy atom, such as iodine, to be able to see inside a body with x-rays. It is a law of physics. But the heavy atoms are toxic to the body.
Osprey has developed a simple system that regulates the pressure at which dye is injected into the bloodstream. The device improves the efficiency of the injection system by making sure that the all the dye that is injected provides visual information, and is not dispersed as a result of the pressure or speed with which it is injected into the blood stream. Clinical studies have shown Osprey’s system reduces the amount of dye used in a stenting procedure by 40%, without having any impact on the quality of x-ray imaging data. As a large portion of stent patients are older or may have chronic kidney disease, the x-ray standard dye often causes irreversible kidney damage. In the last six to 12 months, a number of U.S. studies have shown how frequently kidney damage occurs during stenting procedures. Furthermore, limiting this damage is becoming one of the benchmarks of hospital performance under the Patient Protection and Affordable Care Act.
A lot of regulatory drivers will push adoption of this product. The company already has FDA approval. It is selling the device in Texas, and hospitals in Texas have been very impressed with its performance. In fact, we have heard stories of clinicians who rescheduled their patients to make sure that they could have access to Osprey's device during the prelaunch phase. The company is conducting a clinical trial to expand its label indication so that it includes medical claims of reducing kidney damage. Once it has that approval in hand, the company will roll the product out throughout America and into the European market.
Another company with a good presence in the U.S. market is Nanosonics Ltd. (NAN:ASX). Nanosonics has a low-temperature system that provides high-level disinfection. Increasingly, high-end electronic devices that come into contact with patients' bodies are used in medical procedures. These devices need to be sterilized to prevent the transmission of infections. However, because they are fragile and sensitive, they cannot be sterilized by autoclaving under high temperature and high pressure, or treated with organic solvents that kill bacteria, or treated by high-oxidizing agents or high-chlorine solutions, which are quite corrosive.
Nanosonics' technology is based on a proprietary method of creating a highly concentrated, ultrafine mist of hydrogen peroxide. Hydrogen peroxide is an active oxidizing agent that quickly kills viruses, bacteria, and fungal spores. The droplets are so fine that they behave like a gas, and as soon as they hit a surface, they effectively dissipate and evaporate, so that whatever the mist hits comes out dry. What is attractive about this from an environmental perspective is that hydrogen peroxide is broken down into two components, oxygen and water, and thus disposal is very straightforward.
Nanosonics is now selling its first product, the trophon EPR, which is specifically designed to sterilize an intracavity ultrasound probe. These ultrasound probes are used in gynecological examinations and for checking for prostate and colorectal cancer. The trophon is approved in the U.S., Europe, Australia, New Zealand, South Korea and Japan. It has been sold in the U.S. for about two-and-a-half years by GE Healthcare. In the United Kingdom, the sterilization products are marketed directly by Nanosonics, and also under a distribution agreement with Toshiba Corp. (6502:TYO). Earlier this year, Nanosonics signed a deal with Miele Professional (private), which provides medical sterilization equipment. I forecast that the company will have sales of around $21M this year. It will have a profitable quarter in the next year.
TLSR: Do you cover biofeedback firms?
MS: We have listed an really interesting company called dorsaVi Ltd. (DVL:ASX). DorsaVi was set up by a physiotherapist about 10 years ago. He was a practicing physiotherapist who was frustrated by the lack of clear, quantitative information available in making diagnoses. He developed a system that brings robust science into the physiotherapy space.
For example, a dorsaVi sensor can tell a therapist the exact degree that a patient's limb can bend—or not bend. By substituting hard data for guesswork, dorsaVi is transforming the way physiotherapy is conducted. The new sensors can cheaply provide the type of data that previously required the use of very expensive equipment—such as motion cameras and force plates. DorsaVi has developed three different products targeting three different markets.
The first product is called ViPerform. DorsaVi has had a lot of success signing elite athletes and sports teams to use ViPerform, because the product provides extraordinary insight into motion. For example, when a player comes back from an injury, he or she may look fine. But when examined using the ViPerform trace, the athlete may be seen to favor the uninjured leg when he or she decelerates. If that athlete goes back on the field, there is a high probability for reinjury. There are numerous stories of athletes who wanted to return to the game, were told to hold off and continue treatment for a couple more weeks, and have consequently avoided reinjury and been able to play for rest of the season. Looking at it in terms of the economics of sports clubs, this device is fantastic.
DorsiVi's second product is ViSafe. It uses a similar system to ViPerform, but is marketed for the occupational health and safety market. When workers do repetitive tasks, it is hard to capture real movement data of them doing the tasks as they normally do in the workspace. This small, wearable device can collect and record data for an entire workday. One company, which had a high rate of lower back injury, used the device to discover that its workers were bending forward too many times in a day. Using the device, the company tested a number of possible solutions for reducing the damaging movement, and implemented the one that looked best. Twelve months later, the number of back injuries at that site had decreased by over 85%.
The big money market for dorsaVi's products is in the medical space—for physiotherapists and doctors. It is starting to make inroads in this space because it helps medical professionals correctly evaluate, treat and cure their patients. The company just received FDA approval for ViMove in the U.S. market. It is revolutionizing the whole field.
TLSR: Thank you very much, Matthijs.
Matthijs Smith joined Canaccord Genuity in September 2012 as a senior analyst specializing in Australian life science companies. Smith has more than eight years' experience as equities analyst at Shaw Stockbroking, Lodge Partners Pty Ltd. and Patersons Securities, where he focused on emerging companies developing new pharmaceutical and medical device-based therapies. Prior to moving into the capital markets, he held senior executive roles in the biotech industry, as well as worked at the Boston Consulting Group. Smith has several years' experience in medical research, including earning a Ph.D. from University of London and conducting postdoctoral research at the University of Melbourne. He also worked as an assistant editor at the journal Nature. He holds a master's degree in business administration from Melbourne Business School in Australia.
Source: Peter Byrne of The Life Sciences Report
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1) Peter Byrne 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: ImpediMed. Streetwise Reports does not accept stock in exchange for its services.
3) Matthijs Smith: I own, or my family owns, shares of the following companies mentioned in this interview: ImpediMed Ltd., Osprey Medical Inc., Nanosonics Ltd., Starpharma Holdings Inc., and dorsaVi 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: Osprey Medical Inc., ImpediMed Ltd. and Nanosonics Ltd. 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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