Originally I had planned to set aside a few hours later this week to write a brief comment on Benitec’s (ASX : BLT) shiny shiny new investor deck as well as the recent announcement about their “exciting” collaboration with Reneuron. My interest in BLT had been piqued again because of the updated presentation and fairly aggressive re-work of their public materials (no point in updating your investor presentation unless you are going to be raising money) and also the re-jigging of its ADRs. I figured they were after a PIPE at some stage but I was absolutely gobsmacked and amazed to read yesterday’s announcement about BLT’s F-1 filing. Of course, in a way, it’s not so surprising when you have investors like RA, Perceptive and Ridgeback behind you – none of those funds are going to want simply hold a bunch of ADRs for very long, it’s not their business model.
BLT remains a truly wild story and I consider it to be one of the “family jewels” of the ASX biotech scene. We would be lost without it, a bit like “Lobster Boy” or “Tom Thumb” at an amusement park freak show. I did try to be balanced in my prior commentary on BLT, but for a range of reasonably defensible reasons, my opinion remains that this company is really little more than hype. Instead of developing a drug(s) like it should have been the last decade, it seemed the company was more interested in litigating its patent portfolio. I mean Peter Francis is a bright guy and all, but that’s the sort of strategy you get when you have an IP lawyer as the Chairman of your Board. A bunch of years on, we have a company that is just barely into patients (and sort of tends to tediously remind us on a patient-by-patient basis that this is the case) and has 4 years of intellectual property life left for its definitive and groundbreaking IP portfolio. Not only that, but its lead program goes into a veritable shark tank in terms of clinical choices, competition and pricing (I want to talk more about HCV below).
I just don’t get it.
For the Australian shareholders in BLT, the planned NASDAQ debut is not a validation of the company, despite all the chit chat on trading forums. Although a larger capital base increases the likelihood of some kind of fluke success for the company, BLT still hasn’t shown that it has enough focus and maturity to really deploy $50-60m in an effective way. By the way, for the avoidance of doubt, I don’t expect they will raise that much (my bet is on $25-$30m, max) and so then the question becomes how to prioritise the pipeline? Every time I read BLT’s investor presentation – even the most recent version, which has clearly benefited from some grown-up massaging of content – I see a cure for everything and just a great big black hole for money. In fact, according to their documentation, if the money is only going to last them two years, it means they are really planning on going hard at the pipeline. That raises a big red flag for me.
This planned IPO is a huge dilution for existing shareholders but it is even worse than that. Dual listings, as a general rule, are not a slam dunk for ASX biotech companies because the analyst base is a hell of a lot more sophisticated and the share price doesn’t just move in response to the company’s own news flow (unlike in Australia, which is why our continuous disclosures rules get so badly abused by biotechs). Instead US biotech stocks respond to entire sector movement, are much more influenced by regulatory and policy issues, and also the commercial dynamics of specific drug classes. That means that when runner-up companies to Gilead, Merck and BMS in the HCV space move forward or backward in terms of commercial potential, BLT is going to move to too. I completely get the argument that access to capital is generally better in the United States, but the age-old argument that there is ‘no capital in Australia’ for a good company is also rubbish.
There is just no capital in Australia for junk companies that we have been staring at for a decade and no longer believe in. That’s why I think if BLT achieves their IPO, they are going to get slaughtered.
By implication (above), I don’t want to be unfair to our home-grown analysts, whom I mostly just feel sorry for because they are usually very bright guys that pretty much have to write intelligently worded garbage every day for a living (i.e. we have no independent analysis of our life-sciences/biotech space, which is a huge part of the reason why the quality is so low). For example, I read Marc Sinatra’s (Lodge) analysis of BLT a few months ago and it is a fairly reasonable document, without too much fluff. For example, it is certainly true that BLT is cheap relative to its peers (because it is very early stage and unproven despite a few glimmers of hope from a couple of liver biopsies) and it is true that HCV is an enormous market for those who have a compelling product. The most insightful part of this analyst report is that nothing else matters to the valuation of BLT except the HCV program. Therefore the question that BLT’s management (and new crop of investors) is going to have to grapple with is whether the other programs, which are clearly struggling, are really worth driving ahead.
And don’t even get me started on the wisdom of tackling wet AMD at this time. It makes the congestion around HCV look like a peaceful stroll in Hyde Park.
Besides, let’s face it, this is a company that has a dodgy track record of executing on clinical trials. It needs to not only have robust news flow about its clinical programs in the 9-12 months post-IPO to maintain market traction, but it also needs to make sure that its capital base covers the key pipeline inflection points or it is going to get pummeled if it needs more cash. And please, no more blow-by-blow patient announcements and wishy-washy press releases about stuff we don’t care about. Time to get a proper US-based communication firm and start sounding like a real biotech company rather than a bunch of hobbyists with a hard-on for patent prosecution. That also means no more immaterial and irrelevant press releases about collaborations with AIM-listed companies that are almost as uninteresting as you are. Otherwise analysts are going to dust off their strap-ons and give you a very different kind of red-blooded American experience.
You have enough collaborations – now start developing products. A scatter-gun approach to collaboration is a total resource trap for immature biotech companies. I should know, I have been there myself and made that stupid mistake many times.
For the Australian “Mum and Dad” shareholders that hold BLT, there are a few things to understand as well. Analysts are not always “generalists” in the US, they often have areas of deep and incredibly focused expertise. So an analyst that might follow BLT for its eye drug, might not follow BLT for its infectious diseases work. Right now, BLT doesn’t seem to have a very robust analyst base that is relevant to the US market, and so they are going to struggle to push themselves along especially when they are trying to solve every disease known to man. Even though BMO is the underwriter, there is really no guarantee that Jim Birchenough’s team is going to follow BLT and, frankly, BMO’s analyst team is one of the best out there with complete independence from the sell side (so if they don’t follow it, that will also say volumes). I personally think his team would chew this one up and spit it out like a half-eaten witchetty grub. As for the underwriting itself, BMO has had such a spectacular couple of years, there is basically no harm in doing a deal this small and picking up a few extra fees before the summer break. It’s a slightly odd time of the year to be out doing this, but given the froth in the markets lately (and quality of recent IPOs has gone down a bit) it’s sort of a snoozy time to have a sneaky BLT, as it were. Personally, I have a feeling that BMO is going to get stuck holding a bunch of ADRs, which is fine – it just means that there isn’t going to be a whole lot of price movement while it gets slowly offloaded. As such, Australian shareholders should not expect to see massive bump-up post-dilution.
Anyhoo … Rather than be piss everyone off and rehash a lot of things I have already said about BLT, its leadership and its incredibly long-in-the-tooth IP portfolio, I am instead going to focus on the fundamental issue I have with BLT that I think bears heavily on this IPO. There can basically be no valuation attributed to the company’s intellectual property because the core technology has almost no commercial lifespan (so yes, good outcome on all that strategic litigation). Valuation drivers don’t include BLT’s non-HCV programs because they are essentially pre-clinical and the lung cancer program probably isn’t even going to advance much beyond an initial IND filing with this next round of capital. As for the partnered programs, other then Calimmune (which has been basically stagnant until their recent “B” round), they are all super-early (even Calimmune is early). Thus the only real short-term prospective value of BLT is in the TT-034 program, and ultimately this is what will be reflected in the dynamics of this public offering.
Therefore the fundamental, $60 million dollar question is why would you invest in a very early-stage HCV company at this time?
I get the “one shot” idea (though this has yet to be proven and others have failed to demonstrate it – and if BLT can’t achieve this then it has a very limited value proposition). I get that there is still is a small subset of patients that may need a solution like TT-034. But then I look at the landscape of treatments (and combination treatments) that are considerably ahead – even just DAA’s, let along something more exotic like a gene therapy (see below) this is going to be a tough place to compete. Gilead alone has about a 90-95% sustained virologic response (SVR) across all genotypes with Sofosbuvir, and combo therapies with Ledipasvir are approaching 100% SVR rates, including in traditionally tougher genotypes. Merck’s Grazoprevir/Elbasvir combo is also a hell of a therapy with impressive cure rates, including in patients that did not respond to Gilead’s drug(s). With big boys like Merck and Gilead defining the pricing dynamics for the global market (i.e. extremely competitively) it’s hard to see how BLT – maybe 6-7 years from now – is going to either have a patient to enrol in a clinical trial because the standard-of-care is so robust. Or if the “one shot” paradigm really is the selling point, it is going to come down to a basic price war with guys that have already made a pile of money and can combat a new entrant however they like.
And don’t start telling me about emerging markets like China – they aren’t waiting for anyone’s permission to make generics.
So can BLT really win – or even be a substantial player? Frankly, I don’t think so. Although it might be great for global healthcare to have a genetically engineered construct that relies on gene silencing up one’s sleeve for that difficult 0.001% of patients that can’t be treated by anyone else’s drugs, I am not sure this equates to a robust investment hypothesis.
This proposed IPO is just a way for a bunch of Australian biotech executives to keep the gravy train running for a bit longer…