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On July 3rd, Robert Hazlett from Roth Capital published an initiation of coverage report for BioLine (BLRX), stating there is a 60% upside to the company's stock, providing a 12 month price target of $4 for BioLine's ADS. Based on our scientific and financial analysis of BioLine's activity, we think that some areas in this report are relatively conservative, mainly regarding the valuation of BL-1040. In addition, we think the unique preclinical activity of BioLine has been undervalued by both the market and the Roth Capital analyst.

BioLine Rx develops an array of pharmaceutical technologies from early development stages through to completion of phase 2 clinical trials, following which the company aims to out-license these technologies to pharmaceutical companies for further advancement and commercialization of the products. In order to maximize the probability of success, 4-6 new projects are initiated by the company annually, thus at any given time the company can advance up to 17 projects at different development stages at its current staff capacity. This strategic model, which is also used by companies like Vertex (VRTX), Ligand Pharmaceuticals (LGND) and Ziopharm (ZIOP), enables the creation of a sequence of business opportunities and lowers the company's risk in case of a potential failure in the development process of a specific product.

In this article we will focus on a few specific R&D projects in BioLine's pipeline that to our belief should contribute a more considerable part to BioLine's valuation:

BL-1040

BL-1040 is an innovative solution directed at supporting damaged cardiac tissue following acute myocardial ischemia (AMI), aimed at preventing post AMI cardiac remodeling and subsequent congestive heart failure (CHF), which, according to several scientific articles, takes place among 20 to 24 percent of patients.

BL-1040, which is an absorbable matrix of Calcium gluconate and Sodium alginate that is injected into the coronary artery during the Percutaneous Coronary Intervention (NYSE:PCI) procedure following heart attack. Subsequent to its injection, BL-1040 polymerizes into a gel in the ischemic cardiac tissue, thus forming a temporary scaffold that mechanically supports the injured tissue. The beneficial effects of BL-1040, as shown by BioLine in preclinical experiments and a pilot clinical study include:

1. Reduction of the decrease of cardiac wall thickness following AMI.

2. Reduction of Ventricular remodeling following AMI.

3. Attenuation of end systolic and diastolic volumes following AMI.

Lowering the risk for cardiac remodeling and the subsequent development of CHF forms an enormous unmet need in the cardiology field. The present standard of care for patients in risk for CHF is administration of beta-blockers and calcium channel-blockers. Currently there is no solution that actively prevents or reduces the risk for CHF following AMI.

BL-1040 has been out-licensed by BioLine to Ikaria, which develops it under the name Bioabsorbable Cardiac Matrix (previously termed IK-5001) with the intent to bring the product to the market. Ikaria is a private American company focused on developing and commercializing critical care therapeutics.

Ikaria has recently initiated the PRESERVATION I Study - a CE Mark pivotal trial (300 patients) that is predicted to produce results in H2 of 2013. Ikaria plans to enter an additional pivotal clinical trial (1000 patients) toward registration in the US near the end of 2012. According to the licensing agreement with Ikaria, BioLine is eligible for up to $125m in regulatory milestones (successful completion of each pivotal trial and market approvals), additional $150m in sales-related milestones, and 11-15% royalties.

Based on our calculated chances for approval and the potential market for BL-1040, we think that the commercial opportunity of this product should be translated to roughly double the $0.89 per ADS stated by Roth Capital.

Preclinical projects

One of the factors which enables BioLine to maintain its business model is its ownership of a biotechnology incubator - BioLine Innovations Jerusalem - supported the Ministry of Industry, Trade and Labor. This ownership allows the company to minimize financial exposure at the earliest development stages and allows the company to develop a very large scope of preclinical projects, some of them in advanced stages and targeting attractive markets.

In our view, BioLine's key preclinical projects are BL-8020 and BL-7010. BL-8020 is an oral treatment for Hepatitis C, which acts by inhibiting Hepatitis C virus-induced autophagy. BL-8020's potential arises from the combination of the great unmet needs in Hepatitis treatment, the variability between the different strains of the virus, and BL-8020's mechanism of actions, which differs greatly from the mechanisms of both marketed and pipeline anti-HCV agents.

BL-7010 is a gliadin-binding molecule targeted at Celiac disease - an autoimmune disorder of the small intestine that affects about 1% of the world's population. There are no approved therapies for celiac, which manifests with intestinal inflammation and may result in complete atrophy of the small intestine villous.

As with the valuation of BL-1040, we believe that the value of BioLine's preclinical platform should be approximately double than the one specified by Roth Capital.

As of the publication date of Roth Capital's report, BioLine has been traded with a market cap of $44.5m, while having $36.4m in cash. This means BioLine's entire pipeline is valued by the market at only ~$8m. We strongly believe that the upside for this stock is greater than 60%. Furthermore, we believe that BioLine's rich and diverse pipeline could be a very attractive source for pharmaceutical companies looking to enrich their pipeline through in-licensing deals.

Source: BioLineRx: Upside Greater Than Stated By Analyst