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Benitec: Where To Venture Next?

|Includes:Benitec Biopharma Ltd (BNIKF)

On April 10 2014 Benitec Biopharma (OTCPK:BNIKF) shareholders will vote to ratify the issue of 14,717,995 ordinary shares and 6,623,099 options to new investors. Shareholders will also vote on issuing a further 14,717,999 shares and 6,623,105 options to the same investors. The issue price for the shares is AU$1.07. The options are free and have an exercise price of AU$1.26.

The Board is unanimously supporting these two resolutions and so I feel there is little doubt that the result will be in the affirmative for both resolutions. If this is the case, the company will raise a total of AU$31.5M from the issue of these shares. As the options are already in the money, a further AU$16.7M could be raised through this capital raising process.

The company has outlined its plan for the use of this capital. In this plan the extension of the current clinical trial for its Hepatitis C drug, TT-034, to a Phase llb trial and the commencement of a trial for a treatment for Non-Small Cell Lung Cancer (NSCLC) has grabbed the headlines. What many investors may not have noticed is that the company is intending to use some of the proceeds to acquire another company in an effort to diversify its pipeline.

So what other companies could be a possible acquisition target for Benitec?

Before discussing this question it is worthwhile reflecting on the acquisition of Tacere, which yielded the TT-034 program and the Age-Related Macular Degeneration (NYSE:AMD) program. Tacere was acquired for a non-cash offer of 102,321,345 pre-consolidation shares, worth US$1.5M, plus royalties. This Tacere deal could turn out to be the deal of the century and demonstrates that management is willing to look at non-cash or part cash, part script deals in order to extend the company pipeline.

So where would Benitec get the best bang for its buck?

Would the company consider buying another ddRNAi developer or should it look elsewhere for an acquisition?

There are some non-licensee companies, such as Nanocor Therapeutics and Gradalis, which are progressing ddRNAi technology. In the case of Nanocor, they are developing a shRNA treatment for chronic heart failure as well as other AAV treatments. According to Gene Silencing News, the company is on the lookout for a source of funding for this program. As Nanocor has a ddRNAi/shRNA delivery platform and a small pipeline of products, they could well be an ideal target for Benitec to set their sights on.

In the case of Gradalis, their current extensive portfolio of clinical trials for various cancers would put their value well outside of Benitec's purchasing power. Gradalis is a private company and so it is difficult to put a value on it but it is arguably the most advanced RNAi company in the world and is dealing with areas of major disease, such as ovarian cancer. This would put its value at least on par with Alnylam (NASDAQ:ALNY).

Given the limited options open to Benitec in the pure field of ddRNAi, perhaps management may think of branching out into regenerative medicine through the acquisition of a stem cell company? Peter French, Benitec's Managing Director, has already collaborated with Medistem on a paper detailing a proposed treatment for arthritis. This would have to be an option given that Medistem's current market capitalization is only US$6.3M.

Personally, I would like to see the capital leveraged through the establishment of a joint venture (JV). A JV would see capital being provided by both parties which would increase the scope of what could be achieved with the limited funds available to Benitec. A JV would also open up the options available to management. For example, a JV with Gradalis could see Benitec extend the application of its cancer program. Another JV partner could be Voyager Therapeutics. This company is going to use AAV/ddRNAi technology to develop treatments for diseases of the Central Nervous System (NYSE:CNS). The company has just raised US$45M to pursue this technology. A JV formed by Benitec and Voyager could be the perfect platform to address the problem of Alzheimer's Disease and any cure for that would reap billions of dollars in revenue.

While the exact nature of Benitec's acquisition plan is unknown, one thing is clear and that is there are many good opportunities to be had if management is prepared to the think outside the box. The Tacere deal shows that management is prepared to think outside the box and so, a little of the capital raised from the current round being diverted into a JV or acquisition, is a very good alternate strategy to the company doing everything by itself. It is a strategy that is well worth pursuing.

Disclosure: I am long BNIKF.

Additional disclosure: This article is not intended to be investment advice. Readers must do their own research.

Stocks: BNIKF