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 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. (OTC:CHEOF) [COH.ASX], CSL Behring Ltd. [CSL:ASX] and ResMed Inc. (NYSE: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 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. (OTCPK:SXMDF) [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.
There are a couple of companies in the U.S.- BIND Therapeutics Inc. (NASDAQ: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. (NASDAQ: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.
TLSR: Thank you very much, Matthijs.
This interview was conducted by Peter Byrne of The Life Sciences Report and can be read in its entirety here.
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.
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