5 European Biotech Bargains

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Includes: BNZPF, GNFTF, ICPT, KIADF, OBSV
by: The Scepticist

Summary

European biotech companies with late stage clinical trials often have more compelling valuations than US counter parts.

Genfit, Pharnext, Bone Therapeutics, Kiadis and Obseva are 5 biotech bargains worth adding to a divers portfolio.

All 5 companies have a potentially promising newsflow over the coming 12 months and should be in your watch list.

Introduction

European biotech stocks have a lower valuation in general than American biotechs. It is an observation that many sector followers have already made. In my opinion the cause can be found in the overall ecosystem for biotech. In the United States there is more appetite for this particular type of risky investments. As a result American biotechs have higher valuations but also easy access to cheap financing. This is also reflected in the large cash burns (>200 M.$ per year) that American biotechs can afford to spend on R&D (e.g.MGNX, ICPT, SAGE,ALDR...) versus European biotechs (e.g. GLPG, ARGX, OBSV...) that have less to work with.

However, there is no valid rationale why European biotechs are less valuable. U.S. biotechs commercialize their drugs in the Europe and vice versa thus having the same potential cash flows. In my opinion European biotech stock prices must at some point catch up to their U.S. equivalent and this presents several obvious opportunities for bargain scavengers. There is no universal rule when this will take place. Some biotech companies have tried to force a higher valuation by requesting a secondary listing on the NASDAQ with mixed success (e.g. GLPG, ARGX, TIG, CYAD, OTC:ABYLY..). The general trend is that the share price tends to accelerate towards their fair value when a company get closer to commercialization. This can be after finalizing late clinical phases (phase IIb and III) or after FDA/EMA approval. At this point biotech companies first have the opportunity to monetize their assets at reasonable prices. Many of them await crucial phase III results to negotiate partnerships with large pharmaceutical companies. Such partnerships lead to large sales royalties and milestone payments in exchange for the commercial rights. Other biotechs seek an acquisition for a hefty premium.

Strategy

When it comes to strategy, I see opportunity in European biotechs with best-in-class or first-in-class molecules in a late clinical stage and with important catalysts coming up. Of course, the valuation of these biotechs should be interesting enough to add to a diverse portfolio. Acquisition prices that large pharmaceutical companies are putting on the table nowadays are usually around 2-4 times peak sales. In this article I took a conservative view by valuing companies at 1x peak sales, at least for non-partnered drug candidates. This method of valuation is oversimplified, but is a good value indicator and leaves enough upside.

Genfit

Genfit is a France-based biotech company quoted on Euronext Paris (GNFT.PA) and with a secondary listing in the U.S. (OTCPK:GNFTF). The company’s lead candidate elafibranor is currently being evaluated against NASH (non-alcoholic staetohepatitis) a in phase III study. This disease is characterized by an abnormal accumulation of fat in the liver. NASH is also one of the last multi billion dollar markets with currently no therapies approved. An interim readout of the phase III study is expected in Q4 2019. Based on the interim read out, the FDA and EMA will grant a conditional approval. Genfit is leading the race together with Intercept’s Ocaliva to position itself as a backbone treatment in the NASH fibrosis, a market worth roughly 10 bn.$. Although Intercept is several months ahead of Genfit, the market is big enough for both players that also have a completely different method of action. I estimate that Genfit will capture a market share of around 25% (2.5 Bn $), while Intercept grasps 35% (3.5 Bn. $) of the market for being first-in-class. With a Genfit Enterprise Value of $700m (share price: 23.30 $) versus $3,050m (share price: 109.55 $) for Intercept, the difference in valuation strongly favors Genfit at this point.

Corresponding to a valuation multiple of 1x peak sales and a probability of success of 50%, I estimate the fair value of Genfit at $1.75b. Both Genfit and Intercept (NASDAQ:ICPT) seem likely to be acquired if phase III studies show promising results. Some large pharmaceuticals such as Pfizer, that are too far behind in the race, already announced that they are eager to do acquisitions in this field when the time is right. Acquisition of one or the other would fire up speculations for both companies. Genfit and Intercept have ongoing phase III studies with crucial results expected in 2019.

Pharnext

Pharnext is a France based biotech company quoted on Euronext Paris (EPA:ALPHA). Pharnext’s lead candidate is Pxt3003 recently announced positive results in a phase III study against CMT1A. CMT (Charcot Marie Tooth) is a rare disease that affects around 100,000 people in the US and EU5. The symptoms of this neurologic disease are quite severe and lead to walking and hand disabilities or even handicap. There are currently no approved therapies against CMT as the disease proves quite difficult to treat. There is only one other treatment being developed by a company called Acceleron pharma (currently phase I). If Pxt3003 is successful Pharnext aims at peak sales > 1 Bn. $ by pricing its drug at 10.000 € in the EU and 50.000 $ in the U.S. This drug pricing is certainly not high compared to other orphan diseases. Phase II data showed enough improvement to be both clinically and statistically significant. The company believes its phase III results (in line with previous phase II data) is convincing enough to obtain FDA and EMA approval. Corresponding to a valuation multiple of 1x peak sales and a probability of success of around 80% I estimate the fair value of Pharnext at $800m. The company currently has a Enterprise Value of $143m (share price: 10 €). It is worth mentioning is that it has a wide IP portfolio of pleiotropic drugs against various diseases including Alzheimer (phase IIa) and Parkinson. Pharnext’s approach is rather controversial. Instead of developing new molecules, they are using big genomic data and artificial intelligence (AI) for combining old drugs in new indications. Using combinations of approved, off patent drugs applied in lower doses they can bypass phase I studies and immediately start phase II studies. Thus drastically reducing clinical lead times. With additional resources, the company would be able to start a whole list of phase IIa studies against several CNS diseases. This company has a lot more potential if they only had the resources to start new clinical trials. A NASDAQ IPO as a next step would definitely make sense for this company..

Bone Therapeutic

Bone Therapeutics is a Belgium based biotech company quoted on Euronext Brussels (EBR: BOTHE) and a secondary listing in the U.S. (OTC:BNZPF). The company has two cellular therapies in clinical development for three indications against bone diseases. Indications include osteonecrosis, spinal fusion and delayed union fractures. All indications involve diseases in which the the regenerative capacity for new bone cells is not strong enough to replace the older cells. It’s most advanced therapy (phase III study ongoing) is an autologous cell therapy against osteonecrosis. Osteonecrosis is a rare disease in which the hip bone is progressively decaying until it leads to repeated fractures. For 50% of all patients the standard of care is unsuccessful and the disease will continue progressing. Until they ultimately have no other option then to replace the hip with a synthetic one (drastically reducing the quality of life). Bone therapeutics will release interim results of its phase III study in Q4 2018. Based on this interim report the company may decide to stop the study earlier and file for approval in Europe. In my focus article I estimated that Bone Therapeutics could achieve peak sales of $900m in osteonecrosis. Corresponding to a valuation multiple of 1x peak sales and a probability of success of 30%, I roughly estimate the value of this indication at $270m. But there is more; several weeks ago the company released a press release that they “accidently” found an superior treatment based on hyaluronic acid and two other components for knee osteoarthritis, a disease that affects 250 million patients. Without communicating to shareholders, they performed a phase IIb study in which they performed a head-to-head study with hyaluronic acid (current standard treatment) and achieved superior results compared to current standard of care. The company will start discussions with the regulator to start a phase III study soon. As the current market for hyaluronic acid in knee osteoarthrosis has a size of $2b, Bone Therapeutics might achieve an additional $600m peak sales (corresponding to 30% market share). Corresponding to a valuation multiple of 1x peak sales and a probability of success of 50%, I roughly estimate the additional value at $300m. Adding up both indications, I estimate the fair value of the company at $570m. The company is currently trading at an Enterprise Value of $127m (share price: $10.58).

Kiadis Pharma

Kiadis Pharma is a biotech company based in the Netherlands quoted on Euronext Amsterdam (KDS.AS) and with a secondary listing in the U.S. (OTC:KIADF). The company is developing stem cell therapies for blood cancers. It’s lead drug candidate, ATIR, protects cancer patients from Graft-versus-host-disease after receiving a blood transplant. GVHD is a terrible disease with a high mortality rate in which the T-cells of the blood donor attack the patient. With the administration of ATIR the mortality rate can be lowered from 77% to 42%. The company filed for approval in both Europe and US after receiving an Orphan drug designation and successful phase II results. Kiadis recently announced a delay in the approval process causing the stock to plunge. The stock took another hit after the company announced a private placement at a 25% discount to market price. The company is estimated to achieve peak sales of $500m in a market with 14,000 patients and product pricing of $120,000 - $160,000. Although having a superior product I conservatively estimate that Kiadis will only capture a market share of 30% in a competitive market with competition from MolMed and Bellicum. Corresponding to a valuation multiple of 1x peak sales and a probability of success of 90%, I estimate the value at $585m. The company is currently trading at an Enterprise Value of $243m (share price: €8.92).

Obseva

ObsEva is a biotech company based in Switzerland quoted on the Nasdaq (OBSV). The company is developing reproductive health therapies against severe reproductive conditions for women. Linzagolix, its lead product candidate, is being developed against endometriosis and uterine fibroids and is currently in phase IIb and phase III respectively. Peak sales for Linzagolix are estimated above $1b. Obseva is also developing Nolasiban, a drug candidate that increases the success rate for IVF (In Vitro Fertilization). The drug is currently in phase III and is expected to achieve peak sales of $160m. The expected newsflow in the coming 12 months is very appealing. In Q4 2018 phase IIb data will be published on Linzagolix on endometriosis. Phase III data for Linzagolix on uterine fibroids is expected in H2 2019. Corresponding to a valuation multiple of 1x peak sales, peak sales of $1.2b and a probability of success of 50% the company has a fair value of $600m. The company is currently trading at an Enterprise Value of $553m (share price: $16.4). Note that current valuation target is close to the actual market value, indicating it is priced correctly. However, keep in mind that 1x peak sales is quite conservative and the company has a rich news flow coming up in the next 12 months.

Summary

Company

Shareprice

Enterprise value

Estimated value

Upside

Next Milestone – Timeline

Genfit

23.30 €

700 M. $

1750 M. $

150.00%

NASH phase III interim results – Q4 2019

Bone Therapeutics

10.58 $

127 M. $

570 M. $

348.82%

Osteonecrosis phase III interim results – Q4 2018

Pharnext

10,00 €

143 M. $

800 M. $

459.44%

Pxt3003 EMA/FDA submission for CMT1A – H2 2019

Kiadis

8.92 €

243 M . $

585 M. $

140.74%

EMA approval for ATIR in GvHD – H1 2019

Obseva

16.4 $

553 M. $

600 M. $

8.50%

Endometriosis phase IIb results– Q4 2018

Conclusion

In this article I covered five European biotech companies with an upside potential ranging from 10% up to 460%. All covered companies have crucial milestones coming up in the near future which can increase the upside even further. Note that Obseva is the only company with an upside of less than 100%. This doesn’t make this company any less interesting because of its upcoming milestones. For those of you who are aware of the risks associated with investing in biotech stocks, I recommend to invest a small portion of your portfolio (max. 1% per position) in all five above mentioned companies. I am confident the average return of an equal weighted investment will provide above normal returns in a period of 12 months.

Disclosure: I am/we are long BNZPF, GNFTF, PHARNEXT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I may initiate a position in Obseva, Intercept & Kiadis in the coming weeks.