Benitec Biopharma (BNTC, BTEBY, BNIKF) is about to upgrade its US listing to the NASDQ in a fully underwritten IPO that should net the company US$60M or more. But what does this mean for both new and existing investors?
For new investors it represents one of the last few opportunities to buy into a clinical stage RNAi company (other notable exceptions would be Gradalis and Calimmune, should they ever list publicly) at a price well below what the NASDQ seems to see as normal for such companies. Yes, this is risky technology and not for the faint-hearted but the risk/reward ratio is very high. Furthermore, the risks have been very well explained in the prospectus.
Before the IPO, Benitec will have a market capitalisation of about AUD$100M. Some may say that this is low because the company's technology, ddRNAi, is unproven. My reply to this is that there are currently no RNAi or gene therapy drugs on the market that have gained worldwide approval yet this has not stopped Alynlam (NASDAQ:ALNY) having a market capitalisation of US$10.6B or Bluebird Bio (NASDAQ:BLUE) having a market capitalisation of US$5.4B. ddRNAi is just as ground breaking as either of these companies' technology and so it is not unrealistic to expect that Benitec has similar potential. It is also worth pointing out that both Alynlam and Bluebird have gained their financial strength on the back of targeting orphan or rare diseases whereas Benitec is generally focused on mainstream indications, such as Hepatitis C (HCV), Hepatitis B (HBV) and Age-Related Macular Degeneration (NASDAQ:AMD). The HCV treatment, TT-034, is already in a Pl/lla clinical trial and an early indication of its effectiveness is likely to be announced before the end of this calendar year. While the HCV field has seen some dramatic improvements in treatment in the last twelve months, one has to bear in mind that TT-034 is a one-shot treatment that, because it is based on DNA, provides an added protection against viral re-infection. This is unique to TT-034 and the ddRNAi technology. This technology should therefore be very high on the health payer's radar as the total cost of treatment per individual should be lower than treatments that require multiple doses and possible repeat treatments. Furthermore, the design of the treatment for HBV is based on the design of the HCV treatment and so a successful trial of TT-034, especially the performance of the AAV vector, will have a very significant impact on the development of Hepbarna, the ddRNAi treatment for HBV. HBV is a largely untapped market in term of effective treatments so Hepbarna should be worth even more than TT-034.
These two pipeline products, TT-034 and Hepbarna, alone have the potential to raise the value of the company to a level well above its current AUD$100M market capitalisation. Add to these new treatments for AMD and Non-Small Cell Lung Cancer, which are also heading for the clinical, and the out-licensed treatment for HIV which is already in the clinic and about to release preliminary results, and it is not difficult to see why a proposed issue price of US$13.06 represents good value for money.
For old/existing investors the IPO means a dilution of their holdings. Roughly, a fifty percent dilution. On the surface this is not good but if one looks at the Use of Proceeds section of the prospectus, then it is clear that additional funding is required in order to progress the current and future clinical trials. While some investors may not like this, the fact is that the underwritten IPO will guarantee the funds needed for the company to progress. Non-dilutive funds would have been much better but the reality is that the company has been unable to obtain such funding by way of a significant deal with a partner.
The release of preliminary results for Calimmune's ddRNAi HIV treatment or the preliminary indication of efficacy for TT-034 could change all that. Both of these sets of results will be available before the end of 2015 so there is plenty of potential upside in the very near term, even for existing investors.
It is also very reasonable and responsible of the company's management to issue the IPO now in order to reduce the risk associated with the clinical trial outcomes. All shareholders want the TT-034 trial to be successful but it is a high risk and securing funding now rather than hoping for higher IPO returns later is a sensible course of action.
I have said before that the success of the IPO will depend on what the company does with the new capital. Nothing has changed. Most of the capital will be spent on known programs but I notice that there will still be a significant amount of money available for new undertakings. I look forward to the company revealing what these will be.
I believe the company is undervalued and the NASDQ is a far better board than the ASX to determine the real value of the company. Hopefully, the IPO will be successful but, even if is less that spectacular, the results that we will hear about before the end of the year should make up for any shortcomings.
Additional disclosure: I am long on Benitec. This article is not intended to be investment advice. Readers should do their own research.