On Thursday Benitec Biopharma Limited (NASDAQ:BNTC) shares closed at $4.30. Benitec Biopharma Limited monthly performance stands at -28.21% while its year to date performance is -72.37%. BM Breaking News and Headlines, Friday December 4 2015
With numbers like these, who would invest in Benitec (BNTC, ASX:BLT) at the this point in time?
This is not an unreasonable question to ask, after all, no investor likes losing money and all investors want to have confidence that a company's management team can steer the company to a position of wealth creation. A year-to-date 72.37% loss in value may hit a nerve on both points.
Like any speculative investment, the answer lies in whether or not investors see the current situation as an opportunity or a lost cause. With a market capitalisation about US$32.7M and cash reserves about US$20.5M, the downward trend in the share price is pushing the price of the company down to a level where there the risk is going to be mitigated by the cash in bank. If this is the case, then new investors thinking of getting in right now should see this as an opportunity, providing that there is a reasonable business case for Benitec's technology. Existing investors may still be looking for the exit but the low daily volumes of shares traded would suggest that most are now waiting to see what is going to happen in the next few months.
So what is going to happen in the next six or seven months and is the value of the company greater than the current market capitalisation to cash reserves ratio?
To answer to these questions, one should first note that the company has recently released clinical data from its Hepatitis C (HCV) program which shows that ddRNAi (the company's treatment technology) can be produced in human cells at a rate established in pre-clinical studies as being curative for Hepatitis C. While this was only for one patient, it was observed at a dosing level considered to be sub-optimal. The fact that no viral reduction data was presented at the same time was more to do with a new found cautiousness in reporting and the wish to monitor patients over an extended period than it was to do with any deficiency in the drug (TT-034). In the next six months, the optimal dose of TT-034 will be trialed and this will be reported in the company's quarterly reports.
The success of the HCV ddRNAi construct and its associated delivery vector is clearly important for the HCV program but one could be forgiven for thinking that this may be a little too late. The treatment is still years away from being on the market and there are some very good new treatments already in the market, so TT-034's value is still hard to quantify. That said there may still be a place for a single shot cure for HCV that also acts as prophylactic against the disease but how much will that be worth?
The real value of the TT-034 data is its relationship to the company's Hepatitis B (HBV) program. This program uses the same vector as TT-034 and the same expression cassette. The new, clinical data points to the success of both the vector and the expression cassette in humans. The pre-clinical, in vivo data for the treatment of HBV will be available in the next six months. If this data demonstrates that the ddRNAi construct targets right areas of the HBV genome and prevents HBV replication, then the combination of data will point to a substantial reduction in the risks normally associated with any clinical trial. This reduced clinical trial risk should be of great interest to a big pharma looking for a new blockbuster as the HBV market is forecast to be worth about US$3.5B in 2021 (a time when a ddRNAi treatment could start to be available). As there are no effective cures for HBV, it is arguable that this US$3.5B would be an understatement if a cure were to be found before 2021.
If big pharma does come courting for a HBV treatment, as a bargaining chip, Benitec could thrown in the HCV treatment for good measure.
Just on this opportunity alone one would have to think that the current non-cash value of US$12M for Benitec is grossly understated. So why is it that few serious investors see this hidden value?
I think the answer is threefold.
First, there is the history of the company. Benitec has been around since 1997 so it is not a new startup - the hype lost it's gloss some time ago. Since then it has been involved in several challenges to its IP. Even though it is has mounted successful defences of its IP, the challenges themselves caused uncertainty and lack of confidence.
Second, management has shown immaturity in making announcements and providing pipeline timetables that it has not been able to meet. This kind of behavior erodes the confidence that both investors and partners need before making substantial commitments. To some extent, this activity has occurred because, until recently, Benitec's ownership has been primarily comprised of retail shareholders. While they sit and watch their daily wealth increase or decrease, they thirst for announcements as they dream of the lifestyle that awaits them if Benitec delivers. Management has pandered to this retail investor phenomenon to its own detriment. A new reporting regime may help to turn around this perception of management by institutional investors and potential partners.
Third, there is the matter of the company's inability to sell the value. I have written about this in the past and so I will not go over this point again. However, I will say that investors/partners need to be led to the water, not told were it might be with no notion how much water there will be when the investor finally finds it for themselves. That said, it could be argued that, over the next six to seven months, there will be enough scientific data produced that it will sell itself and mitigate management's shortcomings in this area.
So, besides HBV and the coming together of clinical trial risk reduction data what else is going to happen that investors should be aware of? The most obvious event to be aware of will be confirmation that 4D Molecular Therapeutic has indeed developed a tissue specific vector for Benitec's Age -Related Macular Degeneration (NASDAQ:AMD). This vector will be exclusive to Benitec and the completion of its development should be announced in the next month or two. If the development remains on-track, the pre-clinical, in vivo work should be complete by mid-2016. This market is forecast to be worth US$10B by 2023 and, while there will be new and improved competition in the market during this period, there will be an opportunity to carve out some serious revenue, should the treatment prove successful.
One additional point that needs to be made is that the moving of the Non-Small Cell Lung Cancer (NSCLC) treatment to the backburner does have one silver lining. The internal lab resources that Benitec was using on this program can now be redirected to other programs. I am therefore confident that, over the course of the next six to seven months, there will be an increase in the number of scientific papers/articles/presentations about Benitec's pipeline of products. I think that this data will, to some extent, sell itself and so the poor success in management's attempts to partner with a big pharma will be negated.
In my view, Benitec is trawling the bottom or near bottom of its share price range. The cash reserves will support the price until more good data is made available and the potential for good news is substantial. I think it is only a matter of a few months before a partner or big investor sees this potential and seeks to exploit the comparatively low risk/high reward ratio.
Disclosure: I am/we are long BNTC.
Additional disclosure: This article is not intended to be investment advice. Readers should do their own research.