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Stock markets saw a dip in May, but biotech remained strong

14/06/2012

"Belgian biotech increasingly attractive to US investors", Jan De Kerpel, KBC Securities

Since our update of April 2012, European stock markets have been under pressure over concerns in Southern Europe, sending general indices down by 5-10% year-to-date (Euro Stoxx 50 down by 10%, Euro Stoxx Small -6%). The European Biotech index is still outperforming strongly, but did not fully escape the macro-economic malaise (European Biotech +8% year-to-date, versus the year-high of +16% early May). Belgian Biotech bottomed out to -5% in mid-May, but then recovered well and is now at +4% year-to-date. The Nasdaq biotechnology index remains strong, up 18% year-to-date.

New Agro technology deal unlocks value

The key reason for the almost 10% revival of the Belgian Biotech index in the last four weeks is largely Devgen’s strong share price performance. Since the company disclosed its new RNAi deal with AG-giant Syngenta, its share price has rallied by almost 50%. While Devgen partnered this technology for in planta applications back in 2007 with Monsanto (who is currently testing the technology in phase III with a corn root worm product), Swiss-based Syngenta will develop the technology for ex planta applications via spray. Syngenta said that the first product could reach the market by 2017.

The deal terms are the best Devgen has ever had: Syngenta paid an upfront of € 22m and will provide research funding of almost € 30m spread over 6 years. In addition, Devgen will receive (undisclosed) royalties on future sales. The recent share price proves that investors attribute much more value to the deal than just the near-term non-dilutive funding to the company. Indeed, the market sees another validation of the RNAi technology by a large-cap AG-player in a commercial space that is highly complementary to the in planta (Monsanto) approach. Moreover, investors recognize upside opportunity as the technology is now wanted by more than one industrial player.

Windfalls but sometimes also setbacks offer investment opportunity

Last week, Tigenix published positive news on ChondroCelect in the Netherlands. After Belgium, this is the second country where this cartilage-regenerating product has gained country-wide reimbursement. The stock reacted intraday positive, but the high volume traded that day and the continued selling pressure did not reverse the declining trend suffered by the share in the last few months.

For the first time in its history, Thrombogenics had to report disappointing news. The results of the head-to-head phase IIb trial with anti-coagulant TB-402 versus Xarelto showed that TB-402 underperformed in terms of safety, prompting the company to stop all development efforts with the product. On the same day, it was reported that all rights for anti-cancer product TB-403 were returned by Roche, citing insufficient priority for this large pharma. The market initially panicked, sending the stock down by over 20% intraday. However, after realizing that the fundamentals of the investment case –which hinge heavily on ocriplasmin – remained unchanged, investors thought the decline created a buying opportunity and the stock ended up at -10% that day. After a successful Capital Market Days a few days later, the stock stabilised slightly lower than the level prior to the TB-402/TB-403 announcements.

Thrombogenics will remain on investors’ radar given the US FDA’s upcoming advisory committee on the use of ocriplasmin on 26 July. The outcome of the panel’s vote may offer a first indication on the FDA’s final decision, which the company expects by October 2012.

US investors still looking at Belgian biotech

At the recent Knowledge for Growth conference, the US-based healthcare/biotech investment professionals of Pyramis Global Advisors (Pyramis manage $ 180bn) revealed the core principles underlying their strategy when looking for healthcare investment opportunities. For them, biotechnology is clearly the driving force behind innovation in therapeutics, but investment in such companies requires specific analytical tools. While the European biotech market value is only 10% ($ 26bn) of the US-based market value ($ 268bn), the geographic location of the company to be invested in is less relevant. Their approach is opportunistic and focuses on 4 criteria: 1. upcoming technology advancements, 2. fundamentally solid companies, but out-of-favour stocks, 3. assets mispriced by the market, 4. upcoming one-off binary events with large risk/reward upside potential.

Many Belgian biotech stocks comfortably meet one or more of these criteria, and from a US-based perspective, item 3 is of particular interest. There are numerous examples showing that a comparable asset that is present in both a US-based company and a European one will be valued substantially higher in the former than in the latter. It has recently been demonstrated that mid-sized and large companies such as Thrombogenics and UCB can be of high interest to US investors: Oppenheimer Funds took 3.5% in Thrombogenics while the Vanguard Health Care Fund acquired 3.2% of UCB. Whether this will impact the investment case of UCB is unlikely, but it is clear that strong US interest pushed the stock to a 5-year high back in May.

Most recently, one of the biggest US investors, Capital Research, revealed that it had acquired over 5% of Galapagos’ shares (Capital Research also holds 12% of UCB and is considered a long-term investor). This announcement clearly inspired other investors, which quickly lifted Galapagos’ share price by 15% in flattish markets.

Whether other Belgian biotech companies will be able to attract US investors remains to be seen, but to quote an oversees biotech investor: “if you have good assets, the market will find you.”