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Positive newsflow and bargain hunters push up stocks

11/01/2012

"At current valuations, the hunt for differentiating biotech products is more open than ever, as evidenced by the high premiums paid in recent deals", Jan De Kerpel, KBC Securities

From mid-November to early-January, public stock markets found some relief, with Belgian biotech stocks enjoying a nice rally of 30% (versus 7% for the overall market) driven by positive news flow but also by bargain hunters pushing the stocks up after the massive sell-off triggered by the eurocrisis.

 

Galapagos was without any doubt the winner of the year-end rally. Not only was the company awarded the prestigious ‘biotech of the year’ Scrip award, but investors also sent the stock soaring by more than 75% following the publication of its phase II data for its oral rheumatoid arthritis candidate. These results have drawn the attention of specialized investors from both sides of the Atlantic, and over 10 different pharma players queued up to enter the data room. Galapagos made no secret of its intentions to monetize some value now, with the closing of a development partnership imminent. The investment community is banking on deal terms containing a multimillion euro upfront payment, hundreds of millions in potential milestone payments and double-digit sales royalties.

Rheumatoid arthritis is one of the hottest disease areas, with funding also available from non-profit organizations. Tigenix was able to secure € 3m of non-dilutive funding from a European grant that will cover a substantial part of the phase II development of its stem cells in rheuma patients. Ablynx pushed its anti-IL6R candidate in phase II testing in rheuma after a positive safety report. Huge selling pressure had driven the stock to levels where only the value of the tangible cash position seemed to be giving any support. Once most of the sell-off had passed, smart bargain hunters lifted the stock back up by over 50% by end-2011. Despite this rebound, the value of the Ablynx share has halved year-on-year.

Progress in Belgian plant biotechnology was also rewarded. At its most recent R&D update, US Agro leader Monsanto upgraded its corn rootworm III program to phase III development. This project is the most advanced development asset built on Devgen’s proprietary RNAi technology. Monsanto executives publicly named the technology ‘the next gold standard’ in biotech insect crop protection, a multi billion dollar market dominated by the top five agro players. Investors most likely anticipated Monsanto’s decision and pushed the stock 22% higher since November low.

The market also anticipated Thrombogenics’ announcement of the BLA filing of ocriplasmin at year-end 2011, but took its profit’s once the milestone was met.

Devgen is the only development stage Belgian biotech company whose stock price ended 2011 higher then where it started. However, for full year 2011, the best performer of the Belgian stock market was UCB, which gained close to 30% over the year, largely outperforming the BEL20, which plummeted 19%, and the European biotech index, which ended the year down 18%.

In depressed markets, it’s difficult to convince investors to put their money in loss-making, high- risk ventures. Not so for quality enterprises though it would seem. In the midst of the crisis, private Biocartis was able to secure a massive € 71m of fresh funding, one of the biggest private funding deals of the year in the sector. Early December, Argen-x closed its oversubscribed series B round by raising € 27.5m, securing funds for existing and new top-notch, cross-Atlantic VCs.

In 2011, Belgian public biotech went through a deep valley, dragged down by the euro-crisis, but also because investors showed no mercy with development failures. In December 2011 and early January, stock markets have returned to more rational behaviour, but still haven’t found the risk appetite needed to attribute development stage programs a fair value.

It remains to be seen what 2012 will bring, but there is no doubt that another exciting year lies ahead. In the short term, public (re-)financing may remain difficult. Looking at the international biotech-pharma arena, 2012 is poised to become a year of partnering for most of the public Belgian biotech companies. Pharma and big biotech have shifted up a gear in their search for new products, as evidenced by recent international deals in which massive premiums are being paid for commercially interesting, mid to late-stage assets. At current valuations, the hunt for differentiating biotech products is more open than ever.

 

Source: Jan De Kerpel, KBC Securities