While many small-cap investors rebuked Chancellor George Osborne for the hefty levy on North Sea oil - a move that wiped hundreds of millions from the value of junior oil stocks – his Budget may have provided a further catalyst for the resurgent junior biotech sector.
Savvas Neophytou, Panmure Gordon’s pharmaceuticals and biotech analyst, reckons George Osbourne’s small business-friendly Budget includes a number of new provisions that will benefit the nation’s biotechnology industry.
While development risk, the biggest consideration for investors, will always persist, the funding squeeze we’ve seen since the onset of the financial crisis should now ease, Neophytou said.
“We remain positive on the prospects of the sector ... and SMEs continue to provide most of the innovation to replace technologies that lose patent protection and market exclusivity,” he added.
Among the provisions for small, dynamic companies in the Budget was an increase in the research and development tax credit from 175 percent of allowable R&D costs to 200 percent this year and 225 percent in 2012.
Put simply, for every £1 spent on research and development a small company will get a tax credit for £2 this year.
Also changes to the Enterprise Investment Scheme (EIS) - which gives a tax relief for investors who purchase new shares in smaller companies – will also make new equity-based funding more attractive.
EIS tax relief has been increased from 20 to 30 percent and the annual investment limit has doubled from £500,000 to £1 million.
The scope of the EIS has also broadened to include companies with up to 250 employees rather than 50, and gross assets up to £15 million rather than £7 million.
Neophytou lined up his picks in the sector: Immupharma (LON:IMM, ‘buy’, TP: 300), Renovo (LON:RNVO, ‘buy’, TP: 30 pence), Oxford BioMedica (LON:OXB, ‘buy’, TP: 9 pence) and ImmunoDiagnostic Systems (LON:IDH, ‘buy’, £10.00).
Meanwhile the success of ReNeuron (LON:RENE), Sareum (LON:SAR), Valirx (LON:VAL), Epistem (LON:EPH) and Silence Therapeutics (LON:SLN) has helped to re-kindle interest in biotechnology.
Below we take a closer look at a vibrant sector that appears to be coming back into fashion after several years of being out of favour.
ImmuPharma, one of Neophytou’s picks, is developing a potentially block-busting drug for the auto-immune disease Lupus, in partnership with US drugs firm Cephalon (NASDAQ:CEPH).
Pivotal phase IIb results of a study of Lupuzor initiated by Cephalon are expected this summer.
Earlier research suggested the treatment is easier to administer and may be more effective than GlaxoSmithKline’s (LON:GSK) Benlysta, the first new Lupus drug to be given regulatory approval in almost half a century. Estimated peak sales for Glaxo’s new drug are put at US$3.6 billion, which underlines the potential scale of the opportunity open to the ImmuPharma compound if it passes all the clinical and regulatory hurdles.
Speculation has been growing for some time now that ImmuPharma might be swallowed up by the big American drug company, but overnight the predator became the prey as Valeant Pharma (NYSE:VRX) launched a US$5.7 billion bid for Cephalon.
As Neophytou points out: “Clearly, with change of control, a modicum of risk is introduced to any company’s pipeline. “If the transaction goes through, we expect that Valeant will review its pipeline to decide what it chooses to invest in. This may result in Lupuzor being dropped.”
Navid Malik, of City research firm Matrix, reckons the California-based drugs group would be foolish to overlook the potential of the ImmuPharma Lupus drug – and he says Valeant’s intervention might actually “flush out more bidders”.
Meanwhile Guildford based ReNeuron, who are currently working on the first ever human stem cell trail to treat disabled stroke patients, have already come out in praise of the new budget.
ReNeuron noted that it already benefits from existing research and development (R&D) tax credit and Enterprise Investment Scheme (EIS) and venture capital trust (VCT) investment schemes, which offer tax reliefs to the company and its qualifying investors.
The company also highlighted government proposals to establish a cell therapy and advanced therapeutics Technology and Innovation Centre in the UK, which will assist in the translation of research in this area into treatments for patients.
Earlier this month, ReNeuron revealed that the first two patients treated in its groundbreaking PISCES study, on a stem-cell therapy for disabled stroke patients, were both successfully treated with no acute safety issues arising. Chief executive Hunt then commented that the trial couldn’t have started any smoother.
PISCES is the world's first fully regulated clinical trial of a neural stem cell therapy for disabled stroke patients.
City broker Matrix had a positive response to the update, highlighting the fact that the extensive previous pre-clinical testing of the ReN001 cells, which demonstrated clear dose-related positive safety and efficacy trends, are beginning to be replicated at the lower doses in the current trial.
“Further updates are likely to follow in the short term, both related to the ReN001 stroke trial and the other preclinical programmes,” said Matrix.
The broker has given ReNeuron a price target of 33 pence.
Yesterday one of AIM’s other stem cell specialists, Epistem, revealed an increase in demand for contract research, as it posted a first half rise in revenues and profits.
Epistem is carrying out pioneering stem cell research into cancer and inflammatory bowel disease. It is also in the process of launching the Genedrive portable diagnostic machine that cuts the time it takes to test for diseases such as cancer to minutes rather than days.
The company also revealed it was in a financially strong position with £4.3 million of cash, which will stand the company in good stead for a busy second six months of the financial year.
Dr Paul Cuddon, analyst at Peel Hunt, reckons the stock could be worth a lot more than the current price of 375 pence. He gives the stock a ‘buy’ recommendation with a 515 pence a share target.
“Epistem has leveraged its leading position in epithelial stem cell biology to renew the contract with the US department of defence and has signed a Biomarker discovery and development agreement in the field of oncology with Sanofi-Aventis worth US$4m over three years,” Cuddon said.
Silence Therapeutics, specialised in drugs that perform gene silencing - a way of controlling or shutting down some of the 40,000 genes in the human body, known as RNA interference (RNAi) – has been caught up in on-off takeover talks in recent months. But after its suitors could come up with a ‘sufficiently compelling’ offer it broke off the negotiations back in February.
According to Silence, it possesses one of the world’s most comprehensive RNAi therapeutic platforms - comprised of proprietary delivery technologies, potent siRNA sequences and innovative siRNA structural features. Silence has a number of partnerships with major pharmaceutical companies such as AstraZeneca (LON:AZN), Pfizer (NYSE:PFE), Quark Pharma and Dainippon Sumitomo (TYO:4506).
The group’s credentials were boosted further this morning after two of its scientists have been accepted to present at the world’s foremost cancer conference in the summer - the American Society of Clinical Oncology annual meeting taking place in Chicago from June 3.
There they will present a paper entitled "First-in-human Phase I study of Atu027, a Liposomal Small Interfering RNA Formulation, Targeting Protein Kinase N3 (PKN3) in Patients with Advanced Solid Tumors". It will highlight data from Silence's ongoing phase I study of Atu027 in patients with advanced solid cancer.
Elsewhere Sareum Holdings (LON:SAR) was catapulted into the spotlight in February after it revealed the positive findings from a pre-clinical model study on an early stage leukaemia drug candidate.
After this initial news the runaway share gained over 1,600 percent in just a few days, spiking from 0.275 to as high as 4.79 pence - since then the shares have settled down somewhat, and for the past few weeks they have been trading around the 2 pence mark.
In early March, Sareum followed up with more positive pre-clinical in-vivo efficacy study on the company’s Chk1 compounds on colon cancer, which demonstrated more than a two-fold reduction in cancer growth.
More news on its early stage drug pipeline and licensing deals are expected to be the next catalysts for the small Cambridge based biotech firm.
Valirx (LON:VAL) was another stock to be thrust into the limelight in February after it launched a new over-the-counter Chlamydia testing kit.
The stock shot up from just under 0.30 pence a share to 2.6 pence a shares in fairly short order. Capitalising on the interest, in February Hybridan raised £3.3 million for the company.
The new cash and the revenue from the testing kits are expected to support ValiRx as it proceeds with pre-clinical research on two promising cancer candidates - VAL101 and 201.
So we can see that there may be alternative opportunities for investors hit by the unexpected North Sea oil windfall tax and George Osborne’s budget that may fuel some growth after all, for small UK drug development companies at least.
Conclusion
Near-term the effects of Osborne’s much maligned Budget, may have little impact on the biotechnology sector. What his efforts on R&D tax credits and EIS will do, however, is shine a light on the sector and the potential of some of the sector's most exciting plays. It may also make it easier for some of the cash-starved groups to replenish their coffers.
A case in point recently was the success of a major fundraising by Newcastle-bases e-Therapeutics (LON:ETX) which recently tried to raise between £4-5 million, but was offered far more from an eager and attentive institutional investor base. Instead it managed to raise £17.6 million. Perhaps its success points the way.