Market chemistry grows biotech deals

20/01/2014 - 15:18

SPECIAL REPORT: The biotech sector came to life in 2013 but pricing was critical to the success or failure of capital raisings.

Market chemistry grows biotech deals
PharmAust subsidiary Epichem has been running a pharmaceutical manufacturing facility in Perth for 10 years.

The biotech sector came to life in 2013 but pricing was critical to the success or failure of capital raisings.

Last year’s prolonged slump in investor interest in mining was good news for the biotech sector, and among the beneficiaries were boutique corporate advisory firms Forrest Capital and Otsana Capital.

Forrest had a lead role in five biotech transactions in 2013, including two capital raisings by Sydney-based OncoSil Medical.

“Last year was amazing because there were so many good deals around,” Forrest director Kim Hogan told Business News.

Forrest joined with Otsana to raise more capital for Actinogen, while Otsana upped its activity in the biotech space with the completion of a capital raising for West Perth-based Virax Holdings.

Mr Hogan, whose past roles include time as a director of broking firm Porter Western, teamed up with former Deloitte partner Tom Henderson and Amcom chairman Tony Grist to establish Forrest Capital.

He said one of the big attractions of the biotech sector was the low valuations attributed to many companies.

“There were lots of companies where they had spent $10 million or $40 million and advanced their projects, but their valuations were 5 per cent or 10 per cent of what they used to be,” Mr Hogan said.

Another factor was the ageing of the population, which is driving demand for new drugs and medical devices.

“It was that combination of low valuations, advanced projects and baby boomers all demanding heath care and governments wanting to reduce their spending on health care,” Mr Hogan said.

The ability of biotech companies to raise capital is critically dependent on the pricing of their deals; an example is Melbourne company Patrys.

In 2012, when things were tough, it engaged Forrest Capital to raise much-needed funds; Forrest proceeded to raise $2.8 million at 2 cents per share.

In 2013, with its share price picking up, Patrys engaged Azure Capital and BBY to raise $12.5 million at 5 cents per share. So far, it has managed to raise about half its target.

Another more dramatic example is West Perth company Acuvax, which in February announced a deal to buy Brisbane-based Biolife Science.

The deal fell over because Acuvax and its lead manager, Patersons Securities, were unable to complete a required $4 million capital raising.

Another biotech company, Imugene, subsequently moved in and bought Biolife Science.

The Imugene deal was put together by Forrest, which coordinated the acquisition and managed a $2.5 million capital raising at the same time.

That was a good example of the Forrest business model.

“We source the asset and then get involved in the business as well, and do the capital raising and introduce management,” Mr Hogan said.

“We don’t do a lot of deals but when we do them we’re involved in the entire process.”

Another example is OncoSil Medical, which formerly traded as NeuroDiscovery.

In February the company announced the acquisition of UK-based cancer company Enigma Therapeutics.

At the same time it raised $1.5 million at 2 cents per share. In September, the company was able to raise a further $10 million at 13 cents per share.

Wider role

The small number of listed biotechs based in Perth understates this city’s contribution to the sector.

Perth brokers and investors have played a key role in funding biotech companies based elsewhere.

Patersons Securities, for instance, was a lead manager on two of the larger deals completed last year – the $16.5 million initial public offering by New Zealand company Innate Immunotherapeutics, and a $13.5 million secondary raising by Melbourne-based iSonea.

Brisbane-based Admedus, which was formerly known as Allied Healthcare Group, completed a $10.4 million raising with support from its major shareholder in Perth, Fortescue Metals Group chairman Andrew Forrest.

Another biotech with supportive shareholders is Subiaco-based drug discovery company Phylogica.

Perth cardiologist Bernard Hockings and his wife, Dianne, agreed to fully underwrite a $6 million rights issue in November.

They ended up buying $1.78 million worth of shares, lifting their stake to 22 per cent.

Nedlands-based Pharmaust is another local biotech that had a big year in 2013.

It bought Sydney company Pitney Pharmaceuticals after completing an oversubscribed capital raising, and its contract manufacturing arm, Epichem, celebrated 10 years in business.

Looking ahead, Mr Hogan believes growing interest in the sector could actually make it harder to complete well-priced deals.

“It’s not going to be as easy, that’s for sure,” he said.

“When we went over east just before Christmas, we saw a lot of things coming out at fairly fluffy prices and the assets aren’t that great.”


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