"The biomed industry in Israel is still in its infancy, and investors are wary of the risk. Accordingly, the market cap and the liquidity of these stocks are sometimes lower than the potential value of the companies. Sometimes they are traded close to the value of their cash, with no value being assigned to their activity." This is how Clal Finance Batucha senior analyst Yisca Erez opens a comprehensive survey of five outstanding Israeli biomed companies. The companies Bio-Light Israeli Life Sciences Investments Ltd. (TASE:BOLT), Can-Fite BioPharma Ltd. (TASE:CFBI), BiolineRX Ltd. (TASE:BLRX), Topspin Medical Inc. (TASE:TOPMD), and LifeWave Hi-Tech Medical Devices Ltd. (TASE:LIFE) were selected on the basis of trading volume and market cap.
Erez first compares these companies to companies traded in the US. The comparison shows that US companies with a product in Phase II clinical trials generally have market caps in the hundreds of millions of dollars, whereas Israeli companies at similar stages are all have market caps below $100 million. Erez values the companies on a discounted cash flow basis, but warns, "It is hard to value biotech companies using normal criteria. Buying shares in companies like these is perhaps similar to entering a lottery, with the trial results being the measure of success. It's important to stress that entering that a low-risk lottery can also bring success, while a high-risk lottery is liable to end in a loss. The risk is high, but the return for success is very substantial." For two of the firms - BioLight and Can-Fite - Erez grants a "Buy" recommendation, while two others - Bioline and Topspin - get an "Outperform" recommendation.
BioLight
In general, Erez takes into account in her discounted cash flow model only products in clinical trials, because of the great uncertainty surrounding products at earlier stages, which precludes any possibility of valuation.
BioLight's flagship company is OBEcure, which is at the Phase IIb stage with a treatment for preventing obesity in women aged 50 and under, and at the Phase II stage with a treatment for preventing obesity in patients taking anti-psychotic drugs. The company's main advantage in Erez's eyes is the size of the anti-obesity market that Obecure targets ($2-3 billion), and the fact that the drug has few side effects.
However, the product failed in an anti-obesity trial in the general population. Erez takes that failure into account under product risk, and as a factor that reduces the size of the potential market (women aged 50 and under, as opposed to the population as a whole).
OBEcure has collaborated on the anti-obesity treatment for people taking anti-psychotic drugs with Eli Lilly, whch makes anti-psychotic treatment Zyprexa (olanzapine). Erez points out that, at the earliest, OBEcure's drug will reach the market when the patent of Zyprexa expires, and that there are therefore two possibilities: either it will then be of no interest to Eli Lilly, or exactly the opposite will happen, and Eli Lilly will file an application to register the combination of the two drugs as a new patent. In the latter case, the collaboration with Eli Lilly will become very significant, although the legal challenge will be considerable.
Other companies in the BioLight group are IOptima, which is about to undertake clinical trials for a glaucoma treatment; and Allergica, which is developing anti-inflammatory and anti-allergic therapies. Both await results of initial trials. Another company, Zetiq, is about to undertake clinical trials of a technique for identification of cervical cancer, but the launch of an immunization against this cancer puts a question mark against the need for this product. There is also competition from Pap smear tests.
Erez believes the company will bring in a partner for developing the drugs from the Phase III trials stage onwards, and that it will receive royalties of 10-18% of sales, and milestone payments of $200 million. The valuation also takes into account royalties that BioLight owes to research institutes, of around 5%. Competition to the drugs comes into the estimate of market share. The assessment is that the anti-obesity treatment will achieve a 20% market share, the anti-obesity treatment for users of anti-psychotic drugs will achieve a 10% share, while the glaucoma treatment will achieve a 25% share. Risks that the drugs will not be approved or will not reach the market are taken into account in the capitalization rate used. For biomed companies, the accepted capitalization rate is 30%. On the basis of this model the cash flow is capitalized over ten years, giving a valuation of NIS 499 million, which compares with a current market cap of NIS 98 million.
Can-Fite
Five main cash flows come into play in valuing Can-Fite: from CF101 for treating rheumatoid arthritis (IIb stage), dry eyes, and psoriasis (IIa stage), and CF102 for treating cancer and hepatitis. The advantages of the rheumatoid arthritis drug are that is has few side effects and a large market ($12 billion), but it faces considerable competition. A further advantage of the company is its cash - $17 million. The risks lie in the fact that no collaboration agreements for commercializing and marketing the drugs have yet been signed. Furthermore, a trial for rheumatoid arthritis proved unsatisfactory, which obliges the company to carry out a further Phase II trial and puts development back a year. Here too, it is assumed that the company will have the help of a partner in Phase III trials. Market shares are estimated at 10-15%, taking competition into account. Applying the classic 30% capitalization rate, a valuation of NIS 852 million is arrived at. This compares with a current market cap of NIS 163 million.
BioLine
BioLine has sixteen drugs in clinical development. Erez focuses on two of them: BL1020 for schizophrenia (IIb stage), and BL1040, a product injected into the heart to treat heart failure that is about to enter advanced trials on the medical device track. BioLine's advantages are a large number of drugs in development, that it can easily discover further drugs, a large market for each drug, and cash of $55 million. However, few of the drugs have reached the Phase II trials stage, and there are no collaboration agreements as yet, among other things because the company prefers to commercialize the drugs only after they have been proved efficacious on human beings.
The market potential of the two drugs described above is $1.5 billion and $2.5 billion respectively. There are already interim results for the schizophrenia drug, but Erez prefers to wait for the final results, due at the end of 2007. It is estimated that it will be possible to commercialize the groundbreaking BL 1040 under excellent conditions if it succeeds in the trials: payments of $100-300 million, with royalties of 30%, and a 60% market share because of the lack of competition. On the other hand, the capitalization rate is 35%, among other things because of the risk in such a revolutionary drug. The calculation gives BioLine a valuation of NIS 984 million, which compares with a current market cap of NIS 261 million.
TopSpin Medical
Two products are taken into account in valuing this company a product for detecting fatty tissue in coronary arteries, and a product for diagnosing prostate cancer. The cardiology product has a huge potential market, $5 billion. While the firm also has an agreement with Johnson and Johnson, there is an anticipated problem with the product's market penetration it is intended to detect a problem that is treated with stents, but doctors tend to avoid stent treatments, except in cases of stenosis, or narrowing of the artery (which is not the case that TopSpin checks). The firm will have to convince doctors of the worthiness of the treatment, so that market share is only seen at 4% to 7%. The firm's urological product is designed to diagnose prostate cancer. Existing methods miss 30% of patients with the disease and as such this product has a potential of between a half and one billion dollars annually. Nonetheless, the product is still not in clinical trial stage. The capitalization rate is 25%, because the firm's product is near approval. As such, the firm's calculated value is NIS 314 million, compared with its current market cap of NIS 71 million.
Lifewave Erez estimates that Lifewave will receive FDA approval in 2008. As she puts it, the device offers a comfortable and simple treatment, but the firm's drawbacks are frequent turnover in the management ranks and the absence of convincing clinical data: the firm's trial was small and the significance was realized only after the operating procedure was changed retroactively, and even that was only in a small sub-group of patients. As such, an additional trial is necessary. The firm's capitalization rate is 25%, as the product is close to market, but the growth rate is only 5%, as opposed to 10% at other firms, since it only has one product. Erez gives Lifewave a "Sell" recommendation. She notes that competition cuts the price of the products, and on the basis of these statistics, Erez calculates a company value of NIS 72 million, as opposed to its current 154 million.
Published by Globes [online], Israel business news - www.globes-online.com - on November 29, 2007
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