CMXHF - Starpharma: Patience Needed But A Lot To Like

2023-07-27 09:40:36 ET

Summary

• The news on Starpharma share price is challenging as a significant shareholder exits.
• The news of commercially interesting developments continues to broaden, meaning that substantial share price upside seems likely.
• Starpharma has a strong board and management team which is producing important outcomes. It has partnerships with three huge pharmaceutical companies and numerous unnamed parties.
• Starpharma has important IP that has broad application possibilities, including repurposing previously successful drugs through in-house clinical trials.
• Starpharma is a robust business with a lot of upside that is worthy of investor consideration.

Investing in early stage Biotech companies is fraught with risk, but the upside can be worthwhile if one has the patience to leave an early investment in the bottom drawer. Australian biotech company Starpharma (SPHRY) is a good example of an emerging biotech company that has a lot to like, but which has encountered more than its share of delays. It remains unusual in having a strong cash position, a powerful IP portfolio and interest from several top 10 pharma companies. I last gave a "big picture" overview of Starpharma in February 2021, when the share price was $16.60 and the company seemed poised for substantial business consolidation. My timing was perfect (not) in that since that time it has been all downhill regarding the share price (now $2.05), while a number of projects within the company have advanced significantly. It is still a way from becoming profitable and it is anyone's guess when a solid partnership with one of the top 10 pharma's bears fruit. Nevertheless I remain enthusiastic about the company and consider it worth looking at if you are an investor looking for a biotech investment that has good prospects for substantial uplift.

DEP core technology

DEP is Starpharma's proprietary dendrimer, which is a tiny (nanoparticle) spherical cage that has lots of attachment points for drugs or targeting molecules (or both). The thing is that DEP conjugates of small molecule drugs make them soluble, more effective, less toxic (especially decreasing bone marrow toxicity). The DEP conjugates generate new IP. The increased solubility means less need for toxic companion compounds (eg polysorbate-80) and reduced need for steroid pre-treatment. Small molecules, peptides, antibodies and radionucleotides can be delivered with DEP coupling. Of particular interest is that a DEP conjugate can have a defined number of drugs on a single DEP dendrimer, leading to a highly targetable and concentrated drug-DEP conjugate.

Starpharma has in house programs with three off patent and formerly highly toxic cancer drugs nearing completion of Phase 2 trials. DEP-conjugates of docetaxel, cabazitaxel and irinotecan bring these former successful (but highly toxic) anti-cancer drugs to a new much less toxic opportunity with the DEP-conjugate opening up a new IP chapter.

Below is a summary slide from a recent (June 2023) Starpharma investor presentation indicating that Starpharma has partnered programs with four major pharmaceutical companies. The most advanced program involves one of three partnerships with AstraZeneca ( AZN ) in a Phase 1 clinical trial using AZD0466, which is AstraZeneca's highly toxic AZD4320 (which targets Bcl2 and BclxL on blood cancers) coupled with DEP. The agreement with AstraZeneca involves, development, launch and sales milestones of up to million, plus tiered royalties on net sales. AstraZeneca funds all development costs.

Research agreements with Merck ( MRK ) and Genetech ( RHHBY ) are evaluating DEP coupling to targets of interest to these companies. In the case of Merck this involves DEP being used to build ADC (Antibody Drug Conjugates) which involves a targeting antibody coupled to DEP with precise numbers of the drug used to treat the condition being attached to the DEP.

SPL7013

Given the value of the DEP technology, I don't plan to address in any detail Starpharma's second dendrimer technology area, which is focused around an antiviral/antibacterial dendrimer SPL7013. It is worth noting that Starpharma has a nasal spray version of this compound (Viraleze) which captures/inactivates virus in the nasal passage and has application against many viruses including SARS-CoV-2 (COVID).

The Viraleze story is quite bizarre with various conspiracy theories around why it is yet to be approved in Australia by the TGA (Australian FDA), even though the development of Viraleze was in part funded by the Australian Government. The product is registered in 35 countries as a spray not needing refrigeration that can be accessed if users feel at risk of contacting COVID. It is sad that I have to access this valuable COVID preventer via New Zealand or the UK or Germany. Viraleze is available in New Zealand, UK, Europe, Vietnam, Hong Kong and the Middle East. A clinical trial is in progress in the UK to evaluate the value of Viraleze in reducing viral load and to see if it impacts COVID symptoms and disease progression.

Corporate changes

Longstanding CEO Jackie Fairley, who has overseen major IP developments while managing the company without major shareholder dilution, has announced that she will retire next year, giving time for the company to find a CEO to take the company to the next stage. She will be available for a transition period when a new CEO has been chosen.

The Starpharma board is impressive with recent appointment of two ex-CSL ( OTCQX:CSLLY ) executives (Dr Jeff Davies and Dr Russell Basser) who have deep experience with commercialising major pharmaceutical products including clinical and regulatory affairs and licensing.

Starpharma's VP Business Development, Dr Tony Eglezos, is a member of the executive team with deep experience at CSL, which is Australia's most successful biotech company. Tony has extensive experience with commercialising in-licensed technology and out-licensing IP.

Shareholding

Starpharma is a most unusual biotech company in that it has essentially no VC shareholding. The downside is that there is an absence of pushy shareholders, but the upside is that the company has been able to develop the business with a long term view. In the 2022 Annual report five Institutional shareholders accounted for 42.7% (Allan Gray, Allianz SE, M&G Plc, FIL Ltd, UIL Ltd).

Its major shareholder is Allan Gray Australia Pty Ltd. It increased its holding from 12.32% in the 2022 Annual Report to 14.8% holding as of February 2023. Allan Gray Pty Ltd define themselves as contrarian investors who don't run with the pack. They apply their contrarian approach consistently and invest for the long term.

Market Screener reports the five major investors now own 44% of the Starpharma stock. UIL Ltd appears no longer to be a significant investor and ICM Investment Management Ltd has taken its place. This change may have some significance in the recent share price fall.

Share price performance

It is clear that there has been a concerted effort to drive the share price down for some time now. It is relentless and many biotech companies would not survive such a sustained attack. The share price has fallen from $16.60 in early February 2021 to $2.05 today. Starpharma is in a strong cash position so it can survive without needing to raise cash and destroy shareholder value through dilution.

The market cap is now just $100 million. It is interesting to look under the bonnet to see what assets Starpharma owns to get a sense of how the market cap aligns with the actual value of the business. Considering just the partnership with AstraZeneca on a single new DEP-drug formulation, Starpharma's agreement concerning AZD0466 involves $124 million in milestone payments plus tiered royalties on net sales. Looking at the commercial opportunities that Starpharma has in train , it is hard to understand why the share price is $2.05 currently.

Without a doubt, Starpharma is unloved, with essentially no recent coverage by Seeking Alpha authors, no Wall Street Analysis, no Seeking Alpha Quant ratings, so you have to do your own searching of quarterly reporting, company presentations etc, all of which is available on Starpharma's website. The company is professionally managed and it produces good material on which to consider investment.

Conclusion

A casual look at Starpharma's performance makes it an unlikely company to attract investor interest, but a more detailed look shows a company with strong IP involving two core technologies in the nanotech (dendrimer) space and clear evidence of interest in their technology by major pharmaceutical companies. Having been a participant in the Australian biotech scene, I've watched this company for many years and I've benefited from judicious exits at times when the share price was performing well. In recent years I've rebuilt a position in the company and while I am in a losing position currently, the upside is so large that I'm not tempted to sell. However, I am well versed in good news leading to share price reversal as happened this week with an announcement about development of Starpharma's DEP technology in radiopharmaceutical theranostics (both diagnostics and therapeutics) applications. The company already has interesting results from in house developments in this area. This is just strange.

Presumably those who don't love the company drove the share price down because it wasn't a solid deal with a big pharma company. Instead it was about a partnership with a University of Queensland's Hub for Advanced Manufacture of Targeted Radiopharmaceuticals that receives substantial Australian Government funding to support commercial development. I think the announcement made clear how valuable the DEP technology is and helped consolidate the possibility of Starpharma's DEP technology contributing to this emerging area.

Look away if you want a dividend and steady share price performance, but if you want a stake in a company that has the potential to significantly outperform, then Starpharma might be worth a look. There has never been a better time to acquire shares in this company at a huge discount.

I am not a financial advisor but I look closely at biotech opportunities that offer substantial upside. I hope my commentary is of interest to you and your financial advisor as you consider the risky end of your biotech portfolio.

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