EP Vantage Interview - BTG plans acquisitions

Analysis

The surprising and extensive coverage of trial data for prostate cancer drug abiraterone, which has caused the shares in UK-based, speciality pharmaceutical company BTG to rise 18% in the last two days to two-year highs, while pleasing Louise Makin, BTG’s chief executive, is not about to distract her from planning the next stage of the company’s development that could see BTG buy another company.

Ms Makin, who will be banking milestones and royalties from licensing partner Cougar Biotechnology if and when the drug eventually hits the markets, is on the hunt for late-stage assets, a quest that she concedes could, among other options, lead to a buyout.

“With later stage products very often you’ve got to be prepared to buy the company because that is the only thing that they have got, or the only way to get your hands on it,” she says.

Small - but perfectly formed

While she is not willing to be tied down on either a time frame or specific target, she does accept that the areas she is considering will have to fit in with the strategy of finding niche areas such as pain, sleep and neurology that the company is moving towards with its existing pipeline.

These are indications where it is possible to build a small sales force and take products to market with relatively small and affordable trials.

As a speciality pharma company the group is naturally thinking about the US, where it not only has operations, but is also the region where a lot of its re-occurring royalties come from.

In terms of funding any spending spree, BTG is sitting on £57m ($114m) of cash and, unlike its listed peers, is in the unusual and comfortable position of generating money from the numerous royalty revenue streams it has from out-licensing its technology to partners.

While $114m might not have got much six months ago, the company could be aided in its ambitions by the credit crunch that has left companies on both sides of the Atlantic struggling for cash and with attractively low valuations.

Long-term game

Hitting the acquisition trail is part of a longer-term plan to keep the good news coming as the group faces up to some of the actions taken in its distant past, that have left it facing an estimated $22m fall in gross royalties in 2011-2012 when a number of licensing deals come to an end.

Historically BTG was a raggle-taggle technology actualisation company that in-licensed a variety of early stage products. Not only did the confusing portfolio make it a difficult sell to investors, the scatter gun approach to in-licensing products and the subsequent need to get money in quickly to keep funding the various products in earlier stage of development often meant that products were out licensed at very early stages.

Abiraterone, which has caused the media storm, was in licensed from the Institute of Cancer Research and in 2004 passed onto Cougar for net royalties of 3%. Many other potentially lucrative treatments also left the company commanding low-looking royalty revenues of anywhere between 2-3%.

Defending the deals Ms Makin says: “They were right for the company at that stage, we couldn’t have done anything else we did not have to the capability or the investment, because we were investing in so many things.”

Since joining in 2004 she has slimmed down the group, divesting it of its non-healthcare assets. This sell off of the old intellectual property products in the group has helped to prop up cash levels.

The remaining legacy licensing agreements have also helped her use the recurring royalties to fund operating expenses, steering the group, which last week reported a four-fold increase in full-year pre-tax profits to £10.7m, towards the longer-term goal of being sustainably profitable and achieve the holy grail of small UK healthcare companies and become an earnings stock.

Future catalysts

Another recent event that could help the group achieve this feat is the significant de-risking of the group’s most advanced proprietary product, Varisolve, a phase II treatment for varicose veins.

In June, the group saw its shares rise 15% when it announced positive safety data for Varisolve, which had been on clinical hold since 2004 over fears that its foam formulation could cause small bubbles to enter the brain and cause stroke in a certain subset of patients.

BTG is now in “active”, but early stage, partnering agreements for the drug, which barring another unexpected media frenzy, should be the next catalyst for the shares, that have more than doubled since the beginning of the year to 197¾p. Varisolve is forecast to have sales of $391m, according to EvaluatePharma.

Another big lift to the shares could come from TRX4, a monoclonal antibody that was licensed to private company TolerX, who in turn last year licensed it to GlaxoSmithKline for $760m. The drug is due to start phase III trials before the end of the year. As part of this licensing deal BTG is set to receive an impressive 50% of any of TolerX’s milestone and if Glaxo decides to take it into other autoimmune and inflammatory diseases BTG will get half of those milestones too.

Additionally, share price rises could also come from a number of other out-licensed products including Campath, which is marketed by Genzyme in leukaemia. More interesting in the work to get the drug approved in multiple sclerosis, which has already generated impressive head-to-head data with industry standard Rebif. Some analysts have forecast MS sales of $1.3bn. 

Home grown talent

BTG also has a handful of promising proprietary products including BGC20-0166, a phase II product that could address the need for a pharmaceutical product for the $1bn sleep apnoea market. Following successful trials the group has started partnering discussions, but has not made a firm decision about undertaking further trials itself.

Another promising candidate is BGC20-1259, a phase II drug for Alzheimer's that could have disease modifying properties, and acts on both cognitive and mood aspects of the illness. A phase II trial for the drug in this indiscation is scheduled to start by the end of the year.

But as successful as these products might be, they are unlikely to hit the market before 2012, meaning that Ms Makin, despite serendipitous share price rises, does need to keep her focus and deliver that acquisition.

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