Bavarian Nordic struggling to inject confidence

Since winning a $500m contract from the US government in June 2007, to supply 20 million doses of its attenuated smallpox vaccine, Imvamune, for the national stockpile, Bavarian Nordic shares have been heading south.

To a certain extent, the company has suffered along with other loss-making risky biotechs, and the lack of significant news on the horizon, following the award of the contract, has deprived the market of triggers for the stock. However, that cannot entirely explain the substantial 72% decline since then, much of it due to a real concern about Bavarian’s reliance on highly unpredictable government bio-defence contracts.

Chief executive Anders Hedegaard, who started in the job in August last year, has spearheaded a strategy to focus more on product manufacturing, sales and marketing, and expand sales of the group’s MVA smallpox vaccine, Imvamune, to governments outside the US. The bio-defence pipeline has also been expanded to include anthrax.

This is a brave move, considering the unpredictable nature of the clients and the huge potential for delays and surprises. The example of Acambis, Bavarian Nordic’s arch rival in the smallpox field, is not encouraging. After years of disappointing shareholders the British company decided to veer away from bio-defence for that very reason.

Sell rating

A research note by Goldman Sachs last week, which initiated coverage of the company with a “sell” rating and a 12-month price target of DKr95, significantly below the company’s current price of DKr164, will not have helped confidence in Bavarian's core business. Aside from questioning its sustainability, the bank also believes that because the majority of the cash profit on the US government contract has already been received, it makes a limited contribution to the future valuation of the group.

Bavarian is scheduled to submit data seeking Emergency Use Authorisation for Imvamune in the final quarter of the year, which will trigger a further $25m milestone from the US government. Approval is important, because it will mean Bavarian can crank up its production line and start supplying the US.

Full FDA approval, which is likely to be required before other countries consider building a stockpile, is still some way down the line. Phase III trials are set to start early next year, and will be another key event for the company.

Validation

The US go-ahead will also be important to validate Bavarian’s underlying MVA vaccine vector technology, upon which the remainder of its pipeline is based. The one exception is a phase II therapeutic prostate cancer vaccine, which was in-licensed last month.

The company has phase II projects in prostate cancer, breast cancer, HIV and measles ongoing. The fact that it is pursuing research in therapeutic cancer vaccines, an area that has experienced numerous clinical set backs this year, is also probably giving investors reason to fret. (Cell Genesys is latest cancer vaccine disappointment, August 28, 2008)

The track record of experimental HIV vaccines means hopes are not particularly high for this candidate, while the early stage of the pipeline in general adds to the risk. Phase I/II data due next year from all of the candidates will be watched with interest.

Broader pipeline needed

Bavarian Nordic is in a fairly unique position in that hundreds of millions of dollars are flowing in from a lucrative US contract, which should mean the group breaks even next year, a rare and notable event in the sector. Yet still the market does not believe the bio-defence story.

The US government has an option to extend the MVA contract to a further 60 million doses, adding $1.1bn to the deal value. While some commentators are confident the option will be exercised, Goldman Sachs points out that considering the delays other companies have suffered with similar contracts in the past, it cannot be considered a definite, and the timing is highly speculative.

Still, income is already flowing from the original contract. Like Acambis, the Danish company will be under a lot of pressure to turn that cash into a broader, stronger pipeline, and the focus on the largely unproven area of therapeutic cancer vaccines is not going to be enough. Licensing deals or acquisitions to broaden the pipeline would help, and in fact might be a necessity for the stock to stage any sort of recovery.

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