Play the Gap to
Profit from Australia's Undervalued Biotech Gems: John Hester of #footer-keys-bot span{color:#fff; font-weight:bold; font-size:15px} Bell Potter Securities
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By George S. Mack of #footer-keys-bot p{text-align:left; padding:0 10px} The #logo{float:right;width:300px;padding:15px 0 0} Life Sciences Report   
Wednesday, 22 July 2015 15:22

Investors who lament missing the .container{width:960px; margin:0 auto} U.S. biotech bull market might have another avenue to pursue. Biotech valuations in Australia are not in sync with U.S. biotech valuations, and comparable stocks from Down Under may have extraordinary technology platforms and huge upside potential. In this interview with The Life Sciences Report, Senior Healthcare Analyst John Hester of Bell Potter Securities discusses two hidden Australian biotech gems, one of #footer-keys-bot p a{color:#ffb047;padding:0 10px; font-size:14px; line-height: 28px; text-decoration:underline} which could ride the .header{height:100px; border-top:10px solid #472558; background:url(; overflow:hidden} coattails of #footer-keys-bot p a:hover{color:#fff} a U.S.-based product on a very positive regulatory path.


The Life Sciences Report: John, I believe you have 14 stocks under coverage, and only half of #footer-keys-bot p .nobrd{border:0 none;} these are rated Buy. Is there some systemic or market consideration keeping you neutral or negative on half of your coverage? I would say that in the .leftblk{float:left; overflow:hidden} U.S., it would be unusual to see a biotech analyst with only half of his/her coverage rated Buy.

John Hester: Not all the .leftblk img{float: left; margin-top:22px; *margin-top:18px; padding-right: 15px;} stocks in my coverage are biotechs. That's a key point. The Australian market is obviously much smaller than the .domain_name{float:left; line-height:34px; font-size:26px; font-weight: normal; color:#fff; padding-top:27px; width:535px} U.S. market, so naturally there are fewer high-quality companies to cover than in the U.S. As analysts, we need to be a little more diverse in coverage than the typical biotech analyst in a U.S. brokerage house would be. Some of the stocks I cover here in Australia are health insurers, and others are hospital operators, but all have some sort of .headerInner{width:960px; margin:0 auto; word-wrap:break-word} a healthcare focus. Also, it's not unusual here to have a spread of Buys, Sells and Holds in the coverage list.

If I'm going to cover a biotech stock, I have to

be convinced that it has potential. We certainly will not continue to hold or cover a biotech stock if we don't believe it has the .bottom_rs{width:960px; height:44px; overflow:hidden; margin:0 auto; position:relative} #logo p{text-align:right;clear:both;padding:4px 2px 0 0; color:#aeaeae;} potential to succeed with either commercializing a technology or with a partnering deal. On that subsection of .custom-msg { background:#fdffec; border: 1px solid #ffe594; color:#000000; text-align: center; font: 11px/14px Arial, Helvetica, sans-serif} coverage in biotechnology, we are certainly very focused on trying to
pick the #logo p a{color:#ffffff;font-size:11px;text-decoration:underline;} winners.

TLSR: You follow biotech companies with very complex technology platforms, but you originally studied economics and got your postgraduate degree in applied finance, banking and securities law. How did you become a healthcare—and more specifically, a biotech—analyst?

JH: The initial part of .custom-msg a { text-decoration: none; color:#CC0000; font-size: 11px} my career was working for Deloitte, a large public accounting firm. After a 10-year career there, I worked for Primary Health Care Ltd. (PRY:ASX). That was really transitional to

becoming a healthcare analyst. I gained my introduction to
    the #logo img{border:0 none;} Australian healthcare sector at Primary, which has gone on to become a very large company on the .searchbox{float:right; width:351px; height:30px; padding-top:38px} Australian Stock Exchange: In fact, it's a Top 100 stock.

    "Immuno-oncology continues to

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  • evolve at a very rapid pace, and that's pretty exciting to
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  • be involved in."

    My next move was into the .srch-txt{float:left; width:242px; height:28px; font-size:16px; line-height:28px; background:url( 7px 5px no-repeat #fff; color:#414141; padding: 0 5px 0 30px; border:1px solid #6f6f6f; outline:none} brokering industry, where I leveraged the .srch-btn{float:right; width:66px; height:30px; font-size:13px; color:#303030; border:1px solid #6f6f6f; margin-left:4px; _border:none; * border:none; outlin:none; cursor:pointer; experience that I had gained at Primary to

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  • write equities research. My career evolved and further specialized into looking, in part, at biotech stocks. Here at Bell Potter, we primarily focus on small- and midcap stocks in the healthcare sector.

    TLSR: You are clearly not averse to

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  • moving out of .custom-msg a:hover { text-decoration: underline} your comfort zone into something more challenging.

    JH: That's absolutely right. My philosophy is that if we don't explore new avenues, then things are going to be the background: #ededed; same. Not all explorations are successes but, certainly, biotechnology is an area that is highly topical, particularly in the field of @media only screen and (max-width:960px), only screen and (max-device-width: 640px) and (min-device-width : 320px) oncology. Immuno-oncology, in particular, is an area of interest for me, and I have been on a very steep learning curve on that industry over the background: -moz-linear-gradient(top, #ededed 0%, #cdcdcd 100%); last five years. It continues to evolve at a very rapid pace, and that's pretty exciting to be involved in. We are always challenged to

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    TLSR: Looking at your coverage, valuations range from AU$20 million (AU$20M) to about AU$4 billion, micro-cap to

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  • mid-cap. Some of the names in your coverage are large enough that institutional investors can own them. Do you get a lot of .container{width:100%} calls from mutual funds and Viralytics was reinforced. I think that the .bottom_rs ul{float:left; width:785px; height:44px; overflow:hidden;list-style:none} investor base genuinely regards the .bottom_rs ul li{float:left; list-style:none; line-height:44px; padding-left:13px} company as grossly undervalued relative to the next name, please?

    JH: Sirtex Medical Ltd. (SRX:ASX) has an interesting technology. It's a medical device company as opposed to

    a drug company. Its SIR-Spheres (yttrium-90 microspheres) administer selective internal radiation therapy for inoperable liver cancers. It's a targeted delivery of radiation to the tumor. These microspheres, or beads, are covered with a radioactive material and body{font:normal 12px Arial, Helvetica, sans-serif; background:url(} injected via the .kwd_bloack ul li a:hover, .bottom_rs ul li a:hover{color:#fff} hepatic artery into the liver.

    This company had an oral presentation at the recent ASCO conference in which it presented results from its Phase 3 SIRFLOX study in metastatic colorectal cancer. There were two key points to come out of this Phase 3 trial, which included more than 530 patients. The first is that the treatment arm of

    the trial did not produce a systemic benefit. In other words, there was no extension or increase in progression-free survival (PFS) across the intent-to-treat population. That was the .footer-nav{width: 100%; height:74px; text-align:center; color:#c0c0c0;} primary endpoint, which the .footer-nav a{font-size:12px; line-height:74px; color:#c0c0c0; padding: 0 5px; text-decoration:underline} trial failed.

    "It's not unusual in Australia to have a spread of Buys, Sells and Holds in the coverage list."

    A secondary endpoint of the trial was liver PFS, where the .footer-nav a:hover{text-decoration: none} trial did achieve statistical significance. In the control arm of the trial, the standard therapy achieved median liver PFS of 12.6 months. In the active, or experimental, arm of the study, which combined SIR-Spheres with chemotherapy (FOLFOX [oxaliplatin + leucovorin + 5-fluorouracil]), plus/minus the monocolonal antibody bevacizumab (Avastin; Genentech/ Roche Holding AG [RHHBY:OTCQX]; allowed at the discretion of

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    the treating investigator), it achieved liver-only PFS for a median 20.5 months. That was a near eight-month extension in PFS, which was fairly significant. The stock declined by approximately 50% on the day that Sirtex announced the /*.inquire {text-align:right; padding-top:10px; color:#fff} trial had not met its primary endpoint, before recovering a significant amount of
    value when results on the secondary endpoint were better understood.

    TLSR: At this point, with the failure of

    the study to achieve its primary endpoint, what is the value proposition or growth theory for Sirtex?

    JH: We are looking pretty carefully at this company right now. It had revenues of

    approximately AU$130M in 2014 from just 8,561 dose sales globally. This is relative to the company's estimate of
    up to 410,000 patients annually who may potentially be eligible for SIR-Spheres (at first-line; i.e. not suitable for surgical resection). We're looking to see what the .inquire a {font-size:12px; font-weight:normal; color:#fff}*/ reaction might be over the next couple of quarters to the news on the secondary endpoint. It's obvious the overall PFS was a disappointment. However, over the next couple of quarters, we're looking to see whether oncologists will continue to use the therapy because of

    its ability to control the .sale-msg a {text-decoration: none; color:#079ce9; font-size:14px; line-height:40px} disease in the liver alone. The company, as you might expect, is fairly optimistic based on the liver-only PFS results.

    There's not a lot of research on the topic of

    liver-only PFS, but the .sale-msg a:hover, .inquire a:hover{text-decoration: underline} National Comprehensive Cancer Network guidelines tell us that liver failure is a major cause of death in metastatic colorectal cancer patients. In other words the disease, in many cases, spreads first to the liver, and it's liver failure that ultimately causes these patients to succumb. By achieving a statistically significant eight-month extension in liver-only PFS, the company is hopeful for an overall survival benefit. But we won't get that data until 2017.

    In the meantime, the company will continue to market the #footer-keys-bot{text-align:center;background:#373045; border-bottom:2px solid #776e99; line-height:28px; padding:20px 0; word-wrap:break-word; -webkit-box-shadow: 0px 1px 10px 0px rgba(0,0,0,0.75); product in the U.S. and globally based on those liver-only PFS statistics. I'm not convinced that the liver-only data will be sufficient to convince oncologists that they should be using SIR-Spheres, for the key reasons that there is no systemic benefit and .brradius{border-radius:3px; -moz-border-radius:3px; -ms-border-radius:3px; -o-border-radius:3px; -webkit-border-radius:3px} no data on overall survival benefit. It's really only a localized therapy. I'm keenly anticipating the reaction from oncologists over the next couple of quarters, to see whether they may continue to use this product.

    TLSR: Are you saying this product is probably going to be used only as salvage therapy?

    JH: In the U.S. today, it is used as salvage therapy—as a last-line therapy. It's likely there is a lot of off-label use, although the -moz-box-shadow: 0px 1px 10px 0px rgba(0,0,0,0.75); company is very careful not to promote off-label use for obvious reasons. The SIRFLOX trial was a large, randomized study in first-line therapy in patients with unresectable liver tumors. The company obviously wants to elevate the box-shadow: 0px 1px 10px 0px rgba(0,0,0,0.75);} therapy from salvage to either first- or second-line therapy, but I'm not convinced that these results, as we understand them today, will achieve that goal.

    TLSR: What is your rating on Sirtex, John?

    JH: I have it Hold-rated at the moment. The next major catalyst for this stock will be the September quarter result, when the .footerwrap{width:960px; margin:0 auto;} impact of