If you’re looking for a once-in-a-lifetime investment opportunity that can change your future, don’t look any further!
Recently big player Allergan (www.allergan.com) made a takeover bid for Tobira Therapeutics (www.tobiratx.com) and was paying a staggering premium of 500 percent compared to the last closing price. But it gets even better: in addition to a cash upfront payment of US$28.35 per share, Tobira shareholders will receive up to US$49.84 per share in Contingent Value Rights that may be payable based on the successful completion of certain development, regulatory and commercial milestones.
So in a perfect world for Tobira shareholders, Allergan would pay up to US$1.7bn or 19 times of Tobira’s previous market value. After the failed merger with Pfizer, Allergan is now on the hunt for small biotech companies to fill up its development pipeline. So the big question is who is next in line or which company would justify such a hefty premium?
The majority of the investor herd is solely looking at US-listed biotech companies whereas our experienced team of experts is thinking outside the box and found a heavily undervalued Canadian biotech company that is about to sign a big licensing deal with a big pharma company.
The current market cap of this little gem is a mere C$30m. There is only one European analyst firm covering this biotech company with a target price that equals a C$150m. That was enough to catch the interest of our stock market experts but it is only the tip of the iceberg. The upside potential is nothing short of massive here. And we will now tell you why in a nutshell.
Sirona Biochem (www.sironabiochem.com) is a cosmetic ingredient and drug discovery firm with a proprietary platform technology. Through its wholly-owned French subsidiary, TFChem, it specializes in stabilizing carbohydrate molecules with the goal of improving efficacy and safety.
Sirona Biochem is focusing on attractive indications such as the treatment of type II diabetes which is predicted to be the 7th leading cause of death by 2030. According to the World Health Organization, diabetes is a chronic condition suffered by an estimated 420m people in 2014 and is expected to grow to 642m by 2040. Approximately 90% of the cases are type II diabetes. The global diabetes drug market is currently valued at US$46bn. Sirona Biochem has already signed two licensing deals with big players.
Wanbang Biopharmaceuticals, one of the largest manufacturers and marketers of a comprehensive portfolio of drugs for diabetes in China, is currently advancing the development of Sirona’s anti-diabetic SGLT2 inhibitor which delivered promising preclinical study data. If all goes according to plan, Sirona Biochem could receive upfront and milestone payments of up to US$9.5M in addition to royalty payments for product sales in China. But this is chicken feed compared to the potential of Sirona’s pipeline of cosmetic compounds for i.e. skin whitening and anti-aging.
Two years ago, Sirona Biochem signed a global exclusive licensing agreement with global pharmaceutical company Obagi Medicare Products owned by Valeant Pharmaceuticals International for the commercialization of skin whitening compound TFC-849. Sirona will receive a licensing fee and ongoing royalty payments for global product sales. While Valeant Pharmaceuticals was moving much slower than expected with this skin whitening compound, the scientist of Sirona Biochem were not sitting back and taking things easy. They developed a much safer and more efficient skin whitening compound called TFC-1067 which is hydroquinone free and has 8 times the efficacy of deoxyarbutin, the current gold standard.
One of the major differentiators between TFC-1067 and Sirona’s earlier generation skin lightening compounds is that the chemical process of applying Sirona’s proprietary fluorination technology now requires only three steps to yield a final product. This results in a highly favorable cost of goods (COGs) and more importantly, a product with very profitable commercial viability. A preliminary estimation of COGs for the active ingredient yielded C$0.10 per 100 ml final formulation at a final concentration of 0.1%.
Skin whitening market
There is a huge market for skin whitening treatments in Asia Pacific where fairer skin is increasingly considered more attractive. Did you know that the worldwide skin whitening market is bigger than the market for skin tanning and sun protection? Five years ago, Japan’s market share was about 75 percent. It decreased a bit to 70 percent by now because other Asian market like China and India grow over time.
Particularly in India, Japan and China, fair skin is seen as a representation of youth, beauty and affluence as it is considered an indication that one has not been carrying out extensive manual labor in the sun. Furthermore, skin whitening products can also be used to reduce sun damage or minimize the appearance of sun spots, freckles or uneven pigmentation which makes them attractive to Europeans and North Americans as well.
Because it is targeting specifically the Asia-Pacific market, the potential for skin whitening products is absolutely massive. Approximately 15% of the worldwide population is buying skin whitening products with the majority of the customers located in Asian countries. For instance, about one third of the Chinese population and uses skin lightening products on a daily or weekly basis. About 50% of Koreans and 29% of Filipinos are likely to use skin-lightening products if they have the money to afford them.
The biotech analyst of First Berlin Equity Research (www.firstberlin.com), who is covering Sirona Biochem, used a very conservative number of 500 million potential users for his forecast. The market opportunity for Sirona Biochem is just enormous. Every big cosmetic company is looking to get involved in that growing market. The game changer is going to be if a company can get the right product on the market which removes the perception of risk. People are using these products anyway already even if they know there is risk and if a company can take that risk out of the equation then the market size becomes even greater.
With growing awareness about the harmful (cancer) effects of some skin whitening ingredients that are currently used in most of the products on the market, there is a massive unmet need for a safe and effective skin whitener like the one developed by Sirona Biochem (SBM.V) which opens up a big investment opportunity. Valeant Pharmaceuticals and other global players like Allergan really have the money and marketing power to bring such a potential blockbuster to the market.
It goes with saying that Sirona Biochem has to cut a licensing deal with a big player who will then use Sirona’s superior skin whitening compound in their own products. The stated goal of Attila Hajdu, Chief Business Development Officer of Sirona Biochem, is to license TFC-1067 to a major industry partner with a commercial and R&D infrastructure in Japan, Asia-Pacific, Europe and North America.
Prior to joining Sirona Biochem, Attila Hajdu held various senior leadership positions within GlaxoSmithKline (GSK) and Astellas Pharma, accumulating 17 years of experience in Sales, Marketing, R&D Finance, Medical Affairs and Business Development.
He gave up a high paying job in big pharma and took a 50% salary cut. Moreover, he lost all of his perks (company car, employee stock purchase plan and having a staff of people) because he believed in the massive potential of Sirona’s technology platform from the beginning and that it would pay off in the long term. This requires hard work and determination, and nothing worth having ever comes easy.
We are convinced that he understands how big pharma ticks and what needs to be done to close a big licensing deal regarding TFC-1067 sooner than later. Talk is cheap but actions are priceless and if you check the insider transaction, every investor will realize that Attila Hajdu is putting his money where his mouth is because he knows better than anybody else that TFC-1067 could be a perfect solution for a US$20bn market and a company maker on its own.
This year, Allergan already bought not only Tobira Therapeutics but also a couple of small biotech companies as follows:
- 7th January 2016 - Anterios (US$90m upfront plus milestone payments)
- 21st April - Topokine Therapeutics (US$85m upfront plus milestone payments)
- 11th August - ForSight VISION5 (US$95m upfront plus milestone payments)
- 6th September - RetroSense Therapeutics (US$60m upfront plus milestone payments)
- 14th September - Vitae Pharmaceuticals (approximately US$639m)
- 21st September 2016 - Akarna Therapeutics (US$50m plus milestone payments)
The management of Sirona Biochem came up with an internal valuation of US$265m including upfront, milestone and double-digit royalty payments for their new skin lightening compound TFC-1067 by using the standard risk adjusted net present value forecast model which is highly accepted in the industry. It is only assuming a market share of 15% which a major global cooperation could easily attain with an appropriate marketing budget. This valuation has been validated by Bloom Burton (www.bloomburton.com) which is one of the largest investment banks in Canada.
In our Expert Round Table Discussion about Skin Whitening, Attila Hajdu, said that they’ve been talking to multiple global corporations to license their newest compound which they believe is the safest and most effective skin lightener in the world. He confirmed that they are very close to signing a deal and they’ve been working on this for a long time now. It is very important for them to find the right partner who will continue the development and commercialization of this innovative compound.
With a current market cap of approximately C$30m and an imminent licensing deal for their new skin lightening compound, Sirona Biochem has a lot of upside potential. First Berlin Equity Research is valuing Sirona Biochem at C$0.98 per share based on their current pipeline where licensing deals are in place. The analyst has not even included a deal for the new skin lightening compound TFC-1067.
Please keep in mind that such a licensing deal could add another C$345.8m (USD/CAD 1.305) to the current pipeline valuation by First Berlin which would translate into a potentially new target price of C$3.05 per share. We would also not rule out that a big player would try to make a friendly takeover bid instead of “just” doing a licensing deal. At the end of the day, it doesn't matter if for instance Allergan, AmorePacific, Shiseido or Galderma is making a move first. We think there is a good chance that Valeant Pharmaceuticals would counter a potential takeover bid for Sirona Biochem because they already have a foot in the door with their licensing deal for the older generation of the skin whitening compound.
Even if you just take a potential upfront payment of US$90m (C$117.45m) into consideration and combine this with the conservative target valuation of First Berlin, we are talking about C$267.45m or C$1.65 per share. Sirona Biochem closed at C$0.19 yesterday.
After a big licensing deal, Sirona Biochem would be cashed up with more than C$100m in the bank and could start to look into in-licensing opportunities but also possible M&A transactions in North America. They could also move to the TSX main board to improve the visibility. Another good thing about Sirona Biochem: it is not a one-trick pony because they are also working in the areas of i.e. cell preservation, anti-aging, keloid scar as well as acne treatment.
It is also clear that Sirona Biochem would definitely pop up on the radar screen of the big boys, also called institutional investors. The share price will take care of itself.