Announcing : “The Long Tail”

Before you get too concerned, I am still on “gardening leave”.

But I’m also getting bored. Most of the house DIY tasks are done, the roof garden looks great. I fixed just about everything that needed fixing and then I fixed some things that didn’t need fixing (which, now also need to be fixed). Too many idle hours makes me antsy and I finally had to do something about it.

After the flack I got from my last couple of posts, I decided that I would take Australian life sciences commentary out of this blog. Anyhow, most of you reading this are not Australian and don’t care anyhow about what a bunch of goofy antipodeans are doing in their labs. Instead I have launched a new blog – “The Long Tail.” Don’t worry, this blog isn’t going away, you can still read about me, mostly talking about myself (ha ha).

I’ve been thinking about doing this site for a long time, so I hope you enjoy it. It’s not very pretty yet but it will get better with time.

Like a fine Barossa shiraz … style and substance…

My Amusement : CYP

I’ve been watching, with a combination of amusement and sadness, the reaction on Hotcopper to my previous post. The old adage of “no good deed goes unpunished” is truly alive and well. It’s amazing how day traders will try to find a nefarious intent, where there is none.

My position regarding CYP is very simple. I think the Cynata team are intelligent and capable entrepreneurs. I also am a personal believer in the concept of expounding a vision and letting the rest follow. But when you are a publicly traded company, you owe your shareholders a different degree of transparency and I don’t like to see hype where it isn’t warranted. For the record, I’d like to dispel a few myths:

1) I have no grudge with Cynata whatsoever. I have publicly stated that the members of the management team have my respect for their accomplishments in convincing public investors that their non-clinical technology warrants an $80m market cap. Anyone that manages to RTO a defunct environmental technology company into a stem cell masterpiece deserves all of our respect.

2) My comments are all based on public domain information that is able to be independently diligenced. If anyone wants further references, they can email me at my personal address.

3) I have never intended to make a specific example out of Cynata. From now on I will be publishing – within the limits of appropriate and defensible professional conduct and legal public discourse – my viewpoint on many Australian biotech securities that, for too long, have been sheltered by ad-hoc, lacking or insufficiently independent analysis.

Let me be clear. My belief is that Australia could have a thriving biotechnology economy. We have the brainpower. We have the translational research capability. What is missing is quality in our ASX-listed companies, with a few notable exceptions (CSL, Resmed, Cochlear, Sirtex … and a handful of others). I used to think that a microcap exchange for biotech was a stupid idea, but I have come to realize that Australian life sciences companies have essentially adapted a limited public market to replace later-stage venture capital. I think this actually has the potential to be cool – but only if we call out bullshit when we see it.

Besides, if we are all honest with each other, nothing I have said is new. So just call me un-original. I’m ok with that.

The “poster child” for why ASX biopharma stinks

The opinions expressed in this article are the author’s own and do not reflect the view of any affiliated companies or organizations.

Australia could be a great place to commercialize biopharmaceutical research. We have top institutions, we punch above our weight in publication citations in leading journals and number of pretty decent drugs have been born from the minds of Australian researchers. Sure venture capital is a bit light-on and the enthusiasm level of government policy around life sciences waxes and wanes… but hey, we have the ASX, right? And over a 100 small-cap healthcare/life sciences companies that are listed and capable of accessing public cash.

If you really believe in biotech, you might even take the position that all biotech companies (and for that matter, cleantech, energy, etc. – anything that is capital intensive) should go public as soon as possible. Providing you have an efficient market, good analyst coverage and decent disclosure regulations, the wheat from the chaff should get separated pretty quickly.

Right?

Wrong. Probably.

I have watched with great amusement over the past few days as Cynata’s (ASX: CYP) share price has truly rocketed along (200+ %). Admittedly, if you are an illiquid, “penny” stock to begin with, then any share movement can be dramatic. Even existing investors / directors purchasing (or dumping) stock can move the needle pretty spectacularly. But this is a truly remarkable company and should be a poster child for extreme caution, especially for retail investors thinking about investing in microcap ASX biotech. I’m not saying “don’t”, I am saying “think carefully.”

For those of you reading this post who are not scientifically trained, let me tell you three important pieces of information about the development of new healthcare technologies, particularly therapeutics. These are general statements that apply to all biotech companies.

1) There is nothing remarkable about studying a new technology in animal models. It is not a milestone. It is not an accomplishment. It is simply a part of developing a new product. Any company that issues a press release that it is conducting animal studies, should be strenuously avoided. Not because it isn’t important – it is – but because it tells you nothing whatsoever about the quality of the technology. In fact, it may imply that the technology has been insufficiently validated before going into commercial development.

2) Engaging a Contract Research Organization (CRO) is not a milestone. A CRO is a service provider. It is the biotech equivalent of signing a cable television service. It is humdrum. It is uninteresting. It is a purely vanilla process. It does not imply any commercial or technology competency whatsoever, except the ability to receive an email and place a signature on a piece of paper. It is an entirely forward looking statement.

3) Scientific validation is not a statement of “fact” to be reported in a press release – it is a peer reviewed process involving real data under controlled conditions. It means that the science was able to be reproduced independent of the originator/inventor, and that it has been published in a fashion that withstands expert scrutiny.

(Remarkably the research that “validated” the Cynata Cymerus technology was essentially conducted at the institution from which the technology was licensed. I’m sorry, but that is not scientific validation by any metric, and it is not newsworthy. It also cannot be considered “validated” when the inventor and key members of the “validation team” hold stock in the company commercializing the technology.)

In short, investors should be incredibly wary of throwing their money at a company that makes these kinds of public claims and disclosures as the basis of “progress”. Indeed, it is my opinion that generally speaking, ASX continuous disclosure rules may even require some reconsideration for biotech because an awful lot of irrelevant information gets channeled as “major news” and the non-expert investor can easily get sucked in.

Does any of this actually matter? (Source: ASX)

Does any of this actually matter? (Source: ASX)

My specific analysis of Cynata?

Firstly, I am extremely disappointed by the nature of the analyst coverage that has been dedicated to this security. In a typical example, there is absolutely no detailed or meaningful scientific claims that are relevant to the security under coverage or any identifiable product pipeline. There are tenuous analogies (for example, antibody drugs) and ridiculously generalized statements (that “Nobel prizes are being awarded”) that simply tell you nothing whatsoever about the investment thesis of the company. Such coverage may or may not elucidate an impression about the state of the market, but as for the company – it is a wholly irrelevant analysis. Retail customers see this type of coverage involving respectable firm names (and high-caliber scientific publications in the footnote) and assume that it is robust.

It is not. Recent analyst recommendations are even more breezily formulated. Incidentally, I can also assure you that no Nobel prizes have been awarded for Cynata’s technology.

The second amazing thing about Cynta are the assertions around intellectual property (IP). The jewel in the crown of the Cynata IP “portfolio” is allegedly the US patent 7,615,374 in-licensed from the Wisconsin Alumni Research Foundation (WARF), a patent that was magically discovered by the founders of Cynata. I can’t authoritatively tell you too much about this patent, but let me tell you about WARF (all public domain).

WARF holds one of the most prestigious, thought-leading and impressive intellectual property portfolios in the field of stem cells, mainly because much groundbreaking work in regenerative medicine was accomplished at UW, Madison. The WARF patents are also among the most highly visible, litigated and “picked over” patent portfolios in the world of regenerative medicine and stem cell research. It is worth noting that some of the key litigation around WARF patents recently came to a remarkable conclusion, illustrating not only the complexity of this field but the money at stake for the winner and the purse that is required to maintain a footing.

Now, forget for a moment that you may or may not know about biotech. Forget the science. Forget the clinical development. Just ask yourself this simple question – if millions of dollars have been spent by the finest global biopharmaceutical companies trawling, litigating and fighting over fundamental stem cell technology in US Supreme Courts, might it not be too good to be true that a couple of Aussie entrepreneurs “stumbled” over an undiscovered (but yet published) biotech treasure trove? Might this not raise an eyebrow or at least induce the sensible investor to ask a few more questions? Moreover, if it really is a game-changer, then why was it licensed to a company with a negligible balance sheet and limited means to develop it?

If you were the prestigious WARF (who can and does partner with anyone they wish), wouldn’t you want to reap the benefits of a global biopharmaceutical company taking the technology forward with a full head of steam (and writing big royalty/milestone checks along the way)? Or at the very least, spinning out the next $Bn company directly?

Third – let’s talk about practical realities. Ignoring any patent continuations or international prosecution that may be happening in the background for the 7,615,374 patent, the priority date for the patent is late 2007. This means that the life-span of the patent in largest global healthcare market is almost half over and by the time anyone gets a commercial drug out to the marketplace that might benefit from this manufacturing technology, it’s basically going to be an irrelevant patent (note: developing a drug that might infringe a manufacturing patent is protected by “safe harbor” research laws in most commercially-important jurisdictions). This is probably one of the main reasons why this technology could be snapped up without any real commercial burden to a licensee.

Essentially … it is quite possibly a worthless patent, especially considering the patent “stack” that would be required to take a cell therapy to market these days (if you want to see how messy and money-consuming this space is, just look at what is happening with CAR-T cell therapies).

Moreover, the 7,615,374 patent is effectively a “process” patent. That is, it is a patent that describes a “recipe” for culturing (growing) a certain class of cells (that may or may not, incidentally, have any clinical value). Put into layman’s terms, it is not a patent for THE chocolate cake, it is a patent for the process of making A particular type of chocolate cake. Anyone who has ever baked a cake knows that you can swap butter for margarine or oil, you can substitute self-raising flour for plain flower with baking soda / baking powder. Hell, you don’t even need flour!

That is the problem with the 7,615,374 patent, it is able to be almost trivially “invented around” in order to achieve the same outcome. Read it, including the public-domain patent analytics, it’s not an intellectual stretch even for the uninitiated.

Finally, any investor in biotechnology should be sensitive about companies that make aggressive marketing claims in early, even pre-clinical, product development. I was very concerned, verging on disgusted, by the slick marketing claims “implied” by Regeneus‘ (ASX: RGS) through their technology promotion with the National Rugby League. Finally, people had the gumption to protest what was a blatantly unethical strategy for building consumer traction for a completely unvalidated (and possibly even ineffectual) clinical procedure. Building investor awareness demands a similar level of sensitivity, especially for a public company, and Cynata’s marketing position warrants pause. Any company that makes therapeutic claims that are not actionable for patients, or accessible via formal clinical trials, any time in the near future (especially on a corporate website) should be approached with extreme caution as an investment prospect.

To conclude – on the one hand, I have a grudging admiration for the entrepreneurial spirit that has been demonstrated by the Cynata team, and they have some very bright and accomplished people. I try to ignore the fact that the scientific advisory board (SAB) is chaired by an electrical engineer, rather than an immunologist or an expert in regenerative medicine, but then I was originally trained as an electrical engineer myself, so that would just make me a hypocrite (though I would never have the gumption to chair an SAB). I also try to ignore the fact that the leadership team has very limited experience in the manufacturing of cell therapies – hey, good analysts always look at the overall team, right?

On the other hand, I want to see Australian clinical science produce public companies that show peer-reviewed data, a strong ethos of scientific accountability and become part of the desirable investment bedrock of the ASX. I have previously reported my opinion that we have too many zombie (i.e. crap) life sciences companies on the ASX. The more “hollow chocolate bunnies” we allow to attract investor capital, the harder it will be for the really good ideas to move forward and flourish.

Making a quick buck in the short term isn’t the solution to long-term success for the industry.

Caveat Emptor.

Hollow Chocolate Bunny

Cynata : A hollow chocolate bunny? You decide.

Notes:

1) Hollow-chocolate bunny image sourced from here)

2) The beautiful feature image of a neuron derived from a human embryonic stem cell was sampled from the work by Sharona Even-Ram, Ph.D., of Hadassah University Hospital’s Goldyne Savad Institute of Gene Therapy in Jerusalem