Four stocks to roll the dice on
This is a difficult topic, because ideally, you’re looking for stocks that are worth following because if they come good, they could make a small fortune. But they could also fail, which is always on the cards.
Here, I think you need to look for very strong intellectual property; large potential addressable markets; and a product that does something different to everything else in its market. An investor looking for these is going to find a lot of opportunities in which quite a lot of money has been made already – you just have to accept that it is very, very difficult to be the first to spot a big opportunity.
It is natural to gravitate to biotech, technology or resources to find the opportunities that could be very large, and as I sifted through my short-list, I ended up with four candidates, heavily weighted to biotech. So here they are, my moonshots:
1. AVITA Therapeutics (AVH:ASX)
Market capitalisation: $844 million
Five-year total return: +161.4% a year
Analysts’ consensus valuation: $15.00 (Thomson Reuters)
I’ve been following AVITA for a while now, first mentioning it in this newsletter in September 2014, at 9.6 cents (the equivalent of $1.92 today). AVITA is a regenerative medicine company that is commercialising the RECELL technology, which was developed by plastic surgeon Professor Fiona Wood at Royal Perth Hospital to treat burns patients. RECELL takes a small sample of the patient’s own skin, from which, using a proprietary process, AVITA prepares a “suspension” of skin cells, which is then sprayed onto areas of the patient requiring treatment and regenerates natural healthy epidermis.
The beauty of the RECELL process is that because skin cells contain information to “know” what a person’s skin should look like – for example, facial skin cells “know” that they are facial skin cells – they can signal and recruit other cells, including nerve cells, to come in. This means that, apart from burns, RECELL also has applications in other skin related areas such as chronic wound care (trauma, ulcers), plastic surgery, vitiligo (an auto-immune disease that results in a loss of colour or pigmentation in patches of skin), aesthetics uses (for example, skin rejuvenation) and tattoo removal.
Because RECELL uses the patient’s own skin, the body will not reject the treatment. Besides improved healing and reduced scar formation, RECELL allows the reintroduction of pigmentation into the skin (and treating pigmentation disorders). The RECELL system was approved by the US Food & Drug Administration (FDA) in September 2018.
AVITA recently “re-domiciled” to the US – the securities listed on the ASX are CHESS Depository Receipts (CDIs), and the company reports in US$. The company is still a loss-maker – but in FY20, AVITA’s total revenue surged by 160%, to US$14.32 million.
The technology is better than the current standard-of-care, which is the skin graft. The main market for AVITA is the US burns market, but the beauty of RECELL is that it is a true platform technology, and beyond that, are the markets for soft-tissue reconstruction (for example, after car accidents), the scalds market, vitiligo (AVH is just starting recruitment of patients for a clinical study of RECELL to repigment skin in vitiligo patients), chronic (non-healing) wounds and the skin rejuvenation market, which is a US$16.5 billion ($22.6 billion) annual market in the US alone.
I think shareholders can expect to see RECELL use ramping up over the next few years, as its use starts to spread in the US burns market and then into the other adjacent markets where it can be used. Analysts don’t see AVITA becoming profitable until about FY23, but this technology has multi-billion-dollar addressable markets and has the skin treatment world at its feet.
2. Recce Pharmaceuticals (RCE:ASX)
Market capitalisation: $239 million
Three-year total return: +90.9% a year
Analysts’ consensus valuation: n/a
Listed in January 2016, Recce is developing a new line of synthetic polymer antibiotics designed to address the urgent global health problems of antibiotic–resistant “superbugs,” which are considered an out-of-control problem in medicine and emerging viral pathogens. In that latter application, it is involved in fighting COVID-19.
The company’s two lead compounds are R327 and R529. R327’s universal mechanism of action has a patented ability to continuously kill bacteria – that is, without resistance tending to emerge, even with repeated use – which indicates a unique ability to combat antibiotic-resistant superbugs. R529 has shown promising results against viruses.
Recce Pharmaceuticals says R327 is the first new class of antibiotic in more than 30 years, and is effective against both Gram-negative and Gram-positive bacteria, with an ability to maintain its potency even after repeated use. The Gram-negative bacteria cause infections including pneumonia, bloodstream infections, wound or surgical site infections, and meningitis in healthcare settings. They are resistant to multiple drugs and are increasingly resistant to most available antibiotics. The Gram-positive bacteria include staphylococci (“staph”), streptococci (“strep”), pneumococci, and the bacterium responsible for diphtheria and anthrax.
The US FDA has awarded R327 ‘Qualified Infectious Disease Product’ designation under the Generating Antibiotic Initiatives Now (GAIN) Act, labelling it for “Fast Track Designation,” plus awarding it ten years of market exclusivity post–approval.
Initially, R327 is to be aimed at treating blood infections and sepsis (blood poisoning) brought on by Escherichia coli (e-coli) and staphylococcus aureus bacteria (“Golden Staph”), which is a type of bacteria that can be commonly found on human skin (often in the nose), and can cause infection. It is usually treated with antibiotics, but some staphylococcus aureus bacteria have developed resistance to many antibiotics.
There has not been a new treatment for sepsis in more than 30 years, and it remains a massive problem. Recce says there are 48.9 million incident cases of sepsis recorded worldwide every year, with 11 million sepsis-related deaths recorded. One in three patients who die in hospital have sepsis. Earlier this month, Recce announced a Phase 1 human clinical study of R327, at the CMAX clinical trial facility at The Royal Adelaide Hospital, to assess the safety, tolerability and pharmacodynamics profile of the compound.
With positive indications against viruses, it was only logical that Recce would get involved in the COVID-19 fight, and it has. Earlier this month, RCE announced positive results of both R327 and R529 in in vitro testing against the SARS-CoV-2 infection, the virus that causes COVID-19. The compounds will now move to in vivo studies in animals (ferrets) in a US study. In Australia, the CSIRO and Doherty Institute are testing R327 as part of the SARS-CoV-2 Antiviral Screening Program.
R327 is also showing potential as a topical (applied to the skin) treatment for Wound Infection, where superbug resistance to current standard of care antibiotics is a big issue. The company’s R435 oral-use formulation was announced, last month, to have shown effectiveness in animal trials against helicobacter pylori (H. pylori) bacteria.
Although COVID-19 is important work, it almost becomes a sideline against the potential of Recce’s product portfolio to be effective against sepsis and the colossal, pervasive problem of resistance to natural antibiotics. That is where investors would be looking for the enormous promise of RCE to bring home the bacon.
3. OncoSilMedical Limited (OSL:ASX)
Market capitalisation: $107 million
Five-year total return: –0.4% a year
Analysts’ consensus target price: 41 cents (Thomson Reuters)
OncoSil Medical’s lead product, OncoSil, is a targeted radioactive isotope (Phosphorus-32) that is implanted directly in micro-particles into a patient’s pancreatic tumour, through endoscopic ultrasound. OncoSil implants a pre-determined dose of beta radiation directly into the cancerous tissue. This delivers more concentrated and localised “beta” radiation compared with external beam radiation. The device then works with chemotherapy to destroy the cancerous tissue.
The FDA granted the device “investigational device exemption” (IDE) status in 2016, and OncoSil looked to be on its way to the clinic.
But a big setback hit the company in March 2019 when the British Standards Institute (BSI) denied its application for CE Mark certification, which indicates that a product conforms with health, safety, and environmental protection standards for products sold within the European Economic Area (EEA). The unexpected problem sent OSL back to the BSI with more clinical data and testimonials. In November 2019, CE Marking came through for locally advanced pancreatic cancer, in combination with standard of care chemotherapy.
Then, in March this year, the US FDA granted the company breakthrough device designation (BDD), in relation to inoperable pancreatic cancer. The device is now designated as a breakthrough device in the European Union, UK and USA. In June, it was also approved for sale in Singapore.
The problem (and the opportunity) for OSL is that pancreatic cancer is a huge area of unmet need because the prognosis is very poor. Surgery is not possible in 85% of cases and only 5% will survive beyond five years. About 85,000 new cases in Europe are detected annually, with a further 46,000 new cases in the US. It could be a $1bn annual market and OncoSil has a genuine breakthrough treatment. As well, the OncoSil device is a unique platform technology that could be aimed at most solid tumour types.
In the meantime, revenue is not too far away for OSL, with the device now registered and nearing market readiness in the UK, EU, Singapore, Malaysia and New Zealand. Approvals are also pending in Australia and Hong Kong, with other major markets including China, Japan and the USA in the pipeline. The global addressable market is worth more than US$3bn (A$4.1bn), and OncoSil looks to be a far more effective treatment than what’s currently in place.
4. Bigtincan (BTH:ASX)
Market capitalisation: $488 million
Three-year total return: 96.9% a year
Analysts’ consensus target price: $1.30 (Thomson Reuters)
Bigtincan is a software-as-a-service (SAAS) business that provides companies’ sales teams with enablement and automation software, so that all of the sales content management, documentation, training, coaching and communications (and the data analytics tools to make sense of it all) is held on a cloud-based platform. Bigtincan Hub is a mobile, AI-powered sales enablement platform designed to increase sales team success by helping them better prepare for meetings, improve client and prospect engagement, enhance collaboration with peers, compress sales cycles, and improve overall win rates. By providing a platform that addresses the productivity challenges of a mobile workforce, Bigtincan could have been designed for a COVID-19 environment.
The company has been very successful globally. It has more than 400 customers in more than 50 countries, in 23 languages, across a wide range of industries and market segments, and about 300,000 users. In FY20, Bigtincan grew its revenue by 56% to $31m, with annualised recurring revenue (ARR) surging by 53% year on year, to $35.8m. The company has given guidance for 36.9%–48% growth in ARR in the current financial year.
In sales engagement platforms alone, BTH has a total addressable market of US$6bn ($8.2bn). Add digital transaction management (DTM) to that and BTH’s potential market could be another US$6 billion ($8.2bn) on top of that by 2024. But the company is shooting for bigger things. It cites Aragon Research’s forecast for the customer relationship management (CRM) market at US$67 billion (A$91.7bn) by 2024 as the world that could be its oyster. Bigtincan is only getting started. It is not a profitable company yet and won’t be until at least FY23. But its market potential is huge.