Medical Developments could attract takeover interest on back of regulatory milestones - analysis

16 January 2020 - 03:22 pm UTC

by Louise Weihart in Sydney

Medical Developments, a Melbourne-based Australian pain medication and respiratory device manufacturer, could attract takeover interest on the back of forthcoming regulatory milestones for its Penthrox pain relief medication in the US and China, industry and advisory experts told this news service.

 

John Sharman, CEO of the AUD 630m (USD 421m) market cap company, declined to comment on the takeover speculation but said there is “pent up interest” in light of its upcoming submission to the US Food and Drug Administration (FDA) and approval by China’s medical products regulator in November 2019.

 

Medical Developments’ response to the FDA, which is expected to be submitted in 3Q20, will reflect the requirements and amendments requested by the FDA following its meeting with the agency in mid-June 2019. The approval from China means Medical Developments can run studies on Penthrox in the country, which it says should be completed within 12 months, ultimately bringing it a step closer to selling the drug there.

 

With the potential approval for the sale of Penthrox products in China in 2021 and the US in 2022, potential buyers and investors would be watching Medical Developments closely, said Robert Mead, Chief Investment Officer and director of Victoria-based Endeavor Asset Management, which is Medical Developments’ fifth largest shareholder with a 2% stake.

 

Medical Developments shares have nearly doubled to AUD 9.45 since October, when the company announced a series of positive developments relating to its non-opioid based pain reliever.

 

An industry analyst said that while Medical Developments could be of interest to certain companies, he believed it is overvalued.

 

Endeavor’s Mead, however, said the company’s current share price – which at the time of his comments traded at AUD 9.28 - was justified based on the USD 1bn opportunity in the US for Penthrox alone. Approval in the US and China, along with the potential to develop treatments for other kinds of pain provide significant upside to its current share price, he said.

 

Penthrox, which has been proven as a superior fast-acting, non-narcotic pain solution that’s part of IV morphine in trauma situations, is shaping up to be a suitable alternative to highly addictive opioids, Mead noted. It has been recommended as a first line of treatment by the European Society of Emergency Medicine, he added.

 

Medical Developments’ shares peaked at AUD 9.50 today (16 January) on a market cap of around AUD 630m, so a 30% takeover premium on top of that would yield a price of AUD 12.50, a source familiar with the company said. But if FDA approval is granted, the share price might go significantly above that due to the shift away from opioid use in the US and elsewhere, the source said. All things considered, a takeover price might be AUD 15 per share and certainly a price of more than AUD 1bn for the business, the source added.

 

The company has no direct competitors as its product sits between aspirin and an opioid, but the closest peer is Sirtex, which was bought by an entity owned by CDH Genetech and China Grand Pharmaceutical and Healthcare Holdings in 2018 for AUD 1.8bn at a significant premium, the source noted. The consortium defeated Varian Medical Systems, which initially agreed to buy Sirtex at a 48.7% premium to the last closing price before its bid was announced. The CDH-led consortium’s winning bid valued Sirtex at a 78.4% premium over the same period.

 

Chairman David Williams of Australian M&A advisory firm Kidder Williams, is the largest shareholder in Medical Developments with 14.67%, according to the FY19 report. In total, the board and management hold 17% of the company, Sharman noted. UK fund manager M&G owns 5.02%. Regal Funds Management emerged as a substantial shareholder on 6 December with 5.03%. It bought one-third of its shares at an average AUD 7.12 each.

 

Partnerships as an M&A pre-cursor

Partnerships are often the first step in potential corporate activity, which could lead to formal takeover offers, an industry lawyer noted.

 

Medical Developments has an exclusive partnership with Daiichi Sankyo for licensing and distribution in China, Thailand and Vietnam, as announced.

 

Medical Developments, which is targeting both Europe and the US, and already has approval to sell Penthrox in most European markets, could attract takeover attention from global pharma companies in either Europe or the US, Bell Potter analyst Tanushree Jain and the industry lawyer agreed.

 

Back in 2013, Sharman told this news service that possible bidders include international pharma companies in pain management that want a new product or are looking for market share in the GP, hospital or home care space, such as GlaxoSmithKline, Pfizer, General Electric, AstraZeneca, and Siemens.

 

Penthrox is already being sold in Australia, New Zealand, the UK, Ireland and France, with FY19 sales in Australia up 47% and in the UK up 32% on the previous year. Total revenue for FY19, including sales of its respiratory devices was AUD 21.4m. FY19 EBITDA increased 55% to AUD 3.4m.

 

Medical Developments is planning a targeted roll out of Penthrox in Europe in 2020, including Italy, Germany and Spain, and has marketing authorization in Russia, Vietnam and Taiwan, Sharman noted.

 

The company Is also progressing its continuous flow manufacturing technology, in partnership with Australia’s government-backed research body CSIRO, which increases the production of small molecule pharmaceuticals by 10 times and reduces manufacturing costs by more than 50%, Sharman added. It is also in the final stages of its continuous flow process for numbing medication Lidocaine, which is currently a USD 3.5bn per annum global sales opportunity, he said.