Stock pick: Regal Funds Management

One of our high conviction positions is Opthea Limited (ASX: OPT), a biotechnology company developing treatments for serious eye conditions. The stock has performed strongly since releasing clinical data in August 2019, however we see a further 250% upside from here.

There are three key factors underpinning our investment thesis:

1. Positive study results: OPT’s lead product OPT-302 is targeting age-related macular degeneration (ARMD), the most common cause of blindness globally and a USD 10 billion market. The data presented in OPT’s phase 2b study was uniformly strong with significant improvements seen in visual acuity and retinal thickness compared to the control group, with an important predilection towards the sub-group of patients most difficult to treat. With competing agents in development for ARMD only targeting ease of administration (i.e. not better visual outcomes), we believe OPT-302 will comfortably capture 10% of the global market, if this data is reproduced in its upcoming registrational studies.
2. Implied valuation: Examining historical biopharma M&A transactions, single drugs are on average valued at 3 times peak sales; meaning that our 10% market share assumption above translates into a valuation of USD 3 billion for OPT-302. Although risks exist that the phase 3 study fails, using industry standard probability rates (60% chance of success), OPT-302’s implied valuation is approximately USD 1.8 billion or AUD 2.8 billion; 250% above OPT’s current market capitalisation, implying a share price north of $10. 
3. Potential corporate interest: The final piece of our investment thesis is the likelihood of takeover. The patents for both current leading agents for ARMD (Lucentis and Eylea) will soon expire, exposing their owners (Novartis and Regeneron) to multi-billion dollar revenue cliffs. Further, Novartis’s newly-launched replacement product Beovu had a safety warning issued on it in February 2020 by the American Society of Retina Specialists. We believe Novartis is becoming increasingly incentivised to acquire an agent to defend its market-leading position in the ARMD market.   

In terms of risks, the obvious pitfall for most biotechnology companies is failure of clinical trials. The next such event for OPT is a phase 2a study for Diabetic Macular Edema, with results due in the middle of this year.

Regal may now, or in the future, have a position in Opthea Limited (ASX: OPT). Regal does not authorise this stock pick to be relied upon by retail investors.