Asterand: investing for the future

Scientists have been increasingly using well-characterised human tissue to develop new drug candidates. Often, these scientists need to see if their drugs cause a desired response in targeted tissue, but they also need to test to see if their drugs cause a response in non-targeted tissue that may lead to an undesired side effect. Meanwhile, tissue samples can be helpful in determining which genes or proteins are the cause of certain diseases.

Formed out of a merger in January 2006 of two human-tissue focused businesses – Pharmagene and a US firm also known as Asterand –, the company today boasts an international network for human tissue supply as well as expertise in human tissue-based research services. This makes the firm a one-stop shop for clients seeking human tissue-based solutions for research and development projects.

Asterand is able to supply tissue samples in a variety of formats, as well as tissue derivatives. It can also provide consultancy advice on the development of in-house tissue banks and it offers applied experimental research services, using human tissue, that are tailored to the needs of individual clients.

Asterand’s main competition consists of direct sourcing activities (where pharmaceutical research labs collaborate with academic organisations and research hospitals in order to obtain tissue), as well as smaller rivals offering a similar tissue sourcing service to the pharmaceutical industry. So, it has been able to leverage both the organisation of its business and its economies of scale to good effect. For example, Asterand has unparalleled access to human tissue through a worldwide network of over 100 active collaborative donor institutions, while its XpressBANK biobank contains several hundred thousand specimens from a broad range of therapeutic areas and a diverse ethnic representation. It is not just about economies of scale as the Asterand brand is strongly focused on quality.

Meanwhile, the company’s PhaseZERO process for testing the effect of drugs on human tissue is used by many large pharmaceutical businesses around the world. PhaseZERO enables Asterand to provide a collaborative scientific approach to the delivery of human tissue-based data on target and biomarker validation as well as compound potency, efficacy, disposition and safety.

Since its merger, Asterand has won contracts with a number of large businesses and prestigious organisations in the healthcare arena. For example, Bristol-Myers Squibb has been a key customer for several years.
In fact, the company’s client base now includes every one of the top 30 pharmaceutical companies in the world. And by the end of last year, 13 of these companies had signed master service agreements (MSAs) with Asterand.

Deals made in 2009 included an extension of Bristol-Myers Squibbs’ MSA for a further three years, as well as the signing of an MSA with new client Lundbeck – the Danish research firm that develops drugs to tackle a range of central nervous system disorders, including schizophrenia, Alzheimers, Parkinson’s disease and Huntington’s disease).

Last year also saw a collaborative agreement with Abcam, the fast-growing Cambridge-based firm that markets antibodies online. Asterand assisted the Abcam in the validation and characterisation of selected antibodies using its PhaseZERO platform.

In March this year, the firm’s newly-acquired subsidiary, BioSeek, finalised a drug development collaboration with Japan’s Ono Pharmaceuticals, offering ample milestone based upside possibilities. BioSeek will use its proprietary BioMAP platform in an exclusive collaboration that is centred on a specific drug target class designated by Ono. BioMAP systems are primary cell-based models of human disease biology that are designed to replicate the intricate cell and pathway interactions as they are observed in human pharmacology and toxicology.

The acquisition of San Francisco-based BioSeek was part of Asterand’s ongoing strategy to consolidate its leadership in the global market for human tissue and human tissue-based services. Asterand has agreed to pay up to $14m by the end of 2011 for the business, depending on the level of sales growth achieved by BioSeek.

In the second half of 2009 the pharmaceutical sector as a whole reduced its R&D expenditure affecting most CRO (Contract Research Organization) businesses. Results for 2009 showed that revenues came in lower than for 2008: £12m compared with £15.2m, and  Asterand posted adjusted EBITDA of £0.21 million (2008: £3.1 million). However, despite turnover being lower overall, Asterand had benefited in 2008 from £3.4m of non-recurring licensing revenue from its client Allergan. In the firm’s Human Tissue-Based Solutions segment, where revenues amounted to £11.8m in 2008, there were two further non-recurring items: £1.3m connected to the firm’s contract with the US Department of Defense for the evaluation of the Armed Forces Institute of Pathology’s biorepository; and £2.6m relating to Asterand’s contract with Baylor School of Medicine.

So, Asterand’s management points out that base business revenue actually increased from £7.9m to £9.5m in 2009. Meanwhile, the firm’s profit margin was affected by £1m of exceptional general and administrative costs, which included legal and professional fees connected to the BioSeek acquisition as well as other items.

Asterand certainly has its eye on the future, and its management is prepared to take some short term pain so that the firm can benefit over the long term.

As well as its acquisition of BioSeek, last year also saw it invest in building its supply of biospecimens and accreditation for its UK facility in Royston as a member of the UK Good Laboratory Practice (GLP) Compliance Monitoring Programme.

In Asterand’s recent results announcement the firm’s management points out that while other firms were downsizing, closing facilities and reducing inventories, it invested in new business, technology and product development, which it anticipates will pay off over time.

Although Asterand’s management remains cautious about short-term prospects, the company expects the long-term trend for increased testing on human tissue, as opposed to animals, to continue.

House broker Daniel Stewart & Company (DS&C) value the stock at a buy up to 25p stating Asterand’s performance was in line with expectations, while noting the 7% growth in its core tissue supply business amid significant reduction of R&D spending in the pharmaceutical industry. The broker also called the BioSeek acquisition the “key highlight” of the period, saying that its core product throughput assay system BioMAP is highly complementary with Asterand’s current product and service portfolio.

Cenkos Securities also issued a note on Asterand, saying the group has made great strides by investing in its supplier network, making the acquisition of BioSeek, gaining GLP accreditation and expanding its sales force to leverage global partnerships. It does not expect the current year to be without difficulty but Asterand has positioned itself at the forefront of the human tissue testing market.

Human tissue testing is becoming mission critical to the pharmaceutical industry. Asterand is well placed in a market that is growing, and may well grow more quickly in the future. Consolidation within the sector is also a possibility.

Listed on the main board also has its advantages for Asterand though the stock is still fairly illiquid so should be considered a medium term play and not a short term punt. As the last 6 months have shown, there will be ups and downs along the way, but over 2 to 3 years the future looks promising.

http://www.proactiveinvestors.co.uk/companies/news/15716/asterand-investing-for-the-future-15716.html