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Tuesday, March 01, 2005

pSivida: Down-Under Company has Big Upside Potential

(Editors note: On Friday, February 26, NanoNovus editor Jack Uldrich had an opportunity sit down with pSivida’s Managing Director, Gavin Rezos to discuss pSivida’s business).

pSivida is not listed on either the Merrill Lynch or Punk Ziegel Nanotech Index, and the Forbes Wolfe Nanotech newsletter recently profiled the company but chose not to recommend it. The company, however, has a great deal going for it and is worthy of consideration by any individual investor hoping to profit from nanotechnology. (Full Disclosure: The author is an investor in pSivida and encourages all readers to do their due diligence, as well as consider multiple independent sources before investing in any company).

pSivida is an Australian-based biotechnology company committed to the biomedical applications of nanotechnology. Specifically, the company is developing and commercializing BioSilicon™—a biocompatible and biodegradable nanostructured porous silicon—that has multiple potential applications, including: controlled drug delivery, brachytherapy and tissue engineering.

Below is a list of reason to be bullish on the company:

 pSivida’s BrachySil technology (a radioactive biochip that “locks” on cancer cells and releases predetermined doses of radioactive molecules to kill the cell) has demonstrated effectiveness in reducing the number of malignant cells in a small sample of patients with inoperable liver cancer. By reducing the tumor, the device may help prolong a patient’s life long enough to receive a life-saving transplant. In preliminary trials the technology was found to be 100 percent effective in killing smaller tumors and 56 percent effect in killing larger tumors and reported no adverse side-effects. If it can continue to demonstrate effectiveness in Phase IIb trials, pSivida could be poised to capture a sizeable portion of the $1 billion dollar brachytherapy market.

 To date, one U.S.-based “Top 5 Global pharmaceutical firm” is testing pSivida’s BioSilicon technology and pSivida hopes to report with a few months that a second “Top 5 Global pharma,” along with a major vaccine company, will also begin testing its technology. From an investor’s perspective, these relationships are important because the pharmaceutical firms will fund the direct cost of testing the technology. More importantly, the agreements could lead to significant future milestone payments.

 The company’s BioSilicon—which is silicon manufactured with nanopores that can be loaded with drugs, genes, proteins and other therapeutics or vaccines—is another promising technology. It can be manufactured to release it contents over a defined period of time. Such a technology could free patients from having to take regular dosages of pills and could thus prove helpful for Alzheimer’s patients who may forget to take their drugs.

 BioSilicon is also being investigated by Singapore General Hospital as a scaffold to assist in the growth of tissue cells and, just today, the company announced that it had signed an agreement with PureTech Development to evaluate out-licensing opportunities for BioSilicon in tissue engineering, wound management and orthopedics.

 The company has another agreement with Itochu, one of Japan’s largest life science companies, to help identify, develop and commercialize products for its BioSilicon technology platform in Asia. Itochu is also reportedly interested in developing BioSilicon for food-related applications. BioSilicon is an attractive delivery vehicle because it safely dissolves into silicic acid—which is found in beer, rice and wine—and could expose pSivida to a variety of large commercial opportunity in the field of nutraceuticals.

 The Qinetiq Group, Europe’s largest science and technology company, owns 17 percent of pSivida (and the Carlyle Group, one of the world’s largest private companies, owns 34 percent of Qinetiq). pSivida may be able to leverage these relationships into future business opportunities.

 Lastly, the company has a strong family of intellectual property with over 24 patents and has enough cash on hand ($20 million) to operate until at least 2007.

Like every investment, pSivida is not without some risk. Among the reasons to be bearish are:

 Its BrachySil technology has only been tested on a small sample of patients and needs to be demonstrated to be safe and effective on a much larger sample of patients.

 The company is not currently profitable (it lost approximately $3 million in 2004) and will most likely not be cash-flow positive until 2008.

 Its BioSilicon and BrachySil technology face competition from a host of other drug delivery devices and cancer-fighting drugs (most notably in the treatment of liver cancer from SirTex).

 Finally, the company’s success is obviously dependent on regulatory approval of its products. The company believes the FDA will regulate its technology as a medical device but there is the possibility it will instead be regulated as a drug—which, if it occurs--could greatly slow down product development and adversely affect the company’s timeline to profitably.

Having said this, pSivida appears to be a good, long-term investment for investor’s with a higher threshold of risk. The company’s stock is now traded is the U.S. as an ADR (American Depositary Receipt) under the symbol: PSDV (each U.S. share is worth 10 Australian shares); and on the Australian (PSD.AX) and German stock markets. And although its two leading technologies have not yet received final approval from American, European or Asian regulators, both technologies look very promising. Furthermore, the BioSilicon platform technology holds the potential to be used for a variety of other oncology applications, including pancreatic, ovarian and bladder cancer. The technology could also potentially help Big Pharma reformulate some it’s most profitable drug patents (many of which are set to expire it the next three to four years); and, longer-term, might find applications in the areas diagnostics, nutraceuticals, and tissue engineering.

The challenge for management will be to maintain strategic focus. Company executives, however, appear to be well aware of this problem and are dedicated to bringing BrachySil technology to the market first for the treatment of liver cancer, and then pancreatic cancer.

Moving forward, investors should watch for additional news relating to agreements with major pharmaceutical companies. If additional agreements are announced it’ll be a bullish sign. By the end of the year, investors should also look for pSivida to be receiving milestone payments from at least one of its partnerships. The company’s success will ultimately be driven by regulatory approval—and effectiveness-- of its technology and that is what individual investors should most focus on.

For investors wishing to do more research:

pSivida Limited
Level 12, BGC Centre
28 The Esplanade
Perth WA 6000
Gavin Rezos (Managing Partner)