Biotech Values

[drbio45]

Stock (ticker): ChemGenex (CXS.AX)
Market Cap: A$97m
Recommendation: Buy
Share price: A$0.66
Price target: A$0.91
Up/(down) to target: 38%
Fair value: A$1.40 (DCF methodology)

Subject: CXS - Respected players invest in CXS - Viewed as positive

Analyst: Scott Power ([phone]) / Tanya Solomon ([phone])

Key points:

* Sell down - Charter Pacific (CHF.AX) has sold down it stake (28.1m shares or ~18.5%) in CXS today at a price of A$0.62 per share. Charter Pacific appointed CXS directors Kevin Dart and Roger Byrne have also stepped down from the CXS board. These shares were acquired by respected biotechnology investment firms GBS Venture Partners (Melbourne based), Alta Partners (San Fransico based) and domestic institutions.

* Placement - Following this, CXS has completed a capital raising of A$10.5m through an institutional share and option placement. The new 17.1m shares will be issued at 62cps and the attaching 5.6m options (at 1 for 3) will have a 5 year term and A$0.75 exercise price. This investment was again led by GBS Venture Partners, Alta Partners and domestic institutions.

* Rights issue - To allow existing investors to participate, a 1:10 rights issue for shares and options at the same terms as the placement will be conducted. While the details of this have not yet been released, both Alta Partners and GBS Venture Partners have indicated their intention to participate. If fully subscribed this will raise an additional A$10.5m.

* New directors - CXS has appointed to new non executive directors - Mr Daniel Janney (Alta Partners) and Dr Geoff Brooke (GBS Ventures).

* Investment view - We view these events as positive. CXS is now well funded and following this capital raising and rights issue will have approximately A$25m in cash. CXS is now able to accelerate the development of the remainder of its pipeline, in particular its lead compound Ceflatonin to treat other forms of leukaemia.

* About Alta Partners - Alta Partners is recognised as one of the leading venture capitalist companies in the US with ~US$2b under management. Since its inception it has invested US$1b in more than 125 companies. http://altapartners.com/


Additional details:

* CXS lead compound is Ceflatonin. It is being developed to treat a particular group of patients with Chronic Myeloid Leukaemia who have developed resistance to the current treatments (T315i mutation). Currently in registration directed clinical trials, it is expected that these will be completed in 2HCY07.

* Quinamed is CXS' second clinical stage program. It has shown efficacy in prostate, ovarian and breast cancers. Currently in a Phase 2a clinical trial, if all goes to plan, a Phase 2b trial is expected to commence in 2HCY07.

Key upcoming milestones

* Ceflatonin - Preliminary data from on-going registration directed clinical trials in 4QCY06 - Achieved

* Quinamed - Phase 2a clinical trial to be completed by end CY06 with results expected in 1QCY07

* Ceflatonin - Complete enrolment for registration directed trials in 2HCY07

* Quinamed - Initiation of Phase 2b clinical trial in 2HCY07.


Overall, we consider CXS to be a Tier 1 life science company for three reasons:

* Advanced, deep pipeline means plenty of newsflow - CXS has an advanced pipeline with its lead product to treat a type of leukaemia, called Chronic Myeloid Leukaemia, expected to reach the market in CY08. This is backed up by products to treat cancer, depression, anxiety and metabolic diseases. The depth of the pipeline means multiple newsflow opportunities.

* Well funded - We believe that on completion of the placement and rights issue, CXS should have sufficient cash to take it to the market launch of Ceflatonin.

* Undervalued compared to peers - It is worth noting that CXS' pipeline is particularly advanced in comparison to its Australian peers. Additionally, compared with other listed life-science companies with compounds in late stage development, CXS is undervalued.

* We remain comfortable with our Buy recommendation and A$0.91 price target and expect the stock to be re-rated as trial results are announced.


DISCLOSURE - ABN AMRO Morgans acted as Adviser and Lead Manager to CXS in relation to the placement and was engaged by Charter Pacific to manage the sale of its 28.1m shares. ABN AMRO Morgans acted as corporate adviser and Lead Manager to a placement of shares by ChemGenex Pharmaceuticals in May 2006 and will earn fees in this regard. The Analyst owns shares.


Tanya Solomon | Analyst | Authorised Representative 282999
ABN AMRO Morgans Limited | ABN 49 010 669 726 | AFSL 235410
Level 29, Riverside Centre, 123 Eagle Street, Brisbane, Qld 4000
( Ph [phone] | 7 Fax [phone] | + [e-mail]

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