SYNACT PHARMA

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Ticker: SYNACT
Price: 5.25 SEK
Shares outstanding: 12 417 449
Market cap: 64,57 MSEK
Cash: 21 MSEK
Debt: 1,9 MSEK
Date: June 24, 2017

Company

Synact Pharma is a biotechnology company engaged in research and development in the treatment of inflammatory disease. The company has a platform technology based on a new class of drugs targeting acute flares in inflammatory states and diseases with dual-activity. Their current main focus is Psoriasis arthritis, with a primary purpose of reducing inflammation and stimulating natural healing mechanisms using their product AP1189.

Board and management

Synact Pharmas board and management consists of several well experienced people with a history from several major drug companies and license deals. Some of the experience stem from companies such as AbbVie, Johnson & Johnson, Pfizer, Meda, Alfa Laval, Santaris and others.

Previous license deal involvement by board and management:

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Obviously, Synact Pharma is led by a group of well experienced people that have an idea of what works and what not. If they are successful once again remains to be answered, but their history definitely gives them an edge.

Company strategy

Synact Pharma has a very unique strategy with its lead project AP1189. The company currently has one goal, a commercial deal. It is not often you come across a company that does not wish to reach the market as a stand-alone company. The company has openly stated that they understand the market, and with positive Phase II studies comes the need for more capital, followed by several years of studies in a Phase III study. Synact Pharma wish to complete their Phase II, and then sell the company to a bigger pharmaceutical company. Since the company has announced they expect Phase II results in 2019, current and future stock holders have a chance for a market exit in a 24 month period. Attractive indeed. Since their IPO, the company announced that the capital they raised will be sufficient to proceed with the current Phase I study and the upcoming Phase II study. This decreases the risk from a shareholders perspective as no capital raise will be needed until a potential exit.

Melanocortin receptors and AP1189

Synact currently holds one product in its pipeline, AP1189. AP1189 has a first-in-class potential, meaning it is a completely new treatment method with a new mechanism of action in relation to existing treatments. The drug is expected to slow down the inflammatory process and thus reduce the acute symptoms of pain, swelling and stiffness, but also contribute to a faster healing process.

The melanocortins are peptide hormones which includes adrenocorticotropic hormone (ACTH) and different forms of melanocyte-stimulating hormones (MSH), and are derived from proopiomelanocortin (POMC) in the pituitary gland.

AP1189 is a biased agonist at melonocortin (MC) receptors (MC1-MC5). These receptors refers to a set of hormonal, neuropeptidergic, and paracrine singling pathways that are defined by components that include the five G protein-coupled melanocortic receptors. This signalling system regulates a remarkably diverse array of physiological functions, including adrenocortical steroidogenesis, energy homeostasis, pigmentation, natriuresis, erectile responses and exocrine gland secretion.

Physiological functions of MC1 includes melanocyte differentiation, synthesis of melanin, pigmentation and anti-inflammatory. It is located mostly in melanocytes, keratinocytes, macrophages, monocytes, neutrophils and endothelial cells. MC2 is mostly involved in steroidogenesis, especially in the adrenal cortex, keratinocytes and adipocytes. MC3 regulates anti-inflammatory, energy homeostasis and natriuretic activity specifically in the hypothalamus and limbic system, digestive tract, heart, kidney, immune cells and the placenta. MC4 is involved in energy homeostasis, sexual behaviour, and shares anti-inflammatory properties with MC1 and MC3, while being neuroprotective. It is widely distributed in the brain. MC5 is mainly involved in exocrine gland secretion and is well distributed in the peripheral tissues, specially in glands.

Inflammation is a physiological response to infection or tissues damage which, if properly controlled, ultimately leads to restoration of homeostasis. Cytokines, chemokines, nitric oxide and prostaglandins are mediators of inflammatory processes that induce vasodilation and extravasation of immune cells into injured tissues, activation of pathogen clearance mechanism and tissue regeneration. The inflammation we experience during simple infections cause, in a sense, more damage than the actual pathogen/infection we are experiencing. The human body is in a way, the reason we feel sick or bad. The inflammation factors have been linked to the pathology of several disorders with an exacerbated inflammatory component such as Alzheimer’s, Parkinson disease, multiple sclerosis, HIV, gout, RA and brain ischemia Melanocortins play an important role in the regulation of immune and inflammatory reactions. Different receptors are responsible for the anti-inflammatory properties of the melanocortins depending on the tissue or cell type involved.

Acute inflammatory response usually ends once the insult/pathogen is eliminated and tissue is repaired. If this does not occur, chronic inflammation will follow, leading to harmful effects. Our bodies local inflammation response is essential for pathogen clearance, tissue recovery and regeneration. With this in mind, rather modulating the inflammation process, instead of inhibiting it is important. Ideally, creating a drug which speeds up the inflammation process while speeding up recovery will prove a great benefit for not only the disease process, but resolution as well. This also decreases the chances of chronic inflammation, as seen in psoriasis, gout, rheumatoid arthritis etc.

AP1189 have been tested in mice in a preclinical setting. It was shown that orally active AP1189 is a biased agonists at MC1 and MC3 receptors, exerts anti-inflammatory and pro-resolving actions and reduces arthritis in mice.

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AP1189 was shown to inhibit cytokines as a typical anti-inflammatory effect, and stimulated phagocytosis and efferocytosis as a pro-resolving effect. AP1189 promoted phagocytosis by increasing both the proportion of phagocytic macrophages and the number of particles internalized per single cell. It also promoted phagocytosis of apoptotic neutrophils, a crucial event in resolution and for restoration of tissue homeostasis after an inflammatory event.

Melanocortins are well known compounds for their anti-arthritic actions in both preclinical and clinical setting. They’ve been shown to be effective in the treatment of rheumatoid arthritis and gout. The study on AP1189 revealed a significant reduction of synovitis, evident by the lower extent of leukocyte infiltration. It was also shown to lower total disease activity.

As a summary, AP1189 functions as a unique immune modulatory drug that stimulates melanocortin receptors to reduce the inflammation process by inhibiting major infiltration of white blood cells and decrease the release of inflammatory mediators, increasing phagocytosis which increase the healing process shown in the figure above. AP1189 will be given orally and is expected to be given once or twice daily.

Further studies

Synact Pharma has recently entered into Phase I study on healthy subjects. The purpose of the study is to evaluate safety, tolerability as well as pharmacokinetics of AP1189. Results of the study are expect in the second quarter of 2018, and they are currently preparing Phase II studies expected to begin in 2018.

Psoriasis

Psoriasis is a very common, chronic, noncommunicable, painful, disfiguring and disabling disease for which there is no cure. It is mostly characterised by well-demarcated erythematous plaques with silver scale. The etiology remains unclear, although there is evidence for genetic predisposition. The role of the immune system play a major role for current research.

Prevalence estimates have varied across studies, but it is estimated that the prevalence in adults range from 0.91% – 8.5% percent, and the prevalence of the disease in children is estimated up to 2.1%. Geographic location appears to influence the likelihood of having the disease, which tended to increase with increasing distance from the equator.

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Prevalence of Psoriasis – Global report on Psoriasis – WHO

There is no clear gender predilection, but genetic predisposition clearly plays a role in the development of psoriasis. Risk factors include smoking, obesity, drugs, infection, alcohol and vitamin D deficiency.

Psoriasis is a complex immune-mediated disease in which T-lymphocytes and dendritic cells play a central role. Typical findings of erythema and scaling are the result of hyperproliferation and abnormal differentiation of the epidermis, plus inflammatory cell infiltrates and vascular changes. Hyperproliferation changes can be seen as increased numbers of epidermal stem cells, increased number of cells undergoing DNA synthesis, a shortened cell cycle time for keratinocytes, and a decreased turnover time of the epidermis.

Psoriasis has been associated with multiple comorbidities, including cardiovascular disease, malignancy, diabetes, hypertension, metabolic syndrome, inflammatory bowel disease, serious infection and certain autoimmune disorders.

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Psoriasis arthritis

Psoriasis arthritis is an inflammatory arthritis associated with psoriasis. Initially, it was considered a variant of rheumatoid arthritis but has emerged as a distinct clinical entity. The disease affects woman and men equally, with an incidence of approximately 6 per 100,000 per year, with a prevalence of about 1-2 per 1000 in the general population. It is presented with pain and stiffness in affected joints. Usually, the stiffness is accentuated with prolonged immobility and is alleviated by physical activity. A history of psoriasis is presented in roughly 70% of patients.

Laboratory findings are consistent with an acute phase response and a degree of chronic inflammation, but unfortunately there are no characteristics making it distinct from inflammatory arthritis or systemic autoimmune rheumatic disease. Treatment involves NSAID’s, DMARD’s, biological agents and in severe cases, methotrexate, an anti-cancer drug. Currently there are no drugs treating the disease, only symptoms. This is the general case for all type of inflammatory diseases affecting the joints.

The global market is estimated to $2.5 – $4 billion and is expected to grow in the coming years.

Patents

The company holds patent protection relating composition, production and use up to and including 2027 (USA until 2028), with the option for a five-year extension for AP1189. The transfer of ownership has been registered in most countries were patents still apply, but have not yet been registered in Hong Kong and India.

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Competition

The major players operating in this market includes Johnson & Johnson, AbbVie, AMGen, Novartis, Pfizer, Eli Lilly, March & Co including several other companies. It is a highly competitive market.

As mentioned, there is no specific treatment available, but it is based on controlling the symptoms. Current treatments for psoriasis arthritis and similar disorders acts by reducing the inflammation and joint stiffness. Standard treatment includes NSAID’s, DMARD’s and steroids. These are drugs that inhibit the inflammatory process so that pain, swelling and joints are relieved of disease. There are certain biological drugs such as TNF-a blockers and immunosuppressants available. These drugs act by reducing or inhibiting the immune systems activity, thereby inhibiting the inflammatory process. These drugs are very effective, but come with a higher degree of side effects. In very severe cases we treat patients with methotrexate, an anti-cancer drug. So far, there is no therapy that would give hope for a complete cure of psoriasis.

AP1189 strength lies in its dual-effect of reducing the inflammation and speed up the healing process. If AP1189 is proven to be effective in patients with disease in the upcoming Phase II study, the potential market could escalate to a multi billion dollar market as not only psoriasis arthritis would be a valid target. AP1189 if successful, might then be a valid strategy for similar disorders such as rheumatoid arthritis.

Valuation

It is very hard to really valuate Synact in any way since we can’t really estimate the potential price of a license deal or calculate market numbers since the company will not proceed after completing Phase II studies. But with ongoing Phase I studies, it is safe to say that current valuation at roughly 65 MSEK is very low.

In hypothetical numbers, let’s assume that Synact succeeds with Phase I studies and continue to Phase II. Assume Phase II studies are successful and the company proceeds with a license deal.  Again, in hypothetical numbers, let us assume a market deal for 1 billion SEK (a low and conservative number comparing the product with market size potential), the market is currently giving Synact Pharma a 6.5% chance of market success. Based on the global data report that came out in 2016, the chance of approval for all indications in Phase I sits at 9.6%. Now as Synact will not be proceeding to approval, we could still use these numbers as it would impact the price of a license deal, even though maybe not very accurate. But it is the best we have for now.

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As psoriasis is assumed to be a multifactorial disease, I will use 9.6% as referral, but we could also use 11.1% for autoimmune if we’re picky. But by sticking with a 9.6% chance of success, the ”real” number should be 9.6%,  and not 6.5%. And let me remind you we are using a low sales numbers here, 1 billion SEK is a very conservative number if all things are considered. Putting this into the calculation, a fair price of Synact will be 7.7 SEK.

The potential license deal numbers that have been estimated by the management are $300-700 million. So, assuming we use these numbers instead we get a reference range of 2,6 – 6,1 billion SEK. In regards to chances of success, we receive a future potential share price of 208 – 490 SEK. Now, we can’t really use these numbers as Synact is currently nowhere near the potential of realizing these numbers yet.  But it gives an interesting perspective on risk-reward ratio. Is current share price of 5.25 SEK worth the risk of a potential reward of 208 SEK if we trust the managements numbers? I believe it is.

Now let us use the potential deal price proposed by the management in calculating our numbers. Assume a 2.9 billion SEK license deal, the market currently gives Synact a 2.2% chance of success. Assuming still a 9.6% chance of success as indicated by the global report, our new fair value is 22 SEK.

Now these numbers are calculated using a very hypothetical number, and something the market and investors can argue about for days with no-one really being right on either side. I am not saying that Synact should be worth 22 SEK per share right now, but I do believe that it shows that Synact is heavily undervalued at current valuation.

Upcoming catalysts

Patent approval in Hong Kong
Patent approval in India

2018

Completion of Phase I studies
Preparation of Phase II studies
Preparation of commercial deal with AP1189

2019
Completion of Phase II studies
Commercial deal

Financials

The company is well funded moving forward, and there should be a very low risk of a capital raise the next 24 months as the company will not be proceeding with more studies after completion of Phase II studies in 2019.

Ownership

Insider holdings of Synact Pharma is currently siting at 38.46%.

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Technicals

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Synact made a double bottom formation at 5 SEK, and is currently sitting at share price of 5.25 SEK. The market sentiment for biotech companies in Sweden have been low the past months. With IBB making a new 52-week high and breaking out of formation, we will hopefully see a shift in the trend. Current major support level is 5 SEK. A breakout on the upside could indicate new highs. Bigger resistance is found at a share price of 6.10, 6,45, 7,45 and 8 SEK.

Summary

Synact Pharma is a very interesting company, and one that I feel deserves more respect than it is being given by the market.  The low market cap and strong financials should be able to accelerate the company further if the trend in sentiment shifts for Swedish biotech.

As the biotech sector is a risk-reward game, and that current studies have shown themselves to be very promising, I do believe Synact is worth a small percentage of your portfolio.

Synact is currently in my portfolio with a 1.5% portfolio weight. I am initiating a buy on the stock with a price target of 7.7 SEK. In regards to the current Phase I study, I do believe it will be successful as nothing have indicated otherwise in preclinical studies. I will, if my target is reached, keep some of my shares moving into Phase II.

A successful Phase I study would increase the likelihood of a potential license deal, and would change my current estimations on the stock.

Risks

Risks include competition, financials and potential dilution, failure of clinical trials and cost compensation issues, general market and economic risks.

Disclosure: This article is for information purposes only. There are risks involved with investing including loss of principal. I make no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed will be met.

I wrote this article myself, and it expresses my own opinions. I have no business relationship with Synact Pharma mentioned in this article. This is no investment advice. I am not an investment adviser.

REDWOOD PHARMA

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Ticker: REDW
Price: 3,82 SEK
Shares outstanding: 4 998 833
Market cap: 26,4 MSEK
Cash: ~ 10 MSEK
Debt: ~ 3,2 MSEK
Enterprise value: 19,6 MSEK
Date: May 21, 2017

Company

Redwood Pharma is a Swedish company developing a new ophthalmic drug called RP101, which is an eye drop with a known biological substance. Their main focus is treatment of women after menopause with chronic dry eyes. What separates this company from other similar companies are some unique features; previous positive Phase II data and global rights to a platform called IntelliGel, licensed by Broda Technologies. Both of these features increases the likelihood of positive results in the upcoming study estimated to start later this year.

The aim of the company is to develop RP101 up to a Phase II study with Proof-of-Concept and enter license agreements with a bigger pharmaceutical company. They also aim to enter license agreements with IntelliGel for substances other than RP101 after the ongoing toxicological study is finished, the results are estimated to be announced in July. The company has announced they expect license revenues in the form of upfront payments or advanced payments starting in 2018. In preparation for the upcoming Phase II study, Redwood have retained Associate Professor Gerhard Garhöfer of the Medical University of Vienna as a medical advisor, he is a leading expert in ophthalmology in Europe and has extensive experience in treating patients with Dry Eye Disease.

Redwood announced May. 19, 2017 that they will launch a Rights issue for 13.2 MSEK between June. 1 – June. 20. Those who, on the record date of 30 May 2017, are registered as shareholders in Redwood Pharma, receive four (4) unit rights for each existing share held by the owner in the Company. Five (5) unit rights entitle to the subscription of one (1) unit. The rights issue is secured to a minimum of SEK 9 million through subscriptions and guarantees. In total, 3,999,066 units can be issued at a price of 3.30 SEK.

Next to the newly announced rights issue, there are an ongoing warrant program for 1 999 533 1 shares between June – August 30th. Full coverage adds 11 MSEK to Redwood’s cash balance. Moving forward, the company will be very well funded going into 2018-2019 and should not need to raise any more capital for at least two years.

After the current warrant program and rights issue, outstanding shares will be at a total of 8 997 899 with a market cap of 29,6 MSEK at a share price of 3.30 SEK, and enterprise value at 4,6 MSEK if fully covered. Currently, insider holdings of Redwood Pharma is at 31.14%.

Dry Eye Disease (DED)

Dry eye is a multifactorial disease of the tears and ocular surface that usually results in symptoms of discomfort, tear film instability, hyperosmolarity and visual disturbance with potential damage to the ocular surface. It’s one of the leading causes of patient visits to an opthalmologist.

It is aggravated by environmental conditions and activities to which the patient is exposed. Some common causes of DED include autoimmune disease, e.g Sjögren Syndrome, gland dysfunction, hormonal changes, goblet cell loss, corneal hypoesthesia, windy polluted conditions, general ageing, and computer use or LASIK surgery.

In a sense, dry eye appears when not enough tears are produced properly by the eye, or when the tears are not of the right consistency. In addition, inflammation of the surface of the eye may occur. As always with inflammation, if left untreated it can lead to pain, ulcers or scars of the cornea. This may ultimately lead to some loss of vision.  Hyperosmolarity is thought to be the leading pathogenic mechanism of DED. It is seen across all forms of DED and causes epithelial cell death, inflammation and reduces the ability of mucins to lubricate the eye.

Episodic occurrences of DED can be controlled by palliative therapy provided by several over-the-counter products, but the incidence of chronic dry eyes require enhanced tear stabilization and efforts to protect the ocular surface. Anti-inflammatory treatment is usually added to control the inflammatory aspects of the disease.

The more we understand about the disease, the more potential treatment targets become of interest. Some possible targets are deficiencies of mucin, aqueous tear and lipids. Other areas of interest are managing the ocular surface damage or lacrimal gland stimulation. Still, there are many clinical challenges in the therapy of DED. More than often the treatment fail to address the causative mechanism, and the symptoms alone of DED are insufficient to track its severity. The most common test we use is the Schirmer strip test and corneal staining. These tests are usually the primary endpoints in most clinical trials, but the diagnostics are limited. There are currently two products which are FDA-approved, but unfortunately, there’s still no definitive cure. Until we find a definitive cure, the market of DED will most likely increase because of its multifactorial etiology.

For future management, it is believed that hormonal supplementation and appropriate balance between estrogen and androgen effects on the lacrimal system may provide a better management.

The market for DED is estimated to $4.3 billion, and is expected to reach $5.5 billion by the year of 2022 with a CAGR of 6.9%. Market scope believes nearly 337 million people around the world are affected with episodic, moderate or severe form of DED. The total market is estimated to $22 billion.

RP101

Redwood owns rights to clinical data from Phase II trials conducted by Nascent Pharmaceuticals.  On January. 9, 2006 Nascent presented positive data of a Phase IIb trial in 90 patients with their product iDESTRIN, a 17beta-estradiol ester. It is believed to act by multiple mechanisms, including influencing the health of the cornea, the meibomian glands and the conjunctiva. In patients with moderate-to-severe disease, which was about half the patients enrolled, a significant improvement was achieved in the high dose group for main objectives. This represented an improvement of over 75 percent from baseline. iDESTRIN also demonstrated a significant improvement at 12 weeks for two other objective endpoints, superficial punctuate keratopathy and corneal staining. The trial results indicated that iDESTRIN therapy provided a benefit in relieving the signs and symptoms, presented by dry eye disease in postmenopausal women. Importantly, there were no drug-related serious adverse events in the study.

Later that year Nascent were on the hunt for a partner to conduct its Phase III research. They were scouting more than 47 major pharmaceutical companies across U.S. to find potential funding. They estimated the trial needed more than 1,000 patients, producing a price tag of around $6 to $9 million. Unfortunately this never happened as the company had to drop the project after the market crash in 2007-2010. The current Redwood founders, Martin Vidaeus and Charles du Mée have previously worked with Nascent and acquired the rights of the data and formed Redwood Pharma.

The goal of RP101 is to help patients with moderate to severe problems of chronic dry eye disease. Main indication will be in women after menopause by restoring previous function of the eye. Redwood Pharma have a confidentiality on their product and have not discussed it in detail during presentations, which is understandable as it is not a patented product. My assumption is that RP101 acts very similar to iDESTRIN, being an estradiol ester providing balance in the eye. I am not sure if there are any added androgens. But most likely, Redwood will achieve the same clinical trial results as iDESTRIN did, if not better as RP101 also uses the IntelliGel platform. This should dramatically lower development, regulatory and investment risks due to previous data. With a solid base of research and positive Phase II studies, RP101 should be able to reach the market faster with greater potential.

Redwood have appointed Ulf Björklund as Chief Medical Officer, where he will oversee clinical development of RP101. Ulf has extensive experience in pharmaceutical development of products including Xalatan, one of Sweden’s most used drugs for glaucoma.

IntelliGel

Redwood is licensing IntelliGel from Broda Technologies, a small innovative pharmaceutical company from China with offices in U.S. IntelliGel is a supramolecular hydrogel drug delivery system based on polaxamers, which has the ability to suspend and stabilize otherwise insoluble drugs. It increases the bioavailability and penetration performance with a possibility of sustained release. It is odor-free, clear and transparent with a low solid content. In clinical trials, it has been shown to be non-irritating and non-allergic. IntelliGel already exists in a similar fashion in skin care products to treat acne. It is currently commercially available in the U.S. and China.

Using IntelliGel, RP101 can be dissolved in water to form an aqueous solution or a hydrogel. This creates a potential drug that has broader benefits and effects than if used alone. IntelliGel allows controlled release of the active substance, lowered dosage, and patients only need to use the drug 1-2 times per day. The eye also demands a specific balance of water, lipid and mucins in order to function properly. The goal of RP101 together with IntelliGel is to provide exactly this. Androgens impact the structure and function of the meibomian and lacrimal glands and therefore androgen deficiency is, at least in part, associated with the etiology of DED.

Redwood announced March. 2, 2017, that IntelliGel had received an additional patent approval in U.S. for their platform, it lasts until March. 21, 2031. This new patent reinforce the platform and thus, make it more interesting for potential license deals. Currently Broda Technologies holds three patents in U.S

Redwood’s license agreement with Broda Technologies is very significant. It gives Redwood Pharma global exclusive rights to the IntelliGel platform in all ophthalmological applications. The agreement states that Redwood will pay a combination of advances, milestones and royalties. The current milestone amounts to SEK 900.000 (exchange rate of 8.4 SEK = $1). In addition, a royalty of an unknown, one-digit percentage of sales revenues are to be paid over the remaining 17 years of the patent. With a high likelihood of license agreements, future royalty percentage and milestone payments, this is a win-win situation from Redwood’s perspective.

The possibilities with IntelliGel is very significant for not only Redwood, but other companies as well. All companies wish to expand and find new revenue streams when their old products are threatened with new competitors or patents. By using IntelliGel, Redwood can help other companies create new products. Technically, it is a very simply and cost-effective program with great potential. Hopefully, IntelliGel can become a significant drug delivery platform for external partners, and companies can diversify its oppurtunities, minimize capital risk and seek other sources of income.

Competition

There are two FDA-approved treatments for Dry Eye Disease – Allergan’s Restasis and the newer drug Xiidra made by Shire. Both of these drugs main focus is suppressing inflammation and increase tear production.

Restasis is indicated for increasing tear production in patients whose production is presumed to be suppressed due to ocular inflammation. Restasis is using Cyclosporine, an immunosuppressive agent when administered systemically. Cyclosporine emulsion is thought to act as a partial immunomodulator and the exact mechanism of action is unknown. Restasis is Allergan’s second largest franchise accounting for around $1.4 billion in sales 2016. The only generic competitor today is Xiidra by Shire who was recently approved by the FDA and is kicking up its sales in U.S.

One major issue with Restasis is the lack of immediate efficacy, with a slow onset of action. It causes a burning sensation of the eye in 17% of patients, and it is reported that roughly 50% stop using the drug before effects may be seen. Other more rare reactions to the drug have been reported, hypersensitivity reactions, urticaria, angioedema and others. Still, it is the primary used drug today with a major market share of roughly 75% as reported in Allergans Q1 report.

Xiidra is gaining more market share each quarter, mainly because of the benefit of only using it twice per day and it treats both signs and symptoms. Xiidra have currently undergone the largest clinical trial yet of any ophthalmology drug. It is the first medication in a new class of drugs called lymphocyte function-associated antigen 1 (LFA-1) antagonist. Yet, it is not free of side effects. Most common seen are eye irritation, discomfort or blurred vision and an usual taste sensation. Side effects were reported in 5-25% of patients. It also failed to show statistically significant improvement in cornea staining when compared to placebo. According to Shire’s recent Q1 report, the total market share of Xiidra reached 22%. Other companies with smaller market share include Santen and Alcon, an external division from Novartis.

The market is currently dominated by these two companies, but remember that it is estimated that roughly 50% of patients with DED are not yet diagnosed. There is still potential for a new drug to come in and sweep away a much higher penetration than my estimation of 5% in this analysis.

Mergers and acquisitions

The year of 2015 was the biggest year ever for health care mergers and acquisitions, with $500 billion in sector investments, even though the general sector has decreased in M&A activity the past two years, the current rate at which major pharmaceutical companies have been entering license agreements or making acquisitions in the area of ophthalmology have kept high activity. The mergers in general may have slow down, but the contractual affiliations are continuing, making it very likely we could see some deals with IntelliGel. With a successful Phase II study there is no doubt in my mind the potential for a license agreement/acquisition on Redwood is on the table. The synergy with IntelliGel should increase its value even further.

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* = $40 MUSD upfront with $535 MUSD potential milestones


Valuation

When valuing any development stage biotech, one of the most important factors to consider is regulatory risks. Any company with a decent product has the potential for a billion dollar business, no matter if the specific field of interest has hundreds of competitors or zero. But if the product never gets approved, the company is basically worth zero. In determining how much a pre-clinical, development company should be worth, the risk has to be taken into consideration. My favourite method is using risk adjusted value.

You estimate market potential, multiply it with estimated market penetration and the likelihood of approval. In the recent issue of ”Clinical Development Success Rates 2006-2015”, the likelihood of FDA approval for a Phase I company in opthahlmology is 17.1%.

In Redwood’s case, calculating for a 5% market penetration (base case) yields:

$4.3 billion * 5% * 17% = $36,550,000

By doing this, we estimated a market potential and deducted the risk of failing in clinical studies. Now we have to calculate the fair value price of the stock. What we do is take the risk-adjusted-value, add the cash balance, minus the debt and divide by total number of shares after the ongoing dilution. This yields a Fair Share Value of 7,5 SEK. This of course is not very accurate, but since we deducted the risks and calculated with a very small market penetration of 5%, I would say it’s not too far from the truth if all things were equal.

Remember, this Fair Share Value is calculated from a Phase I to approval perspective. Do not forget that RP101 currently have positive Phase II studies under its wings, which dramatically changes the FSV of the company. In every disease area, Phase II have had the lowest transition success rate of all clinical phases. The probability of a Phase II success for Ophthalmology companies are 45%, the probability of a Phase III success is 58%. Since we calculated our Fair Share Value based on the probability of approval for a Phase I company, let’s be more accurate and calculate it based from what we know today.

Today we know that RP101 have undergone a Phase II study with success with a 75% improvement above baseline. So let us now assume that Redwood’s Phase II study is a success and moves on to Phase III. Likelihood of approval in Phase III is 43,5%. If we do another calculation, the new FSV is 13,60 SEK. Since we have not completed a Phase III yet, let’s calculate the mean:

Final FSV: 13,60 SEK + 7,5 SEK / 2 = 10,55 SEK

Another important valuation for future reference is Discounted Cash Flow analysis (DCF). We’re are gonna use the estimates Redwood themselves have mentioned in presentations, and estimate costs for operation and capital to 30%. We are also gonna calculate with a 10% royalty rate, assuming that 90% of revenue goes to the major pharmaceutical company who signs an agreement with Redwood. Instead of calculating with a 10% market penetration, I will use 5%. I am gonna point out that I feel some of these numbers are very low. According to Market Scope, they believe 337 million of people suffer from episodic, severe or moderate DED. Assume only 5% of these are chronic, and 50% are undiagnosed, this still leave us with 9.4 million people. In this calculation, we will be using less than half of that number.

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Using this calculation we receive a free cash flow of $36.9 million, or 323 MSEK. Divided by total number of shares (after warrant period) this leaves us with a Free Cash Flow Per Share of 35 SEK. This is a measure of a company’s financial flexibility and serves as a proxy for measuring changes in earnings per share. In a sense, what is the company’s ability to pay its debt, pay future dividend, buy back stocks and grow their business. Redwood have announced they are interested in entering license agreements with major pharmaceutical companies, who in turn will complete clinical trials, register the product and sell its product. As calculated above, I’ve used a 10% royalty rate, this number is conservative as it may be much higher or lower.

Remember, we are only calculating the possible revenue of RP101. We have not included IntelliGel which also serves as a major vertical for the company. The upcoming toxicological results together with the Phase II study will change current estimations dramatically.

Upcoming catalysts:

Completion of toxicological study
Announcement of potential license agreements
Clinical Phase II start
Initiate discussions with commercial drug companies
Announcement of Contract Research Organization
Announcement of Contract Manufacturing Organization

Outlook

Redwood is a heavily undervalued, moderate-high risk company with high reward potential long term. As current warrants are out of the picture, the company will be very well funded moving forward. The company have several catalysts the second half of 2017 that can serve as potential triggers. My calculations are based on a 5% market penetration, but I have a feeling Redwood could reach a much higher market penetration if they succeed with RP101. It is currently the only drug I’ve found on the market that focuses on restoring normal balance of tear production. And as I’ve discussed, the market for DED is nowhere near saturated.

The company doesn’t have the multiple shots on goal I look for, but the synergy between RP101 and IntelliGel is too hard to resist. The company will be well funded, insider holdings are currently sitting at 31.14%, they have low debt, chances of success in Phase II trials are high, the market cap is ridiculously low, the possibility of revenue in 2018 is most likely, and the chances of a future M&A is very possible. Combined, this makes Redwood a definitive investment case for me personally.

Generally I don’t like comparing companies to each other as they have vast differences among each other, but I would like to highlight some companies in order to compare market size and valuation, with a focus on Peptonic Medicals. They are a clinical company who was recently valued to 216 MSEK before failing their Phase II clinical trial… for a second time straight. Remember also that Peptonic Medical’s potential market is 1/4 of Redwoods, and it is dominated by big pharma companies such as Pfizer, Novo Nordisk, Allergan and several others. If all things were equal, taking into consideration that Redwood’s potential market is much higher, there is an 800% upside potential compared with Peptonic’s recent valuation. We can add more companies to the list, such as Gabather who is in preclinical phase valued at 125 MSEK, Alzinova in preclinical phase valued at 77 MSEK and Cyxone in preclinical phase at 87 MSEK. With a market cap of 26,4 MSEK, there is a substantial neglect of Redwood, making it a very high reward investment long term. Redwood has previous clinical data from a positive Phase II trial and are about to begin their own later this year. It is definitely an interesting valuation, but I am betting the market will eventually realize its potential value moving forward.

As Redwood have previous positive data, but not yet initiated and succeeded with it’s Phase II for RP101,  I will be sticking with the mean and initiate a buy on the stock with a price target of 10,55 SEK. This target is based of Fair Share Value from the knowledge we currently have about the company and is based on the very lower end of what the company should be worth today. Current market cap of 26,4 MSEK make no sense.

Regarding their upcoming Phase II trial, clinical chances of a positive result are estimated to 44.6%. With reservation to being very wrong, my estimate is that the chances of clinical success for Redwood is more likely to be in the 65-75% range because of past data and success. I do not believe Redwood has made any major changes to RP101 compared with iDESTRIN. But as always in clinical trial, mistakes do happen and there is always risk involved.

Risks

Short business history, early development phase, affiliated partnership, future financing and potential dilution, competition, license agreement, general market, development expenses and regulatory risk.

Disclosure: This article is for information purposes only. There are risks involved with investing including loss of principal. I make no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed will be met.

I wrote this article myself, and it expresses my own opinions. I have no business relationship with Redwood Pharma mentioned in this article. Not investment advice. I am not an investment adviser.

BIOVICA INTERNATIONAL

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Ticker: BIOVIC-B
Price: 11.80 SEK
Shares outstanding: 8 255 875
Market cap: 205M SEK
Cash: ~ 52M SEK
Debt: –
Enterprise value: 153M SEK
Date: May 17, 2017

Company

Biovica is a  Swedish biotech company that develops and commercializes blood-based biomarker assays that improve the monitoring of modern cancer therapies and better predict patient outcome. The primary focus of Biovica is breast cancer, but they are researching other indications as well. The company is collaborating with world-leading cancer institutes as well as pharmaceutical companies launching next-generation therapies.

The company was introduced to Nasdaq First North Stockholm on March. 29 in 2017. The IPO offering consisted of 4.8 million new shares at a price of 12.50 SEK. The IPO resulted in net proceeds of approximately 54 million SEK after expenses.

Biovica have a clear strategy moving forward; Go through with and complete current ongoing clinical studies, complete product development to meet regulatory requirements, apply for regulatory approval and establish a cost compensation plan for their DiviTum technology.

The board and executives currently own 37.8% of the shares in the company and they have a lock-up agreement for one year.

In June. 9 2015 the company announced they had been selected as one of the few companies to receive support from the Horizon 2020 program in both Phase I and II. Biovica was supported with 6.5 million SEK over a period of 72 months and up until now the company has received 2.2 million SEK. The European Commission received 614 proposals, and only 42 were selected.

Technology

Biovica’s technology, DiviTum, is an ELISA-platform based biomarker developed to monitor and predict therapeutic response in solid tumors. DiviTum measures the activity of the enzyme thymidine kinase-1 (TK) in blood serum or cell cultures. Thymidine kinase-1 can be found in two places of our bodies, one in the cytosol and one in mitochondria of cells. The cytosolic enzyme is highly active in proliferating cells during the S phase. It has been found that elevated blood serum levels of TK correlates with metastatic capabilities of cancer and thereby can be used to detect malignant types of cancer.

It works very similar to many of the biomarkers we use today in cancer prognosis such as CEA, CA15-3 or AFP. The problem with some of these biomarkers, is that many times we often have to use them in combination with something else. They are not able to differentiate non-metastasized and metastasized tumors, there is not enough sensitivity and specificity for the tumor we’re looking for or it’s not predictive enough. DiviTum is highly sensitive for TK which allows it to recognise very low levels of activity in blood.

Another issue with biomarkers and other diagnostic tools in general, is time. In a myocardial infarction patient we can do a simple blood test and measure troponin levels. Elevated levels is not definitive, but a fairly accurate indication of MI. It’s quick and easy. Other biomarkers, blood culture, magnetic resonance, computer tomography, x-ray etc, they are all resource- and time consuming, expensive, and sometimes theres a risk involved, for instance, radiation or contrast. For radiologic imaging, patients can walk around for weeks or months waiting on their turn for a scan. This is common practice for non-acute patients.

When a patient has cancer and starts a treatment, it’s normal to do radiological imaging or measure biomarkers in order to evaluate the disease progress. Is the tumor growing, is it metastasized or is the patient getting better? If the tumor is metastazating, radiological imaging won’t help in roughly 40% of cases as it can’t be seen on imaging. Depending on the type of cancer, one might need several months of waiting before any visible changes can be seen after starting treatment. Biovica’s solution with DiviTum allows physicians to measure TK activity on a regular basis and evaluate the progress. A normal DiviTum result takes around two weeks to recieve. One of the major benefits of DiviTum is that it’s a non-invasive blood test that is performed on routine blood samples. This not only speeds up the process, but is much more beneficial for not only the patient, but health personell as well.

And then there’s the cost issue. The choice of biomarkers is mainly guided by the scientific question and financial resources. Cost is always a concern. In a scientific setting, the cost may be low in a small clinical trial, but in an epidemiological study which includes hundreds of subjects the cost can be quite high. In general hospitals and health care institutions, biomarkers are readily available and its inclusion in daily practice and research is essential for positive outcomes. In addition to the benefits of patients, there is potentially a benefit in developing robust biomarkers, especially for oncology. Developing a new drug is not cheap, and there is a substantial risk of failure as the drug progresses from Phase I–III. During these phases, a growing number of patients are needed which is particularly evident in oncology where many Phase II/III trials are conducted in late-stage patients. With the help of biomarkers, there is a potential of creating a solid cancer drug that would otherwise fail in a population, and thus cause financial loss to the company as well as discontinuing the drug. As far as costs and trial research, I do not know how Biovica stands in this regard compared to its competitors. I have not found a price for a single DiviTum test, therefore, I’m leaving it out of the discussion for now. Biovica is however participating in several studies where the progress can be followed with the help of DiviTum, which serves as a major benefit for future revenue if proven successful.

Skärmavbild 2017-05-19 kl. 23.36.57.pngClinical Development Success Rates 2006-2015 – BIO, Biomedtracker, Amplion 2016

Next to the ELISA platform, the company is developing a realtime analysis of TK-activity based on TaqMan-probe technique. The ELISA platform only measures activity during a single point in a reaction and is handled manually. The realtime analysis technology has the benefit of registrating data automatically and is presented immediately after the analysis is done. Development and completion of this new platform will create another significant advantage for Biovica.

Thymidine kinase-1

In a study by Alegre MM et al; ”Thymidine Kinase 1: A Universal Marker for Cancer”, they found that TK could be seen in blood serum even before clinical symptoms began to show.  This suggest that if TK is found in blood serum, it would allow quicker treatment before the cancer becomes too developed. Thyrimidine kinase has therefore been making a growing impact in the cancer research community of late.

Dr. Cynthia Ma presented her studies on CDK4/6-therapy in San Antonio in Dec. 2016 at the Breast Cancer Symposium. Cycling-dependant kinase complex (cyclin-CDK) are protein complexes most known for their role in the cell cycle. CDK4/6 is active in the transition phase from G1/S phase. She showed there is a clear connection between the function of CDK4/6, the G1/S phase and the expression of TK.

In cancer, the genes necessary to slow down the growth of tumors are down regulated or inactivated. The tumor can therefore keep on growing until it causes symptoms and eventually harm us. Today we have several drugs focused on inhibiting the cell cycle genes to slow down the growth of tumors. Dr. Cynthia Ma’s results clearly showed that there is a significant relationship between the tumor suppressor effect of the drug Palbociclib (Pfizer) and TK levels using DiviTum, only two weeks after initiated treatment. There are several new drugs on the market that slows down the tumor growth where TK activity have a strong scientific reason to be valid as a biomarker.

Studies

Biovica is currently evaluating serum TK activity as a biomarker for CDK-inhibitors in cancer therapy in six studies.

PYTHIA is a randomized, double-blind, placebo-controlled Phase II study set up jointly with the International Breast Cancer Study Group. The study was initiated in May 2016 and is estimated to be completed by Jan. 2020. The purpose of this study is to determine whether Palbociclib in combination with Fulvestrant is more effective than placebo plus Fulvestrant in prolonging progression-free survival in 120 post-menopausal women with hormone-receptor-positive advanced breast cancer. DiviTum will be used to measure TK activity in blood taken from the patients before and during therapy to explore whether the results can assist physicians in evaluating which patient will respond to which theraphy, as well as in monitor the efficacy of the drug during treatment. The strength of this trial lies in the conduct in conjunction with another study, the AURORA study, which systematically evaluates a panel of biomarkers in tissues and blood. Currently there are eight hospitals in the UK participating, seven hospitals in Italy and seven hospitals in Belgium.

PREDIX LumA is a Phase II randomised trial evaluating response-guided treatment in early-stage breast carcinoma. The study started in Oct. 2015 and estimated to be completed by Dec. 2024. The study is currently enrolling and will follow 200 women and evaluate efficacy and toxicity of Palbociclib when added to standard endocrine treatment. The study will be conducted at the department of oncology at Karolinska University Hospital, Sweden.

Both of these studies are state-of-the-art studies and the results will be crucial for Biovica’s future and outcome. FDA granted Palbocilib accelerated approval in Feb. 2017 for the treatment of hormone receptor positive (HR+) and human epidermal growth factor receptor 2 (HER2) negative advanced or metastatic breast cancer. In Feb. 2015 it was approved in the treatment of oestrogen receptor (ER) positive and HER2-negative advanced breast cancer in postmenopausal women. The synergy between DiviTum and Palbocilib is clearly interesting for not only scientists, but maybe Pfizer as well.

The main question I’m asking myself is; Do Pfizer see Biovica as a potential takeover target in the future if it is concluded that DiviTum was a major contributor to the end-result? The question remains to be answered. Pfizer currently run a program called ”Precision Medicine” which is a part of their external R&D innovation department, and it is represented on their website with the following:

”We are focused on Precision Medicine as an approach to discovering and developing medicines and vaccines that deliver superior outcomes for patients, by integrating clinical and molecular information to understand the biological basis of disease. This effort leads to better selection of disease targets and identification of patient populations that demonstrate improved clinical outcomes.”

I believe this is something to keep in the back of your mind moving forward.

Biovica have four more ongoing studies, three for breast cancer at the University of Pennsylvania, Prato University Hospital and City of Hope in Los Angeles. The final study is in collaboration with the Dana Farber Cancer Institute, USA. This is the first study with lung cancer as an indication. This could be the first study proving the broad spectrum of cancer indications Biovica might have a potential market share in.

Patent

Biovica currently holds two patent families in several countries. In addition to patents for the ELISA platform-based technology, development of the real-time analysis of TK activity is in progress. On May. 9 2017 the company announced that they received a patent in China as well as patent extension for the technology in U.S. The company is awaiting approval in Japan, Brazil, India, Norway.

Breast cancer & Market

Breast cancer is the most common cancer for women overall and has the second highest mortality after lung cancer. The past few years have seen a decrease in cases most likely through screening, increased awareness, as well as better treatment. The American Cancer Society estimates that in 2017 around 250.000 new cases will be diagnosed, and roughly 40.000 women will die from breast cancer. In terms of upcoming breast cancer treatments, the overall pipeline is very strong with several hundred of products. Despite this, the late-stage breast cancer treatment pipeline is still very weak, with only a few procent of candidates in Phase III development. The global breast market is estimated to reach $17.2 billion annually by 2021. Biovica’s focus will be on HR+ breast cancer, and they are estimating a potential market of 6 billion SEK. This is however, only calculated for breast cancer alone and not for other indications. This number would increase tenfold if  the ongoing and future studies show it’s reliable in other indications as well.

Biovica with its technology might be well on their way to a global market if they can push through and finalize their goals the following quarters. Recall that TK is expressed in many variants of cancer.  The total market for biomarkers are estimated at around $40 billion.

Commercialisation

Successful commercialisation requires that the company creates demand, ensures access to key markets and establishes partnerships for DiviTum. The company has to be effective in ensuring key markets with the help of physicians and via recommendations. It is also necessary that the test is subject to cost compensation and that it finally becomes regulatory approved.

It seems to me that the company has a clear, tunnel vision plan on how to execute. My biggest worry are the ongoing discussions on Medicare and Medicaid. They are two major cost compensation plans via state health insurance that are of outmost importance for Biovica. In my opinion we just have to wait and see what happens since the Trump administration has decided to make some changes, but I doubt it will have any major consequence.

Biovica has entered into agreements with several physicians, The Dana Farber  University, Washington University, Baylor College of Medicine and City of Hope National Medical center, to evaluate and document the clinical use of DiviTum. This forms the basis of commercialisation and should be enough to create a demand with the ongoing studies as a referral.  I except Biovica will receive an updated CE certification in Europe later this year and potentially start creating some revenue in the second half of 2018, or in 2019 as expected by the company.

The revenue model of Biovica consists of two parts; DiviTum sales in price per kit, and analysis service sales in price per analysis. The end customer will be the oncologists who order directly from the specific lab conducing the research. Sales in Europe will be directed through clinical laboratoriums and diagnostic companies. The aim is to increase market penetration to hospital laboratoriums after Biovica reaches regulatory approval.

In May 4. 2017 Biovica received their second largest order yet for DiviTum from a global contract research company, commissioned by a global pharmaceutical company to study the effectiveness of new cancer drugs. The value of the order was approximately one million SEK. The news did not specifically say which company, but my guess is Pfizer as discussed previously.

Competition

The biomarker market is highly competitive. Biovica is competing with several Swedish and International companies focused on diagnostics of disease. According to Amplion, a major biomarker database, the current FDA-cleared and approved novel biomarkers over the past 12 years are led by companies such as Nanostring, with a total of 45 novel biomarkers on the market. It is important to remember that Nanostring’s list of biomarkers are in one panel for prognosing breast cancer.  Of the major big pharma companies, only Abbot Diagnostics and Roche Diagnostics are on the top 10 list of biomarker companies. Interestingly, the majority of the leaders of biomarkers are smaller companies, which could indicate that Biovica is a contender for future market shares.

The current companies also active in TK diagnostics are Diasorin, Beckman-Coulter, SSTK Bio, AroCell and USCN Life science. From what I found, some of these companies are working on technology that measures TK levels in the blood, which is vastly different than measuring TK activity in the blood. From what I understand, only Diasorin and Beckman-Coulter act as direct competitors with similar technology.

Diasorin, a $3.73 billion dollar company was compared against DiviTum with its product Liaison in a study by Nisman et al; “Comparison of diagnostic and prognostic performance of two assays measuring thymidine kinase 1 acitivy in serum of breast cancer patients” – Published in Clinical Chemistry and Laboratory Medicine, July 2012. The study showed that DiviTum was more sensitive, more precise and had a wider range of measurement than Liaison. The study did however conclude that both technologies can be used to measure recurrence of preoperative evaluation of breast cancer. If we only measure technology versus technology, DiviTum had the upper hand.

Another study was done and published in 2014 comparing DiviTum versus Beckman-Coulter’s product, TK REA kit, and again DiviTum came out as more sensitive with a  higher range of measurement.

Comparing the products and evaluating the current market; both studies showed that DiviTum was slightly better. Even though the company is much younger than competitors, even a small market penetration would yield a substantial amount of potential revenue for Biovica.

Upcoming catalysts

Completion of current studies
Complete product development
Apply for regulatory approval
Establish commercial partnerships
Further develop future application areas
New patent approvals

Financials

The company currently have a cash balance of roughly ~ 53 million SEK and no debt. With a quarterly burn rate of roughly 7.5 million SEK they are well funded moving forward. We have to await the next interim report for an update.

Summary

When reviewing companies, I look for certain specifics. Usually smaller companies with a market cap below $150 million, a low share price, insider holdings more than 20%, low debt and positive cash flow. I believe this company is currently flying under the radar from many investors. Biovica is a very early stage company, but compared to many other early-stage companies they have already entered into several Phase II studies because their technology allows them to do so. It might not have the multiple shots on goal I generally look for, but I find the long term perspective very interesting. The compound of six clinical studies could rapidly lead to a mighty market penetration in 2018/2019 which will escalate the company to a billion dollar market.

It does not have positive cash flow, but the company have started receiving orders. The low debt certainly helps. The global pharmaceutical company ordering products is very interesting. Like mentioned I believe this is Pfizer. And as mentioned further up in the analysis, Biovica is already a possible takeover target by Pfizer. If any of the upcoming studies show benefits of DiviTum in cancer treatment, I would not be amazed if Pfizer picked this company up as a part of their portfolio.

Next to a potential takeover target, it is important as I highlighted, that DiviTum can serve as a potential instrument in creating better drugs with targeted therapy in oncology. You might remember Bristol-Myer’s failure with Opdivo for lung cancer? After that, Bristol-Myers changed it’s strategy and AstraZeneca soon followed with its PLD-1 inhibitor. The importance of biomarkers needs to be highlighted, and I believe this is a vertical where Biovica stands a major chance of success in the near future.

Assuming some of this is potentially true, and evaluating the global market for Biovica, I find this company very interesting. The estimated market for biomarkers today is $40 billion, and the cancer biomarker market is estimated to $16 billion by 2020. Biovica might only focus on a single indication as of today, but if thymidine kinase-1 as a marker proves itself, Biovica might find its way to the top with several indications increasing their market tenfold.

My standard base case scenario of 5-10% market penetration would yield a target market of $800 – 1600 million annually. I have not researched the direct competitors in detail, but a quick look at their valuations of $1 – 3.38 billion, could indicate that Biovica has a substantial upside with a current market cap of 205 MSEK.

Risks

Risks include competition, financials and potential dilution, failure of clinical trials and cost compensation issues and general market and economic risks.


Disclosure
: This article is for information purposes only. There are risks involved with investing including loss of principal. I make no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made. There is no guarantee that the goals of the strategies discussed will be met.

I wrote this article myself, and it expresses my own opinions. I have no business relationship with Biovica International mentioned in this article. Not investment advice. I am not an investment adviser.

REDHILL BIOPHARMA

Ticker: RDHL
Price: $9.860
Shares outstanding: 170.5 million
Market cap: $169M
Cash: $61 million (March 31, 2017)
Debt: –
Enterprise value: $108M
Technical support: $9.3-9.4

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Mean pattern

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RedHill Biopharma is an Israeli based biopharmaceutical focused primarily on development and commercialisation of late clinical-stage, proprietary, orally-administered, small molecule drugs for GI and inflammatory diseases and cancer. The company owns over 360 patents as of today.

RedHill has a major development pipeline with multiple near-term milestones and three ongoing phase III programs. They have two speciality GI products in the US, Donnatal for IBS and acute enterocolitis, and EnteraGam, for chronic diarrhoea and loose stools.

RedHill is specialising on the growing area of microbiome. Lead products include BEKINDA, RHB-105 and RHB-104, the latter two focused on restoring the gut microbiome. Its an emerging field which has gained a lot of interest the past few years on areas such as GI inflammation disorders, heart disease and more.

Pipeline 

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RHB-105

RHB-105 is one of the most advanced clinical-stage candidates of RedHills portfolio. RHB-105 is a new triple combination therapy for eradication of H.pylori infection. The drug has successfully completed a Phase III clinical trial which reported positive results in June 2015 in the ERADICATE-Hp study. RHB-105 is an ”all-in-one” combination oral capsule consisting of two different antibiotics and a proton pump inhibitor combined in a single capsule. One capsule contains a total daily dose of: Rifabutin 150 mg, Amoxicillin 3000 mg and Omeprazole 120 mg.
RHB-105 successfully met it’s primary endpoint of superiority over historical standard-of-care eradication rate of 70% with high statistical significance (p<0.001). The study results demonstrated 89.4% efficacy in eradicating H. pylori infection. No serious adverse events related to the drug were noted in the study.

RedHill plans on initiating a confirmatory Phase III study in Q2-2017, which will compare RHB-105 against a high dose amoxicillin and ompeprazole regimen.The planned indication for RHB-105 is first line treatment for eradication of H.pylori regardless of ulcer status.

The drug has received FDA QIDP designation under the GAIN Act for serious or life-threatening infections, including fast-track development, priority review and extended market exclusivity for a total of 8 years. In February 2017, WHO published a global priority pathogen list of antibiotic resistant bacteria in order to help prioritising the R&D of new and effective antibiotic treatments where H.Pylori were included.

In 2015, the U.S and global markets for H.pylori was estimated at approximately $1.45 billion and $4.83 billion respectively. H.pylori is one of the strongest risk factors for the development of gastric cancer and peptic ulcer disease. Its associated with iron deficiency, B12 deficiency and drug malabsorption. Prevalence of H-pylori is estimated at 30-40% of the population, and standard therapy fails in approximately 30% of patients.

RHB-104

Crohn’s disease is a severe inflammatory disease of the GI tract with a large unmet medical need. Existing dugs include high dose steroids, alkylating agents and more, which treat symptoms but are associated with numerous side effects and are widely considered to have limited efficacy in the long term. Most often, surgical colectomy and resection of the colon is the end result. There is a significant failure rate with current standard of care.

The mechanism of Crohn’s is not yet fully understood. Todays assumption is that Crohn’s is a multifactorial disease, and one assumes that hereditary, a defective innate immunity, diet and stress can lead to the development of the disease. Advances of diagnostic technology has led to increasingly higher identification of mycobacterium avum in Crohn’s disease patients, and there is a growing evidence that intracellular mycobacteria play a crucial role in the etiology. Worldwide market for Crohn’s was estimated at $7.6 billion in 2016.

RHB-104 is a proprietary oral antibiotic combination therapy with anti-mycobacterial and anti-inflammatory properties. RedHill is currently conducting a Phase III MAP study in the U.S., Canada, Europe, Israel, Australia and new Zealand. The study is designed to evaluate the safety and efficacy of a fixed-dose RHB-104 in patients with moderately to severely active Crohn’s disease.

RHB-104 has obtained orphan drug status in the U.S. for paediatric usage after a positive clinical study presented in 2013. The study showed remission in 8 out of 10 paediatric patients with Crohn’s disease. Mild adverse event occurred, with no subjects requiring dose adjustments. One patient was excluded due to secondary infection and one patient was non-compliant. RedHill has a newly issued patent for RHB-104 lasting until 2029, and additional patents are filed. The company has a global patent strategy with 3 years (and potentially 5 years) data exclusivity.

RHB-104 has successfully completed a Phase IIa study for Multiple sclerosis called CEASE-MS, with top-line final data. The CEASE-MS study followed the successful completion of four pre-clinical studies with RHB-104 which where conducted using the experimental autoimmune encephalomyelitis MS model. The CEASE-MS study demonstrated an annualised relapse rate of 0.288, which compared favourable with previous studies evaluating beta-1a therapies and Rebif. Only five relapses were observed in the study, four of which occurred in a single patient. RHB-104 was found to be well tolerated with no serious adverse events.

MS is a disease in which the immune system degenerates the protective nerve sheath. The worldwide market for MS is estimated at $18 billion.

RHB-104 has also concluded several successful preclinical studies for other indications such as rheumatoid arthritis, lupus, type 1 diabetes, psoriasis and NTM. More studies are planned and are under development. Combined worldwide market for these indications are estimated at $36.5 billion.

RHB-106

RHB-106 is a proprietary, encapsulated preparation of the Gastrointestinal tract for GI procedures/surgeries. In February 2014 RedHill and Salix Pharmaceuticals (aquired by Valeant in 2015) announced an exclusive agreement giving Salix the worldwide rights to RHB-106.The RHB-106 formula is intended for the preparation and cleansing of the gastrointestinal tract prior to performance of diagnostic tests, such as colonoscopy, barium enema and virtual colonoscopy, as well as surgical interventions. The market is estimated to annual sales of $280 million.

MESUPRON

Mesupron is a first-in-class urokinase-type plasminogen activator (uPA) inhibitor administered per oral capsule. In June 2014 RedHill acquired the rights of worldwide exclusive development and commercialization rights to Mesupron from Munich-based WILEX AG. The company has an extensive patent protection covering the technology platform, and there is a significant market potential. There is a dramatic unmet need in several of the indications that Mesupron is aiming for.

Mesupron is a non-cytotoxic, protease inhibitor for the treatment of several neoplasm indications. This product has a major track record of 8 Phase I studies (160 patients) where safety and tolerability was evaluated. It has completed a Phase II proof of concept clinical study in non-metastatic pancreatic cancer in combination with Gemcitabine (95 patients) where results in 2001 demonstrated 12-month overall survival 49% higher in Mesupron 400mg/day group than in gemcitabine alone group.

It has completed another Phase II proof of concept study in HER2-negative metastatic breast cancer in combination with Capecitabine (132 patients), where results in 2012 demonstrated increase of median progression-free survival and objective tumor response.

There are no ongoing clinical trials for Mesupron, but one Phase I/II clinical study for Mesupron in combination with chemotherapy in patients receiving adjuvant chemotherapy in pancreatic cancer is planned to be initiated in H2-2017 in Germany.

Potential market size is estimated to $26.6 billion in 2018.

RIZAPORT 

Rizaport, formerly known as RHB-103, is a patent-protected, oral thin film formulation for the treatment of migraines. Current advantages of Rizaport compared to other triptans is the effective route of administration, speed of delivery and no need to swallow water. Other advantageous are less patients suffering from nausea, competitive pricing, ease of use, and superior adherence rates.

RedHill currently has a co-development agreement with IntelGenx Corp, a pilot clinical trial completed, successfully completed two comparative bioequivalence clinical trials with the U.S. and European reference drugs.

Rizaport was approved in Europe in Oct. 2015 by Germany’s BfArM. An NDA was filed in March 2013, but received a complete response letter citing issues related to third party manufacturing, packaging and labeling. Re-submission of Rizaport to the NDA is expected in Q3-2017.

Rizaport currently have commercialisation agreements with Exeltis Healthcare for Spain, and with Pharmatronic Co. for South Korea.

This product will most likely be the first thin film triptan to reach the U.S. market. In summary, the drug exhibits the highest efficacy data compared to all triptans. It has the shorted Tmax, indicating rapid onset of action which is extremely important for migraine sufferers. It is highly effective in treatment of migraine attacks in children and adolescents.

Market size of generics for migraine is estimated at approximately $593 million today. Due to the low cost of Rizaport, I expect this product to generate very high profit margins once it reaches the market.

BEKINDA

Bekinda, formerly known as RHB-102, is an extended-release formulation of the generic drug ondansetron. Ondansetron is an anti-emetic drug, and is used to prevent vomiting in patients undergoing cancer treatment or surgery. Ondansetron is also prescribed for children suffering from acute gastroenteritis. Today there is lack of data supporting the use of ondansetron in adults with acute gastroenteritis, but there have been fairly extensive studies in the use of ondansetron in children.

One study, by Marchetti et al., 2016 found that ondansetron was statistically superior to both placebo and Domperidone in treating acute gastroenteritis.

RedHill is currently conducting a Phase III study for gastroenteritis known as the GUARD study. Patient enrolment was completed in Feb. 2017, and top-line results are expected in Q2-2017. RedHill is hopeful that this study is sufficient to support future marketing applications in the U.S, conditional upon achieving highly significant positive results and future review and guidance from the FDA.

From my clinical knowledge of ondansetron, and reviewing the research, my prediction is that BEKINDA will be approved by the FDA in 2018.

RedHill assumes worldwide potential market could exceed $650 million annually.

YELIVA

YELIVA  inhibits SK2, a lipid kinase that catalyses formation of the lipid singling molecule sphingosine 1-phosphate. S1P promotes cancer growth, proliferation and pathological inflammation. By inhibiting S1P, YELIVA potentially inhibits tumor growth and proliferation and pathological inflammation.

YELIVA’s Phase I study on 21 patients with advanced solid tumors, resulted in a rapid and pronounced decrease in levels of S1P, with several patients having prolonged stabilisation of disease.

YELIVA has multiple indications ongoing, including studies on Multiple myeloma, hepatocellular carcinoma, DLBCL and Kaposi sarcoma. Two more studies are planned, one for Ulcerative Colitis in H2-2017, and another study in Q3-2017 for the prevention of mucositis in head and neck cancer patients undergoing therapeutic radiotherapy.

On April 4, 2017 RedHill reported that the FDA granted YELIVA orphan drug designation for the treatment of cholangiocarcinoma, which is a rare malignant bile duct cancer. CCA accounts for 15% to 20% of primary hepatobiliary malignancies.  The American Cancer Society estimates that about 8.000 people in the U.S. are diagnosed with bile duct cancer each year.

RedHill plans to initiate a Phase II clinical study with YELIVA in patients with advanced, unresectable intrahepatic and extrahepatic cholangiocarcinoma in Q3-2017. The aim of the study is to evaluate YELIVA as a single agent in patients with a primary endpoint of determining the response rate.

I’m not aware of any other company working on an SK2 inhibitor, and there seems to be a very high chance of potential synergy with chemotherapeutic agents. This is definitely a field of interest for big pharma companies in the future.

Additional products

RedHill continues to expand its portfolio, and has recently pursued licensing and acquisition of additional commercial product opportunities in the U.S. specialty GI area to further expand its potential and operations.

In Dec. 2016 RedHill entered an exclusive agreement with Concordia International, granting RedHill certain U.S. promotional rights for Donnatal. Donnatal is a anticholinergic and barbiturate combination, used for treating irritable bowel syndrome and intestinal inflammation, in combination with other medicines. It may also be used along with other medicines to treat intestinal ulcers.

Recent clinical trials showed that Donnatal was not more effective than plain antacids in relieving symptoms of dyspepsia, however, other ingredients in Donnatal have been shown to be more effective than placebo in treating moderately severe symptoms of irritable bowel syndrome.

Unfortunately, Donnatal is an old drug and I fail to see how this drug will be beneficial for the company in the future.

In April. 2017 RedHill entered into an agreement with Entera Health Inc. for the exclusive rights to EnteraGram. EnteraGram is a medical food product for the dietary management of chronic diarrhoea and loose stools due to specific intestinal disorders, such as irritable bowel syndrome with diarrhea and inflammatory bowel disease.

EnteraGam neither acts as a probiotic or an antibiotic. It differs in that it uniquely binds toxic substances released by bacteria that upsets the intestinal environment. This helps prevent them from penetrating the lining of the intestine and cause problems.

Enteragam is FDA approved for use in patients for the clinical dietary management of enteropathy in patients with impaired, or limited capacity to ingest, digest, absorb or metabolize certain nutrients.

Adverse effects included are mild nausea, constipation, stomach cramps, headache and increased urination. These side effects had a 2-5% incidence.

Company 

They have a solid business model of building U.S. GI specialty pharmaceuticals, risk-mitigation with multiple shots on goals and they are outsourcing which reduces costs. Least but not all, they have a heavily invested patent structure which secures future growth.

Financials:

As expected, RedHill announced no revenues for the first quarter of the year, but that should change shortly. The company is expecting to add roughly 30 sales member on the marketing team this year. Cash balance as of March 31, 2017 were $61 million, a decrease of $5 million compared to $66 million as of December 31, 2016.

R&D for the first quarter of 2017 were $8.1 million, up 74% compared to the first quarter of 2017 and up 9% compared to the fourth quarter of 2016. This increase is related to the multiple ongoing Phase II and Phase III studies for their lead products. While it seems clear that the burn rate will increase in 2017, management is also making plans to bring in a commercial asset that will potentially generate revenues.

With an estimated burn rate of $10 million per quarter, the company should be well funded into second half of 2018.

Upcoming catalysts:

RedHill has multiple catalysts the next 12 months. They have 2 commercially available GI products in the U.S. They have positive results from a Phase III study with RHB-105 which has blockbuster potential. They have two additional ongoing phase III studies in GI indications for Crohn’s and gastroenteritis. They have several Phase II studies ongoing, and an exclusive worldwide license agreement for RHB-106 with Salix.

RedHill’s CEO had this to stay on the latest interim report:

Exciting potential milestones and data points between now and the first quarter of this year in a likely chronological order include: top-line results from the BEKINDA 24 milligram Phase III GUARD study for gastroenteritis expected this quarter, Q2 2017; initiation of our confirmatory Phase III study with RHB-105 for the treatment of H. pylori infection also expected this quarter, second quarter of 2017; top-line results from the BEKINDA 12 milligram Phase II study for IBS-D, irritable bowel syndrome with diarrhea expected in the third quarter; and a second independent DSMB meeting for the MAP U.S. Phase III study with RHB-104 for Crohn’s disease, including an interim efficacy analysis and evaluation of an option for early stop for success for overwhelming efficacy also expected around mid-year.”

Analyst coverage

There are a total of four analyst ratings for RedHill Biopharma. The latest two include Roth Capital Partners which issued a buy rating on RedHill In February 3, 2017, with a 12 month target price of $26. On January 4, 2017 , H.C. Wainwright maintained a buy rating on RedHill and a 12 month price target of $33. Two other analyst firms have also issued a buy rating.

Analyst rating: Buy (4/4)  – Average target: $25 (+149.5%)

Outlook

RedHill is a heavily undervalued, zero debt, high-risk investment with a very substantial upside. Redhill has three Phase III indications for a market total greater than $14 billion for their main indications. All of them have demonstrated significant efficacy in trials and adverse side effects are limited. I have great expectations on BEKINDA and RHB-105 who both have major potential on reaching a final FDA approval. The second quarter of this year will be filled with potential catalysts from these therapies. Assuming these indications reach commercialization phase, these drugs will start generating serious revenue in 2018/2019, and the current market cap of $169 million seems extremely low.

The approval of any product by the FDA will be a major catalyst for RedHill. Based solely on RHB-105, a base case of 5-10% market penetration yields a potential revenue of $72 – 145 million for the U.S. and $240 – 483 million for the global market annually respectively for this indication alone. Assuming a bull case scenario where all three products are FDA approved, still maintaining a market penetration of 5-10%, yields a potential revenue of $700 – 1400 million annually.

Biotech has had a major turn around in the early start of 2017 after the 18 or so months of a steady downward trend. As we came into earning season, many of the micro and small cap companies had rallied 30-40%. RedHill is one of the few companies that has not yet had a major run, and I expect the time is coming very soon for this undervalued company to prove its potential.

Risks include clinical trail failure, future financing and potential dilution, country risk being based in Israel, competition and general market and economic risks.

I wrote this article myself, and it expresses my own opinions. I have no business relationship with RedHill Biopharma mentioned in this article. Not investment advice. I am not an investment adviser.