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Thursday, October 30, 2014

Initiating Coverage On Matinas BioPharma - A New Player In The Fish Oil Market

By Jason Napodano, CFA

We are initiating coverage Matinas BioPharma Holdings, Inc (MTNB:OTCQB) with an ‘Outperform’ rating and a $1.25 per share price target. Matinas is developing MAT9001, a proprietary prescription grade omega-3 fatty acid composition, comprised of a complex mixture of omega-3 fatty acids, predominantly eicosapentaenoic acid (“EPA”), and docosapentaenoic acid (“DPA”), a rare and potent omega-3 fatty acid. The product also contains several other omega-3 fatty acids, including relatively small amounts of docosahexaenoic acid (“DHA”).

The initially targeted indication is severe hypertriglyceridemia, for which Matinas expects to initiate a U.S. Phase 3 clinical trial in the middle of 2015. Severe hypertriglyceridemia is a condition in which patients have elevated serum triglycerides (TG > 500 mg/dL) that put them at high risk of pancreatitis, and is recognized as an independent risk factor for cardiovascular disease. A second potential indication is the treatment of patients with mixed hyperlipidemia (triglycerides > 200 mg/dL in spite of ongoing statin treatment). The addressable treatment populations for these two indications in the United States are approximately 5 million and 30 to 35 million, respectively.

Fish Oil & Why MAT9001 Is Different

Individuals with hypertriglyceridemia and mixed dyslipidemia have a number of FDA approved prescription therapeutic options to treat their disease. The leading prescription products available for mixed dyslipidemia are statins, one of the most well-characterized and widely used classes of pharmaceutical agents. Statin drugs, such as Pfizer’s (PFE) Lipitor® and AstraZeneca’s (AZN) Crestor®, potently reduce LDL cholesterol, VLDL cholesterol, triglycerides, and total cholesterol, while modestly increasing HDL. In addition to their potency, statins are first-line agents for the treatment of dyslipidemia because they have been shown to reduce cardiovascular events and mortality both in patients with existing cardiovascular disease and in the primary prevention setting. Lipitor, for example, at the 10 mg dose, reduced the surrogate endpoint of non-fatal myocardial infarction or cardiovascular death by 36% in the Anglo-Scandanavian Cardiac Outcomes Trial (ASCOT) (Sever PS, et al, 2003).

Besides statins, fibrate products such as AbbVie’s (ABBV) TriCor® and extended-release niacin products such as AbbVie’s Niaspan® also have been shown to potently reduce triglycerides. However, unlike statins, cardiovascular outcome studies with fibrate and extended-release niacin products have been mixed with respect to demonstrating a reduction in morbidity and mortality with long-term use. The high profile failures of the ACCORD-LIPID trial with TriCor (Margolis KL, et al, 2014) and the HPS-TRIVE trial with Niaspan (Boden WE, et al, 2014) in 2013 have led to a meaningful decline in prescriptions for these two classes of drugs.

Prescription fish oil and omega-3 fatty acid products are the final class of pharmaceutical agents used to treat hypertriglyceridemia and mixed dyslipidemia. The market is currently dominated by Lovaza®, a mixture of eicosapentaenoic acid (EPA) and docosahexaenoic acid (DHA) ethyl esters that is approved for the treatment of both severe hypertriglyceridemia (> 500 mg/dL) and for the treatment of mixed hyperlipidemia in combination with a statin. Lovaza sales in 2013 were $917 million at GlaxoSmithKline (GSK). It is now available as an authorized generic. Other competitors in the space include Vascepa® (EPA ethyl ester) by Amarin Pharmaceuticals (AMRN) and Epanova® (EPA and DHA free acids) by AstraZeneca, each of which are currently labeled for treatment of severe hypertriglyceridemia only.

Cardiovascular outcome data with fish oil products is limited. Amarin is currently investigating Vascepa in an ongoing 8,000 patient, 7-year cardiovascular outcomes study called REDUCE-IT (NCT01492361). The primary endpoints of this study are CV-related death, myocardial infarction, stroke, coronary revascularization, and hospitalization for unstable angina. Data is expected in 2018. The effect of EPA on cardiovascular outcomes has previously been examined in the Japan EPA Lipid Intervention Study (JELIS), a prospective, randomized, trial including 18,645 primary and secondary prevention patients with mixed hyperlipidemia. After 5 years of follow-up, a 19% reduction in major coronary events was observed in the EPA treatment arm (Ohnishi, H, et al, 2013).

Unlike both Lovaza and Vascepa, Matinas’ MAT9001 contains a unique component of docosapentaenoic acid, or “DPA”. Preclinical studies suggest that DPA has the potential to confer a unique therapeutic profile compared to existing omega-3 products, particularly in its ability to exert synergistic anti-hyperlipidemic effects in combination with statins. For example, omega-3 fatty acids have been shown to serve as inhibitors of enzymes involved in triglyceride processing.

Recently, research has pointed toward the ability of certain omega-3 fatty acids to modulate the expression of genes involved in lipid synthesis. The gene regulatory effects of DPA in rat liver cells include the down-regulation of genes such as SREBP‑1c, acetyl coenzyme-A carboxylase, ChREBP, and fatty acid synthetase that are known targets of other omega fatty acids. Notable, however, is DPA’s unusual potency in reducing the expression of RNA encoding HMG-CoA reductase, the enzyme target of statins. By down-regulating gene expression DPA has the potential to act synergistically with statins in reducing the activity of this well-established drug target. Reduced enzyme production is a result of the action of DPA at the gene level, and the protein that is produced is inhibited by the statin.

In vivo results support the in this in vitro finding and its suggestion of potential synergy with statins in man. Figure 15 shows HMG-CoA reductase and PCSK9 gene levels in fatty Zucker rats treated with vehicle (control), vehicle plus statin, or DPA plus statin. The Figure shows that the RNA encoding each drug target is up-regulated, probably as a compensatory mechanism, in rats treated with statin only. The addition of DPA abolishes this compensatory response, and in the case of PCSK9, drives RNA levels below those of rats not treated with statin.

In addition to the effects described above, DPA has several other types of activity. These include an aspirin-like platelet inhibitory and an anti-angiogenic effect through the suppression of the expression of the gene for the VEGF-2 receptor. A study conducted by Satoshi Akiba, et al, 2000, compared the effects of DPA on platelet aggregation and arachidonic acid metabolism to EPA and DHA. Collagen- or arachidonic acid-stimulated platelet aggregation was inhibited dose-dependently by n-3 fatty acids, among which data shows DPA to be the most potent. Furthermore, these fatty acids suppressed thromboxane A2 formation by platelets which were exposed to collagen, thrombin, or by platelets to which arachidonic acid was added. In these experiments, DPA was the most potent inhibitor. DPA also enhanced formation of 12-hydroxyeicosatetraenoic acid in response to collagen or from arachidonic acid by intact platelets, while the other two acids had less of an effect.

The potential of DPA for synergism with statins in the treatment of hyperlipidemias is being exploited in Matinas' lead development candidate, MAT9001. MAT9001 is a proprietary mixture of DPA, EPA, low levels of DHA and certain other omega-3 fatty acids. Matinas believes that the known properties of EPA and DHA, and the potent ability of DPA to regulate RNA expression for HMG-CoA reductase and other hyperlipidemia targets, as well as inhibit platelet aggregation has the potential to be a highly differentiated drug candidate for the treatment of hypertriglyceridemia (primary indication) and mixed dyslipidemia (potential label expansion).

On October 20, 2014 the company filed its MAT9001 IND with the US FDA. The company anticipates commencing PK/PD studies in the first quarter of 2015 in Canada, followed by the initiation of a Phase 3 registration program by the middle of 2015. PK/PD studies are currently taking place in Canada in an effort to better characterize MAT9001 prior to U.S. Phase 3 studies in 2015.

Taken in sum, we believe the data above suggest that MAT-9001 has potential to provide a highly differentiated profile in patients with severe hypertriglyceridemia and in those with mixed hyperlipidemia. We think this is a promising, though very early stage opportunity, with significant upside in the event that clinical results reflect this superior potential.

With A Differentiated Profile – MAT9001 Has Blockbuster Potential

According to data from the AHA/ACC, roughly 5 million Americans have severe hypertriglyceridemia with a serum triglyceride level > 500 mg/dL. Another 35 million Americans have mixed dyslipidemia, with a triglyceride level in excess of 200 mg/dL. Approximately 25 million Americans are taking statin drugs such as Lipitor or Crestor to control their high cholesterol and triglyceride levels. However, according to New Guidelines issued in November 2013 from the AHA and ACC, the number of Americans that actually qualify for statin therapy and should be taking the drugs is closer to 70 million!

Sales of antihyperlipidemic products peaked in 2010 just before Pfizer’s mega-blockbuster Lipitor lost patent exclusivity. AbbVie’s TriCor has also lost patent exclusivity and is now available as a generic. Nevertheless, prescriptions for cholesterol and triglyceride lowering agents remain relatively strong, even in the face of the high profile failures noted above for fenofibrate and niacin products. Prescriptions for fish oil products should still eclipse 5 million in 2014. Amarin’s Vascepa, with comparably better head-to-head data than Lovaza, has only captured roughly 10% of the market (~500,000 TRx). The outcome of Amarin’s REDUCE-IT cardiovascular outcome trial in 2018 and AstraZeneca’s STRENGTH cardiovascular outcome trial in 2019 will have a profound impact on the future prescription and revenue potential for all fish oil / omega-3 fatty acid products.

With clearly superior data, we believe MAT9001 could easily capture >20% of the fish oil market for patients with severe hypertriglyceridemia once approved in 2017. The market for severe hypertriglyceridemia in the U.S. is approximately 5 million patients. However, less than 10% of the patients are actually taking fish oil products. With 20% market share, Matinas Biopharma has an existing market opportunity of ~150,000 patients or 1.8 million prescriptions. Assuming $200 per prescription, the market opportunity to Matinas Biopharma looks roughly $360 million in size.

Matinas will not, however, have cardiovascular outcome data to support expanding the label for MAT9001 into the mixed dyslipidemia market and legally target the 35 million American’s with triglyceride levels between 200 mg/dL and 500 mg/dL. Nevertheless, some of these patients are on prescription fish oil products like Lovaza and Vascepa “off label” per the recommendations of their primary care physician or cardiologist. We estimate approximately 20% of Lovaza’s 5.18 million prescriptions in 2012 were in the mixed dyslipidemia population. With superior data, assuming Matinas captures the same 20% market share away from Lovaza, off label indications for MAT9001 look to be about another $140 million. As such, we see the current peak market opportunity for MAT9001, prior to any outcome data, at $500 million. We caution investors that this $500 million figure assumes a vastly superior clinical profile for MAT9001 vs. generic Lovaza (authorized now, full in 2015), Vascepa, and Epanova.

NPV Analysis Shows Matinas Attractively Valued

Below we present a model for the moderate, high, and severe hypertriglyceridemia market in the U.S. We forecast in 2018, when MAT9001 will likely be on the market, that there will be ~7 million severe hypertriglyceridemia patients and ~38 million high hypertriglyceridemia or mixed dyslipidemia patients in the U.S. Only a small percentage of these patients are on therapy. However, with superior data, we believe MAT9001 can capture 20% of the market away from generic Lovaza and branded Vascepa and Epanova. That puts MAT9001 as a potential $500 million drug. As of now, prior to seeing the MAT9001 data or the results of cardiovascular outcome data from REDUCE-IT or STRENGTH, we believe this is a fair forecast. Assuming industry average margins, which include manufacturing, ongoing R&D, and selling, general, and administrative expenses, we believe Matinas can achieve ~50% net margins at peak sales. Using an aggressive 30% discount rate, we believe the company is worth $90 million in value.

Matinas Biopharma exited the second quarter ending June 30, 2014 with $6.65 million in cash and investments. Burn from operations in the first and second quarter of 2014 totaled $2.3 and $1.9 million, respectively. We forecast burn in the third quarter 2014 totaled around the same amount. Thus, the cash position as of September 30, 2014 probably stood around $4.8 million. We expect burn in the fourth quarter will increase slightly as the company conducts the PK/PD study on MAT9001. Therefore, we forecast cash at year end 2014 will be around $2.5 million. This should be enough to continue to fund operations into March 2015.

All-in, we suspect Matinas will require roughly $30 million to fund the required Phase 3 trial with MAT9001 prior to filing the NDA in 2016. This does not include the potential for a second Phase 3 trial, if required, prior to the NDA filing. We believe the company will seek to raise a small amount of money in the near-term to fund operations through the PK/PD study data expected in April 2015. We suspect that a bridge financing of $5 million gets the company into the second half of 2015, putting them in a much better position to then fund the Phase 3 program in 2015 and 2016.

As of August 8, 2014, Matinas Biopharma had 32.0 million basic shares outstanding. The company has another 8.25 million issuable shares under the existing employee stock option program. Of this amount, 3.1 million is outstanding, 0.8 million of which is currently exercisable at $0.94 per share. There are 1.5 million warrants at $1.00 per share outstanding that expire in July 2018 and 13.75 million warrants at $2.00 per share that expire in July and August 2018. To fund operations through the U.S. NDA filing in late 2016 we believe Matinas will need to issue another 20+ million shares. This assumption includes the issuance of shares to raise the $5 million bridge loan at today’s valuation plus raising a new $15 to $20 million in 2015 at slightly higher valuations post the U.S. Phase 1 data. By 2018, we suspect the basic outstanding share count will be in the area of 50 to 55 million. Including another 15 to 20 million in estimated warrants brings our fully-diluted share count to roughly 70 to 75 million.

As such, we believe the shares are fairly valued today at $1.25 per share. Our target is subject to revision based on the terms of the $5 million bridge financing, the results of the PK/PD data, and the timing and results of the pivotal U.S. Phase 3 study.

Risks To Consider

Today’s price represents as attractive valuation for the long-term Matinas shareholder. However, we caution investors that the fish oil / omega-3 fatty acid industry has been a tumultuous one. Investors in Omthera did very well to see the company acquired by AstraZeneca for $323 million + $125 million in milestones in 2013. The $1.65 billion sales of Reliant to GlaxoSmithKline in 2007 set the bar very high. However, other players like Amarin and Acasti have not fared so well. Amarin’s stock is down >95% from its summer 2011 highs. Matinas Biopharma, with a candidate that has yet to even enter U.S. clinical trials, is clearly late-to-the-game with MAT9001. Investors in Matinas should be excited about the science and market opportunity, but appreciate the risks in both clinical development and financial position. Right now, Matinas requires more cash today to develop MAT9001 through NDA filing that its current market capitalization. As such, investment in Matinas is a high risk / high reward endeavor.

Wednesday, October 29, 2014

Cipher Beats Again, Seeks NASDAQ Listing

By Jason Napodano, CFA

On October 29, 2014, Cipher Pharmaceuticals (DND-TSX) (CPHMF-OTC) reported financial results for the third quarter ended September 30, 2014. Total revenues in the quarter were $7.2 million, up 28% over the third quarter 2013. Revenues did decline by $1.5 million sequentially from the second quarter 2014 due to seasonality of the company’s leading isotretinoin franchise, which we discuss below. Revenues were driven by $4.8 million in royalties of Absorica™ (CIP-isotretinoin) from U.S. commercial partner Ranbaxy, along with $1.1 million in revenues associated with Lipofen (CIP-fenofibrate) and $0.8 million from ConZip/Durela (CIP-tramadol). Cipher also recorded $0.5 million in product sales relating to sales of Epuris® (CIP-isotretinoin) in Canada. This was generally in-line with expectations.

Operating expenses in the quarter were in-line with expectations. The company has been able to keep overhead and R&D costs low even while the top-line dramatically increases. The company has been expanding its commercial operations in Canada and executing on its business plan well over the past year. For example, Cipher hired 6 full-time representatives and 1 part-time representative in 2013 to promote Epirus in Canada. We expect further expansion of this staff to the mid-teens level in 2015. Over the summer, Cipher was successful in expanding the CIP-isotretinoin licenses outside the U.S. with two recent agreements:

- In June 2014, Cipher announced it had entered into a definitive distribution and supply agreement with Laboratorios Andrόmaco S.A. under which Cipher has granted Andrόmaco the exclusive right to market, sell and distribute CIP-isotretinoin in Chile. Andrόmaco already sells a generic isotretinoin product in Chile called Lisacne®, along with other dermatology products Fucidin® and Daivonex®. The company will replace Lisacne® with Cipher’s formulation and call it Lisacne-CIP, once approved. We estimate the generic isotretinoin market in Chile is around $10 million in size and expect Lisacne-CIP will be on the market by the middle of 2015.

- In July 2014, Cipher entered into a definitive distribution and supply agreement with Ranbaxy under which Cipher has granted Ranbaxy the exclusive right to market, sell, and distribute CIP-isotretinoin capsules in Brazil. This agreement extends the current relationship with Ranbaxy, which markets and distributes CIP-isotretinoin as Absorica™ in the U.S. Ranbaxy plans to promote the product through a brand dermatology division in Brazil. We estimate the size of the Brazilian isotretinoin market at around $50 million. Cipher's CIP-isotretinoin formulation is expected to be a flagship product in Ranbaxy's dermatology franchise in Brazil, once approved. Cipher believes Ranbaxy will be in position to launch CIP-isotretinoin in Brazil in the first half of 2016. Under the terms of the agreement with Ranbaxy, Cipher will receive an upfront payment and is eligible for additional pre-commercial milestone payments. Ranbaxy is responsible for all regulatory related activities.

EBITDA in the third quarter totaled $5.2 million, up 37% from the same quarter in 2013. Net income in the quarter totaled $8.7 million, up 158% year-over-year. This equated to $0.34 in positive EPS. Income in the quarter included a $4.0 million gain related to recognition of a net deferred tax asset. Prior to this gain, net income would have been $4.6 million on a pre-tax basis. As of September 30, 2014, the company still has a deferred tax asset of $8.0 million on the balance sheet and an estimated $55 million in net operating loss carry-forwards to offset future income.

Net cash generated from operating activities in the quarter totaled $7.1 million. For the nine months ending September 30, 2014, Cipher has generated $21.6 million in cash from operating activities. Cash as of September 30, 2014 now stands at $47.6 million. We note the company continues to speak about in-licensing or M&A, specifically with a focus on the Canadian dermatology market and North American specialty pharmaceutical market. We discuss this opportunity below. Given the company’s strong cash balance, we would not be surprised to see Cipher acquire at least one more product to promote alongside of Epuris in Canada in the next few months.


Total net Absorica revenues in the third quarter 2014 were $4.8 million, comprised of $0.6 million in amortization of upfront licensing fee and $4.2 million in royalties on U.S. sales at Ranbaxy. We note that Cipher receives a “mid-teens” royalty (we believe ~15%) on U.S. sales of Absorica at Ranbaxy, but then shares that royalty with manufacturing partner Galephar 50/50. Cipher collects a mark-up on transfer to Ranbaxy (we believe ~1.5%). Thus, we believe Absorica sales in the first quarter equated to roughly $47 million. This was a decline from the estimated $58 million in sales in the second quarter 2014 due to seasonality. We note Absorica use in primarily in teenagers who often take a holiday from the drug during the summer months.

Despite the dip in the market over the summer, the launch to date has clearly been impressive. Ranbaxy has 50 sales representatives promoting Absorica to roughly 3,500 prescribing dermatologists. Cipher reported that Absorica held roughly ~20% market share at the end of September 2014. Besides the strong market share gains, the total isotretinoin market continues to be strong. Prescriptions grew by 7% in the for the twelve months ending September 30, 2014, with 4% year-over-year growth in the third quarter alone.

We see Absorica as a differentiated product, promoted by a highly motivated and focused sales force, into a nicely growing market. The trend should continue into 2015. Based on existing trends, we estimate the total isotretinoin market in the U.S. is around 1.1 million prescriptions per year. When equated into Absorica (branded) price, this is around $1.2 billion in potential sales. Ranbaxy’s ~20% market share as of July 2014 equates to a ~$240 million annualized run rate. This is consistent with the ~$175 million in sales we back-calculated off Cipher’s royalty line for the first three quarters on 2014. We are expecting gross sales at Ranbaxy of $55 to $60 million in the fourth quarter 2014, putting total 2014 sales generally in-line with expectations.

The only key risk for investors to be aware of is potential generic alternatives to Absorica. In September 2013, Ranbaxy received a Paragraph IV Certification Notice of filing from Watson Labs of an Abbreviated New Drug Application (ANDA) to the FDA for a generic version of Absorica. Ranbaxy and Cipher intend to vigorously defend Absorica's intellectual property rights and pursue all available legal and regulatory pathways in defense of the product. The Markman (pre-trial) hearing is scheduled for the first quarter 2015. We remind investors that Absorica is currently protected by two issued patents listed in the FDA's Orange Book that expire in September 2021. Management noted on the third quarter conference call that there are three new product patent applications pending with the U.S. Patent and Trademark Office. Hatch-Waxman exclusivity on Absorica protects the product until April 2016. This would be the earliest a potential generic could come to market in the U.S.


Sales of Epuris totaled $0.512 million in the third quarter 2014, up from the $0.498 million reported in the second quarter 2014. We remind investors that Cipher launched Epuris on its own in June 2013. The company hired 6 full time reps and 1 part-time rep to promote the product. Cipher also hired Joan Chypyha as Vice President of Marketing and Sales in early 2013. Ms. Chypyha heads up the company’s commercial operations in Canada, and manage the recently created in-house sales force contracted for the Epuris launch. We note that Ms. Chypyha seems uniquely qualified for this role, having spent more than 25 years in the pharmaceutical industry with an emphasis on marketing, sales and business development in the dermatology area. We note her previous role as for 16 years with Hoffman-La Roche, escalating to Business Unit Director for the Dermatology franchise where she was responsible for the management of a specialty sales force that promoted Accutane, among other brands.

Cipher management noted that this specialty sales force that promoted Accutane was 6 to 8 representatives and achieved peak sales between $25 and $30 million. The current Canadian isotretinoin market is only around $15 million in size, but it has been fully genericized and there is no active promotion of any branded products besides Epuris. As of September 30, 2014, Epirus holds 13.5% market share.

The Canadian isotretinoin market is also growing nicely, with metrics similar to the U.S. Cipher is getting a big piece of a growing pie. We believe that Epuris can be a $5 million product for Cipher in Canada based on the success of Absorica in the U.S. Some private insurers have already picked up coverage of Epuris and Cipher has submitted dossiers to each Province in Canada for public reimbursement. We note that Saskatchewan, Ontario, Manitoba, and Nova Scotia are all online. Applications are pending in Quebec, British Columbia, and Alberta. Provincial insurance accounts for 16% of the isotretinoin market. Private insurance, for which Cipher management believes it has around 70% coverage, accounts for the remaining prescriptions, but private coverage often follows Provincial lead in key markets like Quebec. Cipher’s goal is to have greater than 80% coverage with the private insurers for Epuris by year end 2014.

Below we present a graph of U.S. Absorica and Canadian Epirus market share since launch:

And the change in market share for the major isotretinoin players since CIP-isotretinoin came into the market:


Net Lipofen revenue in the third quarter 2014 was $1.1 million, surprisingly above our forecast for $0.9 million thanks to continued solid growth of the authorized generic product. As a reminder, in the second quarter 2014 net Lipofen revenues totaled $1.9 million thanks to inventory stocking at wholesalers. Lipofen is having an excellent 2014 so far, with total revenues of $4.1 million for the first nine months of the year vs. the $3.4 million reported in all of 2013. As noted above, earlier in the second quarter, Cipher and manufacturing partner Galephar decided to launch an authorized generic formulation of Lipofen ahead of the patent expiration in January 2015. The authorized generic, priced at around 85% of branded Lipofen, now has around 37% market share as of September 30, 2014, up from 15% market share at June 30, 2014. Going forward, we expect the authorized generic to control over 50% of the market by year end, and dominate the market in 2015.

The good news for Cipher is that with still relatively strong pricing we see this astute strategy as allowing Cipher to continue to record meaningful revenues from Lipofen well after the patent expiration in early 2015. For example, Cipher and Kowa Pharma have raised the price on the branded Lipofen product to the point where 85% of that price, the price of the authorized generic, exceeds what the price of the branded product was only 12 months ago. And because of the terms of the manufacturing and promotion deal between Galephar, Cipher, and Kowa, the economics to Cipher are better for the authorized generic than the branded product. This all results in a growing revenue line for Lipofen when a year ago we would have expected Lipofen to almost completely disappear by early 2015. In fact, we would not be surprised to see only marginal erosion in now 2015 given a lack of alternative Lipofen generic products, continued promotion by Kowa, and strong pricing and market dynamics.

…ConZip / Durela…

Net revenues from ConZip / Durela in the third quarter 2014 totaled $0.8 million, mostly driven by sales of ConZip by Vertical Pharmaceuticals Inc. in the U.S. Cipher gets a 15% royalty from Vertical Health on U.S. sales of ConZip and a 20% royalty from Medical Futures on Canadian sales of Durela. Cipher does not breakout ConZip from Durela, but we note that the company did report ConZip prescriptions grew by 10% in the third quarter 2014 year-over-year and Durela prescriptions grew by 47% for the first nine months of 2014 vs. the same period in 2013. Durela sales were up 58% in the third quarter 2014.

One area we may see some new growth from the CIP-tramadol-ER franchise is in Latin America. In late April 2013, Cipher entered into an exclusive distribution and supply agreement with Tecnofarma International Ltd. for the right to market and distribute CIP-tramadol-ER in 18 Latin American countries, including Brazil and Mexico. Under the terms of the agreement, Cipher received an upfront payment and is eligible for additional milestones based upon regulatory approval in Brazil and Mexico. Cipher will supply product to Tecnofarma at a fixed-transfer price.

Cipher and Tecnofarma are working towards regulatory filings in these 18 countries. Management tells us that some of the small countries, ones that work of the U.S. FDA or Canadian regulatory authority, may see some approvals in 2014. Larger countries, like Brazil for instance, may see filings in 2014 and regulatory approvals in 2015. We do not model meaningful revenues from CIP-tramadol-ER outside the U.S. or Canada, so if Tecnofarma can being to generate revenues and start paying royalties to Cipher in 2014 and 2015 it would represent upside to our model.

…Solid Cash Position Should Lead To Pipeline Expansion…

Cipher exited September 30, 2014 with approximately $47.6 million in cash and investments. Cash generation in the quarter totaled $7.9 million, $7.2 million of which was from operating activities. We note the company continues to speak about in-licensing or M&A, specifically with a focus on the Canadian dermatology market and U.S. specialty pharmaceutical market. Given the company’s strong cash balance, we would not be surprised to see Cipher acquire at least one more dermatology product to promote alongside of Epuris in Canada in the next few months. In the U.S., we believe the company will see to acquire either specialty pharma companies or products that can be accretive in two years or less.

Cipher is also working to file a new drug submission (NDS) for the Betesil Patch in Canada. Current guidance is to file the NDS before the end of 2014. Cipher is working with Institut Biochimique SA while they prepare the U.S. NDA filing for the U.S. market. If approved late 2015, we think the Betesil Patch is an excellent complement dermatology product for Cipher’s contract sales force to co-promote along with Epuris. We think Cipher can achieve breakeven Canadian operations based on the launch of Epuris alone by the end of 2015. This would be sales in the area of $3 million. Adding one or two more dermatology products to the portfolio will help improve the overall efficiency and profitability of Cipher’s Canadian operations.

…NASDAQ Listing On The Horizon…

Subsequent to the end of the third quarter 2014, Cipher filed an application to obtain a listing on NASDAQ. We believe a listing in the U.S. on NASDAQ will provide access to a broader range of investors and, over time, greater liquidity for the stock. With positive shareholders’ equity of $58.5 million, $47.6 million in cash, a market capitalization of $320 million, and a stock price near $13 per share, Cipher certainly qualifies for NASDAQ. We believe a listing on the NASDAQ will be followed by major U.S. institutional buying and indexing of the stock.

Valuation & Recommendation

Cipher has executed well in its first full quarter under recently appointed a new CEO, Shawn Patrick O’Brien. The stock is at or near all-time highs, and up an impressive 550% over the past 24 months. With a market capitalization of $320 million, we believe Cipher remains an attractive specialty pharmaceutical company to own. For 2014, we forecast EPS of $0.81 per share. That equates to a P/E ratio of 15.3x 2014 EPS, generally in-line with the industry average of 16x. Cipher also offers positive cash flow, significant unrecognized deferred tax assets of $8.0 million, R&D tax credits of $3.6 million, a net operating loss carry forwards, and roughly $55 million in current cash and investments. We are reiterating our ‘Buy’ rating on the shares and adjusting our price target to $15 per share, or roughly 16x (industry average) our 2015 EPS estimate of $0.87 per share.

Monday, October 27, 2014

Pfizer Walks From Remoxy; Is This The End Or Are There Ulterior Motives?

By Jason Napodano, CFA

This morning, Durect Corp (DRRX) announced that Pfizer (PFE) has decided to discontinue its agreement to develop and commercialize REMOXY (oxycodone extended-release), and will return all rights to the product to Pain Therapeutics (PTIE). The news comes as a major shock for Durect and Pain Therapeutic shareholders. We note that Pain Therapeutics does have the rights to develop and commercialize the product on its own or form a new partnership for REMOXY; however, the fact that Pfizer could not find a path forward for the twice-rejected drug does not provide investors with much confidence in this regard. We believe the only prudent thing to do from a financial modeling standpoint is to completely remove REMOXY from our forecasts.

What Happened?

REMOXY is a drug with a perplexing and checkered past. Despite two positive Phase 3 trials, the second under a U.S. FDA Special Protocol Assessment (SPA), priority review, and a favorable FDA Advisory Committee vote of 11-8 in November 2008, the FDA rejected the approval of the drug in December 2008. The complete response letter (CRL) noted the need for additional non-clinical data on the Chemistry, Manufacturing, and Controls (CMC) for the product. The issues seemed minor. In response to the first CRL, King Pharmaceuticals, then the lead-developer of REMOXY, conducted a new "likeability" study in 2009. Pfizer announced its intention to acquire King Pharma in October 2010, thus taking over control of REMOXY two months prior to the re-filing of the NDA in December 2010.

Data from the "likeability" study was published by Pfizer / King in Pain Medicine April 2011. The data show REMOXY's likeability was significantly lower (p<0.05) than Purdue's OxyContin when both swallowed whole and chewed or crushed. Based on this new data, approval seemed likely. Unfortunately, in June 2011, the FDA issued a second CRL, again focusing on the CMC section, with specific notations around inconsistent release performance during in vitro testing of certain drug lots. It is not known if the underlying problem was manufacturing or an artifact of the testing method. Nevertheless, Pfizer stated publicly following the second CRL that it was committed to resolving the issues with REMOXY.

Pfizer laid out its plan for REMOXY in 2012, stating that they will conduct two Phase 1 bioavailability studies designed to optimize the formulation composition and analytic methods for the product. Pfizer was looking at lot to lot consistency and the reasons for potential variation in the in vitro release assay, which may stem from the oxycodone API, the excipients used in the Durect's ORADUR technology, the manufacturing process, or the analytical testing method used to determine lot specifications.

The first of these two studies was initiated in March 2012 and completed in June 2012 (NCT01552850). The study designed to estimate the pharmacokinetics and relative bioavailability of oxycodone after administration of 40 mg doses of four Remoxy formulations and oxycodone in solution. The second study was also initiated in March 2012 and completed in August 2012 (NCT01552863). The trial was an open-label, single-dose, 6-dosing period study to characterize the pharmacokinetics of oxycodone (process by which oxycodone is absorbed, distributed, metabolized, and eliminated by the body).

Following results of these two trials, Pfizer met with the U.S. FDA to discuss the data. In October 2013, Pfizer notified Pain Therapeutics and Durect that it had achieved technical milestones related to manufacturing of REMOXY, and that they planned to continue move forward with development. Pfizer also noted, thanks to guidance received from the U.S. FDA that they planned to conduct several additional "non-efficacy" clinical studies prior to re-filing the NDA. New studies included food effects studies, dose proportionality studies, bioavailability studies, and new abuse potential studies. Over the past few years, Pfizer has conducted numerous clinical programs with REMOXY attempting to find a path forward toward re-filing the NDA.

As of their last update earlier in 2014, Pfizer was still guiding to re-file the NDA around the middle of 2015. Today's news is a big disappointment. We had previously stated that REMOXY had potential peak sales in the $1.5 billion range. Durect's tiered royalty – roughly 9.1% at $1.5 billion in sales – would have provided significant cash flow to the company.

Pain Therapeutics' Call Sheds Some Light

Pain Therapeutics held a conference call this morning at 9AM EST. Remi Barbier, CEO of Pain Therapeutics, noted during this prepared marks that he spoke with Pfizer prior to the announcement this morning. Mr. Barbier believes that the data generated from the studies above supports re-filing the NDA. However, no timeline was provided on how long it will take to re-file the application. We suspect that will be determined by how Pfizer provides the data to Pain Therapeutics - it could be packaged nicely and ready-to-go, or it could be a complete mess. If it's a complete mess, the tech-transfer process could take as long as six months. We remind investors that Pfizer had originally guided to re-filing the REMOXY NDA around the middle of 2015, so we would not assume anything will be completed before that time.

Investors should be skeptical of what Mr. Barbier said on the call. If the data truly supports re-filing the NDA, then why wouldn't Pfizer just go ahead and do it? The cost to re-file is minimal, perhaps all-in less than $2 million from today. One can assume that Pfizer has already analyzed the data from above and concluded there is no pathway forward for REMOXY. Pain Therapeutic's CEO may just be spinning the news, telling investors what they want to hear.

Or Maybe There's Something Else Going On Here

REMOXY is a big potential product for Pfizer. So too is ALO-02, a Phase 3 oxycodone plus naltrexone extended-release capsule. Pfizer just demonstrated positive Phase 3 data on ALO-02 earlier this year. Results of the Phase 3 study demonstrate a statistically significant difference in pain scores in patients with moderate-to-severe chronic low back pain receiving ALO-02 versus placebo. Previous studies demonstrate lower abuse potential of ALO-02 in recreational opioid users by oral and intranasal routes when compared to immediate-release oxycodone. ALO-02 will complete directly with REMOXY.

The key difference between REMOXY and ALO-02 is ownership. Pfizer is scheduled to pay tiered-royalties on REMOXY to Pain Therapeutics. Durect collects its share of the royalties on REMOXY as well. Also included as part of the agreement are milestones to Pain Therapeutics, including a $15 million payment for approval. The terms of the agreement between Pain and Pfizer are quite favorable for Pain. Also keep in mind that Mallinckrodt (MNK) will manufacture REMOXY for Pfizer. Once you backout manufacturing, milestones, and royalty payments, Pfizer will keep significantly less of the REMOXY economics compared to ALO-02. Even if ALO-02 posts sales at 70% of REMOXY, Pfizer's bottom-line on the drug is higher.

Pfizer also just recently got some good news with respect to EMBEDA, a morphine sulfate and naltrexone hydrochloride extended-release capsules that utilizes the same drug delivery platform as ALO-02. Last week the U.S. FDA approved enhancing the drug abuse deterrent label for EMBEDA. In response to this news, Pfizer has decided to remove its non-abuse deterrent morphine formulation, AVINZA (morphine sulfate extended-release) product from the U.S. market. Instead, Pfizer will focus solely on EMBEDA, and we believe ALO-02 once approved assuming they get a similar label, which now seems far more likely given the positive news on EMBEDA last week.

Of course, we are just speculating, but the dominos seemed to be lining up to fall against Pfizer moving forward with REMOXY. Poor economics to Pfizer and competition from a similar wholly-owned Phase 3 product created a high-hurdle for moving REMOXY forward. Keep in mind, Pfizer is likely doing its annual budget for 2015 right now. Just last week the company announced an $11 billion stock buy-back. Financial engineering at Pfizer - note the failed AstraZeneca bid - seems to be taking center-stage.

What's Next For REMOXY?

Pain Therapeutics will exit 2014 with still greater than $40 million in cash on the books. We'll have a much better sense of the data package on REMOXY in a few months. We suspect that Pain Therapeutics will move forward with the NDA filing, either alone or with a new partner. It will only cost roughly $2 million to file the NDA, so we think it's almost a certainty that REMOXY will be under review at the FDA within the next 12 months. The question for Pain Therapeutics and Durect investors is whether or not a new marketing partner emerges. One potential partner could be Mallinckrodt, the aforementioned manufacturer of the drug. Mallinckrodt already has a suite of opioid products in its pipeline. REMOXY would be a game-changer for the company. Until then, we can only just wait and see.

POSIDUR Now Key Value-Driving Asset For Durect Corp.

In its press release this morning, Durect Corp. noted that it met with the U.S. FDA on POSIDUR on September 23, 2014. Unfortunately, the minutes from this meeting have yet to be sent back to Durect. FDA meeting minutes typically take 30 days from the time of the meeting, so we suspect that Durect will have these minutes very soon. Durect plans to host a call to provide an update on its third quarter financial results on November 3, 2014. We are hoping the company has the minutes by then and can communicate the next steps in the POSIDUR development program following the complete response letter from earlier in the year.

As a reminder, Durect has told investors that the CRL on POSIDUR is related to “imbalances” with respect to the safety data. We characterize the FDA’s issues as a lack of safety data, not necessarily a specific issue with the safety of the drug itself. For example, when Durect conducted the clinical trials and analyzed the data for the NDA, efficacy data was compared to SABER-placebo. Based on management’s comments, the FDA seemed to have no issues with POSIDUR’s efficacy. The issue stems from a lack of safety data vs. an active comparator, such as bupivacaine HCl. In the simplest terms, the agency is comparing the efficacy of POSIDUR vs. placebo and safety vs. an active comparator.

Specifically, the company noted issues like somnolence, localized dryness and itching, and surgical site discolorations as these key imbalances. The FDA saw higher rates of these adverse events or side effects, but lacked sufficient data to quantify vs. an active comparator like bupivacaine HCl. For example, safety data from the 2010 European Phase 2b hysterectomy study noted post procedural hematomas at the surgical site. These were observed with frequency in the POSIDUR and SABER-Placebo groups and not observed in the active comparator group. Data from the 2012 Phase 3 BESST study showed a similar increase in local site reactions in the POSIDUR and SABER-Placebo groups when compared to the active comparator groups. The company noted that most of these observations were discolorations or localized dryness and itching, the majority of which resolved without treatment during the trial.

So it seems like to gain approval, Durect needs to conduct some head-to-head studies with POSIDUR vs. bupivacaine HCl and analyze the adverse events and side effects. Our guess, the company conducts two trials in hernia or cholecystectomy in 200-300 patients total, hopefully with both to start during the first half of 2015. But all this will be confirmed shortly once the FDA meeting minutes from that September 23, 2014 meeting are in hand.

If Durect can get POSIDUR approved, it is a quite meaningful market opportunity. There are roughly 70 million surgeries in the U.S. each year. There are approximately 1 million hernia procedures done in the U.S. each year. A 20% share in the U.S. hernia market at approximately $285 per procedure (priced at parity to Exparel®) represents a $57 million opportunity. Expanding into gallbladder, hysterectomy, shoulder surgery, etc… opens the door to a potential market of 10 to 20 million procedures that are ideally suited for a long-acting local analgesic like POSIDUR. Just 5% market share in this broader patient population represents at least a $250 million opportunity for Durect and a potential licensing partner. The market opportunity outside the U.S. is comparable. We believe POSIDUR, post-approval, could follow a similar path to Exparel and be generating $250 million in annual revenues three years after launch.

Durect's Pipeline Still Offers Upside

In January 2014, Durect announced that it had granted an exclusive worldwide license to Impax Labs (IPXL) for the company’s proprietary TRANSDUR transdermal delivery technology and other intellectual property to develop and commercialize ELADUR. ELADUR is an investigational transdermal bupivacaine patch for the treatment of pain associated with post-herpetic neuralgia (PHN), an indication for which the product has been granted Orphan Drug designation. Under the terms of the transaction, Impax has agreed to pay Durect a $2.0 million upfront payment in cash. Durect is also eligible for up to $31.0 million in development and $30.0 million in commercialization milestones from Impax, along with a tiered mid single-digit to low double-digit royalty on annual net product sales determined on a country-by-country basis. Impax is planning to initiate a Phase 3 clinical study in the next several months. Initiation of this study nets Durect a small (undisclosed) milestone payment. The only thing we know about the size of the milestone payment is that it is greater than the $2.0 million upfront payment – so we include a $4.0 million payment from Impax to Durect in our financial model for the first quarter 2015. We believe ELADUR remains a meaningful opportunity for Impax and Durect, and thus are excited to see the Phase 3 trial begin.

In July 2011, DURECT and Zogenix, Inc. entered into a license agreement to develop and commercialize a proprietary, long-acting injectable formulation of risperidone using Durect’s SABER controlled release formulation technology in combination with Zogenix’s DosePro needle-free, subcutaneous drug delivery system. Durect received an upfront fee of $2.25 million, and can earn up to an additional $103 million in total future milestone payments, along with mid-single-digit to low double-digit royalty on annual net sales. Results from the Phase 1 study were released in January 2013. The next step is for Zogenix to conduct a multi-dose Phase 2b study. This is expected to initiate in the fourth quarter 2014 and offer data roughly nine months later.

In August 2009, Durect entered into a licensing and development agreement with Taiwan-based Orient Pharma Co., Ltd. Under terms of the agreement, Durect granted to Orient Pharma development and commercialization rights in certain defined Asian and South Pacific countries to an ADHD product that utilizes the ORADUR tamper-resistant technology; this is the same technology used in Remoxy. Durect retains rights to North America, Europe, Japan and all other countries not specifically licensed to Orient Pharma. The active drug candidate incorporated in the ORADUR formulation is methylphenidate (previously sold as branded Ritalin), the most widely used ADHD drug. The goal of the collaboration is to generate a clinical data package through a Phase 2 study, then partner in the U.S. If commercialized, Durect will be entitled to receive a royalty on sales of ORADUR-methylphenidate by Orient Pharma in its Asian territory.

Besides REMOXY, Pain Therapeutics controls the rights to three additional ORADUR-opioid formulations that utilized hydrocodone, hydromorphone and oxymorphone as the active drug. In Pain Therapeutics’ fourth quarter recent press release, the company stated that it was looking at options to develop and commercialize these assets on its own or with a licensee of choice. We note that Investigational New Drug (IND) applications for all three drugs are in place with FDA. Durect is assisting Pain Therapeutics in getting ready to initial human clinical studies. For example, during the second quarter of 2014, Durect conducted R&D activities on these programs under approved workplans with Pain Therapeutics. Pain Therapeutics recently announced that they expect to start a Phase 1 clinical trial with ORADUR-Hydromorphone shortly, with an expectation of starting a Phase 3 trial for this product candidate in 2015. At this time we are unsure how today's REMOXY news changes Pain's plans with new ORADUR-opioid candidates.

We believe investors are placing little, if any value on the ORADUR pipeline. Perhaps this is based on the mishaps with Remoxy or the lack of active late-stage clinical programs. However, we note these programs can move rather quickly. If Pain Therapeutics moves into Phase 3 trials with ORADUR-Hydromorphone by the middle of 2015, we believe investors will start assigning meaningful value to the program. Coincidently, this is right around the time we are expecting Pfizer to re-file the NDA on Remoxy and the new Posidur Phase 3 trials to start reading-out. The second half of 2015 will be a very interesting and potentially rewarding time to be a Durect shareholder.


We are obviously disappointed with the news today that Pfizer has decided to walk away from REMOXY. The knee-jerk reaction from investors is that REMOXY is dead. Pfizer wouldn't walk from a potential $1.5 billion product unless there are major issues with the data package. With Durect stock down nearly 50% right now, it's obvious that this is what investors believe. However, as we've outlined above, there may be ulterior motives at Pfizer with respect to economics, competition, and budgets for 2015. Remi Barbier at Pain Therapeutics seems to believe the data package from Pfizer will support re-filing the NDA. The key question for investors is just how cooperative will Pfizer be with respect to the tech transfer of the REMOXY data back to Pain. If Pfizer is truly looking for a way to move forward with ALO-02, there seems no better way to get a headstart on its chief competition then to muddy-the-waters a bit with the REMOXY data package.

From Durect's standpoint, POSIDUR is now the key value driver. Durect should receive meeting minutes from its September 23, 2014 meeting with the U.S. FDA any day now. We are hoping these minutes are in place by the time of the third quarter earnings call next week. Durect's financial position is solid, with $33.0 million in cash on hand as of June 30, 2014 and another $23.4 million in an At-The-Market (ATM) financing facility in place with Cantor Fitzgerald & Co. Investors need not worry about Durect's ability to fund POSIDUR or wait-out the REMOXY story. The issue with Durect Corp. today is visibility. Investors like clarity and catalysts, and unfortunately Durect is lacking both until we get an update.

Our previous NPV analysis pegged fair-value for Durect at $3.00 per share. This included $1.50 for REMOXY. Other assets, including POSIDUR, ELADUR, Relday, and ALZET and LACTLE are worth another $1.50 per share based on probability-adjusted NPV analysis. Keep in mind, products like POSIDUR, ELADUR, Relday, and potentially even ORADUR-hydromorphone could all be in Phase 3 by the middle of 2015. The company also has $250 million in net operating losses (NOLs) to defer future taxes. If we completely remove REMOXY from the equation, Durect shares are under-valued based on today's massive sell off. We would not be surprised to see a slight recovery over the next few months as visibility on all fronts improve.