Phosphagenics (ASX: POH) – Returns coming from a >$100m investment

Article written by Pitt Street Research.  For the full report click here

Since the early 2000s Phosphagenics has spent more than A$100m on its drug reformulation technology called TPM®, built from Vitamin E. The company has ample pre-clinical and clinical data showing that TPM® is not only an effective transdermal drug delivery system, but it can also improve oral bioavailability as well as improve the solubility, stability and safety of injected drug formulations. The company has finished topical products sold by the pharmaceutical giant, Novartis, in India. The company has developed and completed early clinical work on what could become the first patches for transdermal delivery of the opioid analgesics oxycodone and oxymorphone. It is in a global partnership with the Japanese medical device major Terumo, working on a new formulation of the anaesthetic drug propofol.

In addition, it has significant potential for upside from an international arbitration with Mylan, expected to be decided soon. We value Phosphagenics at 5.6 cents per share base case and 11.7 cents optimistic case. Our target price of 9 cents sits at the midpoint of our valuation range. The current A$25.2m market capitalisation, in addition to markedly undervaluing the replacement value of TPM®, discounts the reasonable chance of commercial success for this company under its current leadership team.

Introducing Phosphagenics, ASX: POH

Phosphagenics is a Melbourne-based drug reformulation company whose TPM® technology, based on phosphorylated Vitamin E, has shown promise as a transdermal drug delivery tool and as an agent for improving the stability and solubility of drugs. Historically Phosphagenics is best known for having used TPM® to create, and taken into the clinic, what could become the world’s first patches for the opioid analgesics oxycodone and oxymorphone. Today the company is primarily focused on using TPM® to make injectable drugs more stable and soluble. A collaboration with the major Japanese healthcare conglomerate Terumo is working on an improved formulation of the injectable anaesthetic drug propofol. A number of field studies have also established the utility of TPM® in improving the feed efficiency or performance of livestock animals. We see the potential for sizeable commercial upside from these projects as well as the chance of a favourable and potentially ‘company-making’ outcome from an ongoing arbitration matter with Mylan, expected to be decided shortly.

Why do drugs need to be reformulated, and how does Phosphagenics have competitive advantage in this space? The pharmaceutical industry is always on the lookout for alternative delivery systems for a drug, or other technologies that can improve the utility and profile of drugs being delivered. TPM® can do both. It can create easy-to-administer and long-acting gels or patches as an alternative where pills are problematic. It can also increase the amount of an oral drug absorbed by recipient. Furthermore, it can increase the solubility and/or stability of an injectable drug, allowing the removal of existing excipients known to be toxic. In each case the projects that Phosphagenics has chosen are ones where it believes TPM® can beat competing approaches and where there is an attractive commercial opportunity. When drugs are reformulated, new patent-protected products with significantly higher market reach are often the result. A classic case of this was in testosterone replacement therapy with the introduction of the first testosterone gels in the early 2000s. Testosterone had been routinely delivered in injectable form since the 1950s, and there had been oral pills since the 1970s but it was the topical gels, with their reliability and patient convenience, that made testosterone replacement a blockbuster category.

What is TPM® and what is the evidence that it can form the basis of new products. TPM®, short for ‘Tocopheryl Phosphate Mixture’, is a mixture of two phosphorylated forms of Vitamin E. Phosphorylation is simply the addition of phosphate groups to a molecule. Phosphagenics has shown, in well over a dozen clinical studies and in published in vitro and in vivo work, that formulating drugs with TPM® can quickly deliver the drug through the skin and into the bloodstream in therapeutic quantities. More recently, Phosphagenics has shown that TPM® can be used to formulate drugs that would otherwise be difficult to solubilise or would only be stable for short periods of time. This reformulation technology has become the basis for an important collaboration with Terumo and Phosphagenics is working on a pipeline of new injectable products.

What is the potential upside from the Mylan arbitration matter? One drug reformulation project in which Phosphagenics has been involved is the development of an alternative version of the injectable antibiotic daptomycin. This collaboration had begun with an Indian injectable drug maker called Agila, which was acquired by the major multinational generic drug company Mylan in 2013. Phosphagenics, disappointed with the collaboration, referred the matter, as per the license agreements, to arbitration in January 2016. This matter has a sizeable potential payoff. Phosphagenics’s legal team, headed by the London-based advocate and arbitrator John Rowland QC and assisted by independent experts, estimate that the potential damages could range up to US$300m. In the event of a payout Phosphagenics has publicly committed to a portion being returned directly to shareholders (subject to shareholder approval).

If Phosphagenics is such a good investment how come it is only capitalised at A$25.1m/US$18.6m? We believe three sentiment issues explain the currently low market capitalisation of Phosphagenics. Firstly, there has been disappointments over the last five years in terms of some product or clinical developments not working out as planned. Secondly, some people still remember the mid-2013 scandal in which Phosphagenics’s then CEO was found to have defrauded the company out of ~A$6m over around nine years. Thirdly, the company historically has billed itself as developer of new transdermal products for opioid analgesics, but this effort has yet to result in late stage clinical success or commercial success for Phosphagenics despite more than a decade of work.

An impressive quality of Phosphagenics over the years has been its ability to pivot and go after new opportunities as old opportunities fade. Consider the company’s collaboration with Terumo. Phosphagenics optioned Terumo the Japanese rights to its oxymorphone patch technology in April 2016, adding the oxycodone patch the following month as well as a collaboration over other products including the anaesthetic drug propofol.

Terumo signed a term sheet for the oxymorphone patch in January 2017 and a development agreement for the patch in August 2017. However, in March 2018 Terumo decided not to develop an oxymorphone patch. The market has, we think, reacted negatively to Terumo’s decision on oxymorphone, but forgets that this collaboration enhanced the investment in the development of the patch for all markets outside of Japan, and that a Terumo global collaboration working on reformulating propofol with TPM® to improve its solubility and stability is not only continuing, but has now reached the IND-enabling toxicology stage. Moreover, Terumo are exploring further TPM®-based injectable candidates.

We see Phosphagenics overcoming the negative sentiment issues in the near term. For a start, there have been notable successes in addition to the TPM®/Propofol Project, such as various successful animal health field trials.

Secondly, new and seasoned leadership is in charge with a track record of success in the Life Sciences. And thirdly, the company has, since 2015, diversified its suite of TPM® projects, most notably into injectables and animal health, so that it is not reliant on the legacy opioid projects.

Ten reasons to look at Phosphagenics

1) Phosphagenics’s TPM® drug reformulation technology is versatile. Over many years of development Phosphagenics has shown that TPM® can efficiently deliver drugs across the skin barrier. In more recent years the company has shown that TPM® can increase oral bioavailability, as well as the solubility and stability of reconstituted injectable drugs, which has led to significant commercial collaborations.

2) The Terumo collaboration holds promise, with that company using TPM® to develop a clearer formulation of the anaesthetic propofol that doesn’t have the allergenic excipients extracted from egg or soy products currently used with the drug. This product is currently in the preclinical toxicology testing phase and on track for clinical testing.

3) Phosphagenics has multiple products available for partners to work with, its R&D effort having identified numerous injectable drugs that could benefit from TPM®, as well as other products in transdermal drug delivery, animal health, nutrition and cosmetics.

4) Phosphagenics has a number of marketed products in its portfolio, with revenue being earned from bulk sales of proprietary Vitamin E variants (TPM® & Vital ET™), and from a TPM®-delivered diclofenac gel marketed by Novartis in India and now being introduced to a number of other emerging markets.

5) TPM® has shown promise in animal nutrition, with various field studies showing that TPM® delivered in the feed of various livestock (i.e. pigs and poultry) results in significant improvements in the performance or feed efficiency of these animals.

6) There is still potential for Phosphagenics in opioid patches, with a commercial oxymorphone patch developed in conjunction with Terumo, and an oxycodone patch completed. The oxymorphone patch concept worked well in Phase 1. Although the challenges of side effects and abuse are negatively impacting the pain market, this is providing a large market opportunity for transdermal patches that have the capability of overcoming the compliance, safety, efficacy and significant abuse problems associated with the oral dosage forms. Phosphagenics aims to engage with the FDA soon on these products to ensure that the products capture the most desirable attributes.

7) The time to market is potentially short, with Phosphagenics, as a reformulator of other approved injectable products, not constrained with the usual multi-phase clinical development process of innovator molecules. For reformulations of approved injectable drug products in the US, for example, a single bioequivalence study in humans using the 505(b)(2) pathway is generally sufficient.

8) There is potential for upside from the current Mylan/Agila arbitration, with the arbitrator set to hand down his decision shortly. Phosphagenics and Phosphagenics’s shareholders will both benefit in the event of success, with the company committed to returning part of any award to the shareholders and using the remainder to accelerate the rich pipeline of potential TPM® based injectables now being assembled.

9) Phosphagenics has a seasoned management team. CEO Dr Ross Murdoch, who has worked in both large and small pharma companies, founded and grew both the Emerging Products Business and the Haematology Business at Shire before joining Phosphagenics. Chairman Dr Greg Collier took Chem Genex Pharmaceuticals from a genomics play in 2002 to a late stage cancer drug developer in 2009, facilitating its acquisition by Cephalon for over US$230m in 2011.

10) Phosphagenics is undervalued on our numbers. We value Phosphagenics at 5.6 cents per share base case and 11.7 cents per share optimistic case, using a probability-weighted DCF approach. Our target price of 9 cents represents a midpoint of this range. We see Phosphagenics being re-rated by the market as its various commercial collaborations make progress and, potentially, should the Mylan arbitration come down in Phosphagenics’s favour.

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Pitt Street Research work is commissioned by the listed companies it covers, and Pitt Street Research has received or will receive payment for the preparation of such work. Please refer to the bottom of the research notes as published on Pitt Street Research’s web site for risks related to the companies being covered, as well our General Advice Warning, disclaimer and full disclosures. Also, please be aware that the investment opinion in this report is current as at the date of publication but that the circumstances of the company may change over time, which may in turn affect our investment opinion.


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