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Following the gut
The Anatara/Zoetis deal is a company maker
Anatara Lifesciences, a Melbourne-based drug developer focusing on GI therapies, partnered with Zoetis in an exclusive worldwide licensing agreement for its lead drug, bromelain-based Detach, in May 2018. We believe that the opportunity is remarkable, given the size and scale of Zoetis’ animal health portfolio. Considering the wide manufacturing, marketing, and distribution network of Zoetis, the company is expected to be able to contribute more effectively to Detach’s development than Anatara could have (it being a small company). The deal is also extremely momentous for Anatara, as the interest from one of the largest animal health companies worldwide reaffirms the credibility of the bromelain technology and reduces Anatara’s cost burden, while providing a stream of cash flow to help the company move forward with its plans in human GI health.
Upside from a human health application
Anatara is now focusing on developing a bromelain-based Gastrointestinal ReProgramming (GaRP) product, for human GI health, particularly in irritable bowel syndrome (IBS) and inflammatory bowel disease (IBD). The product is being positioned as a dietary supplement that could be used by itself or in conjunction with prescription medications. Due to the regulatory and commercial advantages associated with natural products and the complexity of management of these diseases, we believe GaRP has a significant upside potential.
Additionally, considering the excellent safety and efficacy profile of Detach, the product is expected to witness a rapid adoption, especially on the back of Zoetis’ global presence. Anatara’s current cash is sufficient to fund GaRP in the human GI space through to the point of licensing out. Milestones and royalty payments will provide funding for future developments.
We value Anatara at $1.34 per share base case and $3.61 optimistic case using a probability-weighted DCF valuation approach. Anatara is currently trading way below this valuation range. We see the potential to be re-rated by the market as GaRP progresses and as Zoetis gains regulatory approvals and launches Detach in North America, Europe and Asia.
Introducing Anatara Lifesciences (ASX: ANR)
Anatara Lifesciences, a Melbourne-based drug developer, is focusing on development of a natural compound called bromelain for gastrointestinal (GI) diseases in animals and humans. Its lead product, a bromelain formulation called ‘Detach’, is a non-antibiotic solution to control diarrheal disease (known as scour in livestock). The product has already been exclusively licensed to Zoetis for worldwide development, manufacturing, distribution, and marketing, for use for livestock and horses. Anatara is presently working on developing proprietary bromelain formulations for gastrointestinal conditions in humans, including Irritable Bowel Syndrome (IBS) and Inflammatory Bowel Disease (IBD) through its new bromelain-based product candidate ‘Gastrointestinal ReProgramming (GaRP)’.
What is bromelain and how is Anatara using it?
First introduced as a therapeutic compound in 1957, bromelain is a mixture of proteases obtained from the fruit or stem of pineapples. These proteases have anti-attachment, anti-secretory, and anti-inflammatory properties. Over time, scientists have identified numerous potential therapeutic applications of bromelain in conditions as diverse as osteoarthritis, angina, and cancer.
Anatara is using bromelain to focus on two areas – antimicrobial resistance and gut health. Diarrhea-causing bacteria have the potential to cause disease once they attach themselves to various receptors located on the intestinal mucosa. Bromelain prevents these bacteria from attaching, thus rendering them harmless. Interestingly, this mechanism of action overcomes issues related to antibiotic resistance in animals as it does not kill the bacteria, but only prevents their attack.
The properties of bromelain that make it useful for potential exploration in gut health include its Generally Recognized as Safe (GRAS) status which allows it to be used as a food additive. Moreover, it has been used as an anti- inflammatory and anti-cancer complementary medicine in the US and the EU and where its unlimited daily intake acknowledges its excellent safety profile. These evidences rationalize its potential use in human as well as animal health.
Which bromelain-based products is Anatara developing?
Anatara‘s first veterinary product, Detach, leveraged several of bromelain’s biological activities, that is, its ability to reduce the attachment of pathogenic bacteria to the gastrointestinal tract and down-regulate fluid secretion that results in diarrhea. The original formulation of bromelain, also called Detach, was developed in the late 1980s and early 1990s for use in the animal health market. Anatara developed a new formulation of Detach.
Meanwhile, GaRP, Anatara’s first human product, exploits the bacterial anti- attachment and anti-inflammatory properties of bromelain while the additional GaRP formulation components contribute to this proprietary product that has been designed to address the disease characteristics of both IBD and IBS. The product is being positioned as an adjunct to prescription drugs in active disease or as a maintenance therapy when patients enter remission. The GaRP dietary supplement proof-of-concept studies in animal models have completed with favourable results – in industry-standard in vitro gut models, Anatara has been able to show that GaRP can:
- reduce production of pro-inflammatory proteins by gut and inflammatory cells by >85%;
- reduced the attachment and invasion of IBD and IBS pro-inflammatory bacteria into healthy gut cells by >95%;
- Protect and maintain gut integrity.
What is the rationale of developing Detach and GaRP for potential use in animal and human health, respectively?
Following extensive safety and efficacy trials, Anatara received APVMA approval for the product in Australia for piglets in October 2018. The product has been successfully out-licensed to Zoetis and hence the company has moved on to explore potential human uses of bromelain-based products.
Anatara’s first product candidate for human health – GaRP – is being positioned as a dietary supplement for the management of IBD and IBS. Both diseases exhibit shared characteristics such as an altered microbiome, impaired intestinal barrier function, mucosal damage and various levels of inflammation. These disorders are currently treated with anti-inflammatory medications or a range of prescription medicines aimed at treating symptoms. However, these therapies are associated with high treatment failure rates which have resulted in a significant unmet therapeutic and market need. GaRP could potentially fill the gap in the GI therapeutics market as it has been designed to restore homeostasis of the gut microbiome, reduce inflammation, and repair mucosal damage, thus overcoming the collective disease characteristics associated with gastrointestinal conditions. Moreover, the company believes that GI disorders represent a lucrative market, since increased education and detailed evaluation of dietary supplements has led healthcare providers to include dietary supplements in the symptom management of both IBD and IBS.
Why did Anatara out-license Detach to Zoetis?
In May 2018, Anatara announced the out-licensing of Detach to Zoetis for worldwide development, manufacturing, distribution, and marketing of the drug for livestock animals and horses for US$2.5m in upfront payment and milestone payments of up to US$6.3m. Royalty rates on product sales typically range 3–4%. However, the intellectual property (IP) licensed to Zoetis under the agreement is expected to remain the sole property of Anatara. Through this deal, Anatara is expected to remain well-funded with no loan facilities or liabilities. We believe the company has sufficient funds required to achieve its milestones for human product development through 2020. By then, the company expects to be able to find suitable partnering and/or licensing arrangements.
Nine reasons to look at Anatara Lifesciences
1) Anatara has been able to out-license Detach to one of the largest animal health companies globally. Zoetis has annual revenue of US$5bn, two- thirds of which is derived from farm animal health products. Moreover, the firm has a much wider scale of manufacturing, marketing, and distribution network compared with Anatara. Therefore, this is an overwhelming opportunity that will help drive the commercialization of Detach worldwide. Moreover, the deal establishes the credibility of Anatara’s bromelain technology and bodes well for future partnership deals of products based on this technology.
2) Detach is likely to remain attractive amid concerns regarding antibiotic resistance. The rising incidences of drug-resistant bacteria or ‘superbugs’ globally have been a cause of worry for policy-makers and food producers alike, with many key opinion leaders advocating for lower use of antibiotics in the food chain. This adds to the lucrativeness of Detach as replacement to antibiotics while still preventing infectious diseases of production animals.
3) Detach has a long history of development and has shown strong results in piglets. Detach has been studied since the 1980s and has shown significant reduction in mortality and increase in weight of pigs in Australia and the EU. In fact, it has already received APVMA approval for commercialization in Australia. Although Anatara does not have any say in the product development after it out-licensed the product to Zoetis, the company will benefit from the milestone and royalty benefits on Detach’s future sales.
4) Anatara is expected to remain well-funded for the next few years. Anatara has significant cash, enough to achieve its human GI milestones., The recently executed Detach deal with Zoetis included US$2.5m in upfront payment, milestone payments of up to US$6.3m, and royalties on product sales in the range of 3–4%. Also, the deal reduced cost burden associated with Detach’s development and liabilities on Anatara, allowing it to focus completely on other potential indications.
5) Anatara has a solid management team with significant expertise in human health. The newly appointed CEO, Steven Lydeamore, has over 25 years of international pharmaceutical experience and deep understanding of the human health space which aligns well with Anatara’s long-term objectives. The company has also recently set up a product development advisory board membered by experts in GI health.
6) There is significant scientific rationale behind GaRP’s development in IBD and IBS. Both conditions are complex to manage, and the currently used prescription drugs have a very high failure rate. Therefore, there is a high unmet need for natural products that can manage symptoms for these chronic disorders.
7) GaRP has multiple regulatory and commercial advantages. Since GaRP is being positioned as a dietary supplement (adjunct to prescription medicines), the regulatory pathway to its approval is less stringent compared with pharmaceutical drugs, thus ensuring rapid market entry. Moreover, Anatara benefits from the rising awareness among public and healthcare professionals regarding the use of dietary supplements. The company will also have the strategic advantage of being able to target both consumers and healthcare professionals, increasing GaRP’s potential uptake.
8) The market opportunity in human GI health is significant. The prevalence of IBD (>5 million sufferers worldwide) and IBS (~11% of the global population) suggests a significant payoff for Anatara should GaRP be able to prove utility in this setting.
9) Anatara is undervalued on our numbers. We value Anatara at $1.34 per share base case and $3.61 optimistic case using a probability-weighted DCF valuation approach. Anatara is currently trading way below this valuation range. We see the potential to be re-rated by the market as GaRP progresses in pre-clinical and then in clinical development, and as Zoetis discloses further progress for Detach in field studies and ultimately in regulatory approvals and launches in North America. Europe and Asia.
The Big Picture – Anatara’s work on human GI disorders has potential to re-rate the company
After the May 2018 licensing deal to Zoetis, Anatara’s share price went down. Basically, the market was disappointed at the apparently low up fronts and milestones that came with the deal and regarded the 3-4% royalty as not a great outcome for the years that Anatara had worked on Detach.
We take a contrarian view on the Zoetis deal. Zoetis is a proven leader in animal health that is hungry to grow with new generation biologicals to replace or augment a lot of the old-fashioned anti-microbials where potentially Zoetis can face a political and regulatory backlash. This means that Detach, once it is launched in all key markets, has the potential to be substantially more than a niche product in the production animal space. In addition, it will not take long for the product to be launched given the lower hurdles required to get the product approved. Consequently, as we show in our valuation section below, we believe that the current Anatara share price is seriously undervaluing the May 2018 deal.
Even if the market ignores Detach, it will be difficult to ignore GaRP. Since the Zoetis deal Anatara has spent a lot of time telling the GaRP story, as a way of emphasizing the versatility of the company’s technology base around bromelain and the significant commercial upside from a new product in IBD and IBS. In this note we begin by looking at the GaRP development effort before turning to Detach. We see Anatara potentially re-rating first around good news from GaRP, which can then turn the spotlight on Detach.
Anatara’s GaRP opportunity
GaRP is a microbiome-targeted dietary supplement
Anatara’s Gastrointestinal ReProgramming (GaRP) product, is a microbiome- targeted multi-component dietary supplement based on bromelain that is being developed to address the primary underlying factors associated with human GI conditions. The product is being positioned as an adjunct to existing prescription medicines, rather than a replacement. Due to the complex nature of GI disorders and diseases coupled with the diversity of individualized symptoms, the failure rate of current prescription therapies is high. Therefore, there is a significant unmet need for products that can manage the chronic symptoms in and underlying causes of GI conditions.
GaRP combines bromelain and other clinically-proven GRAS components to treat GI disorders – some components target the small intestine, while others target the colon. The small intestine-targeted components prevent attachment of pro-inflammatory bacteria, restore gut microbiota, and reduce inflammation. The colon-targeted components, on the other hand, restore gut microbiota, reduce inflammation, regenerate mucosa, rebuild gut integrity which may in turn reduce diarrhea. With its dual targeting approach, GaRP has great potential to have an additive effect on the efficacy of current prescription drugs.
Over the past few years, Anatara has evaluated many potential human applications of bromelain that include inflammation and/or diarrhea including childhood diarrhea, traveler’s diarrhea, and diarrhea associated with IBD and IBS. However, recently the company decided to move ahead with exploring bromelain’s potential in IBD and IBS. We believe that targeting these indications can bring significant commercial returns to Anatara, based on advantages related to rapid market entry and its competitive edge.
Development of GaRP provides regulatory and commercial advantages to Anatara
Positioning GaRP as a dietary supplement (adjunct to prescription medicines) provides many regulatory and commercial benefits to Anatara. A few of them are outlined below:
– Less expensive development, less risky path to market, and rapid market entry: Dietary supplements are regulated differently by the US FDA and are considered to be more like special foods than drugs. Therefore, the regulatory norms for supplements are less stringent which means that the development of GaRP is expected to be cheaper and quicker.
– Awareness among public and healthcare professionals: Due to the rising penetration of internet sales, increasing disposable income, and manufacturers’ efforts to raise awareness about their nutritional supplements, consumers have started focusing on their nutritional requirements. Healthcare professionals are also more aware of the benefits associated with the use of supplements as adjunct therapies. Against this backdrop, the market of dietary supplements is quite attractive and the potential uptake of GaRP is expected to be high.
– Dual target markets: Dietary supplements can be adopted by healthcare professionals as well as marketed directly to consumers. This provides an advantage of dual market entry strategy to Anatara for GaRP.
Proof-of-concept studies have confirmed GaRP’s potential use in IBD/IBS
Anatara has already completed market feasibility studies, filed a provisional patent application, and completed the dose selection of each formulation component. Anatara completed research to gather in vitro data to support GaRP’s efficacy in restoring microbiome, reducing inflammation, and repairing mucosal damage. Over the next few months, Anatara is planning an animal safety study for IBD and a human observational clinical study for IBS.
After pre-clinical safety of GaRP is confirmed in animal models, the company will look for a potential partner to market the product (Figure 1). Considering that Anatara has sufficient cash from its recently executed Zoetis deal, we believe the milestones are achievable.
There is significant market opportunity for GaRP in treatment of IBS/IBD
A decade ago it was estimated that one in four persons on prescription medication also take a dietary supplement for GI disorders. A more recent estimate has suggested one in two. With increasing education about dietary supplements and their more detailed evaluation, healthcare providers are working with patients to develop individualized programs that include dietary supplements for symptom management in GI disorders. This has led to a rise in adoption of dietary supplements, indicating a significant market potential for GaRP.
Prevalence numbers of IBS are attractive
IBS is a functional disorder characterized by abdominal pain, bloating, and alternating constipation and diarrhea. Though the syndrome is marked by a low level of inflammation (versus IBD), it still compromises the functioning of the gut. The market opportunity for GaRP in this segment is significant, considering the high worldwide annual prevalence rates of IBS – averaging ~11% and typically in the range of 5–20%. Geographically, the disease is prevalent in both developing and developed countries, with more recent studies indicating an increasing prevalence in newly developed and developing economies (i.e., Asian countries) as they become ‘westernized’. In North America, the prevalence rates stand at ~11.8% and in the EU, the corresponding figure ranges between 12% and 15% (Figure 2).
Moreover, according to the World Gastroenterology Organization (WGO), IBS with predominant diarrhea forms one-third of the total cases of IBS. Considering that GaRP is expected to be positioned to treat IBS patients with diarrhea (based on its anti-secretory properties), the market is quite lucrative.
Further, recent evidence has confirmed the role of intestinal microbiota in predicting the severity of IBS. Studies also suggest that the use of complementary and alternative medicines (CAM) is highly prevalent in patients with IBS, with ~50% of patients using dietary supplements for symptom management. In fact, diet or lifestyle modifications are often advocated as the first step in the management of IBS. Research indicates that supplements with the potential to be used for the management of IBS symptoms include probiotics, prebiotics, fiber supplements (e.g., psyllium), herbal supplements (e.g., peppermint oil), curcumin (turmeric), and vitamin supplements (e.g., vitamin D).
According to Mordor Intelligence, the global market for dietary supplements is expected to grow at a 6.9% CAGR during 2017–2023 to reach >US$135bn. A major growth driver is the popularity of herbal and probiotic supplements. Some of the key global players that have already developed dietary supplements include Bio- Botanica, Bayer, BASF, Ricola, Herbalife, and Integrated BioPharma. With GaRP’s ability to restore the normal microbial function of the gut, the compound has a significant uptake potential in the dietary supplements market.
Expected growth opportunity in IBD space bodes well for GaRP
IBD is an umbrella term used to describe all disorders that involve chronic inflammation of the digestive tract. The disease is characterized by symptoms such as abdominal pain, cramping, bloating, blood and mucus in stool, loss of appetite, and persistent diarrhea. There are two major types of IBD –ulcerative colitis, where the inflammation impacts the inner lining of the gut, and Crohn’s disease, in which the whole wall of the gut is inflamed. Due to a high level of inflammation, both disorders present a significant market opportunity for GaRP.
More than 5 million people suffer from IBD worldwide. We estimate that there are ~2.5 million patients in the EU and 1–1.3 million in the US. In the US, roughly 40% of these people suffer from Crohn’s disease and the remaining 60% have ulcerative colitis. Moreover, IBD has also emerged in newly industrialized countries in Asia, South America, and the Middle East, and is fast evolving into a global disease. Scientists project that the prevalence of IBD is expected to rise exponentially by 2025 due to cumulative addition of incident cases in a chronic disease that has a young age of onset and low mortality (Figure 3).
To manage the disease symptoms, people often turn to CAM as an adjunct to prescription medicines. Over the past few decades, the use of CAM has increased in popularity, particularly in North America and Europe, and studies suggest that 30–50% of IBD patients use CAM for treatment. Drivers for the increasing uptake of CAM include the perception that herbal remedies are natural, less toxic, or harmless; a lack of response to or undesirable side effects of conventional therapy; and the desire to improve quality of life (QoL). This indicates that GaRP has an opportunity to target nearly half of the total IBD population (i.e., an estimated 2.5 million patients worldwide), representing an attractive opportunity for Anatara. Moreover, considering the predictions related to the rise in global disease burden, this opportunity is expected to continue to grow over the next decade.
Currently, herbal and dietary supplements being used as an adjunct to prescription medicines for symptom management in IBD include curcumin, cannabis (medical marijuana), fish oil, probiotics/pre-biotics, vitamin D, and Chinese herbal medicine. Mordor Intelligence predicts that the market for curcumin is expected to rise at a CAGR of ~12% over 2018–2023 and reach US$85m, driven by an increase in demand for curcumin food supplements. Meanwhile, Markets and Markets predicts that the probiotics market is expected to reach US$64bn by 2022, growing at a CAGR of 7% during 2017–2022.
The evidence indicates that the opportunity for GaRP to grab a share in the dietary supplements market for both IBD and IBS is quite high, and this trend is anticipated to continue to grow over the next 5–10 years.
Detach – Anatara’s out-licensed product for animal health
Detach’s characteristics make it a lucrative candidate for scour
Detach has a broad spectrum of anti-microbial activity that enables it to act against a wide array of pathogens including E.Coli and V. cholera.
Detach is known as an immune modulator: Detach has strong anti- inflammatory properties, although the exact mechanism by which it exerts anti-inflammatory effects is not yet fully understood. Taking inflammation down reduces tissue damage to the intestinal wall, thereby reducing the potential for diarrhea.
Detach is stable at room temperature. This allows the product to be used in markets that lack cold chain pharmaceutical infrastructure.
Detach is a safe for consumption. Bromelain has long been granted GRAS status. Moreover, studies conducted by Anatara on pigs have shown that the drug is safe and well-tolerated at the recommended doses.
Detach benefits from concerns over traditional anti-microbials and antibiotics. In the wake of concerns over antimicrobial resistance (AMR), antibiotics have become very unpopular of late. For instance, Zinc oxide –known to be effective as an anti-microbial in pigs – is banned in some countries, due to its issues pertaining to AMR and environmental implications as a heavy metal. Although copper sulfate – another compound with similar activity – is not banned, it is also considered to adversely impact the environment.
Competition from alternatives is limited. Various oral vaccines as well as probiotics are available as alternatives, but these approaches are typically expensive. Moreover, a low protein diet or organic acids exert similar action but may also affect the quality of meat produced. Therefore, Detach appears to be a superior option.
Anatara has met key milestones for Detach
Detach’s discovery dates back to 1980s. When Detach was launched in 1991 by Ciba-Geigy, it had gained a market share of ~40% in the market for pig health. Anatara was founded in 2010 in order to redevelop the drug with a new formulation. Before out-licensing Detach to Zoetis in May 2018, Anatara had made a significant progress with the drug’s scientific development and achieved major regulatory milestones in key markets.
Scientific Development Milestones (FY2014–FY2017)
When Anatara Lifesciences went public on the ASX in October 201436 it was the third public company to have been involved in the development of bromelain as an anti-infective in animal health. At that time, the company’s primary goal was to develop Detach as a non-antibiotic to aid control of scour in piglets.
During FY2014–FY2016, the company conducted field trials in commercial piggeries in Australia. The results were extremely promising, reducing piglet mortality by almost half. Moreover, a pivotal Target Animal Safety (TAS) study completed in September 2016 indicated that Detach is safe even when administered at higher doses and more frequently than recommended.
In FY2017, the company revealed that it had developed a proprietary dosing device for optimal delivery of Detach by pig farmers.
Regulatory/Commercial Milestones (FY2017–FY2018)
Anatara also already achieved certain commercial milestones in key global markets before and after Detach’s out-licensing agreement with Zoetis was announced:
- Australia: In October 2018, Anatara received APVMA approval of Detach for the treatment of scour in piglets; the approval was based on positive results from the drug’s field trials and is expected to further aid Zoetis’ commercialization efforts in Australia.
- US: In February 2018, Anatara received a ‘complete letter’ from the US FDA for the technical section of its Human Food Safety (HFS) submission. The letter confirms that the US FDA’s Office of New Animal Drug Evaluation, Center for Veterinary Medicine, is satisfied with the human safety requirements for Detach and that the food products from animals treated using Detach are considered safe for human consumption. This decision is expected to catalyze the registration of Detach in one of the most important markets globally.
- Europe: Following an extensive review process, in June 2017, Anatara received a positive note on the MRL status of bromelain from the European Medicines Agency (EMA) confirming that the compound is non-toxic and can be safely used as a therapeutic in pigs. The status is a significant outcome as it confirms that Detach is safer vis-à-vis antibiotics.
We value Anatara at $1.34 per share base case and $3.61 optimistic case using a probability-weighted DCF valuation approach.
Discount rate. We used a WACC of ~15%, appropriate in our view for a ‘Speculative’ risk rating;
Probability of success. For Detach we assumed no development or regulatory risk in terms of the product’s ability to make it through field trials and receiving the requisite marketing approvals. Detach now primarily has commercial rather than development risk. With GaRP we assumed, for conservatism’s sake, a 20% probability weighting to reflect the historic failure rate of therapeutics that have reached Phase 2.
Time horizon. We used a 14-year time horizon in our DCFs followed by a terminal value;
Currency. We assume the AUD/USD exchange converges on 0.7 over a three- year period from now.
Capital. We assume no further capital needs to be raised, with Anatara in a position to fund itself from Detach-related revenues from FY18.
The challenge in valuing a product like GaRP is that licensing deals for functional foods tend to be infrequent, with shareholder value being built through developers launching their own product and then selling the brand or the company at a later stage to a large player in functional foods. We believe that this will change over time, as the functional food and pharmaceutical sectors converge. Consequently, our thinking on valuation for GaRP has been guided more by pharma in-licensing. Given the lack of powerful Rx products in IBS and IBD, we think this is a reasonable approach.
- Anatara can license GaRP to a prospective pharma or nutritionals partner in FY21 (optimistic case) or FY22 (base case);
- Global product launch beginning in FY24 (optimistic case) or FY25 (base case);
- Upfront payments post the licensing agreement of US$5-10m;
- Milestone payments as products are developed of US$20-40m. While we have not been able to identify benchmarks for milestones in functional food transactions, US$20-40m is way below those available in the typical for pharma licensing deal;
- Peak sales globally of ~US$300m (base case) to US$600m (optimistic case).
- A royalty to Anatara of 4% (base case) to 8% (optimistic case).
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