· Prometic has had a string of positive announcements over the past week that both furthers its progress along its clinical pathway (on multiple drugs) and, most importantly, removes balance sheet uncertainty
Analysis: ·
First and foremost, PLI announced that it had secured a $100 million line of credit from Structured Alpha (Thomvest Asset Management). The facility will carry the following terms:
a) 8.5% interest on drawn amounts
b) 10 million warrants at $1.70 (last deal price)
c) Up to 44 million additional warrants at $1.70 to be awarded at ~4 million warrants per $10 million draw on the facility
· While the market did not seem too impressed, we believe this is
incredibly important because:
a) It provides surety of funding, likely out to Q1/FY19. This period should include a number of very significant events such as commercialization of Pg, ivig, IPF data and DFU data
b) While some might think it is expensive, even if ALL warrants are exercised (currently 13% out-of-the-money), the total dilution would be ~7%
c) We believe the financial plan is still to pursue a partnership with upfront cash for 4050 (potentially IPF). Furthermore, upon approval of Pg, PLI could receive a pediatric voucher which it could monetize. If one or both of these events occur, they may not need to tap the Thomvest facility, which would mean the full allocation of warrants would not be issued. Timing is always a difficult thing to manage and with cash likely down to ~4 months, we believe it was prudent for the company to negotiate a “stand by” facility that under worst case scenario, gives the company a 1+ year worth of cash – a position the company hasn’t been in for several years now!
·
The second announcement was that PLI has received Fast Track Designation for its pivotal phase 2/3 clinical trial in IPF. This will be a 3-armed, double-blind trial (which the market should like v/s open label). In particular, the 3-arms:
a) 125 patients – placebo + nintedanib
b) 125 patients – 800mg 4050 + nintedanib
c) 125 patients – 1200mg 4050 + nintedanib
· We believe the trial could start in Q1/FY18 with interim results unblinded at 26 weeks. This would put the results in Q3/FY18. If positive results v/s placebo, we believe the market could start to reward the shares with some expectation that PLI could have a viable IPF drug. Recall that Roche paid $8.3 billion for Intermune and its IPF drug.
We believe there is ZERO value for IPF in the current stock price.
·
The final announcement yesterday was that PLI has received clearance from the Swedish Medical Products Agency to initiate Pg diabetic foot ulcer (DFU) Phase 2 trial. · Recall that PLI bought the IP for Pg use in wound healing from OMNIO AB of Sweden on November 11, 2015. After new formulation of Pg for wound care, PLI is about to start this Phase 2 trial that will include 20 patients
· The market opportunity in wound care, in our opinion, is ENORMOUS. Studies have indicated that diabetics have a lifetime risk as high as 25% of developing foot ulcers with annual incident cases ranging from 3% to 10%. As a point of reference, there are ~30 million American adults with diabetes and another 86 million pre-diabetic.
As such, we believe this is a market opportunity that is $1+ billion/year – and PLI is the only company in the world who is currently capable of manufacturing Pg at volume and scale
· If this trial starts in Q1/FY18 and, we believe results should be relatively quick (ie. either heals the wound or it doesn’t). As such, results should be available in
2H18. If positive trial results in Sweden, we would expect PLI to take the results to the FDA and commence a pivotal trial in the US – and remember that Pg will have already been approved (for deficiency) in the US by that time, so the FDA should have some comfort level with Pg from PLI
·
We believe there is ZERO value for Pg wound care in the current stock price. Near-Term Catalysts: · Now that balance sheet risk has been removed, we believe investors should focus on Pg approval by the FDA. With the PDUFA date set for
April 14, 2018, we believe this is the latest that Pg should receive final approval and commencement of commercialization
·
We cannot over-emphasis the importance of this event, for the following reasons:
a) It will be PLI’s first drug approval in its history. In fact, we believe a Canadian drug company receiving FDA approval for a drug is a VERY rare occurrence. Aside from some smaller drugs, we believe the last significant FDA approval of a Canadian-company drug was BioChem Pharma in 1995 for its HIV drug. Interestingly, from 1995 (when FDA approval) to 1999,
BioChem’s EBITDA grew from $22 million to $163 million. The company
subsequently got bought by Shire in 2000 for $5.7 billion or 30x sales and 35x EBITDA. Interestingly, the R&D team from BioChem found their way to Prometic post the take-over by Shire
b) While some might feel it is not a huge deal for FDA approval of Pg for deficiency since there are not a lot of patients,
we would argue that with the approval, the FDA will have given TACIT APPROVAL OF THE PPPS PROCESS. This will essentially be the first approval of a plasma protein using a process OTHER THAN the Cohn process, which has been around since WWII. If the FDA feels comfortable with the process through which Pg is manufactured, then we believe the approval process for ivig, AAT, C1 and other proteins should carry a dramatically lower risk profile. When one considers this, the market opportunity is not small. For example, ivig, which is currently in Phase 2/3 and is expected to receive Canadian approval and commercialization in late 2018 (with US approval to follow) is a US$10 billion market. The Canadian government itself is a massive buyer of ivig, with no local supplier. We believe PLI, upon regulatory approval, will become one of the suppliers of ivig to Canada, which could translate to $100’s of millions of revenue potential.
2H2018 Major Events: · Revenue from Pg, both for deficiency and off-label
· Ivig – approval in Canada, followed by approval in US
· 4050 interim data for IPF Phase 2 trial
· Diabetic Foot Ulcer Phase 2 trial results
· It is important to remember that ALL of these events are FULLY FUNDED, even without partnerships or vouchers
Conclusion: · Shares of PLI are down 33% YTD and down 55% from its all-time high
· Delays and concerns about balance sheet have taken the momentum out of the shares. However, with this week’s news, we believe the risk-profile of the company has been DRAMATICALLY reduced
· A $100 million line of credit means that the company is fully funded to Q1/FY19, which encompasses the events we highlighted above and which could almost take the company to cash flow break even.
· If the company is able to execute a partnership and receive and sell a voucher, its balance sheet will be in that much better shape
· With this fully funded balance sheet and major milestones that are close at hand, we believe the risk-return has never looked better
Doug Cooper
Managing Director, Research
Beacon Securities Ltd