Small Caps | May 06 2011
– Phosphagenics developing transdermal drug patch technology
– Trial results indicate potential uses for insulin and oxycodone
– Southern Cross Equities sees significant upside, rates stock a Spec Buy
By Chris Shaw
Phosphagenics ((POH)) is an Australian biotech commercialising TPM, a transdermal drug delivery technology. Transdermal delivery uses an adhesive patch to deliver a specific dose of medication through the skin. TPM allows for the delivery of therapeutic doses of drugs that previously had no transdermal option.
Southern Cross Equities rates Phosphagenics as a Speculative Buy, seeing upside from what to date have been strong clinical data for both small and large molecule drugs. A number of clinical tests to date show TPM patches work efficiently and don't irritate the skin.
Potential sources of significant upside for Phosphagenics, according to Southern Cross, include scope for the development of the world's first patches for the analgesic drug oxycodone, a US$3 billion market in the US alone, and for insulin, which is a US$14-$15 billion market globally.
A pivotal trial for TPM for oxycodone is being prepared, Southern Cross seeing the possibility this leads to late stage data and a licensable product by as early as next year. This should generate positive news flow through the course of this year, something Southern Cross expects would lead to a share price re-rating for Phosphagenics.
One advantage for Phosphagenics going forward is the TPM technology offers a short lead time to market of less than three years. As well, Southern Cross notes the costs of clinical development are relatively low, so increasing the chance of commercial success.
In trying to value Phosphagenics, Southern Cross has tried to estimate the value of potential licensing deals for TPM. According to these estimates, a licensing deal could yield upfront and milestone payments of as much as US$100-$200 million.
Using relatively conservative sales growth and royalty payment assumptions generates a base case valuation of 44c per share. Southern Cross's valuation factors in a further $15 million capital raising via an equity issue at 13c per share, funds to be used for funding upcoming oxycodone trials and other preclinical and clinical work.
Blue sky beyond Southern Cross's base case valuation comes from TPM becoming a successful patch for insulin delivery, especially as at present there are no competitors close to entering this market. Using more optimistic assumptions generates a valuation per share for Phosphagenics of $0.86.
Looking beyond insulin and oxycodone, Southern Cross notes Phosphagenics' TPM technology could produce a better way to deliver Vitamin D, while work is also being undertaken with a global dematology company on developing a treatment for acne. Both are likely longer-term possibilities, but add to the attraction of the Phosphagenics story in the view of Southern Cross.
With trial work and licensing agreements still to come, Southern Cross retains a Speculative Buy in recognition of the risks still associated with Phosphagenics. But with the share price well below the target price of $0.40, the broker does see significant potential upside.
Currently Phosphagenics has a market capitalisation of around $120 million and the FNArena database shows no brokers in the database currently providing any coverage.
Shares in Phosphagenics have traded in a range over the past year of 8.5c to 18.5c.
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