Small Caps | Sep 21 2011
– Potential entry of new delivery technology in drug markets
– Phosphagenics also has other growth options
– Bell Potter retains Spec Buy rating
By Chris Shaw
Junior biotech play Phosphagenics ((POH)) is attempting to commercialise a transdermal drug delivery technology called TPM. TPM uses patches and gels to deliver therapeutic doses of medication across the skin.
This is a growing market according to Bell Potter, as Big Pharma continue to look for ways to boost the therapeutic power of their drugs and extend their commercial life.
What sets Phosphagenics apart in the view of Bell Potter is the TPM technology, which is based on phosphorylated Vitamin E, which can transdermally deliver doses for drugs that until now have had no such delivery option.
The other positive is the TPM patches work efficiently and without skin irritation or inflammation, as evidenced by 13 trials of the technology conducted since early in 2006. This opens up the potential for Phosphagenics to develop the world's first patches for the analgesic drug oxycodone and for insulin.
As Bell Potter notes these markets offer significant potential, as the US market alone for oxycodone is estimated to be worth more than US$3 billion, while the global market for insulin is worth around US$14-$15 billion.
At present Phosphagenics is working on preparing for a pivotal trial of TPM for oxycodone delivery as development of a new, improved patch has been completed. In the December quarter of this year a small pharmacokinetic study will be undertaken, before a larger Phase II/III clinical trial around the middle of next year.
According to Bell Potter this would put Phosphagenics on track for data to be made available early in 2013, allowing for an FDA filing later that year and approval in 2014. This potential for strong news flow over the coming year or so implies scope for a re-rating, so Bell Potter retains a Speculative Buy rating on Phosphagenics.
What supports Bell Potter's positive view is the fact Phosphagenics has other products related to its technology. As an example, the group's BodyShaper anti-cellulite cream was launched in Myer department stores in May of this year.
Total development costs for BodyShaper were only around $100,000, but Bell Potter suggests the market potential is large given around US$3 billion annually is spent on cosmetic products worldwide that are 'firming' or 'anti-cellulite' in nature.
As well, Phosphagenics has started selling its Elixia brand cosmetics in the Asian market, which complements the launches in Australia through Terry White Chemists and Priceline health and beauty retail chains. This could add as many as 7,000 stores to the retail reach of the Elixia range.
Further upside could come from a major cosmetics collaboration Phosphagenics has secured with a leading global cosmetic and dermatology company. In Bell Potter's view this offers scope for a major licensing deal to emerge.
Also, previous trials have shown TPM can deliver the active ingredient in Voltaren Gel faster than the original, which implies another significant market opportunity of as much as US$800 million annually.
Bell Potter's model for Phosphagenics suggests a base case valuation of $0.43, rising to $0.85 using more optimistic assumptions. This factors in the dilutionary impact of a potential $15 million capital injection. To take a conservative approach Bell Potter has set its price target at $0.40, which is broadly in line with its base case assumptions.
These assumptions include cosmetics revenue rising from around $4 million in 2011 to $22 million in 2014 and the potential for licensing deals to yield upfront milestones of as much as US$100-$200 million. First year royalty payments for TPM/oxycodone are estimated at $16 million in 2014.
A price target of $0.40 implies significant upside potential for Phosphagenics, as the share price is currently trading at around $0.15. The share price has ranged between $0.088 and $0.185 over the past 12 months.
At current levels Phosphagenics has a market capitalisation of around $123 million, meaning the company receives little coverage on the broader market. As evidence, the FNArena database shows no coverage of Phosphagenics by the either brokers within the database.
Phosphagenics shares today are stronger, trading up 1.5c at $0.165 as at 1.40pm.
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