I'm willing to put myself out on a limb with the following 12-month share price forecast for BOT after diving deep into the company. I may be off the mark, but I believe this to be the most likely trajectory of the business based on the information known to date. Ultimately, I arrive at a share price target of 33c by the end of Q4-FY21 (July 2021) based on comparables with other biotech firms which have similarly progressed assets in clinical trials (phase 2 and potentially phase 3).
Company Overview: Botanix is dedicated to developing next generation therapeutics for the treatment of serious skin diseases. The management team is harnessing the untapped potential of a synthetic active pharmaceutical ingredient known as cannabidiol (CBD) which is currently being studied for the treatment of epilepsy, pain, arthritis and schizophrenia amongst other indications. Botanix has an exclusive licence of Permetrex™, which allows management to overcome existing challenges in the dermatology space (as management has successfully done before) and bring products to market in a quarter of the time and at a quarter of the cost (average 12 years and USD1bn to get a product FDA approved).
Botanix's Products: Botanix currently has 2 products progressing through clinical trials. Its acne product is progressing to a pending Phase 3 Trial, which has a 61.5% chance of being approved as a new drug by the FDA. In terms of how valuable the acne product is, comparable successful dermatology products (at a similar Phase) have been acquired for amounts varying from USD790m to USD5.2bn.Also, Botanix is actively progressing another product, an antimicrobial platform, into a Phase 2 Trial, which based on early data is more effective than the leading product that generates annual revenues of USD228m. At Phase 2, this product has a 24.4% chance of being approved by the FDA.
Management: Matthew Callahan is the Founder of Botanix, his latest biotechnology business in the dermatology industry.Matthew Callahan is a serially successful entrepreneur. In particular, he has a proven track record in the life science industry and is responsible for more than 4 Food Delivery Association (FDA) product approvals. Further, Vince Ippolito (Executive Chairman) has launched more than 20 brands in dermatology and aesthetic medicine and played a leading role in two of the largest dermatology acquisitions completed in the past decade with combined valuations of $7.8 billion. He served as the Chief Commercial Officer Executive Vice President of Anacor Pharmaceuticals, a dermatology based biopharmaceutical company until September 2017
Institutional Investment: On the 1st of August 2019, management raised US$40 million at 21 cents from specialist US based biotechnology venture funds and institutional investors, with new shares outstanding at 946,506,191, which equaled a Market Capitalisation of $198.7m. It is now trading at 4.4 cents (an AUD40m Market Capitalisation/Enterprise Value of approximately AUD5m), which is approximately a 70% reduction from its 12 month high of 29 cents (as at 23 June 2020).
Likelihood of Progressing through Clinical Trials: The four stages and their respective likelihood of successful approval are provided below:The probabilities of success were derived from the largest study of clinical drug development success rates to date. It was conducted by the Biotechnology Innovation Organization (in conjunction with Amplion and Biomedtracker), which analysed almost 10,000 transitions in the Biomedtracker database over a ten-year period from January 1st 2006 to December 31st 2015. It is the largest study of clinical drug development success rates to date.Out of 10,000 transactions, the likelihood of FDA approval at each stage are: Phase 1: 16.3%. Phase 2: 24.4%. Phase 3: 61.5%. New Drug Application (NDA): 88.4%
Share Price Target: The acne market is a multiple billion dollar revenue market, where successful dermatology products have recently been acquired for amounts ranging from several hundred million to several billion USD. This means that a successful progression to a Phase 3 Trial should see a positive valuation re-rating to valuations similar to comparable acquisitions due to the attractiveness of the billion dollar revenue opportunity for large and established pharmaceutical companies. Below I have outlined the revenue opportunity and recent comparable acquisitions across the various stages of product development. In the acne market there are competitive products with tolerability and safety concerns, as well as antimicrobial resistance challenges, which have generated significant annual sales (e.g. Solodyn’s peak gross sales were approximately USD$1bn). BTX 1503 appears to achieve similar, if not better results than existing products based on current trial data, without any adverse side effects. I have outlined 4 recent comparable acquisitions (1 for each stage of product development) in the topical dermatology space, which range from several hundred million to billions in USD:
Pre-clinical example = USD90m (Allergan acquired Anterios in January 2016).
Phase 1 example = USD790m (Purdue acquired drug rights from Exicure in December 2016).
Phase 2 example = USD1.4bn (Roche offloads Lebrikizumab drug rights to Dermira in August 2017).
Phase 3 example = USD5.2bn (Pfizer acquired Anacor in May 2016). Interestingly, Vince Ippolito (now Chairman of Botanix as of May 2019) was the Executive Vice President of Anacor Pharmaceuticals, where he played a key role in the company’s sale to pharmaceutical giant Pfizer for a mind blowing USD5.2bn (Phase 3 example above). Someone of Vince’s calibre, and experience in multi-billion dollar acquisitions wouldn’t join Botanix unless he saw an opportunity similar to Anacor.
Why the Market is Overlooking Fair Value: The reason for the severe drop in share price in October 2019 was a failure to meet the primary endpoint in the company’s recent Phase 2 Trial for acne, which was carried out in both Australia and the USA. The primary endpoint was an absolute change from Baseline to Week 12 in inflammatory lesions. Statistical significance (p<0.05) was not reached for the primary endpoint due to the very high vehicle response from the USA sites only. So, based on the Australian sites, the Phase 2 Trial was a success but because of the very high vehicle response in the USA, the results as a whole failed to show an absolute change from Baseline to Week 12 in inflammatory lesions (statistical significance is the industry measure for absolute change).The “vehicle” was the formula that contained only Permetrex™ (no CBD). Essentially, the vehicle in the USA had similar results to the formula that had 5% CBD with Permetrex™ across the Australian and USA sites (a 40% change, respectively). However, upon further investigation, management produced more detailed analysis around their decision to proceed to a Phase 3 trial. This analysis found that on the reduction in total lesions (i.e. both inflammatory and non-inflammatory), the 5% CBD formulation is statistically significant over the vehicle (p=0.033). This means that the Stage 2 Trial was successful because the reduction in total lesions is a clinically meaningful endpoint that dermatologists use to assess the effectiveness of medication. This is the reason Botanix is progressing to Stage 3 Trials. For the Phase 3 Trial, the Permetrex batches will be manufactured in bulk in the same lab by a global specialty chemicals company. Management’s actions will ensure there is no inconsistency between jurisdictions, which caused the skewed vehicle response in Phase 2 and subsequent failure to meet the primary endpoint.
Why the Downside Risk is Limited: Firstly, at the current share price you are buying the business for only $5m which is crazy (MC of $40m and cash on hand of $35). But even more importantly, there is an entire portfolio of other assets that provide a backup even if the acne product was to not succeed. BTX 1801 is progressing into a Phase 2 Trial, which gives it a 24.4% chance (on average) of being approved as a new drug with the FDA. So, similar to the acne product, if the Phase 2 Trial is successful, Botanix’s share price is reasonably expected to rise rapidly.
All in all, due to the complications around the statistical significance of the acne product and the failed dermatitis study, Botanix is trading at a huge discount to the price and valuation that leading specialist biotechnology investors paid less than 12 months ago. This means Botanix is currently trading at a fraction of the valuations of similar products to BTX 1503 that have been acquired (USD790m for Phase 1 Exicure product) and with no valuation given to the microbial platform.
If the Phase 3 Trial for Acne and Phase 2 Trial for the antimicrobial platform are successful, a significant positive share price re-rating would be reasonably expected given that Botanix is trading at practically the cash it has in the bank. If both of the trials are successful then the 33c share price target will be extremely conservative. I believe the Phase 3 Trial will show statistical significance over the vehicle based on increasing statistical significance (p=0.033) and consistent manufacturing going forward (elimination of the risk of skewed responses that were seen in Phase 2).
Ultimately, a situation currently exists for investors to take advantage of the confusion caused by the recent Phase 2 acne trial and the antimicrobial platform, which seems to not be valued by the market at all.
(20min delay)
