target .27, page-5

Seems Market Guru Stuart Roberts ex Bells has a new home:
Ballieu Holst Research 28 Nov 2013 and has today put a Buy on POH with a Target Base case $0.27/ Optimistic case $0.64


"Phosphagenics (POH) – Breakthrough drug delivery
patches
BUY. Target price $0.27

COMPANY DESCRIPTION. Phosphagenics’ has proved in multiple clinical trials over the
last decade that its TPM technology, which is based on the ability of phosphorylated
Vitamin E to cross the skin, represents an efficient transdermal drug delivery solution. The
company’s patches, which avoid the traditional ‘first pass metabolism’ problem of orally
available drugs, are notable for the speed and safety of drug delivery and the lack of skin
irritation. Importantly, the company has now developed the world’s first patches for the
delivery of the opioid analgesics oxycodone and oxymorphone. This development opens up
a multi-billion dollar market opportunity.
? A near-term payday from oxycodone and oxymorphone. Clinical data to date has
shown that Phosphagenics has viable patches for the delivery of oxycodone and
oxymorphone (see Phosphagenics announcements dated 26 July 2013 and 24 October
2013). The patches are small and can deliver their drug payload either systemically or
topically over a 72 hour period for the treatment of chronic moderate-to-severe pain. These
opioid analgesics represent a large market opportunity - US$3bn p.a. just for oxycodone in
the US market – that has grown strongly in recent years due to increased clinical need for
chronic pain relief. Phosphagenics’ oxycodone/oxymorphone breakthrough positions it for a
good licensing deal. The record of another painkiller called Fentanyl, from J&J, is that the
ability to deliver it via a patch in a product called Duragesic boosted sales eighty-fold over a
15 year period. At its peak J&J sold just over US$2bn worth of Duragesic.
? Patch delivery would represent a solution to opioid abuse. In the last decade
oxycodone has emerged as a drug of abuse, particularly in the US, due to ease with which
abusers can extract the active pharmaceutical ingredient from tablets and use it to get a
high. This has led regulators to look for tamper-resistant formulations. Phosphagenics
patches would represent an ideal solution, due to the difficulty the would-be ‘street
chemists’ would face in extracting the active from the patches, as well as the inability of
sustained release patches to give the abuser the high he or she is looking for.
? Phase II in 2014. Phosphagenics has indicated that it intends to go to Phase II with its
oxycodone and oxymorphone patches next year. After this there is potential for Phase II/III
studies ahead of 505(b)(2) filings, which could take place in 2016 or 2017.
? TPM has been deployed across a range of drug delivery indications. Phosphagenics
currently has programmes with various collaborators ongoing in pain, dermatology, various
injectable drugs and animal health. These collaborations have potential to pay off in a big
way. Consider diclofenac. This non-steroidal anti-inflammatory drug, known globally as
Voltaren gel for the treatment of osteoarthritis and other inflammatory conditions, is a
US$700m global opportunity which is now being tapped via collaborations in India and
Japan. Phosphagenics has shown that TPM allows better dermal absorption of diclofenac
than Voltaren, while maintaining similar levels of systemic exposure.
? Phosphagenics earns revenue from cosmeceuticals. The company has created some
Vitamin E-based cosmeceuticals which sells through various channels around the world.
While these products only net Phosphagenics A$1-2m p.a. it does show the ability of the
Phosphagenics to realise commercial value from TPM.
? Capable leadership. Phosphagenics’s CEO, Harry Rosen, already has a track record of
success in the Life Sciences thanks to Betatene, which became the world’s largest
producer of natural beta carotene before it was sold in 1995 to the German company
Henkel. While 2013 has seen the company experience a scandal in which various insiders
were found to have misappropriated funds, under Rosen Phosphagenics has recovered
much of the lost funds, enabling the company to move forward in 2014.
? POH is undervalued on our numbers. We value Phosphagenics at 27 cents base case
and 64 cents optimistic case using a probability-weighted DCF valuation. We believe
Phosphagenics stock is undervalued because of the long time it has taken to get here – the
company has been developing TPM since 2002. We look for a re-rating of the stock as the
company initiates the next Phase II trials for oxycodone and oxymorphone.

? VALUATION METHOLOGY. Our probability-weighted DCF of Phosphagenics was built as
follows:
- Our WACC was 14.7% (High risk);
- We modelled payoffs for oxycodone and oxymorphone patches only. For conservatism we
allowed no value for other products like tretinoin or diclofenac, as well as revenue from the
company’s cosmetics suite;
- We used a 32% risk weighting for the patches for base case and 38% for optimistic case,
to reflect the fact that the patches are at Phase II and have elements of both small and
large molecule risk associated with them;
- We assume partnering deals for both patches, in 2014-2015 for oxycodone (US$40-70m
upfront, US$120-150m milestones and 8-12% royalties) and in 2015-2016 for
oxymorphone (US$50-100m upfront, US$150-200m milestones and 10-14% royalties).
We have modelled the oxymorphone deal as larger on the assumption that an oxycodone
deal heightens interests by Phosphagenics’ initial licensee.
- We assume oxycodone launch by 2017-2018 and oxymorphone launch by 2019-2020.
- We model peak sales of US$2.3-3.2bn for oxycodone and US$3.9-4.9bn for
oxymorphone.
? MAJOR SHAREHOLDERS. Allan Gray Australia (13.1%) and Harry Rosen (6.3%).
? KEY RISKS. 1) Delays in recruitment for the opioid patch clinical trials; 2) Clinical failure; 3)
Regulatory risk related to the politics of opioid drugs; 4) Funding risk."