Latest 51Capital Update for July:Another short position that has...

Latest 51Capital Update for July:

Another short position that has benefited the fund during the month was in a company called Flexion Therapeutics ($FLXN) listed in the US. This company we came across while researching Paradigm ($PAR) and put on a small short position. Flexion attempts to sell a treatment for osteoarthritis (OA) that already exists (corticosteroids) – except for around 30x more. Next to Paradigms Zilosul®, it looks inferior and unlikely to achieve commercial success at the prices being touted. With aggressive marketing spend and an inferior product the company is likely to require further equity/debt issues. Interestingly, this company was rumoured to have had Sanofi looking at a US$1b take over back in 2017. Since that time the stock is down around -70% as it continues to struggle on delivering profitability in what seems an impossible product offering.

As mentioned above, when we look at Paradigm ($PAR) in comparison to companies like FLXN we get excited at the future potential of the business. During the month we met up with a clinician who is now treating patients under the Special Access Scheme (SAS) in Perth (if you are interested in treatment in Australia – WA/Vic/NSW please reach out for details as we have referred across a number of people interested in treatment). This meeting, along with the discussions we have had with patients who have been successfully treated, continues to reinforce our confidence that this drug has MASSIVE commercial potential. When compared to current treatments (such as cortico-steroids) the feedback continues to show Paradigm as the clear winner. Once commercialised, no doubt this advantage will be reflected in the valuation of the company. From current prices, it would appear Paradigm has significant growth ahead.

Comparison of valuations (EV) between FLXN and PAR both in AUD – Paradigm has a far superior product with strong probability of being commercialised yet trades at nearly half the value of an inferior competitor.

During the month we also caught up with Paradigm management. We remain very pleased with the focus and resources being committed towards the regulatory submissions as they company pushes towards commercialising the product. With a very busy next 6 to 12 months for the company, we are confident that over this period the market will start to re-rate the company valuation.

Ultimately, like our thesis on uranium (demand > supply = price rise), we like to keep it simple. Paradigm have a drug (that before it is even commercialised) shows significant demand and positive effects (i.e. it works). Having a product in high demand = high sales, high margins, high growth.

The risk it doesn’t achieve commercialisation seems very low, yet the valuation (like uranium) appears to be disconnected. So, like uranium it becomes a waiting game were the question is not “if” but “when”.

As such, we added to our funds position over the month and may continue to build on this position further should prices remain attractive relative to our forward expectations.