The below was published on 04/02 in 'Share Cafe', by Richard...

The below was published on 04/02 in 'Share Cafe', by Richard Campbell. It seems a very fair overview.

'Who said any publicity is good publicity? It’s not so in the case with Phosphagenics (POH). As one of the ASX’s numerous mid to low profile biotechs it is still suffering reputational deficit ever since its well regarded and high profile CEO resigned after systematic “invoice irregularities” were uncovered. The shock in Melbourne’s biotech circles echoed for months with existential undertones.

Although the Board has obtained undertakings to ensure full or almost full restitution, the fact remains that the losses occurred over a prolonged period and might not have been uncovered at all a new CFO became puzzled why an R&D company was consuming kilos of Vitamin E, not grams. It didn’t help that another loss of $500,000 turned up a few months later.

Defalcation from a company which relied so heavily on equity funding seemed particularly post modern. While it is fortunate that the proceeds were identified and restitution is under way, the entire episode has suffocated what was potentially a company transforming announcement in late October concerning pain management.

This was the results of Phase One trials of POH’s pain patch, a combination of POH’s “targeted penetration matrix” (TPM) and the powerful semi-synthetic oxymorphone, one of the world’s largest selling opioids. It was a multi-dose trial involved 12 healthy volunteers whose blood serum recorded significantly more analgesic than a 40mg dose of an the highest strength extended-release oxymorphone tablet, Opana. Since there is a already a very well established literature on the effects of oxymorphone – it has been used extensively since the early sixties - the result went beyond establishing proof of concept to provide a relatively clear picture of the expected pain relief.

As the trials showed TPM required just a quarter of the volume used than the table, Phase Two can now focus on the commercial aspects of dosage refinement and so lead to early stage commercial talks. This would necessarily include the big names in pain products like Johnson & Johnson. Ignoring wider applications the immediate market size for such a patch is expected to be $700- $1.4 billion pa in the US alone.

While this is a “first” for oxymorphone delivery, it is not first time patches have been used to deliver drugs – the nicotine patch is well known. In fact there are many types of patches as well as implants, sprays, osmotic pumps and other methods used to treat a wide range of conditions. For example, the ASX listed Psvida has a poIymer capsule which is surgically inserted behind the eye. Acrux has a “patchless patch” spray system to release male and female hormones. A patch has also been used to deliver ultra strength opioids like fentanyl, although with some issues. Recalls and litigation damaged that market segment.

Broadly then, TPM is not unique, but it does appear to have commercial edge as a delivery system which can be applied across a wide variety of compounds, by patch, in spray form, as a gel and other methods.

The focus, however, is on the oxy pain patch. While there were initial problems with crystallisation of the drug, broadly TPM has proved to be relatively simple and adaptable compared to the patches with adhesives which irritated or gel pouches that burst.

Starting with the basic idea that the skin has evolved to be an almost impermeable barrier the task is to develop a system which allows passage of molecules without being repelled or dissolved by fats or water. The task is made all the difficult by the disparity in the size of molecules and differences in age and sex. This is not a pea and orange comparison, but in terms of atomic mass the scale is pea to truck. For reasons that are not entirely clear vitamin E Phosphate or, - to get technical - tocopherol phosphate will encase a wide variety of compounds and will allow them to slide past various forms of tissue to reach the capillaries and then the opioid receptors in the gut and central nervous system.

The recent discovery that opioid receptors are also found in the skin is potentially powerful as it may open up a large market for peripheral pain relief, particularly neuropathic pain which is often difficult to treat. Burning sensations, itching, coldness etc can drive people crazy. If the skin can be directly treated by patch release the analgesic does not have to pass through the digestive tract, but can be applied to the area of pain more sparingly and with fewer side effects.

In short this is all a pretty big deal. In the case oxymorphone and its opioid relatives it is literally a break-through so the commercial leverage is potentially high especially if TPM can be applied across to the $6 billion neuropathic pain market. Successful rheumatoid arthritis treatment would be a company maker in itself.

There are also half a dozen applications for TPM which offer existing products improved skin penetration such as anti-inflammatory compounds, food supplements for animals, skin creams, conditioners and hair treatments. One with potential block-buster potential was a compound closely associated with the former CEO which actually does reduce cellulite after six weeks of treatment.

One application which should produce reasonable royalties is a TPM version of the anti-inflammatory diclofenac (Volataran) which is being sold in India by Novartis and the India pharma group Themis. Acne trials are progressing while treatment of mastitis may be one of the larger revenue streams. Trials in Victoria and New Zealand show promise in reducing the uptake of vitamins, lowering the use of antibiotics in dairy cattle and showing improved fertility. If the 10-11% improvement in dairy cattle is repeatable, that alone is a big pay-off. The dual effects of reduced volumes of antibiotics and better milk prices will gain attention. The low somatic cell count of Grade A milk has a longer shelf life and so attracts a premium. Sales of a horse feed supplement are established and could also be a reasonable earner. There is also more in the pipe-line.

Cash was $14m in June of last year, but sales of goods down from $700,000 in the previous half to $500,000 which was disappointing given the amount spent on marketing the Elixia range of skin products and the cellulite cream. The share issue has also spread like a pancake to over one billion which is in itself off-putting for many fund managers.

So where does this leave shareholders? Initial outrage fell away once it was clear that restitution of most of the $5.7m was feasible. In fact after a weekend property auction went far better than expected some the additional legal and time costs may be recovered, but while many commend the Board for its good sense in keeping matters away from the police for the time being, for others the offence runs deep. It may be one thing for every second Chinese state owned company to be skimmed and embezzled as a matter of course, but in our system directors are required to be diligent, actively enquiring fiduciaries – not just people who read reports, put in their penny worth about strategy and rush off to other meetings.

Then there is the matter of the replacement CEO. Numerous candidates were interviewed over recent months, but so far all is silent on that front. It is likely that the priority will now shift to the Board. A few resignations may then trigger the appointment of a CEO able to extract attractive agreements with Big Pharma.

This in turn may be the catalyst for solid market re-rating. The current market cap of $117-120m contains some anticipation of the oxymorphone market, but a modest part. Reservations may still linger until a CEO is appointed who, the market believes has, in every pore, a grasp of the fundamental duties of fiduciaries laid down centuries ago by the courts of equity.'