Cap51's B & C Series Investor Note at end of Jan - I'm sure they won't mind me posting it.
https://www.fiftyonecapital.com/January 2021
THE PROGRESSIVE GLOBAL FUND – B & C Class Unitholders
Paradigm has consolidated nicely over 2020 and now looks primed and ready for a solid rerating in what
will be a catalyst filled 2021. One big catalyst that should be very soon is their pivotal Phase 3 IND
(Investigational New Drug) application with the FDA – once approved this is a major milestone for the
company. Then, first revenues potentially booked in Australia from an already effective and highly sort after
SAS (Special Access Program). All while potential multi-billion-dollar deals could get executed as Paradigm
edge closer to having a commercialised, best in class treatment for a blockbuster disease – Osteoarthritis.
THE FUND’S PERFORMANCE & OUTLOOK
We write to you at the start of 2021, a year that should be very exciting and catalyst filled for this
fund (B/C Class) core holding (Paradigm Biopharmaceuticals). As a large unitholder of both funds, I am
very excited for the year ahead in what should be a transformative year for the company.
As you all know, 2020 was a crazy year. The COVID-19 virus had ramifications across the world and
impacted different businesses and industries in different ways. Unfortunately, for a company in the
biopharmaceutical industry, this pandemic presented a number of new challenges as overrun hospitals
closed, patients became infected and regulators were swamped with new potential COVID-19
treatments and vaccine applications.
Paradigm over the year of 2020 was lucky in that no major clinical trials were being run by the company,
in what could have been a very disruptive environment for a small company. This allowed the team
considerable time to plan and prepare. From ongoing discussions with consultants and importantly
regulators like the FDA and EMA. The company now feels they have a design for a pivotal trial that can
pass successfully and get the required approvals to then commercialise and sell their drug (Zilosul) in
these major markets. This is no small feat, and Paradigm is taking the regulatory application process
very seriously (which we applaud). It is better to take the time and give yourself all extra ability to pass
this pivotal trial - which is a major milestone for the company. So, we look forward to the final IND
submission in the coming quarter.
As a result of the potential risks from a COVID infection, the company indicated they will increase the
size of the trial further (from around 1200 to 1700 patients). While this might cost a little more to do,
it gives them a significantly higher probability of completing a statistically significant and successful
trial. The way trials work is it measures the spread of the data to see how effective the drug/treatment
is over a placebo. The tighter the data, and wider the spread between the two groups shows the
statistical significance.
When we had previously spoken to the statisticians advising on the design, it was clear that the company
was already powering the trial for a high probability of success. With this increase in patients (assuming
no significant dropouts from COVID), that probability of success should be even more likely. We think
this is a positive outcome, as the company adds considerably more probability of success to their
forthcoming trial.
It’s no secret the drug is highly effective. The recent data released to market this year from further TGA
SAS patients once again pointed towards this fact. Now of a total of 89 patients treated under the TGA
SAS program have recorded their results under the new WOMAC reading measurement. These results
are being recorded on a protocol similar to what will be used in the forthcoming Phase 3 Clinical trial
and therefore give an excellent look through to what the results might look like.
The primary measurement being a reduction in WOMAC pain and function score from baseline. Once
again this has consistently reflected close to a 50% reduction in pain. Within this patient set, the
measurement has been taken at 6 weeks after the final injection (12 weeks after the first injection),
however in the trial it will be taken on day 56. In our opinion (when reviewing prior phase 2b data) this
could make the reading even stronger in the phase 3 (as the recording of the score is closer to the final
injection).
More results from TGA SAS show continued average reduction in pain scores within a tight band of data
readings for treatment (this is the black dots and bars showing the average/high/low of the data). This has
been consistent and is a great potential for the trial data as it shows consistency of drug response within the
treatment population.
Once the Phase 3 study is underway this year, Paradigm is just another step closer to having a commercial
product. A product with significant demand from a large patient population with significant unmet needs
from existing treatments. As the data and feedback continues to demonstrate is that Paradigms Zilosul
is the most effective treatment for Osteoarthritis and likely becomes frontline treatment for patients.
And why wouldn’t it be! Suffering patients continue to experience long lasting reductions in pain,
improved function and mobility as well as enjoying an effective treatment that appears to also slow the
disease progression. A true block buster product once on market.
Our thoughts are that once the FDA has approved the IND submission. US domiciled funds will become
even more interested in the company. Many US domiciled funds use the IND approval of a pivotal study
by the FDA as a major de-risking event. This is because the FDA has an extremely rigorous assessment
process prior to allowing companies to start such pivotal studies in the USA. This includes a thorough
review of all safety data; manufacturing processes and to confirm the claims being made by requiring
the company to show statistical significance in a pre-planned clinical study against a placebo. This
measured way to assess a drug’s effectiveness is the gold standard in new drug development – as such
once approved it has passed through a very serious vetting process - something US biotechnology funds
understand and respect.
Once in the investable universe they can review the company data and submission documents to better
understand the drug’s effectiveness and potential. No doubt, many of these investors will then begin to
understand the blockbuster potential for this drug. Not only this, but Big Pharmaceutical giants will also
see a near term pathway to success and a new likely blockbuster ($1b+ in sales per year) drug. The
precedents for multi-billion dollar deals in this sector is already set. Pfizer and Lilly both shelled out close
to US$2b for now failed Anti-NGF treatments. With Paradigms data showing better results than those
drugs (especially when considering safety) it is likely many of these companies will begin to discuss
becoming transactional with Paradigm. Again, we think for a global distribution deal the will measure
north of US$2b.
Paradigm is also undertaking a study this year in Australia that will look to prove that treatment reduces
inflammation and cartilage breakdown in the joint. They will do this by measuring the synovial fluid in
the joint. This trial will only be 60 patients within Australia with 30 in a placebo arm. Again, if this trial
can replicate the data showing in the Phase 2b within the specific joint it will put this drug into a new
league! Not only will it reduce pain and improve function (also measures from this study) but it stops the
progression of the disease. For patients and clinicians, this is a holy grail of treatment!
Data from the phase 2b trial showed significantly decreased inflammation markers from bloods against
placebo, the new study in Australia will measure this within the joint to further solidify the potential disease
modifying characteristics of treatment – nothing else on the market achieves this for patients.
Paradigm currently has a market capitalisation of ~$650m and already holds around $70m in cash (EV
of $580m). This is a fraction of what the company could be worth upon a successful trial. With OA as a
blockbuster indication, it is also only just one disease this wide acting treatment is effective in treating.
However, as mentioned in the prelude we are also looking forward to the company booking early
revenues in Australia. This means that as the company transitions its currently free TGA SAS program into
a paid treatment. This will allow Paradigm to collect real world data about the demand pricing potential
their treatment could command, while booking first revenues as it begins to sell product for the first time.
Initially these treatments will not be covered under any government rebates (which is uncommon in
Australia) so sales might be limited to more wealthy patients and elite sporting clubs. However, we think
initial pricing could be around the $3000 per course of treatment. However, the company has already
treated over 700 patients on the unpaid TGA SAS program from a limited number of doctors. This means
there is already a number of people seeking or waiting for repeat or initial treatments.
We think with word of mouth and increased number of doctors/facilities offering the treatment the
company could easily treat 5,000 people inside the first year. Of a total patient population of around
2.5 million people, we think this is not a hard number to reach and would translate to around $15m in
revenue. Our view is that with word of mouth and doctor recommendations this number will grow
exponentially. As the growth is forecast, the second year could easily see this number double or triple.
As the company then progresses and gets TGA Provisional approval (meaning they can market the drug
prior to the phase 3 finishing) the number could increase significantly.
Inside 5 years we think the company would be treating around 100k patients in Australia per year. At
$3k per course this would be around $300m in potential revenue (potentially every year as drug effect
lasts around 12 months). For a company currently valued at only around $600m, this is a very gap
between potential earnings and valuation! Not to mention, the early sales data will give US investors
even more confidence of how the drug will sell in a far larger population in the US and developed world.
We believe the company should start to re-rate to a valuation that is more reflective of the potential
value that lies ahead. We can comfortably see this valuation in the range of AU$2-3 Billion dollars,
which is $8.85 - $13.28 per share (current price ~$2.75).
So, while the company share price has yet to re-rate, we remain confident that the choice to split this
asset into a new class of units as opposed to reducing it has yet to be reflected in the value of the funds.
With long term positions, it is not about watching it day to day, it’s about understanding the long-term
potential for the business and the risks of execution. We continue to believe the risks are lower and the
upside far larger… So, while some people become impatient (because they know and follow the stock
market daily) it’s the wrong attitude to have. You best winners are those you hold and let the business
compound overtime… Paradigm we think is one of these extremely rare, once in a lifetime opportunities.
For some more viewing on the recent results this interview with CEO Paul Rennie spells out how good
the recent data is and could be in the upcoming pivotal trial. https://youtu.be/a90cWks03Wg