As for Paradigm, as discussed in our last monthly update, we split our core holding away from the main unit series at the end of last month. At this time the position had reached our 20% threshold for any single stock security. Rather than sell any stock, we split it away from the main series to treat it as a completely new fund for our existing unitholders.
Since last month, Paradigm have released a number of updates including the company’s successful secondary endpoints from the phase 2b trial. Unfortunately, this also included a $78 million dollar capital raising at $1.50 with a 1:8 attaching rights issue. We viewed this as a terrible way to raise capital (rights issue) due to the overhang it caused and it ruined any positive price attribution from the positive news result that otherwise would have likely seen the stock trade towards $3 or $4. However, looking at the positives, the company is now fully funded and has optionality with how it proceeds with their phase 3 trial in OA as well as their trial for MPS.
Probably the best thing about the capital raising is that any further buying from institutional investors (still none are substantial) must now be done on market. Post this capital raising the company has around $81m in the bank and an enterprise value (EV) of just over $200m at $1.50. In our opinion this is extremely cheap for a company that through a successful phase 2b clinical trial has demonstrated they have a drug that works to effectively treat osteoarthritis (OA) and now also appears to slow the progression of the disease by reducing the bone marrow lesions (BME). We have not heard of anyone with OA who is not interested in such a product due to the lack of alternatives. So the fact the stock still trades at a $200m EV seems to be seriously disconnected to the underlying fundamentals being proven.
Another notable event over the month was Pfizer & Lilly’s lead drug for the treatment of OA (Tanezumab) failed to meet the secondary endpoints within their phase 3 trial for the drug. Tanezumab was arguably the biggest competitor in development to Paradigm and the high occurrence of serious adverse events in their trial has put the treatment into question. It is highly unlikely that in its current form the FDA would approve this drug for sale given the serious risk to patients taking the drug. Secondly, even if they did give it the green light, it’s highly unlikely that doctors would be rushing to recommend it to their patients, especially as a front-line treatment option.
We couldn’t help but think that little Aussie Paradigm is doing a “Steven Bradbury” where all these flashy multi-billion dollar NGF drugs are falling over at the finish line. With Paradigm’s reformulated PPS sailing through to claim the gold. A truly Australian analogy for what could become a new Australian biopharmaceutical success story.
Paradigm doing its best impression of Gold Medallist Steven Bradbury
So, what is next? Well, Paradigm are now fully funded for their trials and are likely to start deal discussions. As we have previously indicated, we believe [given the quality of the data] the total deal size should be similar in size to what the NGF drugs were. To be conservative you could estimate a deal size of US$1b for the OA rights and US$500m for MPS, which would be equivalent to AUD $2.1b. The OA alone could see an upfront payment of somewhere around $300m - $600m AUD.
Just yesterday (8th May) Pfizer paid US$810m with US$340m (AUD$485m) upfront for an orphan indication drug called TA-46, owned by Therachaon used to treat achondroplasia (dwarfism). TA-46 is an investigational drug that would be administered as a weekly subcutaneous injection (similar to PPS) for a disease impacting around 250,000 people worldwide. TA-46 has completed a Phase 1 study and received orphan designation. Paradigms MPS indication could quite easily achieve a deal of similar size, yet the market does not fully appreciate this.
Remember, Paradigms EV is currently only $200m and they are now fully funded to go the trials alone in both MPS & OA should they so choose (i.e. if the deal isn’t big enough, you don’t bother doing it). We believe that once the company has provided more clarity around its trial designs and submitted their IND (Investigational New Drug) and can go ahead with their phase 3 trial, that big pharma and big funds will start to become seriously interested in the company as they can gauge the probability of success. Not to mention when they start releasing more real world evidence from the SAS program in Australia, in particular around MPS and the lysomal storage diseases.
With a bigger treatment population in a phase 3 trial and likely an improved trial design, we think Paradigm is highly likely to take the drug through to commercialisation. As we have indicated, this would result in significant returns from current prices. Good things take time but it’s very hard to see significant downside from current prices given the next major risk catalyst is the results from the Phase 2/3 studies in MPS and OA which won’t be expected for at least 18 months.
There is a lot of news in the coming months as well as the potential for big pharma deals. Just some of the news we are focused on:
Phase 3 trial designs & IND filing
SAS data releases
TGA approval in Australia (first sales)
MPS SAS data (first cases will give great real-world evidence of drug’s efficacy
Potential new indications the company can explore and patent with new studies
Institutional investors taking substantial positions from buying on market
So, while the traders from the placement continue to churn through stock for a few cents, when that runs out and accompanied with some substantial new institutional buying, we would expect the company will start to trade significantly higher! The company looks very cheap at a $200m EV given the size of the upfront payments from a deal could be many multiples of this.
PAR Price at posting:
$1.51 Sentiment: Buy Disclosure: Held
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