By Jason Napodano, CFA & John Tucker, PhD
We are initiating coverage of Cynapsus Therapeutics (CTH.V) and (CYNAF) with a Buy rating and establishing a price target of $1.25 per share. Despite limited volume and a market capitalization well below that of our typical coverage universe, we believe the company’s focus on developing a sublingual form of the injectable Parkinson’s drug apomorphine offers significant upside potential with a limited financial commitment, and that the company’s commercial strategy to partner with a larger pharmaceutical organization presents meaningful upside to investors today.
Download The Full 25 Page Report --> CTH/June3_Napodano.pdf
In the above report we’ve outlined our belief that APL-130277 has peak U.S. sales of $200 million. Although this is somewhat lower than management’s internal forecast of $284 million, we agree, in principal, with essentially all the company’s conclusions about the opportunity. We see APL-130277 as a potential $500 million product worldwide.
A Little Background
Parkinson's disease (PD) is a progressive degenerative disease of the central nervous system that affects more than 1 million individuals in the U.S. and some 4 million in the developed world. The shortage of dopamine in the brain caused by the loss of dopaminergic neurons is believed to cause observable symptoms of paucity of movement and rigidity. Levodopa is the best known therapeutic agent for the treatment of PD. Unfortunately, while levodopa can result in improvement in symptoms of rigidity, patients can experience serious side effects including dyskinesia. This dyskinesia is often treated by lowering the dose of levodopa, which causes rigidity to return. This creates a situation where patients are fluctuating in clinical states between mobility and immobility for periods ranging from a few minutes to a few hours.
The fluctuations are manifested in various scenarios, including a "wearing-off' phenomena where deteriorations in the relief occurs before the next dose takes effect, but may be predictable given routine dosing schedules, or in an "on-off” phenomena where the transitions is more sudden and unpredictable. Clinical experience shows patients can switch from “on” to “off” and develop akinesia or rigidity in minutes or even seconds (Swope D M., 2004) with no discernible relation to a patient's dose schedule. Two other phenomena are the “delayed on", in which levodopa's effects are substantially delayed, and “no on” (dose failure), in which no effects occur at all.
Subcutaneous injections of apomorphine (Apokyn) have proved to be effective in the treatment of "on-off” fluctuations in PD within 5 to 15 minutes, and last for 45 to 90 minutes. Trials have shown consistent reversal of "off' period akinesia, a decrease in daily levodopa requirements and consequently a decrease in the amount of "on" period dyskinesias. Advantages of apomorphine include a quick onset of action, lower incidence of psychological complications, and a relatively short half-life. For these reasons, it is an ideal "rescue therapy".
Unfortunately, subcutaneous injections of apomorphine have proven to be impractical for patients entering a period of “wearing-off” or switching from “on-off” given most patients impaired motor function, diminished dexterity, and aversion to frequent painful injections. Furthermore, a common side effect of subcutaneous injection is the development of nodules, which often become infected, necessitating antibiotic treatment or surgical debridement (Prietz et al, 1998). Development of alternative formulations of apomorphine has been met with little success. For example, oral administration of apomorphine tablets has required high doses to achieve the necessary therapeutic effect because apomorphine administered by this route undergoes extensive first-pass metabolism. Intranasal administration produced transient nasal blockage, burning sensation and swollen nose and lips. Finally, sublingual administration of apomorphine tablets caused severe stomatitis on prolonged use with buccal mucosal ulceration in half the patients treated (Deffond et al, 1993).
An Undiscovered Gem
Our two economists from the above scenario might make a similar conclusion about Cynapsus Therapeutics. The market capitalization (~$12 million basic / ~$18 million fully-diluted) and stock price ($0.30 per share) certainly suggest that to be the case. However, we see the potential that Cynapsus, located in Toronto, Canada, and listed on the TSXV, is an undiscovered gem. Several points lead us to believe Cynapsus has a meaningfully better opportunity to create positive shareholder returns than the market cap and stock price would suggest:
- The Parkinson’s disease market is large, growing rapidly, and highly under-served.
- The company is not trying to reinvent the wheel with APL-130277. The product is an astutely designed re-formulation of an existing approved and known-to- be effective product, Apokyn.
- The company held a pre-IND meeting with the agency confirming the path to approval is bioequivalence to the reference product, subcutaneous apomorphine via the 505(b)(2) pathway.
- The company seeks the same indication for use as Apokyn, reducing risk that the FDA comes back and asks for new efficacy studies. We see low clinical development risk here.
- Based on the patient filings and existing pharmacokinetic data from CTH-102, the formulation and intellectual property protection seem solid.
- The Michael J. Fox Foundation is funding the bulk of the next clinical study, a pilot study dubbed CTH-103, to further characterize the APL-130277 formulation.
- The company secured (net) $6.7 million in cash in March 2013, which we find to be sufficient to fund operations through the CTH-103 pilot study data – a potential re-valuation inflection point.
We think APL-130277 can be effectively priced near parity to Apokyn, but agree with management that it might be prudent to model a slight discount to both drive uptake and reimbursement early in the launch. We see a meaningful opportunity to expand not only the number of patients that will take a sublingual apomorphine, but also dramatically increase the use for existing patients given the far more convenient and practical method of delivery.
Results from the CTH-103 pilot study, being largely funded by the Michael J. Fox Foundation, should become available in the third quarter 2013. The next step for management is a pivotal bioequivalence study, CTH-201, in healthy volunteers with a 2mg, 3mg, 4mg (n=36 per arm) Apokyn crossover design. This should take place in 2014. Cynapsus will also need to complete a placebo-controlled safety / tolerability study, CTH-301, in 150 apomorphine-naïve patients in 2014 and 2015. We see the cost of these three studies, along with operating burn over the next two years, at around $20 million. If all goes well, we expect the U.S. FDA submission for APL-130277 in 2015, with a decision in 2016. Given the current cash balance of $6.1 million as of March 31, 2013, we do not see a need for the company to raise cash prior to the results of the CTH-103 pilot study.
We see peak U.S. sales at $200 million and peak global sales at $300 million. This assumes the company can secure a large pharmaceutical partnership for the drug. We believe that with positive data from CTH-103, CTH-201, and CTH-301, Cynapsus should be able to command an upfront payment in the area of $40 million. This equates to only 8% of our peak sales forecast. We believe that APL-130277 could command an approval milestone of similar magnitude and backend sales and regulatory milestones outside the U.S. eclipsing $200 million, along with double-digit tiered royalties on worldwide sales.
The basic share count as of April 2013 is 38.9 million. We note there are approximately 21.5 million warrants outstanding with an exercise price of $0.575 per share. This has the potential to generate an additional $12.4 million in cash to the company. We note these options have a call option where if the stock trades above $1.38 per share for 20+ consecutive days, the company can force the exercising of the warrants for cash. We believe a good portion (perhaps as much as 25%) of these warrants will be exercised – which could provide another $3 – 4 million in cash to the company – if the CTH-103 study is successful. On a fully-diluted standpoint, there are 62.1 million shares outstanding. For the purpose of our financial model, we assume Cynapsus seeks to raise additional cash to push forward into CTH-201 and CTH-301 in 2014. We suspect that if CTH-103 is successful, the next financing will be at meaningfully higher levels than the $0.30 price today.
We believe the shares are fair-valued at $1.25 per share. In the report linked above we've outlined our DCF valuation for investors to view. Key assumptions includes peak U.S. sales at $200 million, Ex-U.S. sales at $300 million, a partnership with a larger pharmaceutical player, upfront, approval, and sales milestone payments, double-digit royalties on sales, and a 22.5% discount rate. A revenue build-up model can be found earlier in the report. We would expect that our discount rate, which includes a significant risk portion prior to the CTH-103 results, would come down after the CTH-103 results, potentially allowing for upside to our target above $1.25 per share. We also note the potential for an outright acquisition of Cynapsus by a larger pharma player. The Pfizer / Nextwave deal for $700 million, for example, pegs the Cynapsus valuation at nearly 40x the current valuation.
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Two economists were walking down the street when one spots a $20 bill lying on the sidewalk. The first economist says, "Look at that $20 bill!" The second says, "That can't be a $20 bill because if it were, someone would have surely picked it up already." So they walk on, leaving the $20 bill undisturbed.