Futura Medical plc (FUM.L)

Transcription

1 11 September 2014 Pharma & Biotech 80 FUM FUTURA MED. ORD 0.2P 75 Futura Medical plc (FUM.L) Initiation Resourced to break-even Q Q Q Q Source: Fidessa Source: Fidessa Market data Price (p) m High (p) Low (p) 49.0 Shares (m) 99.0 Mkt Cap ( m) 55.4 EV ( m) 44.2 EPIC FUM Free Float* (%) 98% Market AIM *As defined by AIM Rule 26 Description Futura is engaged in the development of drugs and medical devices and their commercial exploitation; products includes condoms, erectile dysfunction, enhanced sexual control, pain relief and delivery technology. Company information Surrey Technology Centre 40 Occam Road Guildford Surrey GU2 7YG Next event Investor conference 30 Sept 2014 CSD500 launch Sept/Oct 2014 Pain relief trial update 4Q 2014 MED2002 trial update 4Q 2014 Finals Apr-15 Futura Medical has developed proprietary topical technology which can be incorporated into formulations of well characterised drugs to improve their performance and extend their uses. Its product focus is sexual healthcare and treatment of pain. Following a recent capital increase, the group has a strong balance sheet with which to conclude the development process and commercialise its products. Strategy: FUM is a virtual company in which management has adopted a low-risk strategy whereby its drugs are well characterised after years of use in alternative formulations/uses. By reformulating in FUM s novel transdermal technology it can greatly improve performance and potentially expand the number of indications of the drug. Portfolio: FUM has six products in its development portfolio. PET500 for improving sexual performance is on the market in the US; CSD500 is a condom containing an erectogenic gel and will be launched in 2014; MED2002 requires a pivotal study for proof-of-concept for erectile dysfunction. The pain portfolio is at the late development stage. Commercialisation: Management strategy is to work with the strongest players in each territory rather than seeking global deals. To date it has signed seven licensing deals and more are expected in the near future as products near regulatory approvals. Valuation: To date, about 25m has been invested in the business to get it where it is today, compared to an enterprise value of 39m. FUM is forecast to reach break-even and become cashflow positive in On a discounted cashflow model, we believe that the shares are worth 117p per share an uplift in excess of 100%. Risks: The core strategy of the group has minimised risk. The greatest risk is the time taken to conclude commercial deals and, once on the market, that the market penetration is far less than anticipated, which would delay the time to reach cashflow breakeven and profitability. Investment summary: The next 18 months will see the first three products reach commercialisation which we believe will be a significant inflection point regarding valuation. The recent capital increase will allow management to bring forward and develop the pain portfolio to a later stage realising greater shareholder value. Analysts Mark Brewer mb@hardmanandco.com Martin Hall mh@hardmanandco.com Investor engagement Max Davey md@hardmanandco.com Felicity Reid fr@hardmanandco.com x Financial summary and valuation Year end Dec ( 000) FY11 FY12 FY13 FY14E FY15E FY16E Sales Royalties ,750 Underlying EBIT -1,996-2,327-2,390-3,108-3,461-3,379 Reported EBIT -2,099-2,456-2,532-3,263-3,636-3,574 Underlying PTP -1,972-2,308-2,381-3,058-3,255-3,243 Statutory PTP -2,075-2,437-2,522-3,213-3,430-3,438 Underlying EPS (p) Statutory EPS (p) Net (debt)/cash 2,583 2, ,687 6,799 4,069 Shares issued 3,569 2, , P/E (x) EV/sales (x) , Source: Hardman & Co Life Sciences Research 1

2 Table of Contents Executive Summary...4 Product portfolio...7 Overview... 7 Sexual healthcare... 7 PET500 Epic/Uphoria... 7 CSD500 Zanifil... 9 MED Pain relief SPR300 methyl salicylate/menthol TIB200 ibuprofen TPR100 diclofenac Intellectual property DermaSys Delivery technology Key patents Financials & Investment case Financial history Share capital Financial discussion SG&A R&D investment Balance sheet & Cashflow Financial statements Valuation Company Matters Board of Directors Risks Background Regulatory Manufacturing and suppliers Commercialisation Glossary Disclaimer Futura Medical plc 2

3 R&D investment 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, E 2015E 2016E 2017E 2018E FUM has invested approximately 25m in R&D since inception Most R&D is centred on new formulations of existing, well characterised drugs R&D spend is forecast to rise in future as FUM invests in its pain relief portfolio Currently there are 5 employees undertaking R&D, rising to 6 in near future Source: Company data; Hardman & Co Life Sciences Research Net cash at 31 st December 12,000 10,000 8,000 6,000 4,000 2, E 2015E 2016E 2017E 2018E FUM is a cash burn company The burn rate broadly equates to the R&D investment each year Following the capital increase in March 2014, FUM has a substantial runway The cash position reaches its low point in 2017 and will be dependent on how successful its commercial partners have been Source: Company data; Hardman & Co Life Sciences Research Royalty income 6,000 5,000 4,000 3,000 2,000 1, E 2015E 2016E 2017E 2018E FUM currently has 7 commercial deals Most deals are structured to receive an average midteen royalty on wholesaler prices Each 1% market share of the condom market equates to $5m per annum royalty income Royalties increase significantly when the pain relief portfolio reaches commercialisation Source: Company data; Hardman & Co Life Sciences Research Free cashflow FCF/share (p) E 2015E 2016E 2017E 2018E 2,000 1,500 1, ,000-1,500-2,000-2,500-3,000-3,500 FCF ( m) Free cashflow remains negative until the royalty stream picks up Company s cash position is carefully managed FCF increases over next three years with increased R&D investment, particularly on the pain relief portfolio In 2018, royalties are forecast to drive FCF into postive territory Source: Company data; Hardman & Co Life Sciences Research Futura Medical plc 3

4 Executive Summary History Futura Medical Development Limited (FMD) was founded in 1997 for the development of innovative pharmaceutical products focused on sexual well-being in healthy people and the treatment of sexual dysfunction in men. In 2001, FMD was acquired by Futura Medical plc (FUM) in a share swap, developed further with two funding rounds prior to flotation on Aim in July The company has had a number of funding rounds to advance its product portfolio which today comprises six core products for sexual healthcare and pain relief, mostly using its advanced proprietary transdermal technology, Dermasys. Strategy Given the high cost of pharmaceutical product development, management has adopted a low-risk strategy of developing new uses for established pharmaceutical products coupled with administration via FUM s transdermal delivery system in order to improve performance. All manufacturing is out-sourced. Commercialisation is achieved via licensees with established marketing expertise in consumer healthcare. Low-risk strategy Approach Advanced transdermal technology Controlled development risk Strong intellectual property Commercialisation Comment Offers innovative delivery of proven compounds through the skin to improve their performance and/or address new indications Using only approved compounds to control the risk profile Developing products where the group can secure strong patent protection Out-licensing products to leading healthcare companies which offer the optimum potential financial returns All activities are controlled from the Group s HQ based on The Surrey Research Park in Guildford and have been achieved through a combination of capital increases, research & development tax credits and government grants. To date 40.0m has been invested 36.0m through share issues and 3.5m from grants and non-dilutive funding. Products Over the last 10 years, Futura has developed a portfolio of topically applied drugs and medical devices using established chemical entities. Wherever possible, FUM also tries to incorporate the active moiety into its proprietary transdermal technology. Initially, the portfolio comprised products to improve sexual health, but more recently, the company has added products for pain relief. Futura Medical product portfolio Product Active compound Comment/competition Sexual Healthcare PET500 lidocaine Topical spray for premature ejaculation CSD500 glyceryl trinitrate Erectogenic condom MED2002 glyceryl trinitrate Local gel for erectile dysfunction Pain relief SPR300 methyl salicylate/menthol Deep Heat, Icy Hot, Bengay TIB200 ibuprofen Nurofen TPR100 diclofenac Voltaren gel ; Hardman & Co Life Sciences Research Futura Medical plc 4

5 Delivery technology DermaSys Over the last 10 years, whilst studying different formulations to improve the absorption of its treatment for erectile dysfunction, FUM developed novel transdermal technology DermaSys which has been patented. Wherever possible, FUM tries to utilise DermaSys in its products to afford it more protection and provide a competitive edge. DermaSys is a versatile system that allows better targeting of the drug and enables optimization of dose and onset and duration of action. There is increasing recognition within the pharmaceutical industry of the flexibility and advantages that DermaSys offers. Through this, FUM is looking to expand its product portfolio. Commercial partnerships Once products have achieved or are nearing regulatory approval, management seeks marketing partners to commercialise them. Often the approach by healthcare companies is to have a global partner for each its products. However, the approach of FUM is different. Management believes that the strongest players in each territory for its products are quite different and, therefore, prefers to seek a strong partner for each territory, thereby maximising potential returns. To date, FUM has established a number of partnerships and this is expected to expand over the next two years as products approach their commercial phase. Declared commercial partners Partner Product Territory Experience CSD500 North America Certain European territories Trojan #1 Condom brand in North America Church & Dwight Co Ltd Ansell Limited PET500 CSD500 Worldwide China World leader for health & safety protection in human well-being CSD500 Sweden, Norway, Finland, Denmark Condom market leader in Scandinavia Not-for-profit organisation RFSU AB Saudi Pharmacy Group CSD Countries in Middle East & North Africa Strong distributor in Middle East & Africa Condom Distributor CSD500 Certain EU territories (not Undisclosed; Experienced covered by Chrurch & Dwight) Kwang Dong CSD500 Korea Experienced pharmaceutical player in Korea Futura Medical plc 5

6 SWOT analysis SWOT analysis Low risk strategy IP of transdermal technology Strong balance sheet Experienced management Relatively small Dependence on commercial partners and licensing deals Regulatory uncertainty in some territories with certain products Dependent on success of commercial partners Some regulatory issues remain Competitive markets Stigma associated with indications Big condom players looking to move up value added chain Products mostly targeting OTC markets Opening being created in market by Voltaren gel Source: Hardman & Co Life Sciences Research Sensitivity/risks Forecasts are sensitive in the short term to the performance of FUM s commercial partners. FUM has limited this risk by its strategy of partnering with multiple organisations strong in local markets for each product, rather than undertaking global licensing deals. Management has tried to mitigate this risk by having minimum annual off-take in its licensing deals. Valuation In our opinion, DCF is the most appropriate method of valuing a development stage company. Based on our key assumptions, a forecast period of 5 years and a terminal growth rate of 2%, we derive a net present value for the enterprise of 114.7m or a fully diluted per share value of 117p. This suggests that there is potential upside in excess of 100%. Investment Conclusion Futura is at a very interesting stage of its development. The last 10 years as a quoted company has seen some ups and downs, largely the result of setbacks with partner organisations. However, we believe that management has learnt considerably from these negative experiences, resulting in a modified strategy to have several commercial partners with local strength. Couple this with a relatively strong balance sheet following the recent capital increase and the fact that it is on the cusp of significant royalties through commercial partners, suggests that FUM shares are about to break out of their tight trading range. Expected newsflow Initial launch of CSD500 Improved sales visibility on PET500 & CSD500 Further CSD500 out-licensing deals Extended roll-out of CSD500 by licensing partners Update on MED2002 clinical trial programme Launch of MED2002 in EU initially as a special Update on pain relief trial programme Pain relief clinical trial results (around end 1H) MED2002 phase II trial results (end 2H) Commercialisation of pain relief portfolio ; Hardman & Co Life Sciences Research Futura Medical plc 6

7 Product portfolio Overview Futura currently has a portfolio of six products at various stages of development ranging from mid-stage development through to regulatory approved and being commercialised. Three products are focused on sexual well-being and three are for pain relief. Management has adopted a low-risk strategy to develop improved formulations and delivery systems of well characterised active ingredients which are not protected by patents for new indications. Futura Medical product portfolio Product Active compound Comment Sexual Healthcare PET500 lidocaine Topical spray for premature ejaculation CSD500 glyceryl trinitrate Erectogenic condom MED2002 glyceryl trinitrate Local gel for erectile dysfunction Pain relief SPR300 Methyl salicylate/menthol Deep Heat, Icy Hot, Bengay TIB200 ibuprofen Nurofen TPR100 diclofenac Voltarol gel ; Hardman & Co Life Sciences Research Sexual healthcare The three product for treating the symptoms of sexual dysfunction and are the most advanced in FUM s portfolio. A summary is provided in the table below: Sexual healthcare portfolio PET500 Epic/Uphoria PET500 is a topical spray containing the local anaesthetic lidocaine in a DermaSys AquaFree formulation and is used to prevent premature ejaculation. Loss of sexual control in the form of premature ejaculation (PE) is thought to be the most common form of sexual dysfunction in men and is estimated to affect around 20% of the male population. It is a problem which affects men of all ages and is often associated with anxiety and stress. PET500 is being positioned as a product that will enhance sexual control rather than a product to prevent early ejaculation. Understanding the causes of PE is quite tricky as there appear to be many different possible causes and no two men are alike. The causes of PE can be both mental and physical which makes them difficult to define when acknowledging that there is a problem Futura Medical plc 7

8 and seeking/taking advice from your doctor. PE is considered to be the most embarrassing and frustrating problem faced by males. Stigma associated with PE Extends duration of sexual intercourse PET500 is presented as a small canister containing a minimum of 50 sprays. It is sprayed directly onto the penis (usually 3-10 sprays), where it is rapidly absorbed. This minimises the likelihood of the product being passed on to the partner. The local anaesthetic has an effect lasting up to eight minutes. PET500 is being targeted at a spectrum of the male population from those that suffer occasionally with premature ejaculation through to severe cases of clinically diagnosed PE. United States: PET500 is approved in the US as an over-the counter product (OTC) and is available without the need for further clinical trials. China: Being approved in the US is an advantage for getting approval from the Chinese regulator as it accepts US studies and provides reassurance. FUM is expected to file for approval in late 2014/early Europe: Regulatory approval will require a further clinical study which would cost around 0.5m. We believe that this is being driven, in part, by an inconsistent regulatory stance about whether premature ejaculation is or is not a medical condition and, therefore, a prescription product requiring a GP appointment. In contrast, FUM is of the opinion that it is an OTC product. Therefore the product is on hold until the commercial outcome in the US is better understood. Commercialisation: FUM has a worldwide marketing deal with Ansell. PET500 has been launched in the US under the Lifestyles EPIC brand, where it has been available since April 2014 through Walmart 800 A stores out of a total of 4,000. Progress has been slow as Walmart is sensitive to advertising and EPIC is achieving 1.2 SKUs per store per week compared to a target of 1.5. At this stage it is too early to ascertain if there has been repeat purchasing, but this will be closely monitored. Ansell branding in the US Lifestyles EPIC Lifestyles uphoria Ansell s second largest market is China. Availability in the US will help the regulatory process in China and Ansell expects to do well in this market once the product is approved Futura Medical plc 8

9 PET500 marketing features Fast absorption and onset of action DermaSys AquaFree system Effectiveness User friendly Multiple applications from 50 dose canister Competition: There are a host of products available in the market, mostly as OTC products. The majority of them use a local anaesthetic as the active ingredient. Differences in performance are largely the result of formulation and method of application. The closest product to PET500 appears to be Promescent. Most of the products are marketed to the public as enhancing sexual control rather than treating premature ejaculation. Competitive products Product Marketer Comment Blistex (Blisteze) OTC India only Caverject Pfizer Injection into penis Climaxagen OTC Different formulations cream/tablets Emla OTC Off-label use; local anaesthetic (lidocaine) cream; onset min Enlast OTC Local anaesthetic (benzocaine) cream ManDelay OTC Local anaesthetic (benzocaine) cream Priligy Menarini/JNJ Rx-only; Approved in some EU; not approved US Promescent OTC Fast-acting lidocaine spray Temp (PSD502) Plethora Approved EU; Rx-only Treatment of PE ; lidocaine/prilocaine spray Stud OTC Slow acting, short duration, partner transfer; lidocaine spray Source: Hardman & Co Life Sciences Research Financials: Terms of the global licensing deal with Ansell have not been disclosed. However, in the presentation for the recent capital raise, FUM management stated that potential global royalties once fully launched in the range of 8-10m for a 5% PE global market share. CSD500 Zanifil CSD500 is a latex condom which incorporates a viscous gel formulation of glyceryl trinitrate (GTN) brand named Zanifil which is aimed at improving the sex lives of healthy men and women. Studies have reported that healthy men can experience a loss of sensitivity when using a condom which, in turn, can contribute to a loss of rigidity. In extreme cases the condom could fall off which raises compliance issues as men prefer not to wear a condom in these circumstances. In less severe cases, it leads to condom slippage during intercourse which could lead to the risk of both unwanted pregnancies and possible transfer of sexually transmitted diseases (STD). CSD500 has been approved by European regulators as a condom to help healthy men maintain a firmer erection during intercourse while wearing a condom. When a condom is placed on to an erect penis, the teat releases a pharmacological dose of CSD500 directly onto the glans which diffuses into the localised bloodstream where it increases local blood flow which, in turn, helps to improve rigidity, tumescence and duration of the erection. In a double blind clinical study involving 108 couples comparing a standard latex condom against one containing CSD500, of those who expressed a preference, a significant proportion of both men and women reported improvements in the firmness of the man's erection during intercourse with CSD500. Furthermore, where an opinion was expressed, a significant proportion of both men and women felt that CSD500 increased the penis size and a significant proportion of women reported a longer lasting sexual experience with CSD500. The safety and tolerability profile with CSD500 was very positive. Futura Medical plc 9

10 In July 2005, CSD500 was the subject of a worldwide commercialisation agreement with SSL International, which was then the global #1 condom manufacturer under the Durex brand. However, when SSL was acquired by Reckitt Benckiser in November 2010, despite taking CSD500 through the Class III medical device regulatory pathway, which resulted in CE Mark in August 2011, the new product management team wished to renegotiate the commercial terms with FUM. Unable to reach agreement, the commercial rights to CSD500 were returned to FUM in August As part of the process of becoming the product license holder a revised dossier was submitted to the EU regulators and a new CE Mark (CE ) was awarded in October 2013, which allows CD500 to be launched in 29 European territories plus some additional non-eu territories. Management is now focused on driving forward a clear commercial strategy. The gel formulation is manufactured (outsourced) in the UK. The company has received ISO13485 certification and progress has been made with establishing a two-pronged outsourced supply chain, one for Europe (approved) and the other for Asia (approval expected in 2015). Whilst in the process of establishing these supply chains, FUM has improved the technical specifications, which are expected to extend the shelf-life of the product and reduce the cost of goods. Since re-acquiring the rights to CD500, FUM has been able to reduce COGS by 60% and further improvements are anticipated. A new patent for this process is being sought which, if granted, would extend the patent life of CSD500 from 2023 to On the commercial front, management has adopted internationally a policy of multiple regional deals with partners that have established consumer health expertise, rather than one global deal. This has two advantages: 1. Always working with local market leaders where brand is important 2. Faster decision making process Moreover, it mitigates economic risk through diversification. Commercial partners Company Church & Dwight Ansell RFSU Saudi Centre for Pharmaceuticals Unnamed distributor Kwang Dong Pharmaceutical Co. Territory North America; Defined Northern Europe China (option; assessing other territories) Defined Scandinavian countries Middle East; Defined North African countries Certain EU territories not covered by Church & Dwight under the brand name Blue Diamond Korea under the brand name blue diamond FUM is seeking commercial deals for all territories, but is focusing in the short term on South America, Russia, Asia/India (excluding China) and Australia/New Zealand. Where a local brand is not established, the product will be marketed using the brand blue diamond. Commercial deals with licensing partners for CSD500, and indeed for all of FUM s marketing activities, all have the same structure. Typical commercial license Structure Up-front payment Marketing commitment Royalties COGS savings Comment Typically 000 s Minimum marketing spend Based on wholesaler sales, typically 10-25%, with an average of 15% Minimum annual royalties Higher savings = higher royalty stream Futura Medical plc 10

11 Management is also aiming to increase brand awareness. Where the commercial partner has an established brand name for its condom, the brand name of the gel Zanifil will be included on all the packaging alongside the partners established condom brand name. In cases where the commercial partner does not have an established brand, CSD500 will be launched using the brand name, Blue Diamond. Typical Blue Diamond packaging Once in-market sales are made, the returns to FUM will be primarily in the form of royalties. United States: The decisive question regarding the US is whether FUM needs to undertake a clinical study in order to get approval from the FDA. The issue is whether CSD500 is considered to be a pharmaceutical, because of the GTN gel, a medical device, or a combination product. Discussions are on-going with the FDA. Over the years, FUM has accumulated a very large amount of clinical data to support its application, but these have not been undertaken in the US and the drug department at the FDA might require a USbased clinical study. In our opinion, FUM is likely to submit its dossier during 2015 and will take a wait-and-see attitude. Should a US clinical study be required, FUM would still be well down the road with the FDA, but US launch would take about an extra 18 months, until China: A similar situation is also in place in China where discussions are also underway. The regulators in China would be more reassured if the product was approved by the FDA. The Chinese regulators (SFDA) are also concerned about HIV and the spread of sexually transmitted diseases. Should a clinical study be required for Chinese regulatory approval, this would need to be funded in full by FUM, but its commercial deal with Ansell allows for recovery of some of the costs following approval. We expect FUM to file CSD500 with the SFDA by the end of Futura Medical plc 11

12 As part of its commercial strategy, FUM commissioned a report by the international consumer agency, Millward Brown based on 800 interviews equally split between the US and the UK. Its findings confirmed the view that CSD500 was highly innovative and likely to change fundamentally the condom market. The results were particularly appealing to potential commercial partners seeking growth from their condom offering and moving up the value chain. Key Millward Brown market research findings CSD500 will command a premium price over existing condoms CSD500 is expected to a market share in excess of 10% in the markets researched CSD500 is expected to grow the condom category because of its appealing proposition and unique claims Market potential: The global branded condom market was valued at over $3.5bn in 2011 and growing at 6-7% per annum (source: A global strategic business report, 2012). Global condom market by value US$m 5,000 4,000 3,000 2,000 1, E 2013E 2014E 2015E 2016E 2017E 2018E US Canada Japan Europe Asa-Pacific Latin America Rest of World Source: A global strategic business report, 2012 Global condom market by volume 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5, E 2013E 2014E 2015E 2016E 2017E 2018E US Canada Japan Europe Asa-Pacific Latin America Rest of World Source: A global strategic business report, 2012 It is characterised by strong local brands often with dominant market shares. Market research suggests that CSD500 is likely to do well in established markets which are less sensitive to price and where the clinical claims can have an impact. Markets in Asia are considerably different and condoms frequently cost less than 10% of the price in territories where brand is important. To counter this, FUM will need to, and is in the process of, establishing lower cost manufacturing in these territories to reduce COGS. Futura Medical plc 12

13 However, a core strategy of FUM will be to price CSD500 at a 50% premium in each market to the average local price of branded condoms. Condom market Geographical price variance US$ E 2013E 2014E 2015E 2016E 2017E 2018E US Canada Japan Europe Asa-Pacific Latin America Rest of World Source: A global strategic business report, 2012 To guide readers of the potential value to FUM, each 1% share of the global market gained would equate to a royalty stream as follows, assuming that the global retail market will be worth $4.5bn in 2015 (forecast to rise to $5.4bn in 2018): Retail market in 2015 estimated to be: Equates to wholesale market (50% of retail price) of: 50% price premium for CSD500: 1% market share equates to: Average 15% royalty on each 1% market share equals: $4.5bn $2.3bn $3.4bn $33.7m $5.1m MED2002 Public awareness of erectile dysfunction, which is the inability to achieve and maintain an erection for satisfactory sexual intercourse, rose significantly during the 1990s with media coverage of the launch of Viagra (Pfizer). Until then, it was a condition that was rarely spoken about. Even today, there is a reluctance for males to seek help from their doctor. This was re-iterated in the Massachussetts Male Ageing Study ("MMAS"), which estimated that up to 52% of men aged 40 or over have some degree of erectile dysfunction. Working from conservative projections the British Journal of Urology expects the number of men with erectile dysfunction to more than double from 152 million in 1995 to 322 million by 2025, although much of this growth will have been seen already due to the increased public awareness following the launch of Viagra. The reluctance of those with difficulty is backed up by market research which indicates that only 1 in 5 men with erectile dysfunction consult a doctor. This represents a significant market with unmet needs and provides the opportunity for FUM. Opportunities in the erectile dysfunction market Existing therapies all require a prescription Market research indicates only 20% of sufferers go to their doctor An estimated 5-10% of sufferers take other medicines which are contraindicated for ED drugs ; Hardman & Co Life Sciences Research Futura Medical plc 13

14 MED2002 is a topical gel of glyceryl trinitrate (GTN) in FUM s proprietary DermaSys technology. It is applied with a specially designed single-use applicator directly to the glans of the penis, rapidly absorbed to increase blood flow giving a fast onset of action. It is very safe to use because local application eliminates many of the side effects associated with systemic prescription drugs, such as headache and flushing. Because MED2002 is based on GTN, a well-known drug used for over 40 years to treat angina, it can safely be used in those patients where the likes of Viagra are contra-indicated. Global rights to MED2002 were originally out-licensed to SSL International, whose acquisition by Reckitt Benckiser brought the development programme to a standstill. In August 2012 Futura took back all the rights. Given FUM s limited resources at that time, management s first step was to commission a market research report to obtain a better understanding of the potential. The report not only supported the opportunity but also indicated its potential as both an Rx and an OTC product. The recent capital increase in March 2014 means that FUM now has the resources to fully develop this opportunity. Management intends to start an adaptive phase II/III clinical trial before the end of Initially it will start as a phase II trial and only move into a full phase III trial on a successful outcome. The issue for MED2002 is to prove that males with erectile dysfunction can obtain an erection with MED2002 as opposed to simply maintaining an erection. The total cost of this trial will be in the order of 3m, but 2-2.5m of this (phase III) will only be spent if the phase II component is positive. MD2002 clinical trial features 300 treatment naive or dissatisfied patients Dissatisfied or contra-indicated with existing Rx drugs Mild-to-moderate ED Dose escalating 3-4 doses Study initially in EU Optimised formulation patented to 2025/2028 Despite the fact that Viagra does not treat a chronic condition requiring daily medication, it achieved sales in excess of $1bn within a year of launch. Competition from similar drugs, Cialis (Lilly) and Levitra (Bayer), has created a global branded market worth $4.43bn in In addition to this, there is an unquantifiable generic/black/internet market for these drugs. Growth in the branded market is now only 1% as patents begin to expire for example, the Viagra European patent expired in 2013, although there is still patent protection in the US (expires 2019) which accounted for 51% of global sales in Global Rx market for erectile dysfunction Drug Generic Company Viagra sildenafil Pfizer Cialis tadalafil Lilly Levitra vardenafil Bayer Global market Growth rate 2% 6% 3% 1% 1% US/Global 46% 45% 45% 48% 51% Source: Hardman & Co Life Sciences Research Commercial opportunity: Management is in discussion with a number of players both major pharma and regionals but is in no hurry to conclude a deal. The optimised formulation of MED2002 in the DermaSys delivery system is patent protected until 2025/2028. Given the data above, the US represents the big opportunity. FUM believes that it might be better to take the product further to the development process, reducing the risk, to conclude the best deal for shareholders. Futura Medical plc 14

15 MD2002 marketing features Fast onset of action Known mode of action Safety of GTN coupled to low dose Rapid absorption low risk of transfer to partner Competitive price Early launch as a Special? In Europe, FUM has the opportunity to launch MED2002 as a Special. The following is from the Association of Pharmaceutical Specials Manufacturers: A Special is an unlicensed medicine prescribed to meet the individual clinical need of a patient when a suitable licensed medicine is not available. There are many different reasons why a licensed medicine might not be available. Often the formulation that would best meet the patient s needs has not been commercially manufactured by any drug company in a licensed version. Sometimes the licensed product that may suit the patient s needs has been discontinued temporarily. In these circumstances a Special will be prescribed. These Special prescriptions are dealt with in exactly the same way as any other prescription, except that the pharmacist dispensing the drug will have to take steps to fulfil the prescription in a different way. This can be either by formulating it themselves or, as most often happens, by contacting a pharmaceutical Specials manufacturer to make up the prescription. Source: apsm-uk.coml In the event that an unmet medical need has a disabling effect on the patient, a doctor can prescribe a special prescription product. The risk to the doctor is that he/she is responsible if anything goes wrong. In this case, an untoward event is unlikely because of the vast amount of data available on GTN. Classification of a Special allows clinical data on one formulation (eg tablets/buccal spray) to be applied to another formulation (eg cream/ointment). FUM is considering a deal with a specials pharmaceutical company that would allow availability throughout Europe in 2015, which would become void as soon as MED2002 received full regulatory approval. Potential competition: The main competition for MED2002 comes from different formulations of alprostadil (Caverject) and a topical formulation of Viagra which is in early stages of development. Strategic Science and Technologies completed a Phase 1 clinical trial of topical sildenafil (SST-6006) in May Apricus Biosciences topical cream formulation of alprostadil is approved in Canada and Europe although many NHS trusts have not approved its use/reimbursement, given its lack of clear efficacy. Pain relief Having developed the novel DermaSys technology to enhance the characteristics for its sexual healthcare products, FUM looked at applying it to other therapeutic areas. From this, it has developed a range of topical products for the very large pain relief market. Its three leading products are summarised in the following table. Pain is the most common reason that patients seek help from their GP. It is also known to be the most frequent cause of days absent from work. Essentially there are two main forms of treatment for pain. The first is non-steroidal anti-inflammatory drugs (NSAID), such as aspirin, for mild-to-moderate pain. The second is opiates, such as morphine, for severe pain. Both have their problems. Continual use of NSAIDs reduces effectiveness and causes gastric irritation in many patients. Use of opiates produces tolerance and addiction. Futura Medical plc 15

16 Pain relief portfolio The global pain market was estimated to be worth 15.7bn in 2011 (source: Nicholas Hall 2012). Precise data on the market is difficult to obtain, largely because most of the drugs are very old and off-patent and generic manufacturers rarely provide sales data for their products. FUM will be targeting one segment of the market topical pain relief. In 2011, OrthoCor Medical estimated that this market was worth $850m in the US alone, so the opportunity for FUM is substantial. Target features of topical pain relief products 1. Faster pain relief 2. Push product claims but risks 3. Longer duration of action 4. High maximum strength 5. Brand 6. GP recommendation 7. Friend recommended ; Hardman & Co Life Sciences Research FUM is at a critical juncture with its topical pain relief products with two important questions to be answered: What needs to be done to get products onto the market as soon as possible? What claims can be made? In tests, FUM has found that the DermaSys formulation can increase the permeability of some drugs through the skin by 20-fold. By advertising this fact, the consumer makes the assumption that increased penetration of drug equates to better efficacy. FUM can take two approaches. On the one hand it could be cautious and simply claim that its products are non-inferior to existing brands and allow the consumer to equate higher drug absorption with greater efficacy. On the other hand, FUM could undertake trials to prove that it has better efficacy and, assuming such outcomes, allow it to take a more aggressive stance regarding its claims. However, the size, time and cost of such a study needs to be carefully considered. In our opinion, the key is to get the product onto the market as soon as possible with modest claims and, once generating income, to consider a trial to expand the claims to include superiority. FUM would like to do the least clinical work possible to get the products on the market. However, the issue facing the group is that there is no validated model of bioequivalence for topical pain relief. There is a model for nociceptive pain instilling pain via UV light which creates mild pain/burn which can then be treated. While this would be a relatively quick and cheap approach, as it is not dependent on finding patients and can be conducted in a Phase I clinic, it is not a model that has been validated and would require regulatory approval. Furthermore, it might limit the claims that FUM can be made regarding its products. On the other hand, management might decide on a head-to-head trial against existing marketed products with the outcome that the FUM product is not inferior to Futura Medical plc 16

17 the branded product, which would reduce its marketing edge compared to being able to claim that the product is superior or clinically better. Depending on which approach is taken, study/trial costs are estimated to be in the range of 300k to 2m and could take up to two years from initiation to product launch. Given the opportunity, coupled with its funding position, management is under no haste to seek commercial partners, as terms are likely to be better the further that the products are developed. SPR300 methyl salicylate/menthol SPR300 is a more advanced version of the well-known brand Deep Heat rub. It is a topical gel containing methyl salicylate and menthol in the DermaSys delivery system, which significantly improves the bioavailability of the active constituents. In tests SPR300 has been shown to have up to 4x higher skin permeation for a prolonged period of time (>24 hrs) compared to three currently available competitor products Deep Heat (Mentholatum), Icy Hot (Chattem/Sanofi), Bengay (JNJ). Superior delivery of SPR300 Cumulative amount of methyl salicylate permeated across human epidermal membrane (mean n 10 ± SEM) TIB200 ibuprofen FUM has also applied the DermaSys technology to the well characterised non-steroidal anti-inflammatory (NSAID), ibuprofen, to create a formulation that delivers up to 20x higher skin permeation sustainable over at least a six hour period. This product would compete with many competitive products, the best known being Nurofen (Reckitt Benckiser) and Ibugel (Fleet/Dermal). Superior delivery of TIB200 Cumulative amount of ibuprofen permeated across human epidermal membrane (mean, n=7 ± SEM) Futura Medical plc 17

18 TPR100 diclofenac Of the three pain relief product in the FUM portfolio, TPR100 has the greatest potential, in our opinion. Diclofenac is the active NSAID ingredient in Voltarol, the brand owned by Novartis, which was originally launched into the market 25 years ago. It is the second largest and fastest growing OTC analgesic brand globally (Novartis Annual Report 2013) used and trusted by millions to relieve joint pain and inflammation. In response to consumer demand, Novartis invested in a new formulation so that the active gel strength could be increased from 1% to 2%. This, coupled with heavy advertising, made Voltarol a top seller in Although the precise sales are unknown, Voltarol gel sales were in excess of $300m in 2013 (Novartis presentation, April 2014). Given that the growth is all being driven by the stronger formulation, the opportunity for Futura with an even better and longer acting formulation is clear. Superior delivery of TPR100 TRP100-Rx 2.5% TRP % Voltarol 1.0% Futura Medical plc 18

19 Intellectual property The strategy of FUM is to develop active ingredients that have been well characterised and no longer have patent protection. Therefore, in order to protect its commercial position, FUM applies for patent rights in appropriate international territories. Initially, these were in the form of monopoly protection, but development and patenting of its topical DermaSys technology has significantly advanced its patent protection. Futura retains Withers & Rogers, a UK-based firm of European & Chartered Patent and Trade Mark attorneys, to handle the filing, administration and prosecution of its patent portfolio. DermaSys Delivery technology In the process of investigating a suitable formulation and delivery system for its first product, MED2001 for the topical treatment of erectile dysfunction, FUM scientists developed a technology that provided a highly efficient process whereby active molecules could be absorbed through the skin. This proprietary technology has been called DermaSys. DermaSys is a bespoke technology that can be tailored to suit the specific active compound being used and the therapeutic indication. Such targeted delivery offers an optimised profile in terms of dose, onset time and duration of effect as well as an improved safety profile through lower systemic uptake and the reduced risk of side effects. Its versatility means that it can be applied to a range of drugs. In some instances, FUM has found that the DermaSys technology can increase skin permeation of the active drug by 20-fold. Wherever possible, FUM combines this technology with the active ingredients that it is developing to afford the product greater patent protection. DermaSys delivery technology In the process of developing a formulation/delivery system for PET500, FUM altered the DermaSys technology platform to produce a delivery system that does not contain water. This is advantageous for drugs that are water sensitive unstable or limited stability hydrolytically providing a system that overcomes the difficulty of getting many drugs into the body topically. FUM has trademarked this technology as DermaSys AquaFree. Futura Medical plc 19

20 Success in the development of DermaSys and DermaSys AquaFree should not be underestimated and provides shareholders with a valuable asset. This is borne out by the following quotation from Novartis 2013 annual report: Developing the new formulation involved 120 Novartis associates working to overcome some demanding technical hurdles. For example, the development team sought to extend the effectiveness of Voltaren gel by increasing the concentration of diclofenac its active ingredient from 1% to 2%. However, they found that the solubility of diclofenac could lead to the creation of drug crystals in higher concentrations, which would affect the rate of absorption through the skin. It was a deep and complicated technical challenge, said Dr. Gabi Hecker-Barth, Chief Medical Officer at Novartis OTC. The thoroughness of the development program necessary to overcome that challenge underscores the science and innovation at the heart of the new formulation. After many different prototype formulations and analytical tests, the development team s ultimate solution involved adding an ingredient that increased diclofenac s ability to penetrate the skin and enabled the new 2% formula to be highly effective at the appropriate concentration. A three-year stability testing program verified the new product s shelf life and an almost four-year clinical phase confirmed the formula s safety, efficacy and tolerance on users skin. Having developed the technology, FUM is now keen to acquire more drugs to which it could be applied and to license the technology out to other companies struggling with topical delivery of their branded drugs. DermaSys delivery platform SKIN DERMIS Technologies w ithin DermaSys drive the active through the skin PARTITIONING The active starts working Targeted delivery TARGET Patents FUM has extensive patent coverage on all its products in key territories. Futura Medical plc 20

21 Financials & Investment case Financial history Futura Medical Developments Ltd was founded in 1997 with 3m of share capital, which funded the early development of the group. In 2001, FMD was acquired by Futura Medical in a share swap, which floated on the London junior market in FUM has undertaken 10 capital increases, culminating in the largest of 12m in March To date, FUM has raised 36.32m from shareholders and a further 3.46m of non-equity funding (grants/r&d tax credits), giving a total of 38.5m of capital net of expenses. Capital increases Date Shares Price Raised Shares o/s Valuation Comment (m) (p) ( m) (m) ( m) Jun Founded Futura Medical Developments Ltd Jun FUM acquires Futura Medical Developments Ltd for shares Jan Private placing at 33p per share Oct Private placing at 50p per share Jul Listing on AiM at 70 per share Nov Placing at 64.89p per share Mar Placing at 82p per share Jul Placing at 78p per share Nov Placing at 48.56p per share Nov Placing at 30p per share Mar Placing at 67.5p per share Sep Placing at 57p per share Mar Placing at 57p per share Total Annual Reports; Hardman & Co Life Sciences Research Share price performance FUM FUTURA MED. ORD 0.2P Source: Fidessa Source: Fidessa Futura Medical plc 21

22 Share capital There are currently 98.98m shares in issue and options over 3.62m shares, giving a fully diluted share capital of m shares. If the options were all to be exercised, it would raise a further 2.0m capital for the group. Management and directors own outright 27% of the shares and the six largest institutional shareholders a further 31% Share capital August 2014 Directors, 2% Lamb family, 13% Others, 65% Henderson, 7% Blackrock, 6% Hargreave Hale, 4% Investec, 4% Financial discussion The financial profile of FUM is relatively straight forward. The company is almost virtual with most of its activities being outsourced. There are no sales as such and in the future when products are being commercialised all income will be in the form of royalties. Therefore, the only lines that need to be considered are the management costs of running the plc and the R&D investment, which will eventually lead to a royalty stream. SG&A Excluding R&D, the company has x employees running the company and the historic cost of this activity has consistently been just under 1m pa. In the future, as more work is required towards the commercialisation stage, SG&A is forecast to rise by about 50% or 0.5m. R&D investment There are currently 5 employees undertaking R&D, investigating formulations, stability and permeability for the products in development. This is likely to rise to 6 persons over the next 18 months. As with most companies in the pharmaceutical/healthcare development business, R&D expenditure is written-off in the year that it was expensed. Since inception, FUM has written-off 15.5m of R&D investment. Some of this will have been, and will continue to be, recovered through government incentives such as R&D tax credits. In addition, each time that FUM out-licenses its products through commercial deals, there is normally an up-front payment which is, in part, recovery of some of the development costs. As more of its products are nearing the regulatory approval stage, we expect R&D costs to rise over the next three years to 3-4m per annum. Futura Medical plc 22