Acquiring BayMedica

InMed Pharmaceuticals 20 September 2021 Update
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InMed Pharmaceuticals

Acquiring BayMedica

Development update

Pharma & biotech

20 September 2021

Price

US$2.0

Market cap

US$24m

Net cash (US$m) at 31 March 2021 + offering

20.5

Shares in issue

12.1m

Free float

82.9%

Code

INM

Primary exchange

Nasdaq

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(10.0)

(31.6)

(46.5)

Rel (local)

(9.6)

(34.9)

(59.5)

52-week high/low

US$6.8

US$2.0

Business description

InMed Pharmaceuticals is a Canada-based biopharmaceutical company focused on manufacturing and developing cannabinoids. Its biosynthesis platform may be able to produce cannabinoids for less cost and with improved purity compared to currently used methods. The company is also developing a proprietary pipeline, including INM-755 for epidermolysis bullosa, a serious, debilitating orphan indication.

Next events

INM-755 Phase II initiation

Q3 CY21

Analysts

Maxim Jacobs

+1 646 653 7027

Jyoti Prakash

+91 981 880 393

InMed Pharmaceuticals is a research client of Edison Investment Research Limited

InMed has announced that it has entered into a definitive agreement to acquire BayMedica, a private US-based company that is focusing on the manufacture and commercialization of rare cannabinoids. This is an all-stock transaction in which InMed will issue 1.78m shares to BayMedica’s equity and convertible debt holders. At the current stock price, this values BayMedica at approximately US$4m. Following the closure of the transaction, the combined company will have expertise in both yeast and bacteria biosynthesis as well as chemical synthesis of cannabinoids. Additionally, it will be a commercial company with cumulative revenues of over US$2.5m since December 2019 stemming from the sale of cannabichromene (CBC). The acquisition is expected to close in the coming weeks.

Year end

Revenue (US$m)

PBT*
(US$m)

EPS*
(US$)

DPS
(US$)

P/E
(x)

Yield
(%)

06/19

0.0

(9.2)

(1.77)

0.00

N/A

N/A

06/20

0.0

(9.0)

(1.73)

0.00

N/A

N/A

06/21e

0.0

(10.2)

(1.55)

0.00

N/A

N/A

06/22e

0.0

(10.9)

(0.90)

0.00

N/A

N/A

Note: *PBT and EPS are normalized, excluding amortization of acquired intangibles, exceptional items and share-based payments.

A leading manufacturer of rare cannabinoids

The combined company will have multiple tools to produce rare cannabinoids at meaningful yields and at attractive costs. BayMedica provides expertise in the use of chemical synthesis and yeast to manufacture cannabinoids while InMed provides expertise in using E. coli (bacteria) through its IntegraSyn platform.

A growing commercial product

BayMedica is currently the global leader in large batch (currently 200kg but with the ability to scale up to metric tonnes) supply of CBC, a rare non-intoxicating cannabinoid. It is currently being marketed to consumer health and wellness companies focused on nutraceuticals, cosmetics, functional food/beverages and animal health. Cumulative revenues since the launch in December 2019 are over US$2.5m.

Additional rare cannabinoids scaling up

Besides CBC, which is already at commercial scale, BayMedica is currently scaling up on tetrahydrocannabivarin (THCV), cannabidivarin (CBDV) and cannabinol (CBN). Each has its own set of benefits and once manufactured at scale will likely have meaningful margins, in our view.

Valuation: US$242m or US$20.03 per basic share

We have adjusted our valuation to US$242m or US$20.03 per basic share, from US$236m or US$29.27 per basic share. The total valuation rose due to higher net cash following a US$12m (gross) calendar Q221 financing, while the per-share value decreased due to a higher number of shares outstanding.

Becoming a leading rare cannabinoid manufacturer

InMed has announced a definitive agreement to acquire BayMedica, a company it had previously signed a collaboration with in November 2020 and for which it announced a non-binding letter of intent to acquire in June of this year. The combined company will have multiple tools to produce rare cannabinoids at meaningful yields and at attractive margins. BayMedica provides expertise in the use of chemical synthesis and yeast to manufacture cannabinoids while InMed provides expertise in using E. coli (bacteria) through its IntegraSyn platform. This acquisition put InMed in an attractive position to take advantage of the biosynthesis market. As mentioned in the recent Edison report on biosynthesis (‘Biosynthesis – Taking the cannabinoid market to new heights‘), the global market for consumer packaged goods (CPG) and pharma cannabinoid biosynthesis products is predicted to reach C$10bn in 2025 (~US$8bn) and C$115bn (~US$90bn) by 2040 according to Raymond James.

The need to find alternative methods to manufacture cannabinoids, especially rare cannabinoids, is clear. Plant-based extraction of cannabinoids is time consuming (it takes three to 10 months just to cultivate the plant), which also requires a high degree of purification as otherwise the product would likely have unwanted pesticides, molds, fungi or bacteria, residual solvents, and non-target cannabinoids. For example, it was noted during the FDA advisory committee meeting to discuss the potential approval of GW Pharmaceuticals’ Epidiolex (CBD) for pediatric epilepsies that there was as much THC in its pharmaceutical grade compound as some of the lower doses of dronabinol, an FDA-approved THC product. Additionally, only a few cannabinoids, such as THC and CBD, are plentiful enough in the plant to be extracted in an economically viable fashion.

BayMedica has already demonstrated an ability to manufacture rare cannabinoids at scale. BayMedica is currently the global leader in large batch (currently 200kg but with the ability to scale up to metric tonnes) supply of CBC, a rare non-intoxicating cannabinoid. Preclinical studies have shown its ability to inhibit the growth of cancer cells,1 block pain,2 potentially promote brain health,3 combat depression4 and inhibit acne.5 It is currently being marketed to consumer health and wellness companies focused on nutraceuticals, cosmetics, functional food/beverages and animal health. The company has indicated that cumulative revenue since the December 2019 launch was US$2.5m. However, we do not have information on the burn rate or cash needs of BayMedica.

  Ligresti et al., Antitumor Activity of Plant Cannabinoids with Emphasis on the Effect of Cannabidiol on Human Breast Carcinoma. Journal of Pharmacology and Experimental Therapeutics, 2006 318(3), 1375–1387.

  Maione et al., Non-psychoactive cannabinoids modulate the descending pathway of antinociception in anaesthetized rats through several mechanisms of action. British Journal of Pharmacology, 2011 Feb;162(3):584-96.

  Shinjyo et al., The effect of cannabichromene on adult neural stem/progenitor cells. Neurochemistry International. 2013 Nov;63(5):432-7.

  El-Alfy et al., Antidepressant-like effect of delta9-tetrahydrocannabinol and other cannabinoids isolated from Cannabis sativa L. Pharmacology, Biochemistry and Behavior. 2010 Jun;95(4):434-42.

  Olah et al., Differential effectiveness of selected non-psychotropic phytocannabinoids on human sebocyte functions implicates their introduction in dry/seborrhoeic skin and acne treatment. Experimental Dermatology 2016 Sep;25(9):701-7.

Besides CBC, which is already at commercial scale, BayMedica is currently scaling up on THCV, CBDV and CBN with an expectation to launch additional products in the next six to 12 months. THCV has been shown in preclinical studies to have an impact on obesity,6 epilepsy7 and Parkinson’s disease.8 Additionally, human clinical data demonstrated the potential for THCV to improve glycemic control in Type 2 diabetics.9 CBDV is being investigated by GW Pharmaceuticals (acquired by Jazz Pharmaceuticals in May 2021) in a number of indications. A Phase IIa study in adults with focal seizures did not meet its primary endpoint but trials are ongoing in autism and Prader-Willi Syndrome. GW/Jazz has also indicated interest in the treatment of Rett syndrome.

  Riedel et al., Synthetic and plant-derived cannabinoid receptor antagonists show hypophagic properties in fasted and non-fasted mice. British Journal of Pharmacology (2009), 156, 1154–1166

  Dos Santos et al., Phytocannabinoids and epilepsy. Journal of Clinical Pharmacy and Therapeutics 2015, 40, 135–143

  Garcia et al., Symptom-relieving and neuroprotective effects of the phytocannabinoid Δ⁹-THCV in animal models of Parkinson's disease. British Journal of Pharmacology 2011 Aug;163(7):1495-506.

  Jadoon et al., Efficacy and Safety of Cannabidiol and Tetrahydrocannabivarin on Glycemic and Lipid Parameters in Patients With Type 2 Diabetes: A Randomized, Double-Blind, Placebo-Controlled, Parallel Group Pilot Study. Diabetes Care 2016 Oct;39(10):1777-86.

With regards to CBN, it has been the focus of InMed’s pharmaceutical pipeline with INM-755, which is entering Phase II for epidermolysis bullosa (EB) and INM-088, in preclinical development for glaucoma. Broadly, there is evidence of efficacy across a plethora of indications. Key for the treatment of EB (a rare debilitating genetic dermatologic disorder characterized by skin fragility where just wearing normal clothing can lead to wound formation), CBN has been shown in a variety of published preclinical studies to have an effect on pain,10 inflammation (due to the inhibition of the expression of cytokines)11 and bacterial infection.12 In addition, and recently presented at the 2020 EB World Congress in London, InMed has demonstrated in its own preclinical studies an effect on both pain and inflammation. In pain, InMed’s research has demonstrated a positive impact in nerve growth factor (NGF) induced pain models in rats. With regards to inflammation, CBN was tested on IL-8 and MMP-9, markers of inflammation suspected of having links with blister formation in EB simplex (both IL-8 and MMP-9 are upregulated in blisters) and in chronic cutaneous inflammation. Depending on dose, IL-8 was reduced by 35–54% and MMP-9 was reduced by 22–40%.

  Zygmunt et al., Δ9-Tetrahydrocannabinol and Cannabinol Activate Capsaicin-Sensitive Sensory Nerves via a CB1 and CB2 Cannabinoid Receptor-Independent Mechanism. Journal of Neuroscience. 1 June 2002, 22 (11) 4720-4727

  Jan et al., Attenuation of the ovalbumin-induced allergic airway response by cannabinoid treatment in A/J mice. Toxicology and Applied Pharmacology, 188 (2003), 24–35.

  Appendino et al., Antibacterial Cannabinoids from Cannabis sativa: A Structure−Activity Study. Journal of Natural Products, 2008 71(8), 1427–1430.

CBN has also previously been shown to have efficacy in glaucoma. In cats, CBN has previously been shown to significantly reduce intraocular pressure (IOP) by around 27% after nine days.13 Also, InMed recently disclosed in vivo animal data for INM-088 at the H.C. Wainwright Ophthalmology Virtual Conference, which indicated a significant lowering of IOP at days 7 and 17 compared to the vehicle treated group.

  Colasanti et al., Intraocular pressure, ocular toxicity and neurotoxicity after administration of cannabinol or cannabigerol. Experimental Eye Research, 1984 39(3), 251–259.

BayMedica also has an extensive suite of new naturally occurring rare cannabinoids and cannabinoid analogs which can be developed as pharmaceutical products. This may potentially strengthen InMed’s pipeline going forward.

With regards to the current pipeline, InMed has filed Clinical Trial Applications in multiple countries for the Phase II of INM-755 in EB (Germany, France, Italy, Austria, Israel, Greece and Serbia) and anticipates the trial will begin in Q321.

Valuation

We have adjusted our valuation to US$242m or US$20.03 per basic share from US$236m or US$29.27 per basic share. The total valuation rose due to higher net cash following a calendar Q221 financing (described below), while the per-share value decreased due to a higher number of shares outstanding. We have not made any adjustments to our model yet to take into account the BayMedica acquisition, but may do so once it closes in the coming weeks.

Exhibit 1: InMed valuation model

Program

Stage

Probability of success

Launch year

Peak sales (US$m)

rNPV
(US$m)

Biosynthesis (manufacturing)

Development

23%

2022

1,243

$198

INM-755

Phase II

10%

2026

313

$24

Total

$221.8

Net cash and equivalents (as of 31 March plus offering) (US$m)

$20.5

Total firm value (US$m)

$242.35

Total basic shares (as of 7 September 2021, m)

12.10

Value per basic share (US$)

$20.03

Options and warrants (m)

7.4

Total diluted shares (as of 7 September 2021, m)

19.5

Value per diluted share (US$)

$12.43

Source: Edison Investment Research

Financials

InMed is acquiring BayMedica in an all-stock transaction in which InMed will issue 1.78m shares to BayMedica’s equity and convertible debt holders. At the current stock price, this values BayMedica at approximately US$4m. This may be reduced in the event that BayMedica’s net liabilities exceed a certain negotiated threshold at the closing of the transaction. BayMedica’s equity and debt holders will also receive Series A warrants to purchase up to 800,000 shares with an exercise price equal to 125% of the 20-day volume-weighted average closing price of InMed shares prior to the third business day before the closing of the proposed transaction (the ‘Deal Price’) and Series B warrants to acquire up to 800,000 common shares of InMed priced at 200% of the ‘Deal Price’.

InMed reported a net loss of US$3.1m in Q321 (the period ending 31 March 2021), up from US$2.0m in the same period in the prior year due to higher R&D and SG&A expenses. R&D expenses were US$1.8m in the quarter compared to US$1.3m a year ago thanks to preparations for the INM-755 Phase II clinical trial. G&A was US$1.3m, up from US$0.9m in Q321. Our R&D estimates for FY21 and FY22 are now US$5.5m and US$6.3m, respectively (as compared to US$4.3m and US$5.0m previously). Our SG&A estimates are substantially unchanged.

InMed had US$9.5m in cash and marketable securities at 31 March and subsequently (in July 2021) raised approximately US$12m in gross proceeds (US$11m net) from a private placement of 4.036m units, priced at US$2.973 per unit, with a unit including a common share and a warrant (the warrants have an exercise price of US$2.848 per share, are exercisable immediately after issuance and have a term of five years).

Based on the cash level following the offering, we believe InMed has funding into FY23. However, the exact level of funding requirement will depend on the expense level for the combined companies. We will update our financial model once the acquisition closes and we have some clarity on cash needs.

Exhibit 2: Financial summary

US$'000s

2019

2020

2021e

2022e

Year end 30 June

US GAAP

US GAAP

US GAAP

US GAAP

PROFIT & LOSS

Revenue

 

 

0

0

0

0

Cost of Sales

0

0

0

0

Gross Profit

0

0

0

0

Research and development

(5,126)

(5,811)

(5,465)

(6,285)

Selling, general & administrative

(4,297)

(3,227)

(4,305)

(4,477)

EBITDA

 

 

(9,423)

(9,038)

(9,770)

(10,762)

Operating Profit (before amort. and except.)

 

 

(9,542)

(9,151)

(9,890)

(10,882)

Intangible Amortization

0

0

0

0

Exceptionals/Other

(34)

82

65

68

Operating Profit

(9,576)

(9,069)

(9,825)

(10,814)

Net Interest and financial expense

328

130

(345)

0

Other (change in fair value of warrants)

0

0

0

0

Profit Before Tax (norm)

 

 

(9,215)

(9,021)

(10,235)

(10,882)

Profit Before Tax (IFRS)

 

 

(9,248)

(8,939)

(10,170)

(10,814)

Tax

0

0

0

0

Deferred tax

0

0

0

0

Profit After Tax (norm)

(9,215)

(9,021)

(10,235)

(10,882)

Profit After Tax (IFRS)

(9,248)

(8,939)

(10,170)

(10,814)

Average Number of Shares Outstanding (m)

5.2

5.2

6.6

12.1

EPS - normalized (US$)

 

 

(1.77)

(1.73)

(1.55)

(0.90)

EPS - GAAP (US$)

 

 

(1.78)

(1.71)

(1.54)

(0.89)

Dividend per share (c)

0.0

0.0

0.0

0.0

Gross Margin (%)

N/A

N/A

N/A

N/A

EBITDA Margin (%)

N/A

N/A

N/A

N/A

Operating Margin (before GW and except.) (%)

N/A

N/A

N/A

N/A

BALANCE SHEET

Fixed Assets

 

 

1,264

1,490

1,442

1,345

Intangible Assets

1,221

1,087

1,086

1,086

Tangible Assets

43

403

341

245

Other

0

0

15

15

Current Assets

 

 

14,173

6,312

7,885

8,788

Stocks

0

0

0

0

Debtors

65

45

70

70

Cash

13,784

5,848

6,488

7,391

Other

324

419

1,327

1,327

Current Liabilities

 

 

(1,194)

(1,676)

(1,714)

(1,714)

Creditors

(1,194)

(1,676)

(1,714)

(1,714)

Short term borrowings

0

0

0

0

Long Term Liabilities

 

 

0

(248)

(216)

(216)

Long term borrowings

0

0

0

0

Other long term liabilities

0

(248)

(216)

(216)

Net Assets

 

 

14,243

5,878

7,396

8,202

CASH FLOW

Operating Cash Flow

 

 

(6,624)

(7,375)

(10,776)

(10,074)

Net Interest

0

0

0

0

Tax

0

0

0

0

Capex

(27)

(43)

(21)

(23)

Acquisitions/disposals

0

0

0

0

Financing

205

(31)

10,938

11,000

Dividends

0

0

0

0

Other

0

1

0

0

Net Cash Flow

(6,446)

(7,448)

141

903

Opening net debt/(cash)

 

 

(20,179)

(13,784)

(5,848)

(6,488)

HP finance leases initiated

0

0

0

0

Exchange rate movements

(17)

416

(495)

0

Other

69

(905)

994

0

Closing net debt/(cash)

 

 

(13,784)

(5,848)

(6,488)

(7,391)

Source: company reports, Edison Investment Research


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This report has been commissioned by InMed Pharmaceuticals and prepared and issued by Edison, in consideration of a fee payable by InMed Pharmaceuticals. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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This report has been commissioned by InMed Pharmaceuticals and prepared and issued by Edison, in consideration of a fee payable by InMed Pharmaceuticals. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are ‘wholesale clients’ for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a ‘personalised service’ and, to the extent that it contains any financial advice, is intended only as a ‘class service’ provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the ‘FPO’) (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the ‘publishers' exclusion’ from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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