InMed Pharmaceuticals — Acquiring BayMedica

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.

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.

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%.

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.

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.

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.

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.