Photocure — Looking at other strategic opportunities

Photocure recently announced that after seeking partners for Cevira and Visonac for the last few years, it is expanding the search to include outright sale of those products, possible spinoffs or other strategic alternatives. While partnership discussions are continuing, the chances that these will be successful appear diminished (a risk that we had highlighted previously). Feedback indicates that there are concerns with regards to development risk with Cevira and the current combination of drug and device for Visonac.

As a reminder, Cevira is a non-invasive photodynamic therapy based on a gel form of hexylaminolevulinate (HAL) under development for HPV-related (cervical) diseases and has an SPA in place with the FDA. It consists of an HAL gel along with a disposable battery-powered LED device that is inserted next to the cervix. The HAL gel surrounds the cervix and after five hours, the time it takes for the gel to enter infected cells and be metabolised, the device’s LEDs are activated for 4.5 hours. The LEDs then activate the drug and kill the abnormal, precancerous cells (although some normal cells are also killed).

The company ran a 262-patient Phase IIb trial comparing three different concentrations of HAL gel (0.2%, 1% and 5%) to placebo. The primary endpoint was lesion response rate at three months, with a response originally defined as histological regression to CIN1 or normal, cytology of LSIL or less severe and HPV negative. The 0.2% and 1% doses were no different from placebo, although the 5% dose showed a 73% response in confirmed CIN1/2 patients vs 60% placebo (p=0.2). However, there was a statistically significant response in the HAL 5% dose patients with confirmed CIN2. 18 of 19 (95%) patients in the HAL arm compared to 12 of 21 (57%) patients in placebo responded (p<0.001). Importantly, among patients with the oncogenic HPV 16/18 subtypes, which are responsible for 70%1 of cervical cancer cases, HPV clearance was seen in five of six (83%) patients in the HAL arm compared to two of six (33%) in placebo at the six-month point.

Also, at the behest of the FDA, the company conducted a reanalysis of the results, which included a new pathological assessment conducted by a panel of three independent pathologists (originally the samples were only read by one pathologist) and applied new clinical success criteria. As a result of this re-read of the results, 76% of HSIL patients in the Cevira group responded compared to 28% in the treatment arm, a statistically significant difference.

Of course, a major caveat here (and potentially a key reason why potential partners are hesitant) is that the previous data are from small numbers of patients. Out of a 262-patient trial, these data come from less than 20% of the total intent-to-treat trial population. Whoever takes over Cevira would either need to run another Phase II to better understand the risk-reward of a Phase III trial or simply stomach the risk with the understanding that they are moving forward with limited data.

Visonac is a photodynamic therapy for moderate to severe inflammatory acne. It is a cream that contains methyl aminolevulinate (MAL) as its active ingredient, which is the same active ingredient as that of Metvix, Photocure’s first approved product for skin cancers, which was divested to Galderma in 2009 for €51m. It works by killing the bacteria P. acnes and decreasing sebum (oil) production.

Visonac therapy consists of applying the cream to the face and allowing it to be absorbed by the skin and bacteria in the pustules for 90 minutes. The cream is then washed off and the face is exposed to red light for 10 minutes. This process is then repeated an additional three times over the next six weeks. In a 153-patient Phase IIb trial, Visonac demonstrated efficacy that was comparable to and possibly slightly better than Solodyn (see Exhibit 1), which in 2011 had sales of $761m in the US. There were no serious adverse events, but 12% of those in the treatment arm (compared to 0% in the placebo arm) dropped out of the trial due to adverse events, mainly burning/pain during illumination, which was an issue seen with Metvix and other MAL studies over the years.

The issue with potential partners is that the Phase IIb exclusively used the Nedax full-face lamp. If the Phase III used the same lamp and the product was approved on that data, that would require dermatologists to acquire another light source in order to use Visonac and many dermatologists already have multiple light sources in their office. A new partner might have to run additional Phase II trials with additional light sources in order to increase the chance of having a broader label and enabling dermatologists to use Visonac without additional capital expenditures.

At the April 27 annual meeting, three new board members are expected to be elected, including a new Chairman. Dr Jan Egberts, the nominee for chairman, has held various business development and management positions at Merck and Johnson & Johnson, leading buyouts. He has also been CEO of a specialty pharma company and a molecular diagnostics company. Currently he is a managing partner of a private equity company focused on healthcare. Dr Johanna Holldack has experience in clinical trials, drug approvals, IPOs and licensing, and has managed several mergers and acquisitions. Gwen Melincoff has held senior business development positions at BTG and Shire and led Shire’s corporate venture fund. Given the experience of these prospective board members, they may assist Photocure in monetising its assets.

We have decreased our valuation from NOK1,511m or NOK70 per share to NOK886m or NOK41 per share. This is due to the removal of all Visonac and Cevira partnership related milestones (NOK360m total for Visonac and NOK240m total for Cevira, spread over the next 8-10 years) from our model and setting their probabilities of success to 20% given the company’s inability to consummate a partnership transaction. We continue to expect Photocure to retain 17.5% of the economics as it would likely retain a minority shareholding in any spinoff after outside investors capitalise the company. As mentioned above, we view the probability for an outright sale as low. These changes have reduced our rNPV for Cevira by 67.5% and for Visonac by 75.3%. Together, these two products are now valued at NOK248m ($28.8m). We will review our valuations for these products upon any updates on the new, broader strategic option process.

The Hexvix/Cysview franchise is profitable, with NOK30m in EBITDA in 2016, though the company as a whole had an EBITDA loss of NOK8m over the course of the year. The biggest upside currently to future sales of Hexvix/Cysview is expansion into the US bladder cancer surveillance market, which has 1.2m procedures per year, compared to the current market of 250,000 transurethral resection of the bladder procedures. Photocure is in a pivotal Phase III clinical trial, and it announced as of February 2017 that the trial was fully enrolled. The primary readout will be the number of malignancies that were caught using Hexvix/Cysview that were missed with normal white light cystoscopy. Top-line data are expected in mid-2017.

With NOK169.2m in cash at the end of 2016, no change to our 2017 and 2018 financial forecasts and a continued expectation for 2019 profitability, Photocure should have enough capital to attain profitability.