Photocure — Update 21 September 2016

Photocure is a photodynamic therapy company that was founded by the Norwegian Radium Hospital in 1997 and listed on the Oslo Stock Exchange in 2000. It received its first approval in 2001 for Metvix, a photodynamic therapy for skin cancers, which was first licensed and then sold to Galderma. It currently markets the imaging agent known as Hexvix in the EU and Cysview in the US, which is approved globally for detecting and managing bladder cancer. It improves detection rates and helps prolong recurrence-free survival. The company recently announced the approval of its SPA by the FDA for the registration programme for Cevira, which is an integrated drug/device combination for the treatment of patients with HPV-related diseases of the cervix. It has demonstrated statistically significant efficacy in patients with high-grade squamous intraepithelial lesions (HSIL), which have over 1m cases diagnosed annually in the US and EU and indicate a higher risk of cancer. Visonac is its Phase III-ready treatment for inflammatory acne, which could be used in those who fail or are unsuitable for isotretinoin and oral antibiotics, a two million-person market in the US and EU.

Using a risk-adjusted NPV model with a 10% discount rate for Hexvix/Cysview and 12.5% for Cevira and Visonac, we arrive at a value for Photocure of NOK1,455m or NOK68 per basic share (NOK67 per diluted share). As the company has indicated that it is seeking partners to continue the development of both Cevira and Visonac, we have assumed that it will receive a 17.5% royalty rate, as well as milestones for both products.

The Hexvix/Cysview franchise is profitable, with NOK11.3m in EBITDA in H116, though this is down from NOK14.8m in H115 due to higher marketing expenses and costs related to extension into the surveillance market. US revenue is the main growth driver as it is up 42% so far this year compared to last year. With NOK104.4m in cash and the possibility for upfront and regulatory milestone payments, Photocure should have enough capital to meet its needs.

Photocure is subject to various sensitivities common to pharmaceutical product companies, including development, commercialisation, competition, reimbursement and patent expiration risks. Hexvix/Cysview could potentially have a surge in sales following approval for the surveillance market, expected around 2018, but its patent runway is short. Patent protection expires in the EU in September 2019 and in the US in November 2020 (however, we assume there are residual sales due to the drug/device combination nature of Hexvix/Cysview). Also, major impediments to Hexvix/Cysview adoption in the US are not likely to be resolved any time soon, namely poor reimbursement, the need to purchase a specific and expensive device that can do both white light and blue light for use with the product and inadequate sales/marketing support. With regard to Cevira, it is a relatively high-risk programme as its proof of efficacy comes from a small subgroup within a larger trial. Also, there are competitive excisional and ablative procedures that are very efficacious, quick and relatively inexpensive. Finally, the company has said the programme will not progress before a partnership is signed. For Visonac, while data have been promising, it has been Phase III-ready since 2013 as the company has sought a partner. This leads one to question whether potential partners agree on its market potential due to the fact that it requires four visits to a physician’s office for close to two hours each over the course of six weeks.

Photocure is currently focused on the development and commercialisation of three products (see Exhibit 1). It currently markets Hexvix/Cysview, which is approved globally for detecting and managing bladder cancer. Clinical studies have shown that it consistently helps improve recurrence-free survival compared to the standard of care. Cevira is a drug/device combination for the treatment of patients with HPV-related diseases of the cervix. It appears effective in HSIL, which has more than one million cases diagnosed annually in the US and EU and indicates a higher risk of cancer. Visonac is its Phase III-ready photodynamic treatment for inflammatory acne, which could be used in those who fail or are unsuitable for isotretinoin and oral antibiotics, a two million-person market in the US and EU.

Hexvix/Cysview is a marketed colourless contrast solution, hexaminolevulinate hydrochloride (HAL), indicated for the detection of non-muscle invasive papillary bladder cancer as part of the transurethral resection of the bladder (TURB) procedure. The solution is administered into the bladder before cystoscopy (a cystoscope is a thin tube with a lighted tip). It then takes about an hour for it to be absorbed into the urinary epithelial cells and accumulates in rapidly growing cells like cancer cells. Using a blue-light cystoscope, cancerous tissue would appear to be bright pink/red. Historically, doctors would shine just a white light onto the bladder to see any cancerous tissue, but unfortunately this led to them missing lesions, especially if they were small or flat (cancer in situ).

The addition of Hexvix/Cysview was shown by Photocure in its clinical trial programme to detect tumours that white light misses (see Exhibit 2). In total, 16% of patients had Ta (non-invasive papillary carcinoma) or T1 (cancer that invades from the surface epithelial layer into the connective tissue) tumours that were missed by the white light standard of care and were only detected through the use of Hexvix/Cysview. This is quite meaningful as bladder cancer is one of those cancers where there is a big difference between five-year survival rates for cancers that are caught early and those that are caught late. According to the National Cancer Institute, the five-year survival rate for those with localised cancer is 69.9%, 34% for those with regional and 5.4% for those where the cancer has distant metastases.

By improving tumour visibility, Hexvix/Cysview enables more complete removal of tumours, which then leads to longer recurrence-free survival, as studies have consistently shown across most subgroups (see Exhibit 3).

Importantly, based on long-term data from a study by Georgios Gakis at the Department of Urology at Eberhard-Karls University in Tuebingen, Germany, the recurrence-free survival benefit is durable (three-year recurrence free survival was 77.8% for those patients where Hexvix/Cysview was used and was 52.4% when white light was used) with a p-value of 0.002 in a 224-person trial.1

Photocure is commercialising Hexvix/Cysview in the US and the Nordics. It is using partners such as Ipsen in the EU outside of the Nordics, BioSyent in Canada and Juno in Australia (where it was just approved in August) to market elsewhere. It has been successful in the Nordic region, where it has been able to achieve ~40% market share as the therapy is not linked to a specific device, reimbursement is favourable and the company is based in Norway. Unfortunately, with only around 26 million people in the entire Nordic area, even this sizeable market share does not lead to meaningful sales (currently at a NOK42m annual run rate as of Q216, which is slightly over $5m at current exchange rates). Also, growth has slowed with Q216 revenues only 6% higher than last year’s, with actual unit sales 2% lower (due to lower volume in Norway, which was made up for by growth in Sweden).

The growth market into which Photocure is selling is the US, although some turnover within its salesforce has caused a hiccup in growth in Q216 (the openings have since been filled). Year-on-year revenue growth in Q116 was 66%, much faster than the 23% growth in Q216. Growth in unit sales also fell from 37% in Q1 to 11% in Q2. Also, while sales are growing faster than in the Nordics, the actual sales level remains low. Q216 sales were at an annual run rate of NOK28.4m (~$3.5m). Sales remain low despite a launch in 2012 because of the company’s limited sales and marketing infrastructure, as well as unfavourable reimbursement. The company has approximately 15 sales and marketing representatives in the US, which has allowed it to penetrate and service 79 hospitals and urology centres (up from 65 at the end of 2015 and 58 at the end of Q215). Additionally, the FDA requirement that the product is used in conjunction with the Karl Storz Photodynamic Diagnostic D-Light C System has been a further impediment to hospital penetration, as a capital purchase by the hospitals will likely be necessary. The cost of the device is $100-120k, which is around $20k more expensive than the standard white light-only device (the device does both blue light and white light). Ultimately, the company would like to target the top 400 centres, which represent the majority of TURB procedures.

Another issue is that Medicare does not separately reimburse centres for use of the Hexvix/Cysview blue-light procedure, but instead bundles it with the total reimbursement for TURB, which is estimated at around $2,000.2 This means that the ~$800 cost of the product comes out of the centre’s profits and therefore there is no financial incentive for its use. Also, as the imaging solution takes one hour to be absorbed by the bladder, it increases the time of the entire procedure, further hurting profits. As bladder cancer is definitely a cancer of the elderly, with 72.1% over the age of 65 at the time of diagnosis (mean age is 73 years), Medicare is the key third-party payor. So, despite the fact that around 40% of private insurers reimburse for the procedure, it is not enough to move the needle meaningfully. Without profitability, procedures tend to be limited to use in academic/teaching centres, which are less concerned than community hospitals with profits.

Although a cost-effectiveness study indicated that the five-year overall costs of a patient who is given Hexvix/Cysview are lower than for a patient who initially only received white light ($25,921 vs $30,5813) due to lower downstream costs related to recurrence (see Exhibit 4), it is unlikely that Medicare reimbursement will change in the near term.

The company is attempting to go down the legislative route to get a separate reimbursement code for Hexvix/Cysview and there are two bills that have been introduced to achieve that end: HR 1178 and S 1466. The bills do not mention the product specifically, but rather make it so Medicare reimburses contrast agents separately in certain cases (this fact means we might see other companies with imaging agents starting to get involved on behalf of these bills).

Unfortunately, this process can have very extended timelines (from months to years) and can be expensive if lobbying is used. HR 1178 was introduced in the House of Representatives on 27 February 2015 and referred to the Subcommittee on Health in March 2015, but has had no further action since, though it currently has 45 co-sponsors. The Senate version was introduced on 22 May 2015 and referred to the Committee on Finance, again with no further action though it has nine co-sponsors.

Besides increasing sales and marketing personnel and lobbying to change Medicare reimbursement, the company is also relying on guideline changes to help spur sales. Recently the American Urological Association (AUA) and the Society of Urological Oncology (SUO) have recommended the use of Hexvix/Cysview to increase detection and reduce recurrence of non-muscle invasive bladder cancer. The company is also seeking a label expansion for Hexvix/Cysview, which could greatly increase its market potential. Currently, Hexvix/Cysview is used in the initial diagnosis and treatment of patients as part of the TURB procedure. However, following TURB, patients will undergo surveillance in the form of cystoscopy examinations every three to nine months. So, while there are an estimated 250,000 TURB procedures in the US and another 300,000 in the EU, there are 1.2m surveillance procedures in the US and another 750,000 in the EU. Photocure has initiated a 360-patient study to obtain this label expansion and is on track to complete recruitment of patients in Q416 with results in 2017.

We currently model peak Hexvix/Cysview revenues to Photocure of NOK332m (~$40m) in 2020 down from NOK387m (~$47m) previously, mainly due to US sales tracking lower than we had expected. Our current estimate takes into account a label expansion in 2018 to include the surveillance market. We consider this to be very reasonable given that the TURB market alone has $400-500m in market potential, but we assume that the limited sales and marketing infrastructure and unattractive reimbursement in the US continue to hamper product adoption. While patents are set to expire in 2019 in the EU and 2020 in the US, we expect there to be a slower decline than usual when a drug goes generic due to the nature of Hexvix/Cysview as a drug/device combination. There is likely to be limited generic competition as generic companies are not specialised in devices. Also, as Hexvix/Cysview is part of a procedure rather than part of a pharmaceutical benefit for patients, payers are unlikely to force conversion to the generic product and hospitals will be able to make their own decisions, based largely on price and physician preference.

Cevira is a non-invasive photodynamic therapy based on a gel form of HAL under development for HPV-related (cervical) diseases and has an SPA in place with the FDA. To gain US approval, the company will need to run two randomised studies with 200 patients each, comparing Cevira to placebo in women with biopsy-verified, high-grade cervical lesions. The company is currently seeking partners to fund the development of Cevira, though no guidance on timing has been provided.

Cervical cancer is caused by HPV, which can cause normal cells on the cervix to become abnormal. It can take five to 10 years after infection for cells to become abnormal, with abnormal cells graded either as low-grade squamous intraepithelial lesions (LSIL) or high-grade squamous intraepithelial lesions (HSIL). LSIL usually indicates mild dysplasia (normally graded as CIN1) with a 13% chance of turning into a more severe form of dysplasia (CIN 2/3) over the next two years, according to the American Academy of Family Physicians. Also, only about 2% progress to cervical cancer within 10 years, while 74% regress to normal in five years and 88% regress to normal in 10 years.4 Due to this low risk of progression to cancer and high probability of regression to normal, LSIL is often untreated, with “watch and wait” being the dominant paradigm.

Patients with HSIL have around a 15-20%5 chance of getting cervical cancer and so those patients are usually treated in a number of ways, either by ablative or excisional treatments (see Exhibit 5).

Cevira treatment 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 service 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%6 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. These new success criteria are the same as will be used in the company’s Phase III trial, and the trial itself is powered to succeed even if the treatment difference is half that seen in the Phase IIb.

Of course, a major caveat here 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. As a result, and because of the fact that there is additional partnership risk (Cevira will not move forward without one), we are attributing a 50% probability of success, which is less than the 60-70% probability typical of Phase III programmes.

In terms of pricing, most of the competitive technologies have relatively low reimbursement (see Exhibit 6), although there is high variability between payers and between procedures. Also, based on a cost-effectiveness study comparing Cevira treatment to excisional conisation procedures, the authors calculated that the risk of premature birth added approximately $630 per treatment.7 The company could therefore argue that $1,000 per treatment is fair given the price savings in the long term from fewer premature deliveries.

Treatment of abnormal cervical cells related to HPV is still a large market. There are 50m pap tests performed each year in the US alone, with approximately 5% returning an abnormal test result. Most of these cases are LSIL, with the number of HSIL cases around 500,000 in the US according to the American College of Pathology, with a similar amount in Europe, making the addressable market around one million. Our valuation model assumes a signed partnership next year with upfront and milestone payments with a 17.5% royalty and peak penetration of 17% of the HSIL cases treated with Cevira. Sales peak in 2030 at NOK2.4bn (~$290m) and then fall following the expiration of the method-of-use patent, although we assume there will be residual sales for the same reasons as those for Hexvix/Cysview and the fact that the light device will have residual patents through 2034. We do not currently include any life cycle management opportunities with regard to Cevira in our model.

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.

Acne is a very common skin condition that has near-universal prevalence during teenage years. Approximately 95-100% of boys and 83-85% of girls aged 16-17 years old are affected by the condition, with 10-20% having the moderate to severe form.8 In total, there are an estimated 40-50 million Americans of all age groups that suffer from the condition.9 Approximately half of those are between the ages of 15 and 24 and if 10-20% have moderate to severe acne, it would mean a prevalence of around 2-2.5 million moderate to severe patients.

There are quite a few types of treatment for Acne, which include over-the-counter medications (salicylic acid, benzoyl peroxide and vitamin A) and prescription medications (topical or oral antibiotics and hormonal therapy for women). Treatments generally work by reducing oil production, unblocking pores and/or killing acne-causing bacteria. More severe forms of acne are often treated with Accutane (isotretinoin) or oral antibiotics such as Solodyn (minocycline). Unfortunately, neither is 100% effective, with approximately 50% of patients failing treatment according to a market research study conducted by the company. On the safety side, Accutane in particular is considered to be rather toxic, and is associated with birth defects and liver abnormalities.

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 7), 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.

In terms of pain severity, the mean score on the visual analogue scale (0-10) was 3.38 (range 0-8.8) compared to 0.52 (range 0-3.6) for placebo. This indicates a mild to moderate amount of pain on average for most patients (see Exhibit 8). Also, 86% of patients in the treatment arm had mild to moderate and 3% had severe facial reddening (resolved by day two) compared to 70% with mild to moderate reddening in the control arm.

In terms of the future of Visonac, the company is currently seeking a partner to further the development of the product. Like Cevira, there is an SPA associated with the product, lessening regulatory uncertainty (although it was already lower-risk given that it has the same active ingredient as Metvix, which was approved globally). However, despite the fact that the Phase IIb data have been available since May 2012 and the SPA was granted in 2013, no partnership agreement has been signed to date.

Our model currently assumes a 60% probability of success for the programme. It would be higher given the data and the regulatory history of MAL, but the extended period without a partner prompts us to lower it. We would otherwise give it a 70-80% chance of success. We also assume the company will sign a partnership in 2017, with upfront and milestone payments and a 17.5% royalty rate, with approval in 2020. We expect the price per treatment to be NOK2,500 or $300, comparable to other therapies for acne. Peak sales should hit NOK2.2bn (~$260m) in 2029, which is around one-third of Solodyn’s peak sales. As this is a drug/device combination product like Hexvix/Cysview and Cevira, we also expect sales to continue past the expiration of its method-of-use patent in 2029, at least until the expiration of the full-face lamp patent in 2033.

Photocure is subject to various sensitivities common to pharmaceutical product companies, including development, commercialisation, competitive, reimbursement and patent expiration risks. Hexvix/Cysview is currently growing very well in the US and could potentially have a surge in sales following approval for the surveillance market, expected around 2018, but the patent runway is short. Patent protection expires in the EU in September 2019 and in the US in November 2020 (however, we assume there are residual sales due to the drug/device combination nature of Hexvix/Cysview). Also, the current major impediments to Hexvix/Cysview adoption in the US are not likely to be resolved any time soon, namely poor reimbursement (eg for Medicare patients, the cost of Hexvix/Cysview comes directly from the hospital’s bottom line as it is not reimbursed separately), as well as too few sales and marketing resources behind the product. The company is attempting to resolve the reimbursement issue through legislation, but that is a long and potentially expensive process that could last past patent protection.

With regard to Cevira, it is a high-risk programme as its proof of efficacy comes from a subgroup of a subgroup representing only ~20% of the patients within a larger trial. Also, there are competitive excisional and ablative procedures, often with 90%+ efficacy, which are quick and relatively inexpensive. Cevira does have the advantage over the excisional procedures of little premature labour risk, but that is less of an argument against the ablative procedures. Finally, the company has said it needs to find a partner to fund the Phase III programme, so it could be on hold for quite some time.

For Visonac, while data have been promising and it also has an SPA with the FDA, it has been Phase III-ready since 2013 as the company has sought a partner, which leads one to question whether potential partners agree on its market potential due to the fact that it requires four visits to a physician’s office for close to two hours each over the course of six weeks. It is a treatment regimen that is simply not as convenient as oral antibiotics and creams, which are typically prescribed for acne.

Using a risk-adjusted NPV model with a 10% discount rate for Hexvix/Cysview and 12.5% for Cevira and Visonac, we arrive at a value for Photocure of NOK1,455m or NOK68 per basic share (NOK67 per diluted share), down from NOK1,591m or NOK74 per basic share (NOK72 per diluted share) previously. The downward adjustment is mainly due to a lowering of our US Hexvix/Cysview revenue forecasts such that current expected peak US Hexvix/Cysview revenues are at NOK202m (~$25m) in 2020, down from NOK261m (~$32m) previously, effectively lowering the CAGR 2015-20 from 63% to 54% for the US business. We have also moved our assumption for Cevira and Visonac upfront payments to 2017 from 2016, though this impact was mitigated by rolling forward our NPV to Q216.

With regards to the other products, the company has indicated that it is seeking partners to continue the development of both Cevira and Visonac; we have assumed that it will receive a 17.5% royalty rate, as well as milestones for both products. For Cevira, we assume NOK80m (~$10m) upfront and an additional NOK160m (~$20m) in milestones, as well as a 17.5% royalty. For Visonac, we assume NOK80m (~$10m) upfront and an additional NOK280m (~$34m) in milestones, as well as a 17.5% royalty. Also, as Photocure’s products are drug/device combinations, we assume that sales do not completely evaporate on patent expiration, as not all generic companies have the skills necessary to develop a drug/device combination. Also, as all its products are physician administered in the office/hospital setting, physicians will have more of a say as to whether to stay with the branded product, especially in the case of bundled (eg bladder cancer diagnosis) or typically non-reimbursed (eg acne) procedures.

The Hexvix/Cysview franchise is profitable, with NOK11.3m in EBITDA in H116, though this is down from NOK14.8m in H115 due to higher expenses. US revenue is the main growth driver as it is up 42% so far this year compared to last year. With NOK104.4m in cash and the possibility for upfront and regulatory milestone payments, Photocure should have enough capital to meet its needs. If Photocure is able to out-license Cevira and Visonac in 2017, we forecast potential total company profitability in that year and in 2018 if they are not out-licensed.