Description

Apparently I was traumatized in high school by attending a party while sporting sweaty armpits despite antiperspirant use because here I am now presenting an idea that addresses this condition (with a ticker that itself inspires high school memories too).  Brickell Biotech (“BBI”) is starting Phase III for Primary Axillary Hyperhidrosis (“PAH”) which is a relatively new category tied to excessive sweating created by Dermira’s launch of Qbrexa in Q418. Dermira was acquired by Eli Lilly for $1.1 billion in January 2020.  This dynamic of a second and potentially superior entrant to a new category reminds me of the erectile dysfunction market created by Pfizer’s marketing engine for Viagra followed by Icos/Lilly’s Cialis (“the weekender!”)  Here is where this gets super interesting: despite its $25 million market cap, BBI is led by the former Chief Marketing Officer of Eli Lilly who launched Cialis (as well as Taltz and Cymbalta) and left after 30 years at Lilly in November 2018 to pursue this opportunity.  Meanwhile BBI’s product has already been submitted for regulatory approval by its partner in Japan at a lower dose and the company could start receiving royalties in early 2021 that I estimate could be worth approximately the current market cap.  The company hit an existential rough patch that, though resolved, has created this opportunity and I will describe what happened below.  Assuming similar market share to Cialis in a much smaller category, BBI could be a multi-bagger over time after it completes two upcoming fully funded Phase III trials while supported on the downside by probable Japanese royalties.   

Business Description

Brickell Biotech has completed Phase IIb in the US for its topical sofpironium bromide (SB) to address Primary Axillary Hyperhidrosis that causes excessive sweating.  Hyperhidrosis affects 15 million people in the U.S. with the most common body type being axillary/underarm which affects 10 million people (I am not alone! Maybe there can be a group meeting of sufferers who come out from the stands like at the end of Revenge of the Nerds) 80% of people have excessive sweat in three or more body places (I am guessing one of those might be “where the sun don’t shine” so I suppose it could have been worse for the pubescent Styx1003).  Until rival product Qbrexa launched in 4Q18, any sufferers who went so far as to seek medical treatment (approx. 23% according to a 2016 study) used either frequently ineffective prescription strength antiperspirants or botox injections.    SB has been successfully studied in 1,200 patients across two Phase IIb trials in the US and a IIb as well as a pivotal Phase III in Japan conducted by BBI’s Asian partner Kaken Pharmaceutical (which licensed SB in 2015 and has provided significant non-dilutive funding to date). Further data is forthcoming but SB could be a superior product to Qbrexa because it looks like it can be given in higher doses (as it is quickly eliminated), designed to avoid systemic side-effects and it can be given as a gel inside a container that looks like any other deodorant instead of cloth wipes that can get on your hands and then in your eyes if you rub them (ouch).  All joking aside, you can learn more about the condition here:  https://www.sweathelp.org/ .

BBI came to market through a reverse-merger with cash-rich shell Vical that closed in August 2019.  As mentioned above, BBI’s CEO Rob Brown is well suited for this task and he is impressive but not arrogant upon meeting him.  After the reverse merger announcement in June 2019 he said the following when introducing himself to Vical shareholders on a conference call: 

“I know when you invest in a company you are not only investing in the assets but also the team. So I wanted to just take a minute and share a little of my background with you. I joined Brickell as CEO in January of this year. My previous position was EVP and Chief Marketing Officer at Eli Lilly. I spent my career building commercial capabilities around the world and launching drugs. For the last 10 years I was directly responsible for Lilly’s launch capabilities. Earlier in my career I was the global commercial leader for the Cialis launch. Cialis launched several years after Viagra, and because of our commercial strategy ended up beating Viagra in sales in most countries around the world. Part of the reason I joined Brickell is because I see a very similar opportunity with sofpironium bromide.”

Sounds great right? Get ready to wince in vicarious pain.  Things got very messy in a hurry at the end of last year and it took until last month to clean them up.  BBI planned to initiate 2 phase IIIs in 450 patients each in 4Q19 that it believed were fully funded via Vical’s cash and a $25 million R&D funding agreement with NovaQuest.  NovaQuest planned to fund its $25 million in return for 8 to 12% interest, 10% warrant coverage and repayment of $37.5 million on successful R&D.  Shortly after the closure of the merger, the technology’s original investor sued BBI over a licensing dispute and as a result NovaQuest terminated its funding agreement in November 2019.  This left a gaping hole in the financing for the Phase IIIs.  Updates followed in which mediation was unsuccessful and suddenly it was possible that BBI could see its license to SB be revoked.  The stock price fell from over $4 per share to around $1 per share.  There was finally a settlement in February 2020 but the damage was done.  Ultimately BBI had to sell 65% of the company to raise $18.6 million of net proceeds in June at a price of $1.15 per share and many of those newly issued shares were immediately blown out. The deal had 100% warrant coverage at $1.25 per share so the dilution will actually be worse.  BBI’s CEO might need to bathe in SB on a daily basis after that experience and I am sure the inventor is on his holiday card list. Fortunately for the yet to be involved investor, the license questions and the funding of the next trials are now resolved and the company is investable again.

And now back to the trial ahead.  With the funding in hand, the 40-50 site Phase III trials will now be 350 patients each instead of up to 450 patients and the company has not given guidance on when the trials could begin given COVID.  The plan was for the trials to take one year and for a filing to the FDA to follow within six months.     The co-primary endpoint of the Phase IIIs as agreed with the FDA are the proportion of subjects achieving at least a 2 point improvement in HDSM-Ax (a sweaty symptom scale) and the change in gravimetric sweat production (where a paper is weighted then placed under the arm for a period of time and then weighed again to see how much sweat it absorbed).  

For reference, a review of BBI’s US Phase IIb can be found here: https://www.jaad.org/article/S0190-9622(20)30224-3/pdf  and a review of Dermira’s Phase III can be found here:  https://www.jaad.org/article/S0190-9622(18)32224-2/pdf  .

To round out the pipeline, the company is also evaluating four new drugs for cutaneous T-cell lymphoma (“CTCL”), psoriasis, androgenic alopecia and allergic contact dermatitis, and hopes to complete earlier-stage clinical trials and proof-of-concept studies in 2021.  BBI had originally planned to begin a proof-of-concept Phase I trial for its CTCL drug called BBI-3000 but that has not begun yet given the funding drama discussed above.  Its psoriasis compound, BBI-6000, was originally slated for a Phase I trial in early 2021 but that is likely delayed as well.     

The company also has an up to $28 million share sale agreement with Lincoln Park from February 2020 and an $8 million ATM facility put in place in April 2020.  

Valuation

BBI has 28.1 million shares outstanding (in addition 19 million warrants strike between $1.16 and $1.25 vs a share price of $0.90 today) and a market capitalization of $25 million.  Including cash reported in the last 10-Q less $4 million of operating burn similar to 1Q20 (a remaining balance of $3.1 million), net cash raised in the last quarter ($18.6 million) and $3 million of payment obligations for manufactured drug inventory to its Japan partner which I will treat like debt, the enterprise/technology value is $7 million.

To determine a rough estimate of what BBI could be worth with successful trial data and Cialis-like commercial execution I looked to Dermira’s estimate of the market size and Cialis market share in 2006 (two years after its launch).  Using Dermira’s $550 million peak-sales estimate from its investor materials prior to its acquisition and Cialis’ 35% market share, BBI could capture $192.5 million of sales.  Even with a 3x sales multiple that would equate to a $577.5 million value.  Assuming that all cash including from future warrant exercises is spent and the fully diluted share count included all securities (49.4 million) that would equate to a share price of $11.69.  Not bad from $0.90 today.  If those sales were from 2026 (assuming product launch in 2023 or 2024) then this would be a seven year annualized return of over 40% from current levels.  

If the trials fail, BBI would be left with its probable Japanese royalty and an earlier stage pipeline.  Assuming the Japan market is half the size of the US based on population and a similar 35% market share (Qbrexa also available in Japan) then Kaken’s peak sales could be $87.5 million.  For reference, Dermira estimated 5.75% of the population or 7.5 million people in Japan were the target market when it licensed its compound to Maruho in September 2016 for up to a lower-double digit royalty. We don’t know BBI’s royalty rate but we do know that 1.5% was trimmed off it in return for a cash payment in 2018 so let us assume 5% or $4.4 million annually to BBI on the $87.5 million of sales.  We also don’t know the details of $30 million of sales-based milestone payments so exclude those but note that they would generate the current market cap in cash. Applying an 8% discount rate to a 25% taxed earnings stream that grows by $1 million per year until reaching $4.4 million in year 5 through year 15 (an estimate), the NPV with no terminal a year from now would be $23.1 million which approximates the current market cap (without accounting for potential sales milestones), For the moment let us also value the other programs at zero until they enter human trials.  

Investment Positives

• The big dilution hit is over. BBI is adequately funded now and the inventor litigation is settled.
• CEO Rob Brown was a C-level marketing executive of big pharma’s of best comparable launch.
• SB could have a more convenient administration method (gel in deodorant-like container called a metered dose pump and applicator vs. Qbrexa’s cloth towelette/wipes which can get on your hands and then in your eyes if you touch them afterwards) and potentially better efficacy than Qbrexa.
• Phase IIIs only projected to take a year to complete once they begin.  
• Potential to expand to other parts of the body beyond the underarm via additional Phase IIIs.  
• Likely approval in Japan will lead to royalties that help protect the downside.  
• Two other completely independent compounds are ready to begin human trials which could begin before any readout from the Phase IIIs.  

Investment Concerns

• Phase IIIs in the US may fail.  They are each going to be 350 patients instead of the originally planned 450 patient studies.  
• Japan could still reject the partner’s filing though their trial met its endpoints (this would seem to be unlikely).
• We don’t actually know what the Japanese royalty rate is but I have assumed that it was slightly lower than what Qbrexxa receives less a 1.5% subsequent adjustment that was made in return for cash in 2018.   
• $500+ million market size is only an estimate in a new category and could be smaller.  Qbrexa 3Q19 sales annualized are still only $40 million so there is a ways to go.  The market could also be larger.  
• Side effect questions in the IIb but the recent larger open-label Phase III safety study did not observe any serious side effects.
• Gravmetric-sweat is a “tricky” additional endpoint as even described by BBI’s CEO and the Phase IIb was not powered to measure it.
• Substantial warrant overhang at $1.25 from June 2020 deal.
• Issued IP only goes until 2031 although potential to expand that to 2040 if applications are approved.  
• Downward pressure on drug prices could mean peak sales estimates are too high.  Qbrexa currently costs $550/month or $6,600 a year.
• Eventual de-listing without a reverse-split unless stock can stay about $1.00.  

Disclosure 

We make no claims, promises or guarantees about the accuracy, completeness or adequacy of the contents of this document and expressly disclaim liability for errors and omissions in the document.  We have no obligation to update this document.  We may change our position at any time without posting an update.  The views expressed here are merely the opinion of the author.  Readers should do their own research.

Catalyst

Category awareness via Qbrexa marketing spend; Phase III data; Japan approval