Buy-Rating (Dundee)
26 May 2010
BIONICHE – BLADDER CANCER UPSIDE, BASE BUSINESSPROTECTS DOWNSIDE
Bioniche has 3 businesses with diversified risk/rewardprofiles: 1) Animal Health, which is expected to generate $27-$28 million insales in fiscal 2010; 2) Human Health, with lead product, Urocidin, in Phase 3testing for bladder cancer (results expected mid-2010); 3) Food Safety, with anapproved (in Canada) vaccine for reducing E. coli 0157 in cattle feces (U.S.conditional license pending) and a pipeline of other vaccines. The commonelement linking most of the company’s products and development programs isimmune stimulation.
Animal Health
We view Animal Health as a stable business and a value backstop for the higher risk/rewardopportunities. Our estimated F2010 sales of $27-$28 million would be lower Y/Yvs F2009 (sales $33 million) due mainly to foreign exchange impact and softnessin some end markets due to the economic turndown. However, 2011 could be abetter year with the economy recovering and potential for geographic expansionof Folltropin.
Urocidin
Urocidin (Mycobacterial Cell Wall-DNA Complex, or MCC)provides the biggest upside potential forBNC investors, with Phase 3 results expected mid-2010. MCC is a DNA/proteinisolate from non-pathogenic mycobacterium, phlei. Its main action is tostimulate direct pro-apoptotic and indirect immune-mediated killing of cancercells in patients with non-invasive bladder cancer.
Our initial diligence suggests that Urocidin has arelatively high overall probability of approval, although the first of twoplanned Phase 3 trials has a moderate level of risk – the refractory patientsenrolled in the first Phase 3 are a “tougher-to-treat” population than wasenrolled in Phase 2. Mitigating the risk to a degree, is the 20% completeresponse (CR) hurdle for Phase 3 – in Phase 2, patients achieved a 46.4% CRrate at 26 weeks in a population that was mainly relapsed, but also included afew naïve patients (Figure 8).
Figure8: Urocidin Phase 2 Complete Response Rate (%)
Week12 Week 26 Month 12Month 18 (for MCC 4 mg / MCC 8 mg)
27 / 46 27/ 46 32 / 64 23 / 73 (rounded %ages)
A second planned Phase 3 trial will testUrocidin head-to-head against the current standard of care, baccilusCalmette-Guerin (BCG) in first-line treatment, where we expect Urocidin todemonstrate better efficacy based on prior data, and superior safety and tolerability– BCG is a live pathogen, carrying with it risk of contamination, fatalinfection and frequent painful bladder inflammation.
In July 2009, Bioniche licensed U.S. Urocidincommercial rights to Endo Pharmaceuticals (ENDP-Q; unrated). Bioniche receivedan up-front cash payment of $20 million with the potential for as much as $110million in additional payments based on future clinical, regulatory, andcommercial milestones. Subsequently, in February 2010, Endo exercised an optionto license the remaining global commercial rights for Urocidin, paying Bionichea further $8 million, and taking on the remaining Phase 3 development costs.Bioniche will manufacture the product and receive a transfer price for supply.After COGS, we estimate the net to Bioniche will be approximately 20%-25% ofsales. Bioniche currently operates a cGMP facility capable of manufacturing~35,000 Urocidin doses annually, with plans to build a million dose facility ata cost of approximately $30 million (planned funding to be provided bygovernment loans and grants) contingent on success of the upcoming Phase 3trial.
Bladder cancer is the fourth most common cancer in men,and the ninth most common in women. About 500,000 people in the U.S. currentlyhave bladder cancer, and the number of new cases each year is about 70,000 (ofwhich 50,000 have the non-muscle invasive form of the cancer that is eligiblefor Urocidin treatment). Two thirds of patients (33,330) typical do not respondto BCG or relapse within a year. Globally, it is estimated that 80,000 bladdercancer patients become refractory each year.
Based on these estimates, the global market opportunityfor Urocidin in the refractory population would be $800 million – this assumesa per dose cost of $1,000 ($21,000 for a full course of 21 doses, supported bythe $22,000 cost for a full course of Valstar), and assumes that eachrefractory patient receives an average of 10 doses (based on 25% receiving afull course and 75% receiving only the first 6 induction doses). If the secondPhase 3 trial expands the Urocidin label to first line treatment, the marketopportunity would grow to the estimated 2 million doses of BCG sold globallyeach year, or $2 billion. 25% penetration of this market would represent $500million in annual sales, and an estimated $112.5 million in gross profit forBioniche.
Food Safety
Food Safety, the third Bioniche business, is primarilyfocused on development and commercialization of a vaccine for cattle whichlowers the fecal load of pathogenic 0157 E. coli bacteria. The product islicensed in Canada,where the primary market, upscale cattle farms, is very small. The company ishopeful it will receive conditional approval to sell the vaccine in the U.S. this year,where there are many more cattle farms, and a higher percentage (20% vs. 2% bymanagement’s estimate) produce upscale, branded beef.
Near-term Hurdle for Value Inflection
The key hurdle for BNC value inflection will be Phase 3Urocidin results expected mid-2010. We believe there is a moderate-to-goodchance of success for this trial, and we believe with the base Animal Healthbusiness, that downside risk is limited.
Key risks:
Clinical risk –While we believe Urocidin has demonstrated strong indications of superiority(safety and efficacy) vs BCG in prior clinical testing, the hurdle is high forthe upcoming results for the first Phase 3 trial for the bladder cancer drug.Mitigating this risk is the base business of Bioniche, the deep-pocketedpartner for Urocidin, and our view that the long term probability of approvalof the drug is high.
Urocidin pricing - The expected pricing for Urocidin (~$1,000 per dose) is substantiallyhigher than for BCG (~$50 per dose). We believe higher pricing can bejustified, but it will be necessary to continue to demonstrate substantialefficacy and safety benefits in Phase 3.
Base business risk - The base businessis on track for lower sales in F2010 vs F2009. F2011 may see an uptick on theback of better economic growth and specific Animal Health product initiatives,and we believe Urocidin will be the bigger driver of BNC stock in the nearterm.
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